Sanmina-SCI's CEO Discusses Q1 2011 Results - Earnings Call Transcript

 |  About: Sanmina Corp (SANM)
by: SA Transcripts


Good afternoon. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI First Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Ms. Paige Bombino. Ma'am, you may begin your conference.

Paige Bombino

Thank you, David. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's First Quarter Fiscal 2011 Earnings Call. Today's call is being recorded and is posted along with a copy of our earnings release and a slide presentation on the quarter at in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on our website. Please turn to Page 2 with the Safe Harbor statement.

During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections.

The company's actual results of operation may differ significantly as a result of various factors, including the state of the economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change.

We refer you to our quarterly and annual reports filed with the Securities & Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You'll note in our press release issued today that we have provided you with the statements of operations for the three months ending January 1, 2011, on a GAAP basis, as well as certain non-GAAP financial information.

A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and is posted on our website.

In general, on our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense and other infrequent or unusual items to the extent material.

Any comments we may make on this call as they relate to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, net income and earnings per share, we're referring to our non-GAAP information.

I would now like to turn the call over to Jure Sola, Chairman and Chief Executive Officer.

Jure Sola

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome to Sanmina's Conference Call. Here with me today I have Bob Eulau, our Executive Vice President and CFO.

Robert Eulau

Good afternoon, everyone.

Jure Sola

Also, Hari Pillai , our President and Chief Operating Officer.

Hari Pillai

Hello, everybody.

Jure Sola

So agenda is that Bob Eulau will review our financial results for the first quarter and fiscal year 2011. Then I will follow additionally with some comments relative to Sanmina-SCI results and future goals. Then Bob, Hari and I will be open to answer all the questions that you might have.

And now, I would like to turn over to Bob. Bob?

Robert Eulau

Thanks, Jure. It is a pleasure for me to be joining you on today's call. Please turn to Slide 3.

Overall, this was our seventh consecutive quarter of improved operating margin. Revenue of $1.66 billion was down 1% on a sequential basis and up 12% over the first quarter last year. This was at the high end of our guidance of $1.625 billion to $1.675 billion.

Gross margin was unchanged from Q4 at 7.8%. This was below what we had planned primarily due to the mix of business or revenue decline.

Operating margin improved 10 basis points from last quarter to 4.2%, which is a good outcome since this was achieved in spite of slightly lower revenue than Q4.

Non-GAAP EPS was $0.45 per share. This was based on 82.8 million shares outstanding on a fully diluted basis. Non-GAAP EPS was above the range of our guidance primarily because of lower operating expenses.

Please turn to Slide 4. I'll start by making a few comments on the GAAP numbers. For the first quarter, we reported a GAAP net income of approximately $28 million, which result in earnings per share of $0.34.

This is down slightly from Q4 and up significantly from last year once you adjust for last year's one-time events totaling $48 million, which consisted of proceeds from a legal settlement and the resolution of a tax matter.

Restructuring costs totaled $5 million for Q1. The restructuring costs were significantly below what we had planned due to lower cost than expected for the strategic acquisition of an optical business last year.

The integration of this business is now complete and the business is ahead of our plan from a margin standpoint.

For Q2, we expect restructuring cost to be in the range of $5 million to $6 million. After the second quarter, we will continue to see some minimal restructuring expenses on our GAAP P&L of approximately $3 million to $4 million per quarter that relate to cost for past restructuring actions that are booked as incurred in accordance with GAAP.

These excesses primarily relate to real estate which is being held for sale. We expect these expenses to decline over time as properties are sold. These properties are listed on the market at over $130 million.

My remaining comments will focus on the non-GAAP financials for the first quarter. Revenue was down 1% or $25 million to $1.66 billion. At a $129 million, gross profit was down 2% from the prior quarter.

Gross margin came in at 7.8%, which was flat with the previous quarter. Gross margin did not meet our expectations. The biggest challenge was the Components area where revenue was down in most categories. The contribution margins are generally higher in the Components business, so a decline in revenue had a disproportionately negative impact on gross profit.

Operating expenses were down for the quarter at $60 million. This is down primarily due to a change in estimate for bonus expenses that were previously accrued. We expect operating expenses to return closer to recent levels of around $64 million next quarter.

At $69.3 million, operating income improved by 1% over the prior quarter. Operating margin was 4.2%, which was a 10-basis point sequential improvement. This is a solid outcome given that revenue was down by 1%. The tax rate for the quarter came in lower than planned at 16% of pretax income.

Based on our current profit mix assumptions for FY '11, we believe our FY '11 tax rate will be in the 15% to 17% range. On a non-GAAP basis, we are in $37.3 million in net income.

On Slide 5, we're showing you some of our key non-GAAP P&L metrics. As we expected, revenue growth has slowed in the last couple of quarters after a very strong growth last year. But nonetheless, we've started this year with our Q1 revenue up 12% over last year's first quarter.

After improving dramatically in the first half of last year, gross profit has not met our expectations. While revenue and gross profit have grown over the last year, our operating expenses actually declined in Q1. With the significant decline in operating expense and a modest increase in gross profit, operating profit has grown 42% since the first quarter last year.

During the last year, operating margin has improved from 3.3% to 4.2%. EBITDA was up 35% over Q1 last year and flat with Q4. Our EBITDA for the first quarter was $93 million and our EBITDA margin was 5.6% for the first quarter.

For modeling purposes, I want to mention that depreciation and amortization were $25 million for the quarter.

Please turn to Slide 6. Our earnings per share improved dramatically since the first quarter of last year. In fact, EPS has almost doubled since the first quarter last year. EPS was down slightly from last quarter, mostly due to business mix and higher taxes, which was not quite offset by lower operating expenses.

I'd like to turn your attention to the balance sheet on Slide 7. Our cash and cash equivalents were $549 million. Cash was down $44 million from the previous quarter for several reasons which I will summarize in a moment.

Accounts receivable declined by $16 million, mostly due to better revenue linearity than last quarter. Inventory declined, for the second quarter in a row, by about $11 million.

The most significant change in the balance sheet related to accounts payable, which was down $84 million. The primary issue with accounts payable was the fact that we received a high percentage of material early in the quarter. This issue was driven in part by the delivery of components that had previously been supply constrained.

Let's turn to Slide 8 to discuss some of the balance sheet metrics. Our cash position remains strong, given our potential cash needs. The major reason for the decline this quarter was the accounts payable which I previously mentioned. The decline in accounts payable was partially offset by accounts receivable and inventory. We also used $12 million to pay down short-term debt during the quarter.

Cash flow from operations was negative $2 million and net capital expenditures were $28 million for the quarter.

The net capital expenditures included $5 million in real estate sales during the quarter. This led to a negative $30 million in free cash flow.

Inventory remains a key focus. Inventory declined for the second quarter in a row, but our inventory turns remain flat at 7.3. We still have room to improve and our goal is to get up to at least eight turns within a few quarters.

In the lower left quadrant, we are showing cash cycle days which combine our cycle time for inventory, accounts receivable and accounts payable. Inventory days were flat when compared to last quarter at 49.9 days. We saw an increase in accounts receivable day sales outstanding from 51.8 days to 54.7. This was primarily driven by mix and turn changes.

Past due AR was very good. As I mentioned earlier, accounts payable was unfavorable as the decrease from 55.1 days to 52.4 days. Overall, cash cycle time increased from 46.5 days last quarter to 52.2 days this quarter.

Finally, return on invested capital was 16.5% for the quarter. This was adversely impacted by the accounts payable situation I described earlier. We don't like to have this measure decline, but it's still well above our cost of capital. We expect our ROIC to improve over the next few quarters.

In summary, this was a challenging quarter, but we were still able to deliver solid operating margin and EPS in spite of the sequential decline in revenue.

As you'll hear from Jure, we expect modest results in the first half of the year. Our early look at the second half continues to be very positive from both a revenue and an operating margin perspective.

At this point, I will turn the discussion back over to Jure for more comments on the business and our guidance for next quarter.

Jure Sola

Thanks, Bob. Ladies and gentlemen, I would like to add few comments and an update to the first quarter results and the future forecast.

Number one, I'll talk about the revenue breakdown by end markets, talk about our second quarter outlook and I'll give you a business update and visibility for calendar year 2011. Then Bob and I and Hari will open for Q&A.

So now please turn to Slide 9. Here I'm going to review the first quarter breakdown, but also give you a forecast for second quarter, what we call March quarter.

First of all, our top ten customer has a total 49% of our revenue. We also have two customers that were a 10% plus, that mainly coming from Communications and Networks (sic) [Communications Networks]. Well, let me make a comment, more details in each of these markets.

First of all, Communications Networks consisted of 48% of revenue. Here, we focus in networking, wireline and wireless infrastructure type of product.

This group grew approximately 3.5% quarter-over-quarter. Networking and wireless business continues to be very strong for us. If we just compare it on a yearly basis, this business grew approximately 60% year-over-year.

As we look at the second quarter, in the long term, we still look at these markets to be very strong. For the second quarter, we're forecasting at this time flat, maybe slightly down on the revenue point of view. But let me give you some more insights for the rest of the calendar year 2011.

We believe this market is going to continue to grow strongly in 2011. And this is mainly driven by some of the changes that going on in the market. There's a lot of changes and new technology, so if you just look at some of the latest products that will be in shipping, like in optical side of our business 4G systems, that is doing really well. And we continue to introduce now 100G system. Those type of systems will continue to drive the revenue for us for rest of 2011 and beyond.

Also, the rollout of the 4G LT (sic) [4G/LTE] rollouts what we call in industry, we're well involved there. A lot of good customers, so we expect that type of technology to contribute to our revenue as we look in 2011 and beyond.

If you look at the whole group here, we're well diversified, not just by the products itself, but also the customers that we are involved. We offer very strong value to our customer as we continue to invest in a new technology that will allow us to continue to gain market share in this side of the business.

Again, we are winning the new businesses and these businesses are all about the new technologies that's going to drive Communications Networks markets for us for many years to come.

Now let me talk to you about Enterprise Computing & Storage. Last quarter, that was approximately 13.5% of our revenue. First quarter was down 2.7%. If you look at the quarter-over-quarter comparison, demand if you look in this market for us, last three quarters was weak, mainly driven by old programs. Some of these programs are going to end of the life.

As we look at in the second quarter, I believe this business is going to start to stabilize so we'll forecast second quarter's flat to potentially up. We expect also to see nice growth in calendar year 2011, mainly starting the third quarter and beyond. And this will be driven by the new programs that we've been winning in the last two, three quarters.

Also Sanmina is introduced in the last six months, our own product and storage product, what we call CDMA custom design product ODM. This is for high-end storage boxes. We're starting to ship this product and we think we got a pretty good demand going on if you look at 18 months out. So we believe it's a good future opportunity for us.

If you look at the whole market, what we call Enterprise Computing & Storage, which is the high end of the servers and storage product, we believe this group will play a bigger role for our growth in 2011 and beyond than it did in the last four quarters.

Now let's go now to Industrial, Defense and Medical. That was 24.6% of our revenue last quarter and that was also, quarter-to-quarter basis, slightly down, about 1.7% down. In that group, we have Medical, Defense and Aerospace and Industrial, let me talk to you about each of them.

Medical, actually was very strong for us. On a quarterly basis, that was up about 9%. Industrial was flat. Dus [ph] is the really only business that was down and that was down about 20%. The main reason in the Dus [ph] being down last quarter, we have some existing program that the demand was pretty weak last quarter. So as we forecast second quarter, I would call that group to be flat, potentially up.

Defense and Aerospace business, we're forecasting up next quarter. Industrial also should go slightly up. And Medical, I would say it will be flat, maybe slightly down. I think medical for next quarter, to me, it's more timing than anything else. But let me also make a little bit more comments what we see rest of the year.

As we look at the third quarter 2011 and calendar year 2011, this group should continue to grow nicely, as I said, starting in the third quarter, driven mainly again by Medical. In Medical, we should see a strong demand for a diagnostic imaging product, patient monitoring systems and respiratory products and other products that we'll be working on in 2010. So we won a lot of new programs in 2010 in the Medical and I believe those things will start helping us improve in our revenue in 2011.

Industrial, mainly focus here on a clean tech and semiconductor products. I believe we're well positioned here. We have a lot of good opportunities on front of us and we expect the calendar year 2011 to continue to expand.

Back to the Defense and Aerospace, again, we expect this business to start to improve next quarter, but hopefully that based on our plans and what we see sequentially each quarter, we should see some improvements and hopefully exit the calendar year 2011 in a lot better position than what is today.

So a lot of focusing here because our Defense and Aerospace business has a lot of potential and I'll talk about later more than that.

Multimedia, approximately 14% of our business and last quarter that business was down about 14.4%. In that group, in Multimedia group, we have automotive, set-top boxes and some other equipment there, what we call Multimedia.

Automotive actually was very strong, but I would say the rest of them, multimedia products, we had a few -- two major customers that the temporary, their demand is pretty weak. So as we look at the next quarter, we believe this business will be flat, mainly driven by Automotive, Automotive should be nicely up.

Rest of the businesses, we don't see major recovery in the Multimedia until second half of our calendar year 2011. I think it's mainly, as I said earlier, weak demand with couple of our customers there, and we do expect that business to turn around. So it's a timing here for us more than anything else at this time.

Now, I would like you to turn to Slide 10 and I will talk about our outlook. As Bob mentioned, we expected these first two quarters to be kind of flat when you compare them to the fourth quarter of our fiscal year 2004, but we're starting to see a good demand in the second half.

So revenue outlook for second quarter is $1.62 billion to $1.67 billion. We expect gross margin to move in the right direction, 7.9% to 8.1%. Operating expenses should be around $64 million. Operating margin should come in between 4% and 4.2%.

Interest expense and other should come around $26 million to $27 million. Depreciation, amortization is about $25 million. On CapEx, last quarter, we spent about $28 million. This coming quarter, the second quarter, we're planning to spend about $30 million for equipment, mainly for new equipment, and for the whole year, we're still planning to spend around $100 million.

Tax rate should be in the range of 15% to 17%, and diluted shares outstanding should be approximately 83 million to 84 million shares. And we're also forecasting non-GAAP EPS of $0.40 to $0.43 next quarter.

What I would like to do now is really give you a little bit more insight of our business, what's going on, and visibility for calendar year 2011.

90 days ago when we had this conference call, I think at that time, we're a little bit concerned about economy. That's what we're hearing from our customers, but I can tell you that we feel a lot better about global economy today. I'm not economist, as you know that, but I can tell you that visibility and the forecast are giving us some more confidence about the calendar year 2011 than what we had 90 days ago.

Outlook for us is more positive. First quarter results and second quarter results support our view of a flat first half of our fiscal year 2011. In the second half of our fiscal year 2011, we see stronger forecast and expect to deliver revenue growth and large margin expansion in third quarter and remainder of fiscal year 2011.

Our strategy is working. We still believe that our long-term goals for operating margin of 6-plus percent is attainable. And I believe we talked about it last quarter that if the economy continues to improve, we believe that we have potential to exit calendar year 2011, which is December quarter for us, with operating margin for our total business around 5%.

We still believe that today. And I know there is some question out there, it's okay, how Sanmina is going to get through these numbers? So what I like to do is share with you some of our key points from our strategy how we're going to get there, how we're going to meet our goals.

First of all, our strategy is differentiated. We've been working now in this strategy, and this is not just shutting down bunch of manufacturing plants around the world and say this is a new strategy. Our new strategy is really focus on project that will drive more sustainable growth and deliver, look for

for opportunities that can deliver us better industry margins.

So that's the key focus. Focusing on key markets, providing leading solution and partnering with our key customers. I think we accomplished that and I think we got a foundation that we can build on that.

We also have been developing our component capabilities. I know there's a lot of focus strictly in the Circuit Boards, but we really widened our components technologies. Let me give you some highlights.

We're providing leading component technology solution to these key markets and these key customers that I'm talking about. So for example, if you just look at the optical components. Two years ago, we had a basically zero revenue in optical components. Our revenue in optical components today is approximately $500-plus million run rate. So great accomplishment. We took some time to invest in these businesses, we're building these businesses and they're starting to deliver some good margin. But they have a lot of room for growth to get up, what I'd say the industry margin goals, and I'll talk about it later on.

Printed Circuit Boards and backplanes, yes, we have some challenges, I think. Today, it's all about the growth and growing these factories that we have, and we continue to invest in some of these key technologies.

Enclosures including precision machining and frames, well positioned globally on that. We continue to expand our memory modules, which today not just focus on the memory module, but also has its own product that focus in solid state drive, what we call internally SSD solution.

As I mentioned earlier, Defense business for us, what we call Defense and Aerospace, is very critical to the future of this company. But we're changing -- not changing, but we're including a strategy that we had there for a long time, is we're expanding the products here, not just focusing on EMS services. So we've been shipping our products to this market directly to the end user. We continue to invest, so we're really changing the model in our Defense and Aerospace business.

I mentioned about earlier, we introduced a fair amount of product in our storage and server business, which what we call custom-design and ODM products. We believe that we have a good potential there, and other products that I'm not even ready to talk about today.

So we are building a different EMS company than what Sanmina was in the last five years. Going back, what I would call to the roots, where we are focusing on the strong customer relationship, offering the unique technology, and really focusing on the products that will make us a different company.

So we also focus, as I've said, on a long-term product mix to make sure we improve those. Traditionally, EMS, yes, but in those traditional, we're going to focus on the key markets and the key customers that have a requirements for high-end, higher-technology products. I just mentioned technology components group. Dus [ph] and Aerospace, and again, and some other CDMA, the ODMA (sic) [ODM] product that were going to be coming at the high-end markets.

So if you kind of analyze what's the margin potential in these businesses, I think we, as an industry, we have a little bit different strategies, we all have a different strength and weaknesses and we focus where we have a strength.

When it comes to the margin, margins are driven by markets. We, as a supplier to those markets, we basically adjust to them, make sure that we can compete in those areas where the customer is willing to give us a chance to grow in those higher product lines.

So, for example, if you look at EMS high-end technology products, the companies out there are doing this and we're doing it ourselves in certain products, those type of margin should be around 5-plus percent. If you look at technology component companies, including optical component companies, high-end printed circuit boards, high-end backplane, they had delivered an operating margin 8% to 10% industry today.

If you look at the custom-designed products especially for high-end stuff, there is about 10% to 15% operating margin. And then aftermarket services, operating margin 6% to 10%.

So those are the businesses that we are uniquely positioned, and we're driving these margins to that level. And that's why the way we focus and what we are doing today, we have more confidence, assuming that the company cooperates with us, then we have a pretty good chance to exit the calendar year 2011 around 5%.

But let me give you a couple more comments, what are the key drivers for our margin expansion. Again, as a management, we have to continue to improve our efficiencies. We're working very hard to improving our mix and sustainable revenue growth. That's combination of mix and revenue that are sustainable for many years to come. Continue to leverage our Components and expand our Components and grow where they need to be.

There's a lot of work still to be done. And we know that. But we believe that it's still right strategy to continue to move in that. And of course, continue to utilize our capacity. As you know, we do have extra capacity around the world.

So if I kind of analyze the whole product lines, both from EMS components and the products, I still believe there's a lot of work done in each of these fields. But we are very confident as a management that every one of these businesses will see nice growth and nice financial improvements in calendar year 2011.

So in summary, I am optimistic about our future. And I believe that we're well positioned to grow revenue and achieve our operating margin and EPS goals for fiscal year 2011.

So now, I would like to, again, thank you all for your support and time today. I would also like to take this opportunity to thank our employees for their hard work and dedication and their support.

Operator, we are now ready to open the lines for questions and answers. Thanks again.

Question-and-Answer Session


[Operator Instructions] Your first question comes from the line of Jim Suva of Citigroup.

Jim Suva - Citigroup Inc

In the press release, you made a comment in the text about to obtain or achieve your operating margin and EPS goals for 2011. Can you just quantify the operating margin and EPS detailed goals of what specifically you're saying? I know in your comments you'd mentioned you think you can exit the year with operating margins of 5%, is that what you were alluding to in your text?

Jure Sola

Yes, I think that's what I was alluding to. Our goal, you see the guidance -- we delivered 4.2 operating margin in the first quarter. We're guiding now 4 to 4.2 second quarter. We believe that everything that we see today, that the third quarter demand is up even today, the visibility is good. So today, unless I think the whole world changes, the third quarter is going to be a lot better than the second quarter. And based on that, our operating margin should move in the right direction. And based on all the data, we believe the fourth quarter will continue to move, and we're expecting to have a pretty strong first quarter of 2012, which is our December quarter. And if you'll do the math, I really believe that we think we can hit that or around the 5%. We have to. I know we've been talking about it. Nobody is going believe us, then we deliver, so that's kind of what we're saying.

Jim Suva - Citigroup Inc

And then my quick follow-up, Jure, is one of your indirect customers on the semiconductor equipment side, notably again indirect customer, Intel, guided significantly higher for capital expenditures for this year, I believe about $9 billion and most people were expecting about $5 billion. And on this call so far I haven't heard you talk a whole lot about semiconductor equipment .You talked about optical and other areas. Is semiconductor equipment just less of a focus today or...

Jure Sola

No, I'm glad you brought it up. First of all, semiconductor equipment, for us, I think we're well positioned. About five, six years ago, we went and expanded in the machining, precision machining, precision plastic, precision frames. So we have one of the leading industry capabilities for semiconductor industry. The reason maybe I'm not highlighting it because it's a business that we had for a long time, we're well positioned, so I try to focus more on the new one. But you're right, I think as I've said in my prepared statement, and I'm saying in industrial semiconductor and clean tech, that's the really what I would call three groups, what we call industrial that we are focused on. Semiconductor, I think, we're well positioned with all the key players. And we expect to have a nice growth in 2011. It was pretty strong beginning of 2010. And then things for us, maybe, I would say flatten it out end of the 2010. But I believe that third quarter on, we should see a little bit more pickup in that side of the business.


And your next question comes from the line of Wampy Mohan [ph] of Merrill Lynch.

Unidentified Analyst

I want to ask a question about the ODM design, particularly, the one that you're referring to in high-end Enterprise Storage. Can you share any details around this ODM design that makes it differentiated? And do you have any customers testing this now? And what do you think...

Jure Sola

Yes. First of all, we are partnering with another key software company out there that I can't talk about. We're providing a high-end design. It's one of maybe the, I would say the biggest unit that is offered by independent ODM company out there, is being well received. And we're getting orders on this and this product is going to some big players in the industry.

Unidentified Analyst

Can you talk about the revenue opportunity and the margin profile of this?

Jure Sola

Well, revenue, any of the project like this, unless we're at least -- couldn't think at least $100-plus million, we wouldn't even talk about it. But the margins on this unit, it should be no -- we're not interested in getting the custom or ODM type of products where we can deliver an operating margin better than 10%. It's not worth the investment for us, otherwise.

Unidentified Analyst

The gross margins came in a bit lower. You mentioned that Components business had some lower volumes, but were there any other follow-up cost execution issues you alluded to last quarter, or are those well behind you?

Jure Sola

Well, I think we had last quarter -- we had a one-time issue. I mean, as Bob mentioned, and I'll have Bob add to it, but definitely, the revenue. But I think, of course, that we could have -- there's some other issues that we could have maybe do a better execution. We are manufacturing company. There's always little things that we can do better. So when you ask that direct question, yes, we could do better everywhere, including some of the components. But I am very confident about that business, as I've said in my prepared statements. And I think if you look at the fourth quarter, demand for Components, because there's a fair amount of inventory with our customer base that we believe that also will have a higher pickup in the second half of the calendar year 2011.

Robert Eulau

I don't have a lot to add. I mean I think mix within Components was a challenge. As I mentioned, revenue had a pretty significant impact there. And mix on the EMS side, while EMS did pretty well overall, mix could have been a little better there, as well.


And your next question comes from the line of Christian Schwab with Craig-Hallum Capital.

Christian Schwab - Craig-Hallum Capital Group LLC

Just a little bit more information if I may, though. You talked about, in essence, 86% of this quarter's revenue, that being Communications Networks, Enterprise Computing & Storage, Defense, Industrial and Medical, that we have new program ramps and we expect strong growth from that portion of the revenue in the second half if everything comes together as you expect. So just to make sure all of us are on the same page, does that mean that you think that revenues year-over-year in 2011 could be double digits plus? Or is that recovery of growth just mean a return to low to high-single digit revenue growth, then it comes up with a number closer to 7% to 9% revenue growth? How should we be thinking about that given the increased visibility?

Jure Sola

Yes, I mean if you just look at the first six months, if you compared it to the year ago, it's going to grow about, it could be as much as high as 9%, 10%. So I would say our internal forecast today is probably low double digit for right now. It all depends how the programs come in. If some of these programs are in a little faster, then they can be moved up. I mean we're driving internally to grow 10% to 15%, that's our goal. I don't see anything today that I can tell you we can grow 15% in the fiscal year 2011, but I think we feel pretty confident that we have a potential to grow 10-plus percent.

Christian Schwab - Craig-Hallum Capital Group LLC

Just to make sure that we're all crystal clear on what you guys were saying then. I understand we're driving for 10% to 15% growth. But given the visibility of the program ramps that you have, it's not unrealistic for us to assume that you have a 9% to 11% year-over-year fiscal year '10 to '11 revenue target is kind of what you're looking for. And if those programs are stronger, it could certainly be better than that. And if the economy rolls over in tanks, it will obviously be less. Is that fair?

Robert Eulau

Yes, just to summarize. I mean we believe, and we've been saying for a while, we think low double-digit growth is achievable this year. And there's nothing that tells us that's not the case at this stage.


And your next question comes from the line of Craig Hettenbach of Goldman Sachs.

Craig Hettenbach - Goldman Sachs Group Inc.

Just a follow-up on the comments on the better macro than 90 days ago. Anything, whether it's company, customer forecast or by end market that gives you the increased confidence that growth is going to be improved this year?

Jure Sola

Well, about 90 days ago, I think what we saw at least with our customers and projects that we had, we had a kind of a strong drive in the third quarter. And beginning of the third quarter, things look like that's going to continue. And then end of the fourth quarter, I think more some of these projects, somebody put a breaks on. And we just kind of worried at that time. And like I said, I'm not economist, but you read papers every day, you listen to the experts, and it was a scary news. I would say what we seen since then, number one, is that customers are more optimistic than they were, let's say in the November timeframe. Also the forecast, which in our case that's what kind of what we look, is the forecast. If you look at them today, our visibility for third quarter today is probably better than what we've seen for a long time. Would you guys...

Hari Pillai

Yes, and I would add to that, important is program wins that we've already won in the last couple of quarters, that we'll expect to contribute in a meaningful way in the third and fourth quarters.

Craig Hettenbach - Goldman Sachs Group Inc.

And then on the margin front, Bob, as you guys talked to a 5% potential exiting calendar year, does that mean you can keep the OpEx, SG&A and R&D around flattish at $64 million or so? Or how should it trend through the back half of the year?

Robert Eulau

Yes, so from an OpEx standpoint, we really don't see much growth there. I mean it would be little, if any. I think this quarter was a bit of an anomaly, but assuming $64 million and then slight growth, I think is reasonable for the year.

Jure Sola

And only increases there that, Craig, we'll count there, as we are starting to make more money, we'll probably have to reserve a little bit for higher bonuses for our people. That will drive it little bit, but I would say I agree with Hari, I don't see major changes.

Craig Hettenbach - Goldman Sachs Group Inc.

And any update on just component availability today, and any constraints in any areas?

Jure Sola

I'll turn it over to Hari, he does this every day.

Hari Pillai

Towards the start of this past quarter, so in the October, November, we saw some softening up, improvement of supply conditions. So generally, I would say that conditions are improving.


And your next question comes from the line of Sean Hannan of Needham & Company.

Sean Hannan - Needham & Company, LLC

So since a large part of your story is really the return of Components and the margin contribution that's there, perhaps if you can share with us a little bit around what you saw for bookings or book-to-bill for that business in the quarter? And then if you can provide a perspective, secondly, the level of growth that perhaps you expect to see in the back half of the year based on what you know for your current bookings and ramps?

Jure Sola

Sean, let me give you a little bit longer answer on that one. First of all, the book-to-bill are slightly down, especially because of the holidays. A lot of our bookings came in the first week of January. So if you kind of can count, the week of January was kind of flat up, okay? But because of the holidays, and we had a shutdown, week and a half, end of the year, a lot of the bookings came in first week of January. So I think when it comes back to the Components and a reason I spent a little bit more time talking about today, is that we expand in our Component because our strategy is really to kind of not strictly depend on assembly alone. And where a few years ago, majority of our revenue was assembly, that was a key focus. With the new strategy, we basically -- final system integration, just end of it. What we want to do in these critical systems, to provide as much technology as possible where we have a competitive advantage. So we don't have competitors trying to focus on some of these high-volume stuff. But if product requires a lot of technology, a lot of global logistics, very, very difficult to install, very difficult to test, very difficult to build, that's where we fit in. So we expanded our technology to fit and support our markets. So the reason we went to optical business, pretty soon our optical components is going to be bigger than our Circuit Boards business. Not today, but it will be. Because we believe those are type of technology, if we're going to compete in a telecommunication infrastructure, which is for us is networking and wireline, wireless, you have to offer some unique capabilities. So we've grown our Optical business as we invested in it. And we spent a lot of money investing in it because, as I said earlier, two years ago we didn't have much. Today, that business is well over $500 million and growing. And I believe has the opportunity to one day to be delivering 8% to 10% operating margin. Because there's a one comparer with a small public company, I think they're about $800 million company, if you look at their operating margin, they're already delivering, I believe, 10% operating margin. So that's why some of these businesses we are expanding and because I believe the long term, that's how we get to that 5%, 6%. Otherwise, I don't think we get there. So you're right, these components are very critical to us. When it comes to the growth, as I said earlier, I think we're going to expect little bit more growth in our second half for this high-end Components because I think combination of demand and also in watching our pipeline inventory.

Sean Hannan - Needham & Company, LLC

So we don't have a book-to-bill number now for this December quarter, and I suppose that's fine.

Jure Sola

I just said it was slightly below, and because a lot of the bookings came in the first week of January.

Sean Hannan - Needham & Company, LLC

If we were to look at that piece of your business, it appears when I try and reconcile the back half of your revenue ramps, new programs, the consideration of that, and that we perhaps have some better penetration in terms of design with your Components into some of those. And then the goals of executing at an operating margin at around 5% or better. It sounds to me like there should be better revenue acceleration around your Components business than the rest of your business. And is that a bad conclusion?

Jure Sola

No, you could be right, but let me put it that way. Let us go through the second quarter, and I think 90 days from now we can give you a little bit more details at that time. Because I think we'll have a lot better visibility in April, what's going to go on the rest of the year. But we're pretty optimistic. But again, also, Sean, remember a lot of these components that I'm talking, these are all high-end components, you have to get qualify, it takes a long time, and it's good and bad. Once you're into these critical projects, you really have to screw up to get disqualified. So getting qualified, it's the must, and that's really -- so we've been investing fair amount of time and money in the last year or so to make sure that we're on these key programs that are coming up.


And your next question comes from the line of Sherri Scribner of Deutsche Bank.

Sherri Scribner - Deutsche Bank AG

So you mentioned a number of new program wins ramping in the second half of the year. I think you mentioned Medical is one area where you see some substantial programs ramping. What other segments are you seeing, specifically where you have new programs ramping?

Jure Sola

Well, the Medical was good. I mean we brought in I think 10 to 15 new customer last year. New customers and that's addition to our core. We have a very strong core customer base in Medical, so we have a couple of players that maybe their business was flat, so bringing these new medical accounts I think is going to help us grow that business in future. We have Industrial. There's a lot of opportunities. And the reason I don't want to be talking too much about Industrial because it's a longer process. The stuff that we do Industrial, which is typical industrial product, clean technology, semiconductor products, these are all what we call internally big and ugly. These are large systems, a lot of machining, a lot of metal, high-end special electronics and so on. So there's a lot of opportunities there that we are working on, and there's a lot of projects. And we are hoping that's the right investment for us because we've been spending a lot of time with that customer base. So a fair amount of new programs. But back to Communications Networks. I think there, I am -- I would say we're best positioned ever. We're talking to existing key customers and also the emerging customers that we've been doing some business with, but their business can now double and triple. So we have a lot of opportunities in the Communications Networks. And most importantly, we're also diversifying there that we're supplying a lot of product, it's not just the one program. And that goes across all of our components that we also supply. So we're excited about that one. Enterprise Computing, like I said, that was a kind of a dead market for us in 2010. We are working very hard to drive that up, and I think we have enough confidence that the worst is behind us on that market. Only market that I would say for us this year, there is -- in Multimedia that I can say flat, down. And I think in automotive and multimedia, it will do fine. And some of the high-end cameras that we do will do fine. But there's some other products in the Multimedia for us that might not, like I said, not have a lot of demand, probably until the second half of the calendar year 2011. And I want to be perfectly clear that we did not lose any of the customers or projects in that group. It was just more about the demand of our customers. There are a lot of inventory that we built ahead. If you note, that business for us was very strong first nine months of a calendar year 2010.

Sherri Scribner - Deutsche Bank AG

And then in terms of you talked a lot about your strategy and that you're targeting the higher-end market. I guess I'm curious, who are you seeing as competitors in those markets? It seems like a lot of people are talking about trying to address sort of higher margin opportunities, but I wanted to know who are you competing with?

Jure Sola

First of all, just like any other customer, Sherri, there's a lot of different competitors, large and small, that want to play in these markets. I personally believe it's about focus and what solution you are bringing to this market, if you're going to be winning the orders or not. I believe that, that our culture is to be able to perform on a high mix, lower volume business where they are very challenging to do around the world. We got to understand, Sanmina, yes, we are a $6.5 billion run company today, but we got a global infrastructure when it comes to the IT capability of the plant, just like one of our biggest competitors. Actually, our IT systems are just, I don't know exactly how they are, but let me put it this way, there's no programs out there when it comes to IT systems or manufacturing capabilities that we cannot do. So we have a huge advantage to be able to focus on these niche markets that allows you to do globally. Our Medical is perfect example. If you look at a lot of our Medical growth, our customers' biggest growth is going to be in the third world countries, China, India, some others in Southeast Asia, third world countries, Eastern Europe. And that's the area that we can give them a complicated solution and give it to them on a units of one where some of our big players are really not focused. So I'm not saying they can't do it, but we are focused. It's all about focus technology and execution. So you have to be afraid of everybody, but you just got to do a better job.


And your next question comes from the line of Amit Daryanani from RBC Capital Markets.

Amit Daryanani - RBC Capital Markets, LLC

I didn't get the spot, but Components revenue sounds like they were down sequentially in December. It's a quarter I would think Components business should be up. So can you just talk about kind of what drove that business down? And then secondly, specifically in the PCB side, I think last quarter you had a couple of internal issues. Have those been resolved?

Jure Sola

Well, I think for us, I think many of the demands I think was the inventory. Like I said, I think if you just a look at the customer base that we have, that we're driving extra inventory because a lot of these shortages, especially tougher prices would be at the high-end systems. They require few very expensive components, they are hard to get. And so what do you drive? You got to help in the Circuit Boards, so you got to have optical component in order to do it. So I think inventory. And the second question, yes, the issue that we have, it was really the management issue locally that we have. We replaced the management. We sent two individuals from North America that's been us with for over 25 years. So it's just building around the management, which is challenged all the time, but I think we got it fixed.

Amit Daryanani - RBC Capital Markets, LLC

And then just in the Components side again. It sounds like that it was down because inventory correction and you're convinced that it's probably one more quarter where it stays flat and then it bounces back. I guess, what gives you comfort the inventory correction wouldn't sustain for a couple of more quarters?

Jure Sola

Well, I think it's more by our -- as I said earlier, it's hard for us to always know exactly what our inventory is, but I think we have a pretty good idea. It's really based on the forecast. I'm really giving you -- our forecast is based on what we are seeing today for third quarter. And I can tell you that if we can shift everything in the third quarter, I mean what is forecast for third quarter will be a lot bigger than our second quarter.

Amit Daryanani - RBC Capital Markets, LLC

And then just my final thing, to achieve the 5% operating margin target, what's the revenue run rate you need to be at to get there?

Jure Sola

We always go over this internally, and my friend over here, Hari Pillai, says, well, when I go play golf, if I can hit birdies I'll be the best golfer. If everything was perfect, believe me, we can do a lot more than what we are doing, okay? I believe that we know we are smart enough to know not every project, not every operating operations around the world is going to be always perfect. But we believe that we can improve the margin even at the flat revenue. So that's one. The second thing is, of course, growing the right revenue, and also expanding these programs that I just talked about earlier.

Amit Daryanani - RBC Capital Markets, LLC

But you don't want to come out with the revenue target or bandwidth that would get you to 5% now?

Jure Sola

No, I don't think it's necessary. I think if we ship the extra 5% next quarter, or whenever we ship that, if it doesn't fall to the bottom line, something is wrong.

Operator, we have a time for one more question.


And that question comes from the line of Brian Alexander of Raymond James.

Brian Alexander - Raymond James & Associates

So just to kind of clarify what your expectation is in the Components business. So the margin issues here were related to revenue softness that were driven by component constraints, as well as the lingering effect that you had from an issue last quarter where you replaced the management team. And so going forward, do you expect the component constraints to ease and that's going to drive margins in the Components business up and that's primarily why you're looking for gross margins to improve overall for the company next quarter?

Jure Sola

I think that's just one of them because that -- just to give you an example, the comment that you make in one of our Circuit Boards factory in Malaysia that's when they had a one issue. But if you look at the -- I have other Circuit Boards division that are delivering today operating margin, probably around 12%, 13%. So that's just the one issue. We have in the components and EMS, as Bob said, we can make improvements in a lot of places. So it's a combination of a lot of things that we got to do in order to hit that. But not everything, as I was joking earlier, not everything has to be a burden, not everything has to be perfect in order for us to continue to improve these margins.

Brian Alexander - Raymond James & Associates

But given that you're expecting gross margins to go up sequentially when you're looking for revenue to be basically flat sequentially, the key swing factor for the March quarter, at least, is better profitability in Components? Is that. . .

Jure Sola

Well, I think March quarter, we're guiding 4% to 4.2% in operating margin. We just delivered 4.2%. We want to deliver the highest possible margin there. So we kind of look at this quarter to be flat. I think for major margin improvements, we expect in the third quarter, but hopefully that we built a stronger foundation in the second quarter that will allow us to hit what we need to hit in the third quarter.

Brian Alexander - Raymond James & Associates

The comment about hoping for low double-digit growth in FY '11. Is that organic or does that include the benefit of the BreconRidge acquisition?

Jure Sola

That concludes the BreconRidge, but everything else should be organic. I mean we picked up some small strategic projects here and there, but there's no -- we don't have anything outlined for anything major.

Sean Hannan - Needham & Company, LLC

It seems like you guys have been very successful with new wins, so how much of that low double-digit growth, if you were to get there, do you think would be driven by new wins versus just growth in the existing business?

Jure Sola

Well, first of all, I think it is most important to keep what you have. And if you just look at the Communications Networks, what we call, there's a lot of new -- it's an existing customer, in some cases, it's existing project, but the new technology is coming in. So as you are building existing products, you got to make sure you win the new program, new technology product, so that is must, that's the most important. And the second most important is that you add new customers, right new customers, it's the right projects.

Brian Alexander - Raymond James & Associates

And then just finally, the Enterprise Computing business, it's been down more than 20% year-over-year for the last couple of quarters. It looks for the March quarter you're expecting it to be down close to 20%. The end markets for Computing are actually doing quite well. It doesn't sound like you're actually losing customers. So I'm just trying to understand what's driven the performance and, more importantly, why are you so confident that this business is going to turn around and drive double-digit growth?

Jure Sola

Well, first of all, if you just look at the last three quarters in that business, a lot of it, we had a lot of old programs, end of life programs, actually driven by few customers. And we believe that a lot of those old programs are now end of the cycle, some of the new programs are helping out. We believe our own storage box, high-end storage boxes that we're introducing will help us out. As I look at all the customers and the projects that we're working on, I just believe it'll be more positive than 2010.

Brian Alexander - Raymond James & Associates

And then just on the opportunity to refinance debt, any update there?

Jure Sola


Robert Eulau

I mean we obviously continue to look for opportunities to de-lever the company, and we are paying attention to what's going on in the high-yield market. But there's really nothing to announce.

Brian Alexander - Raymond James & Associates

I mean can you just be a little bit more specific on, I guess what you're looking for, and why in this kind of environment there wouldn't be a huge opportunity to replace some of the debt that you have?

Robert Eulau

Well, the first debt we have is due in 2013 has a coupon of 6.75, so that's not bad. So we have to keep an eye on what are the alternatives, and we're going to move cautiously forward and continue to de-lever. We paid down a little bit of short-term debt this quarter, and we'll continue to see fluctuations in terms of how we manage that.

Jure Sola

Well, ladies and gentlemen, that's the end of our call today. Hopefully, we answered most of your questions. If not, please give us a call. Again, thanks for your support. Goodbye.


Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.

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