Flextronics CEO Discusses F3Q2011 Results – Earnings Call Transcript

Flextronics International Ltd. (NASDAQ:FLEX)

F3Q2011 Earnings Call Transcript

January 20, 2011 5:00 pm ET

Executives

Kevin Kessel – VP, IR

Paul Read – CFO

Mike McNamara – CEO

Analysts

Shawn Harrison – Longbow Research

Jim Suva – Citi

Steven O'Brien – J.P. Morgan

Amitabh Passi – UBS

Sherri Scribner – Deutsche Bank

Brian White – Ticonderoga

Brian Alexander – Raymond James

Steven Fox – CLSA

William Stein – Credit Suisse

Lou Miscioscia – Collins Stewart

Alex Blanton – Clear Harbor Asset Management

Operator

Good afternoon, and welcome to the Flextronics International third quarter fiscal year 2011 earnings conference call. Today’s call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Kevin Kessel, Vice President of Investor Relations. Sir, you may begin.

Kevin Kessel

Thank you, Victor. And welcome to Flextronics’ conference call to discuss the results of our fiscal 2011 third quarter ended December 31, 2010. Joining me on the call today is Chief Executive Officer, Mike McNamara, and Chief Financial Officer, Paul Read. The presentation that corresponds to our comments today is posted on the Investors section of our website under the Conference Calls and Presentations link, and it can also be accessed directly from our home page.

Our agenda for today’s call will begin with Paul Read reviewing the financial highlights from the third quarter of fiscal 2011, and Mike McNamara will follow up with some insights on our current business trends and conclude with our guidance for the fourth quarter of fiscal 2011 ending March. Following that, we will take your questions.

Please turn to slide two where I’ll cover the risks and non-GAAP disclosures. This presentation contains forward-looking statements within the meaning of the US securities laws, including statements related to revenue and earnings guidance, business prospects of our market segments, expected benefits from new business wins, and expected improvements in profitability of our components business units.

These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by these statements, are based on our current expectations, and we assume no obligation to update them. Information about these risks is noted in the earnings press release on slide 12 of this presentation and in the Risk Factors and MD&A sections of our latest annual and quarterly reports filed with the SEC, as well as in our SEC filings. Investors are cautioned not to place undue reliance on these forward-looking statements.

Throughout this conference call, we will reference both GAAP and adjusted financial results, which are non-GAAP financial measures. Please refer to the schedules to the earnings press release and the GAAP versus non-GAAP reconciliation in the Investors section of our website, which contain the reconciliation to the adjusted financial measures for the most directly comparable GAAP results.

I will now turn the call over to our Chief Financial Officer, Paul Read. Paul?

Paul Read

Thank you, Kevin. And welcome everyone to our call. The third quarter was another solid quarter for Flextronics with revenue exceeding the high end of our guidance range of $7.5 billion to $7.7 billion by $133 million, which represented – which resulted in 6% sequential increase.

We continue to see broad-based year-over-year growth across all our market segments and almost all segments saw healthy sequential growth for the third consecutive quarter. Our growth continues to be principally driven by new outsourcing programs with both new and existing customers, market share gains, and the extension of favorable seasonal trends expressed by our mobile and consumer digital segments during our September quarter.

Adjusted operating income was $232 million, up $19 million or $0.09 sequentially and 23% above the $189 million of a year ago. GAAP operating income was $219 million, up $20 million or 10% versus the prior quarter and 31% above the year-ago level of $167 million. Adjusted net income for the third quarter was a $193 million, increasing 8% sequentially from our second quarter and 40% from $138 million a year ago.

Our GAAP net income for the quarter reflected a $35 million benefit from the favorable settlement of certain tax litigation and also include the impact of intangible amortization and stock compensation expense. Our GAAP net income was $198 million, expanding 38% from last quarter’s all-time record result and more than double the $93 million from a year ago.

We reported adjusted earnings per diluted share for the December quarter of $0.25, which was at the high end of our EPS guidance of $0.23 to $0.25 and grew 9% sequentially from $0.23 last quarter and close to 50% from the $0.17 of a year ago. It’s also noteworthy that our GAAP EPS was $0.26, marking a new record for the company and eclipsing the $0.18 we delivered last quarter by a wide margin.

Please turn to slide four. Adjusted SG&A expense totaled $204 million in the quarter, up $16 million sequentially and $34 million year-over-year on revenue increases of $411 million and $1.3 billion respectively. Adjusted SG&A dollars trended slightly above our targeted range of $190 million to $200 million to increase discretionary investments, design and engineering resources, as well as other general infrastructure costs necessary to support our anticipated future growth.

As a result, our SG&A as a percentage of revenue rose slightly to 2.6% from 2.5% last quarter and was in line with a year ago. Despite our SG&A percentage of sales ticking up slightly this quarter, we still remain confident that we can further leverage SG&A in fiscal 2012 as we grow our revenues.

Our adjusted operating margin was 3% and improved 10 basis points from 2.0% both last quarter and last year. We are continuing to see strong performances from our core EMS businesses and confident in their continued execution and growth. We are making good progress in improving the operational performance required to realize consistent profitability in our components businesses, which experienced low-double digit sequential revenue growth during the quarter. We acknowledge that it is taking time for these businesses to work through their growth challenges, but we remain confident that they will approach breakeven in our upcoming March quarter and be profitable during the upcoming fiscal 2012.

Our EBITDA rose to $335 million in the December quarter, up 6% from $317 million in the prior quarter, and our LTM EBITDA expanded above $1.2 billion. Year-over-year quarterly EBITDA rose 19% or $54 million from $281 million a year ago. Our adjusted EPS rose to $0.25 from $0.23 in the prior quarter, an increase of 9% and was almost 50% above the $0.17 we earned a year ago. This marks the fifth consecutive quarter our year-over-year adjusted EPS has grown.

Please turn to slide five. Focusing on the income statement items below the operating lines, adjusted net interest and other expense was $24 million, up from $21 million last quarter and within the targeted range we discussed last quarter of $20 million to $25 million. Included in this number is the realization of $13.2 million loss on the early extinguishment of our 6.25% senior subordinated notes, which was offset with some favorable FX gains and other income we realized during the quarter.

The adjusted tax expense for the quarter was $15.6 million, reflecting an adjusted tax rate of 7.5%, which was above last quarter’s tax rate of 6.2%, but we still remain below our stated guidance range of 10% to 15%. We also experienced a large favorable tax resolution related to a previous tax matter resulting in a $35 million non-cash credit to our GAAP net income that I previously discussed. This is not, however, included in the 7.5% adjusted tax rate. For our upcoming quarter’s guidance, we are modeling a 10% tax rate.

Our weighted average diluted shares outstanding came down from $784 million to $777 million as a result of the continued impact of our share buybacks, which totaled $68 million during the quarter at an average purchase price of $6.93 per share. In the past nine months, we reduced our shares outstanding by nearly 61 million or we tried approximately 7.5 % of our common shares. We have accomplished this by spending $368 million for an average purchase price of $6.04 per share. For our current quarter, we suggest modeling $775 million shares outstanding, which takes into account the full impact of all our buybacks to-date.

Finally, turning to the reconciliation items between our GAAP and adjusted EPS, stock-based compensation was $13.8 million in the quarter and represented a $0.02 per share EPS impact. Intangible amortization net of tax was $15.2 million in the quarter, down from $19.5 million last quarter due to certain intangibles becoming fully amortized and also represented a $0.02 EPS impact. These expenses were more than offset by a $34.7 million tax credit realized during the quarter.

Please turn to slide six. As we had expected, inventory declined $116 million or 3% sequentially and inventory turns improved to 8.3 turns from 8.1. We continue to believe that we should be able to drive improvements in our inventory management and that our inventory turns can increase as there are numerous actions underway and will also benefit from a different blend of our business as we see increased computing revenues.

We experienced cash conversion cycle on working capital management continue to be industry-leading at 14 days, which is consistent with the prior quarter and prior year. As highlighted in the footnote on this slide, we have recalculated the cash conversion cycle days to exclude the impact of non-cash reductions to our accounts receivable from our AR sales programs.

Historically, these reductions had a one to two-day favorable impact on our cash conversion cycle, but this quarter had a more meaningful 6-day impact. We believe it is appropriate to make this adjustment given the non-cash nature and to improve comparability. We remain confident that we can maintain a cash conversion cycle in the mid-teens going forward, excluding the non-cash benefit of our ABS program.

Now turning to net working capital chart on the top right of this slide, while this quarter’s working capital management was negatively impacted by our conscious pay-down efforts of our accounts payable, we still ended within our targeted range of 3% to 5%, coming in at 5%. It is important to note that we have added the non-cash benefit of our ABS programs of $821 million into the December quarter back into the working capital calculation of this metric and have adjusted the historical presentation to consistency.

Flextronics asset management coupled with our improving profitability drove substantial improvements in our return on invested capital, for the return on invested capital increased to 33.6%, another record high for our business, above the 30.1% of a year ago and up from 31.9% last quarter.

Please turn to slide seven. Our cash flow from operations reflected a modest use of $15 million during the quarter. Net capital expenditures for the quarter were $106 million, which essentially match the depreciation expense of $105 million, as we continue to invest in our business for anticipated growth. Free cash flow for the quarter was eased to $120 million.

Please turn to slide eight. We ended the quarter with $1.6 billion in cash, down $190 million versus the prior quarter, principally reflecting our negative free cash flow as well as $68 million in cash payments to repurchase common stock. Total debt remained essentially flat at $2.2 billion. Our net debt, which is defined as total debt less total cash, rose to $633 million from $444 million.

Our debt-to-EBITDA level ended up the quarter at 1.9, flat versus last quarter and down from 3.0 last year. The chart at the bottom of the slide shows our significant debt maturities by calendar year compared with our current liquidity. The chart reflects an early extinguishment of the $302 million of our 6.25% senior subordinated notes back in December and highlights our next debt maturity is not until 2012.

With that, I will turn the call over to our Chief Executive Officer, Mike McNamara.

Mike McNamara

Thanks, Paul. And thanks again for everyone joining us on the call. For the past two quarters I’ve highlighted the theme focusing on our overall healthy business environment. And judging by this quarter’s results, I think it is fair to say the theme remains strongly intact. The breadth and strength of our competitive position continues to improve, which is reflected in our value-added supply chain services and solutions experiencing strong demand.

Please turn to slide nine. Our low volume, high mix businesses were once again led by communications infrastructure growth this quarter. Infrastructure sales were $2.1 billion and represented 27% of sales. This segment grew another 5% sequentially on top of the exceptionally strong September quarter, having now risen over 17% during the past six months and again coming above our forecast.

We attribute infrastructure growth to broad-based strength across the existing customer base and continued new market share wins. We saw strength coming from multiple technologies in geographies within our infrastructure segments such as optical, metro-Ethernet, wireless, base stations for multiple technologies, radio access and broadband access equipment. Our March quarter outlook for infrastructure caused for continued high production levels, consistent with the December quarter.

We see infrastructure ending fiscal 2011 in March with more than $1 billion in incremental sales growth, which would solidly position us for the 10% to 20% growth rate target we discussed in our May 2010 investors and analysts day. For the fiscal year, growth was propelled by strong new bookings, with both existing and new customers. We expect the growth in our infrastructure segment to continue into fiscal 2012 and are confident that our industry-leading position can be further strengthened.

Industrial, automotive, medical and other comprised 18% of sales, down from 20% last year. This is the first quarter in 18 months that this combined group did not see sequential growth. However, it makes sense to break down this group in order to better understand the dynamics. With medical and automotive continued to enjoy sequential growth, industry on the other hand was off due to some of the end-of-life programs and inventory rebalancing within our semiconductor capital equipment and office equipment customer base.

The overall group’s 20% year-over-year growth rate remains very healthy, and we are encouraged by a backlog of new wins across a multitude of areas. As a result, we expect this combined segment to grow low-double digits sequentially in Q4. Our industrial segment’s business development activities were exceptionally strong during the quarter as the book to record amount of new business wins totaling over $450 million, with rate nearly double that as the past couple of quarters.

As is typical in this segment, new program wins were spread across the diversified base of customers and markets. We are optimistic about new segment win that refrains from the two new clean tech wins we announced publicly during the month of December in the MCN to several new kiosk wins within the retail automation space for varied activities, such as airline baggage handling, digital media procurement, self-service copy, package handling.

We obviously forecast from our capital equipment and customers improving following our quarter of demand readjustment in overall industry segment growth in the mid-to-high single digits. Lastly, we continue to improve our position in both meters and controls and appliance product categories with new wins in each. Our medical segment’s strong momentum continued this quarter, growing sequentially in the mid-single digit range and finishing the December quarter at the highest monthly sales level in company history. Medical growth has been mainly driven by our medical equipment and consumer health diabetes businesses, which we expect to post 60% and 20% year-over-year growth in fiscal 2011.

In general, our new major program wins continued to task well. Medical booked $225 million in new wins during the first three quarters of fiscal 2011, and its sales pipeline remains very strong for the next quarter and into fiscal 2012. We see consistent revenue performance for medical next quarter, which could translate to close to 30% year-over-year growth and to put it on pace to surpass the $1 billion sales level in fiscal 2011 for the first time. We now – for the quarter we’re expanding our medical presence with the opening of 180,000 square foot medical operations in Malaysia.

Our automotive group continued to accelerate its growth during the quarter, growing over 15% quarter-on-quarter and reporting its fifth straight quarter of sequential growth. Perhaps even more impressive is the 50% year-over-year growth rate, which signifies its strong industry position within a very fragmented market. The demand environment has remained strong, especially for our premium European car customers who continue to see significant growth in the APAC regions and specifically within China. Our automotive group continues to have success when a new in-car connectivity, interior lighting, and LED programs.

Our mobile segment thawed up on a 15% sequential growth during the September quarter with a further 11% sequential growth during the December quarter at $1.7 billion or 22% of sales, as seasonality in new program ramps drove the majority of the segment growth. Our only 10% customers this quarter was in this segment and with RIM. For the next quarter, we see the segment experiencing difficult seasonality and declining mid-teens sequentially.

In computing, we post $1.4 billion in sales, which would mean that 18% of our revenue. The segment rose 5% sequentially as new program ramps were slightly offset with server declines Q2 program transitions. During the quarter, we significantly launched a couple of new ODM programs – ODM products, including our first tablet and the new desktop.

For the March quarter, we expect a single-digit decline as increased levels of production in our ODM business are offset by normal seasonality in our enterprise and storage business, in addition to the collision of a server program transition we mentioned last quarter. We remain confident in our ability to achieve our long-term targets for our personal computing business, which we’ve outlined as $2 billion for fiscal 2011 and $4 billion for fiscal 2012.

Consumer digital saw third consecutive quarter of strong sequential growth, increasing 12%. The segment ended above our original forecast at $1.2 billion or 15% of total sales. Success from new program ramps were the primary growth catalysts for the quarter. I’m also proud to share with you that this segment would see the very important customer award during this quarter. We won Value Excellence Award in recognition of exemplary partnership support for the launch in mass production of its Xbox and Kinect products. For the March quarter, we are currently forecasting a double-digit seasonal declining.

Our components business, which include Multek, VistaPoint and FlexPower, so aggregate growth slow a little sequentially, but it still remained in the low-double digits. We are encouraged by the improving manufacturing efficiencies for our component product offerings and learned the quarter, we made solid progress producing aggregate operating losses, and we expect these businesses to be breakeven existing the March quarter.

Turning to Multek, we continue to believe that revenue expansion will lead to margin expansion. The business has the potential to constantly operating the high-single digit operating margin range. During the quarter, Multek’s FP, flexible printer circuit business, saw strong growth in both North America and Asia, and multiple new program wins were secured across many market segments.

Like our operating loss declined as it benefited from operating efficiency across factories as a result of strong initiatives coupled with continued progress on the relocation of certain manufacturing processes, so inland China and improving mitigation of commodity price increases.

VistaPoint saw its quarterly revenues increase to a record level. Its operating loss reduced substantially as well driven by improvements made in our manufacturing yield and efficiency. Our global services business composed of roughly 15,000 employees and focuses on after-market activities such as logistics, repair and warranty and service priced logistics. This business continues to grow operating profit on a quarterly basis reaching the highest level since prior to our Solectron acquisition. The new operations we announced last quarter in India and expanded operations in Europe have been formed exceptionally well in gaining tractions with key customers.

Our Retail Technical Services or RTS business provides competitive and flexible field services for customer operations such as Verizon, American Express Open, Systemac and AT&T. We are now two quarters into the launch of our branded Firedog business. In addition, we launched Firedogbusiness.com this quarter, which offers a full spectrum of technology and business support services to the business community and nicely complement some more focused Firedog.com.

Now turning to our guidance on slide 10, I wanted to talk you to show more seasonal wins than prior years. Looking back over the last five years, our average organic December to March decline was 17%, which is adjusted for acquisitions to provide an appropriate organic comparison. If we exclude the large recessionary decline of fiscal 2009, our average organic decline was 13%. In our upcoming quarter, we’re currently forecasting a more modest sequentially, design roughly at 7% of the midpoint, our lowest since fiscal 2004.

Our guidance is for a range of $7.1 billion to $7.4 billion, which corresponds to a sequential decline ranging from 5.5% to 9%. We expect our adjusted EPS in the range of $0.21 to $0.23 per share versus the $0.25 just reported. Quarterly GAAP earnings per diluted share expected to be lower than the adjusted EPS guidance I just provided by approximately $0.04 for intangible amortization expense and stock-based compensation expense.

Please turn to slide 11, key takeaways. Our third quarter continued our trend of sequential and year-over-year revenue and profit growth. For the quarter ahead, the midpoint of our revenue guidance range points to rough seasonality than our business has traditionally experienced, and we expect our trend at healthy year-over-year revenue and profit growth to continue. Our key takeaways are as follows. We are executing well on the top line growth.

We delivered strong sequential and year-over-year revenue growth of 6% and 19% respectively. Every market segment and business unit posted year-over-year growth, and the same holds true for quarter-over-quarter growth with the exception of one segment. We are also continuing to invest in our company to fuel above average industry growth in fiscal 2012. And we expect based on pipeline of opportunities as well as book business slated for the coming year.

Our profitability and earnings are also improving, with the operating profit rose 6% sequentially and 23% year-over-year. Adjusted EPS was also up 9% sequentially and was up 47% year-over-year. We are off to set new company records for GAAP net income and GAAP EPS during the year. At the same time, it’s worth mentioning that we have drove $13.2 million in debt extinguishing cost for buying back our 6.25% senior notes early. Lastly, the royalties’ improvement are evident in our ROIC, which ended the quarter at 33.6%, the highest level we have achieved.

Thanks for your time and attention, and I’m going to open the call for Q&A. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Shawn Harrison of Longbow Research. Your line is open.

Shawn Harrison – Longbow Research

Hi, good evening. I wanted to follow up on just the incremental gross margin this quarter. It was the best I think you’ve done in four or five quarters, but it doesn’t sound like the components business was breakeven. So maybe if you could just talk about the components of the sequential gross margin this quarter and then maybe what we should expect going forward as the components business gets into profitability.

Paul Read

Hi, Shawn, it’s Paul. I’ve said that we would approach breakeven in the March quarter and that heading into next year we’ll see a gradual improvement of that with a target that the back end of the fiscal year we’ll see the bundle probably operating around – focus on operating margin. And so I think that for the December quarter, there was improvement, which we were encouraged by and have to continue improvement going into March.

Shawn Harrison – Longbow Research

Just to that – I mean, more I’m thinking about the incremental gross margin for the quarter at 9%. Was it a mix of business that drove that? Was it the components business getting that close or breakeven? Was it just –?

Mike McNamara

Yes, it’s a bit of both. You’ve got increased revenues of course, so there’s increased absorption. And there wasn’t improvement in the components business through the quarter over the September quarter. So both of those contributed to the increased incremental gross margin that you referred to.

Shawn Harrison – Longbow Research

Okay. And then as a follow-up, looking at the 10% to 15% year-over-year growth rate target, as we move into calendar ’11, maybe if, Mike, you could discuss, just which end markets you would see tracking above that? It looks like computing would definitely would be above, but maybe which end markets would be above versus below?

Mike McNamara

Yes. As we look forward to next year, we would certainly expect all of our segments to hit over double-digit growth. So we will accomplish that this quarter. We saw very, very nice growth across every single one of them. The only one that I would suggest may not hit the double-digit growth rate is the components business, and that’s a totally mix here. We hit the profitability targets that we’re emphasizing – with substantial emphasis on operating profit target as opposed to revenue growth targets in that segment as it’s grown to a very significant – all of our segments have grown to very significant size. So we don’t answer your question directly. There’s not one answer. We run a very, very broad diversified portfolio. We drive all our businesses to hit double-digit growth rates and to invest in a way that they can do that. And we actually expect to see that next year with the exception of components.

Shawn Harrison – Longbow Research

Okay. Thank you.

Mike McNamara

You’re welcome.

Operator

Our next question comes from Jim Suva from Citi. Your line is open.

Jim Suva – Citi

Thank you very much and congratulations. I think the sales results and the sales outlook are remarkably impressive. Taking it down a little bit further below the sales line and looking at operating margins and EPS flow-through, can you help me better understand if components are seeing progress, which I don’t doubt they are, I’m sure they are, given the situation? And your sales this quarter was meaningfully above your guidance, yet your posted EPS was only at the higher end and you are helped a little bit by taxes – lower taxes. It just seems like the flow-through is not coming through to the bottom line. Can you maybe explain kind of what’s going on operationally and why we didn’t see more on the EPS line? And the same holds true for the outlook.

Paul Read

Jim, thanks. It’s Paul. We did see a 20 basis points improvement in gross margin. So I think some of it did flow through – some of the revenue, 9% incremental gross margin improvement. But you saw some SG&A expense increases. We would typically have a reduction in SG&A to fund in the December quarter with higher revenues, but actually had the reverse. We had – it went up because the spend did go up sequentially. So I think we lost a little bit there. And the reason for that is, we’ve been investing in this what we see the future strong organic growth that we have, both here in fiscal ’11 and fiscal ’12. And so we’re putting in place more design engineering resources, more infrastructure, people around the world to support next year’s growth. And so I think that took away from the margin slightly in the December quarter also. Components did contribute positively the margin for us in December, and we expect that to continue through March and next year as well.

Jim Suva – Citi

Okay. Then my follow-up is, if that’s the case, are we at the SG&A level now to support that double-digit growth or are there still some more discretionary spending to continue to provide the funds to grow at the double-digit?

Paul Read

Well, we’ll see much – probably the range is $195 million to $205 million kind of levels. So we’re at about – certainly for the next three to six months anyway. But we’ve got very strong growth next year organically that’s already pipelined, and what our intent is to gain leverage out of the SG&A, as you would, but increasing revenues next year. We still think that there is going to be some leverage for us in the SG&A line for next year for sure.

Jim Suva – Citi

Thank you, and congratulations to you and your team.

Paul Read

Thanks, Jim.

Operator

Our next question comes from Steven O'Brien from J.P. Morgan. Your line is open.

Steven O'Brien – J.P. Morgan

Hi, thanks for taking my question. I wanted to ask a little bit about the infrastructure results, which were of course strong. And you talked about some broad-based strength. It seems like maybe others in the industry or the food chain aren’t seeing that kind of strength. So if you could elaborate on that a little more, that would be helpful. And also maybe in context to the June quarter, I know it’s a little early, but some are looking for that quarter to be seeing particular order pullbacks from OEM customers.

Mike McNamara

Yes, I think there is maybe couple of major reasons for our strength there. One is, I think we will represent what’s happening in the industry because we are a little bit larger and a little bit broadly and a little bit more diversified. We actually have some Chinese customers. One in particular that has a very, very strong growth rate, most of our competitors aren’t really positioned with that account and a lot of the industry analysts in the United States don’t spend a lot of time talking about the growth of the Chinese infrastructure customers. But we are well penetrated into that customer base, and it allows us some nice growth rates as a result that lot of times you don’t see from either the infrastructure analysts or from the other country manufacturers.

The other thing that you’re seeing is our position is very, very strong in this industry. And I would say what’s different about the wins that we’ve had over the last year is that the wins tend to be the future generation products. And I would say that across a number of different customers were really, really well positioned from a products category and a product line standpoint. So a lot of the new investments are going in. We’re actually going to be the leading supplier to, I would almost say, most of the OEMs. So I think our mix has transitioned over this last year to be very, very favorable for future growth. And we are well penetrated into the Chinese OEMs. And I think that’s going to – as a result, you’re going to see – we expect again next year to have this group despite the fact that it’s very large to grow double digits.

Steven O'Brien – J.P. Morgan

Okay. Thanks for the color, Mike. And then if I could, one follow-up. I appreciated the update on the components profitability. Any change to your outlook for ODM profitability going forward – ODM computing? Thanks.

Mike McNamara

No real change. We’re still, what I would say, moving to the last phase of our transition. We expect – as I mentioned, we expect about $2 billion left over the deal we’re currently in. I fully expect we got everything booked to $4 billion for this next year. But at that time, we would expect it to fund more into the more normalized industry levels. We’ll sort of go through that transition. There would be some cost associated with that. In fact, our computing business from Q4 in the March quarter to the June quarter will double. That’s where you are going to see a significant amount of ramps. And we’ll have to get through those transition periods and then we’ll hope to – we'll obviously work on getting to hitting the operating profit targets then, because we have the business booked, we have the revenue in sight, and then we have to be able to deliver the operating profits.

Steven O'Brien – J.P. Morgan

Thanks. Good luck.

Mike McNamara

Thanks.

Operator

Our next question comes from Amitabh Passi from UBS. Your line is open.

Amitabh Passi – UBS

Thanks. Paul, just a question for you on the SG&A line again. As we look beyond the next six months, what’s the best way to think about the operating leverage in the model and the level of SG&A? Would it be at this 2.6% of sales level or do you think there is enough leverage that we could probably see that percentage trend down?

Paul Read

We’ll definitely see it trend down post March, of course. March quarter revenues are down. So you won’t see it trend down then. But in fiscal ’12, we’ll see it trend down from 2.6% with the revenues that are coming on stream and the cost, even though dollars are increasing, the percentages will reduce. And maybe you could see 20 to 30 basis points even reduction in that over the next year.

Amitabh Passi – UBS

Got it. And then any update on your stock buyback plan? I think you’ve pretty much exhausted the remaining amount. Any further updates?

Paul Read

Well, we still have some $30 million left that’s approved from the Board of the current plan. We are pretty opportunistic about that. We update you every quarter. From a shareholder perspective, we are positioned to purchase 10% a year and that goes through next July. So there is still a significant amount available under that approval, but we would need sort of the Board approval for that.

Amitabh Passi – UBS

Got it. And then just one final question. On the balance sheet, there was a big movement in the other assets line item. Any clarification in terms of what happened there?

Paul Read

Yes. I kind of alluded to it in the script that the ADS programs that are off balance sheet, there is a need for us is like to commit into that program. That goes to other current assets. So the purpose of the slide deck, we pulled it out of other assets, put it back into receivables, about $800 million. And – to show the CCC without that benefit because it’s non-cash and just another current assets. And that’s why we adjusted the receivables, CCC and working capital percentage of sale to reflect that.

Amitabh Passi – UBS

Okay, got it. I’ll jump back in the queue. Thanks.

Paul Read

Thank you.

Operator

Our next question comes from Sherri Scribner from Deutsche Bank. Your line is open.

Sherri Scribner – Deutsche Bank

Hi, thank you. I was trying to get a sense of what’s driving the unusual seasonality in the March quarter. The new program wins, is there any particular segment? I’m just trying to get a sense of what’s driving that.

Mike McNamara

Well, we tend to have a little bit more balanced portfolio. We talked a little bit about that over the last year ever since we did the Solectron acquisition. We actually did it to move our portfolio in a slightly different direction. So that’s one thing. And I think, in general, we have a pretty strong book of business. So, part of which you are seeing there and you’re going to most interpret that from looking at the SG&A. We have a pretty strong book of business and we expect to go into FY ’12 with some pretty healthy growth rates. So, between the two, just in general, very strong book of business going forward. We are seeing some of those programs hitting in the March quarter. We are seeing some just reduced seasonality as a result of a little bit better of a blend as a result of our movement in the portfolio several years ago. And it’s allowed us to hit a much reduced seasonality.

Sherri Scribner – Deutsche Bank

Okay. That’s helpful. And then I know, Mike, you mentioned strong growth expectations for calendar 2012 pretty much across the board. In terms, I know you’ve won a lot of new programs and you’ve talked about a little bit, but are there any particular segments where you are seeing more strength than others?

Mike McNamara

The percentage growth will probably be highest in computing. But outside of that, I think they will all be positioned to grow pretty steadily.

Sherri Scribner – Deutsche Bank

So you’re winning – sorry, go ahead.

Mike McNamara

Yes, I was – I think we’re really well positioned in virtually every one of those categories. As we look through our numbers, we have trouble finding any of them being weak. Computing might given an extra pop because of the new PC business, the incremental PC business that we talked about. But kind of across of the board we’ve built a pretty strong portfolio. And our competitive position is pretty strong, and we tend to win more than we lose. And as a result, I think you will see the growth pretty balanced. This last year you saw lot of good growth. Industrial grew over 20%. Computing will probably grow over 12%, and consumer digital is probably up in the mid-20s. Infrastructure, we may – we'll probably end up around 15% this year. And the medical and the automotive and mobile are all up over 20% in FY ’11. So they are all pretty broad-based growth this year. And I actually expect to see more of the same next year –

Sherri Scribner – Deutsche Bank

Yes, right. So, it sounds like the new program wins are really across the board or broad-based.

Mike McNamara

Yes.

Sherri Scribner – Deutsche Bank

Okay. Great. Super. Thank you.

Mike McNamara

You’re welcome.

Operator

Our next question comes from Brian White from Ticonderoga. Your line is open.

Brian White – Ticonderoga

Mike, just on the components business, you said it probably wouldn’t grow double digits over the next year, and just remind me why that’s going to grow.

Mike McNamara

Because our – because we’re trying to focus on execution and we’re trying to focus – and who knows? Maybe it will end up rolling. They tend to sometimes know years long way away, and our quarters doesn’t start for three – our year doesn’t start for three months. But our objective is to really try to drive profitability. We’re trying to control a lot of the problems that we had in this last year, was actually two months growth. The impaired bundles are well over 30%, but part of the problem is that some of the bundles grew 100% to 300%. And we’re just trying to grow in a much more balanced way that drives a lot more profitability.

Brian White – Ticonderoga

Okay. Are you disengaging with programs?

Mike McNamara

I wouldn’t say we are disengaging. I’d say we are being more picky perhaps, but I wouldn’t really call it disengaging, no.

Brian White – Ticonderoga

Okay. And then I just want to be clear, components will be breakeven or profitable in the March quarter?

Mike McNamara

They will cross over to breakeven, but they won’t – they will be close to breakeven in the March quarter, but they will cross over into profitability through the quarter. And then as we come into June quarter, we should be profitable. So one other thing I would like to mention, Brian, is the other thing is that the – the components business is very, very capital intensive. And we want to – we'll also want to meter our business there just due to how we want to balance our investments and where we want to spend our money for this next year. So we want to keep a little bit a balance in that group that makes sense. As you can see, we’re hitting realized return on capital in the overall Flextronics and we want to – and that’s a high focus for us and something that we are – that’s very important to us.

Brian White – Ticonderoga

Okay. And I just want to be – it's a minor nuance, but on the last call, you said certainly profitable in the March quarter. And now we’re saying breakeven. I just want to be clear – is there a slight change in your thought for the March quarter?

Paul Read

No. I don’t think so, Brian. Slightly breakeven, slightly profitable. It’s all around about the same. I mean, it’s a huge move from where it was this year, this fiscal. And to end the year roughly breakeven, slightly profitable is actually a great achievement for us and positions us well, as Mike said, going into the June quarter being profitable.

Brian White – Ticonderoga

Okay. Just finally, when we look at the computing business, is there any way that we can – can you break down what is kind of the notebook ODM, PC business, percent of computing, so we can track that?

Mike McNamara

We don’t break that out, but you can do the math. $2 billion for the year and obviously December quarter is pretty big. So the ODM computing represents a fair amount of that that we reported in total computing, but we don’t break that out except that we’d say for the year it’s $2 billion.

Brian White – Ticonderoga

Okay. Thank you.

Mike McNamara

Welcome.

Operator

Our next call comes from Brian Alexander from Raymond James. Your line is open.

Brian Alexander – Raymond James

Thanks. Just given the expectation that you laid out earlier for improved expense leverage over the next few quarters and then also to comment about hoping to get to 4% margins in the components business towards the back half of the year, does that suggest that you would expect the overall business to improve operating margins by about 40 to 50 basis points in the back half of the year, or are there certain offsets that we should consider that could lead to leverage for the overall company?

Paul Read

We certainly didn’t want to spend the time here talking about guidance for next year. I don’t think it’s appropriate. We still have another quarter left in this year that we want to get through. We do expect incremental margin increases throughout next year. And a lot of it is very much mix dependent and how fast our components business can get to that level as well next year. So I think you see just trending improvements for each quarter, and once we get through March, of course, through June and the leverage from SG&A, we get components increases. I move on and make sure that we keep the mix in balance and can deliver that sequential improvements in gross margin next year.

Brian Alexander – Raymond James

Okay. And then just a follow-up. Back to the comment about June and September, I think one of your smaller competitors talked about broad-based customer forecast reductions that will affect their June quarter, to a lesser extent, September. Mike, you commented you aren’t really seeing this and you’ve made a very good comment about how you are well positioned globally with next generation products and some of those low volume, high mix segments. Do you also think that your wins in those segments are becoming smaller in nature per program and perhaps you are becoming more competitive to some of those smaller players? Thanks.

Mike McNamara

I don’t know if we’re becoming more competitive, but certainly we do low volume, high mix business than anybody by far. And we’ve been very, very focused on those kind of businesses for many, many years, and they are sizeable and they are very, very profitable for us. So we are after certainly every $20 million, I think you are kind of referring the infrastructure, but certainly any $20 million account, we go after. And we have a system within Flextronics that handles the low volume, high mix kind of customers. So to us, we were after that business and we will continue to go after it in a pretty aggressive way and leverage the strength and the overall whole in order to be able to get that business. So I won’t say it’s a new initiative, but I’d say it’s an old initiative and it just works well for us.

Brian Alexander – Raymond James

Okay. Thank you very much.

Mike McNamara

You’re welcome.

Operator

Our next question comes from Steven Fox from CLSA. Your line is open.

Steven Fox – CLSA

Yes. Hi, good evening. Two questions. First of all, can you just talk a little bit about tablets from a strategic standpoint? How important is it to be playing in this product category? And you mentioned a win in tablets. Can you just sort of talk about what drove that win for you? And then secondly, Mike, just relative to the growth rate you talked about for next fiscal year, how do you compare that to the overall outsourcing market growth?

Mike McNamara

Yes. Tablets – three tablets, you know whether it’s a smartbook or a tablet or a netbook or a notebook or a Polycom station. I mean, we actually participate in all the different product categories. So we’re well positioned. We have a very, very big position in smartphones, as you know. We have a very big position in PCs, that’s growing. So, to me, a tablet is kind of a blend of both those, a lot of the same technology, a lot of the same supply base. So for us, it’s just – it's a category that we will inevitably pick up and go manufacture. Maybe we’ll do some on an ODM basis, maybe we’ll do some on an EMS basis. So to us, we will just – it’s just one more electronics product and we build all of them. So we will – I’m sure we’ll be participating substantially as that market picks up.

As for the EMS rate and Flex rate, I think most of the inlets have – you have the growth rate of next year, down like at 8% or 9%. And I think Flex, we’ve always said that our target for our long-term growth rate has been 10% to 15%. We structured and diversified our business in order to be able to achieve that 10% to 15% growth rate kind of on a continuous basis, not as a one-year target. And without giving guidance for next year, which we are obviously not going to do, we still continue to believe that our company is well positioned to generate 10% to 15% growth ahead of a market of 8%.

Steven Fox – CLSA

Great. Thank you very much.

Mike McNamara

You’re welcome.

Operator

Our next question comes from William Stein from Credit Suisse. Your line is open.

William Stein – Credit Suisse

Great. I’m hoping you can give us or remind us a bit about the margin targets and the drop-through on the operating lines a bit, whether we model April 15 for next year. We get an idea for assuming the mix doesn’t change dramatically from what it is today, where we think margins might wind up.

Paul Read

Yes, you’re right, Will. Will, this is Paul. You’re right. It’s very mix dependent, and we don’t know the full picture of next year yet. But needless to say, that 5% to 15% that we’ve always been talked about in terms of incremental contribution margin is what’s holding through this year and should hold through next year. What’s important to us is we will certainly maybe see improvements in the operating margin. If you net out – I think you’ve seen us this year kind of flat line with all the investments we’ve been making in components in particular, but we will get, like I said earlier, leverage out of that. We’ll get leverage out of the SG&A.

But even though the margin has really been flat this year, we’ve still been able to – with a revenue growth of 20% organic for this fiscal year, $5 billion of organic growth, we were 60% plus increase in earnings per share this year and record ROIC is 33%, strong free cash flows. That’s really what we are driving next year as well. We want to continue to drive EPS and the quality of earnings up, the return on capital with cash, as well as improved margins. And I think if you looked at the December quarter, we could have hit 3.5% if our components businesses had delivered that 12% operating margin. And so it’s definitely being something that’s been hindering less, but next year’s next year, we’ll talk about that kind of when we are in next year. But there is a lot of leverage in here.

William Stein – Credit Suisse

Okay. And any change to the tax rate guidance?

Paul Read

No. We say 10% to 15%, but from last quarter, probably around the 10% would be fair to say.

William Stein – Credit Suisse

You keep coming in lower. Are we ever going to really see that 10% to 15%?

Paul Read

Yes, of course.

William Stein – Credit Suisse

Great, guys. Thank you.

Paul Read

You’re welcome.

Operator

Our next question comes from Lou Miscioscia from Collins Stewart. Your line is open.

Lou Miscioscia – Collins Stewart

Okay, great. A clarification and a question. I think you said that in – from the March to June quarter that either the ODM business would double or just the whole computing sector would double. Could you just clarify that for me?

Paul Read

Yes, our ODM business.

Lou Miscioscia – Collins Stewart

Okay. And going back to the tablet question, I think – are you also currently manufacturing a tablet that’s actually already out in the stores today?

Paul Read

We have, yes – we have one in the stores. We have one in the stores today, yes.

Lou Miscioscia – Collins Stewart

Okay, great. I thought so. And then finally, my main question has to do with the components, which we all keep asking about. Historically, many of those component businesses ran up to something in the 10% operating margin level. Is there anything that you see structurally that would say that those businesses now will never get back to 10% that maybe the cap is 5%? And if it is 10% one day in the distant future, not obviously next year since you’ve already talked about that throughout the call, how long do you think it would take? Would it be a 24-month, 36-month type of effort?

Mike McNamara

When I think – 10% is a high bar, and I think to hit the 10%, you have to have a certain product mix within your components to be able to achieve that. So what that means is like in your power businesses, in order to get 10%, you need to be way on – heavily skewed on the server end as opposed to chargers or adapters as an example. The same thing with printed circuit board. You have to have technologies that are unique and different in that standard technologies that may go into a PC or a tablet or the other things. So I think that really depends –that’s really getting into margin management. It’s on the high end. So – I think we are not too focused on that. We’ve set a goal of – that we think these will go around between 5% and 10%. Lot of it’s going to be margin dependent, lot of it’s going to be a blend of whether it’s a camera modular or a charger or an adapter or a high-end server or if it’s a printed circuit board. And we are just staying focused to try and get to there first.

Lou Miscioscia – Collins Stewart

Okay, great. But it sounds like it’s more likely a, let’s say, 4 to 8, or 4 to 7 would be the long-term target.

Mike McNamara

I mean, I think we’ll stay with the target of 5% to 10%. I mean, I think that’s still a reasonable target. I mean, you’re just talking about 10% and I think that’s pushing it to the high end awfully quickly when we are trying to breakeven today. But there is no reason these components – and part of what I’m saying that we will do with these things is work on mix over the coming years. And – but – so we can get up to that higher end. But right now, the way the business is run, we think they ought to be in a 5% to 10% kind of range, and we think that’s reasonable. And some of that’s achievable if we ever target that up.

Lou Miscioscia – Collins Stewart

Okay, fair enough. And just last clarification, the 4%, was that the end of the fiscal year, being next March, or was that the end of the calendar year being this calendar year?

Paul Read

It’s probably the end of the fiscal year, but we’ll target the end of the calendar year as well.

Lou Miscioscia – Collins Stewart

Okay, great. Well, good luck on the new calendar year.

Paul Read

Thank you very much, Lou.

Mike McNamara

Operator, we’ll take one more question.

Operator

Okay. Our next question comes from Alex Blanton from Clear Harbor Asset Management. Your line is open.

Alex Blanton – Clear Harbor Asset Management

Thank you. Thank you. The first question is related to the market share gains that you mentioned right at the beginning when you said two of the sources of your growth are your outsourcing and market share gains. Could you elaborate on just where those market share gains are coming from, which segments, and what kinds of customers are – I mean, competitors, what kinds of competitors you might be taking share from and why?

Mike McNamara

Yes, that’s a real broad-based question, Alex.

Alex Blanton – Clear Harbor Asset Management

Yes.

Mike McNamara

If I think about the whole bundle – let me start from a high level first. If I think about the whole bundle and you look at the midpoint of our guidance, we are probably up year-on-year like about a 20% organic growth rate. Within that, literally every single segment is going to be over double-digit growth. So the way we look at it is we are penetrating kind of across the board on a pretty, pretty active way. Our infrastructure business we talked a little bit about and I think that ends up like 15% year-on-year. I don’t think the market has grown 15% year-on-year. But we also expect on top of that 15% this year, we expect to grow double digits next year.

So just using that as an example, the reason we think this is going to do that is because we think we have a market competitive position that’s stronger than anybody else. We’re much larger. We have more capabilities. We have more things to show, and we’re well penetrated around the world and all the way into Chinese marketplaces. So we just have competitive advantage. If we think about the industrial base, it’s about a $4 billion – or if you think about industrial, medical and automotive, it’s about a $6 billion business for us. It’s substantially large. It has a lot of different vertical capabilities that support it. And there’s just a lot of different ways to penetrate that market, which we feel that we’re doing really well to go do.

So we have a bigger infrastructure. We have more locations. We have more vertical technologies for those kind of components such as machines around the world, plastics around the world, sheet metal bending and soft tool and hard tool, all around the world, and cables, and we – we did have a lot more things that are attractive to industrial companies. So we think we can have a pretty strong growth rate. We think that – in this last year, we’re probably up 20% on that bundle. Things like medical, we’ve expanded our footprint to include things like disposables. Again, a very, very broad footprint. Very large dedicated operations that have been through many, many FDA audits over and over and over again, very, very successfully, and not only in China, in Mexico and in Europe.

So, by the time you have kind of put all those together, our competitive positioning is very, very strong. And then you bundle into that some of the new product categories that we’re going after, such as clean tech and other things. And it just creates a very, very strong growth profile. So I don’t know that it’s in any one thing, but we’ve tried to build each one of the segments to be themselves diversified, take each one of them can have themselves have the right vertical capabilities to be successful competing in the marketplace. And by doing that, we expect each one of them to grow double digits. And we are being very, very active in making that happen. So I don’t know that it’s any one thing, I just think it’s a very, very strong base of business that is very, very broad-based, very penetrated into China, and has a number of different verticals that help support a very attractive business model with the customers.

And lastly, I’ll just add on that is [ph] services. Services extend all the way into retail technical services that we talked about, allowing the Firedog, and while the revenue itself in Firedog is not that meaningful, the ability to create and add solution for our customers that they can use or not use, or we can just penetrate the marketplace independently with those business is very, very strong. So there’s no one answer to it. It’s just the way we’ve built our business and how we’ve done our investments over the past. And we think we’re just extremely well positioned for the future. So once again, we’re somewhat bullish about our FY ’12, and I think we can again accomplish some kind of results. It’s kind of a broad answer, but hopefully that works for you, Alex.

Kevin Kessel

Operator, that’s everybody?

Operator

Yes, that’s everybody in queue.

Kevin Kessel

I’m sorry. Operator?

Operator

Yes.

Kevin Kessel

Okay. So we’re done.

Mike McNamara

All right. That was kind of a weird ending but. Hopefully you got what you needed, Alex. And thanks, everybody, for attending the call, and we’ll look forward to speaking to you again next quarter.

Kevin Kessel

Yes. Thank you. And you can also access the replay of the call and obtain a transcript in the Investor section of our website. Talk to you next time.

Operator

Thank you for your participation in today’s call. You may now disconnect.

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