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Flextronics International Ltd. (NASDAQ:FLEX)

F4Q 2011 Earnings Conference Call

April 27, 2011 17:00 PM ET

Executives

Kevin Kessel – Vice President, Investor Relations

Mike McNamara – Chief Executive Officer

Paul Read – Chief Financial Officer

Analysts

Sherri Scribner – Deutsche Bank

Matt Sheerin – Stifel Nicolaus

Steve O'Brien – JPMC

Jim Suva – Citi

Lou Miscioscia – Collins Stewart

Amitabh Passi – UBS

Brian Alexander

Craig Hettenbach – Goldman Sachs

Wamsi Mohan – Bank of America Merrill Lynch

Shawn Harrison – Longbow Research

Operator

Good afternoon, and welcome to the Flextronics International Fourth 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, Flextronics’ Vice President of Investor Relations. Sir, you may begin.

Kevin Kessel – Vice President, Investor Relations

Thank you, Victor. And welcome to Flextronics’ conference call to discuss the results of our fiscal 2011 fourth quarter ended March 31, 2011. Joining me on the call today is our Chief Executive Officer, Mike McNamara, and our Chief Financial Officer, Paul Read. The presentation that corresponds to our comments today is posted on the Investors section of our website under Conference Calls and Presentations 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 fourth quarter of fiscal 2011 and from the yearend for fiscal 2011 and Mike McNamara will follow-up with some insights on our current business trends, how our business performed during fiscal 2011 and he will conclude with our guidance for the first quarter of fiscal 2012 ending in June. Following that, we will take your questions.

Please turn to Slide two, for review of the risks and non-GAAP disclosures. This presentation contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, which may cause actual results to differ materially from those set forth in this presentation. Such information is subject to change, and we undertake no duty or obligation to revise, update or inform you of any changes to forward-looking statements. For a discussion of the risks and uncertainties, you should review our filings with the Securities and Exchange Commission, specifically our most recent Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments thereto.

This presentation references both GAAP and 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 of the adjusted financial measures to the most directly comparable GAAP measures.

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

Paul Read – Chief Financial Officer

Thank you, Kevin. And welcome, everyone to our call. Please turn to Slide three. We finished the year in our strongest financial and competitive position ever driven on the success of our diversified business model, which delivered $4.6 billion of organic growth and to the 19% year-over-year increase.

Our fourth quarter sales, however, proved more challenging on revenues in our guidance anticipated. Revenue of $6.9 billion was $241 million, or 3% below the low end of our guidance range of $7.1 billion, 7.4 billion. While our revenue was below our expectations for the quarter, we don’t believe the underlying reasons for this weakness require us to revise our overall revenue growth expectations for the next fiscal year. Mike will discuss this in detail, when he will review the market segments and guidance.

Our fiscal 2011 fourth quarter adjusted operating income was $189 million, up $19 million, or 11% year-over-year. GAAP operating income was $176 million for our fiscal 2011 fourth quarter up $41 million or 30% versus the prior year level of $135 million. Adjusted net income for the fourth quarter was $162 million increasing 25% from a year ago levels. Our GAAP net income for the fourth quarter was $135 million expanding 125% from last year’s result.

Reported adjusted earnings per diluted share for the March quarter was $0.21 which is within our EPS guidance of $0.21 to $0.23 and grew 31% from the $0.16 we earned last year. Our GAAP EPS for the fourth quarter was $0.17, more than twice the $0.07 we earned in the year ago period. Our weighted average diluted shares outstanding ended the quarter at 776 million slightly below the 777 million of last quarter and 67 million below the 827 million of a year ago.

Additionally, our weighted average diluted shares outstanding were reduced by 31 million shares or 4% to 790 million for our fiscal 2011 from 821 million in fiscal 2010. These reductions were driven by our share buyback program. During the quarter we completed our second $200 million share buyback program as we repurchased 4.5 million shares for $32 million at an average cost of share of $7.25.

Overall, since our recent buybacks began in June of last year we repurchased $400 million of our outstanding shares or 65.4 million shares with an average cost of $6.12. In addition, we just announced today that our Board of Directors authorized a new $200 million stock buyback program.

Turning to the full fiscal year, I would like to focus on something you forget or overlook when it comes to our growth. Let me how far we’ve gone in just the past year and what we believe fiscal 2011 signals about our future. Our 6.9 billion in sales rose more than 15% from March quarter levels of a year ago. Our fiscal 2011 sales of $20.7 billion grew $4.6 billion on 19% above our fiscal 2010 of $24.1 billion.

Our $4.6 billion in organic growth was generated by broad based year-over-year growth across all our market segments with all recording year-over-year growth. Every segment grew double-digits industrial, medical, auto, and other up 31%, consumer digital up 27%, mobile up 23%, infrastructure up 11%, and computing up 10%. Our components businesses also grew nearly 50% year-on-year in aggregate. Our growth continues to be organically driven by newer sales in programs with both new and existing customers, our market share gains, which we anticipate continuing into fiscal 2012.

We experienced strong operating leverage through a 38% increase in our adjusted operating income to 824 million up from 598 million a year ago. GAAP operating income exhibited an even stronger result rising 77% to 769 million versus 435 million in the year ago period. Fiscal 2011 also mark strong progress on improving our quality of earnings as evidenced by GAAP net income reaching a record level of 596 million and generating a record GAAP EPS of $0.75. Our adjusted EPS came in at 87% up 64% from last year’s $0.53 result.

Please turn to slide four, March quarter revenue rose more than 15% above a year ago levels and we have achieved four straight quarters of solid double-digit year-over-year revenue growth, a trend that we believe will continue into fiscal ’12. Our adjusted operating margin was 2.8%, which was lower than we expected resulting from the revenue shortfall and related, rise in SG&A of 30 basis points despite the reduction in overall spending level.

While our core invest businesses performed well and we are confident in that continued execution and growth our operating margin was negatively impacted by losses in personal computing due to substantial revenue ramps. Our components businesses improved on the December quarter performance, but still sustained the slight loss due to lower revenues than anticipated for the quarter.

Our EBITDA rose to $299 million in the March quarter, up 13% from 264 million in the prior year March quarter. Although sequentially EBITDA decreased $36 million, our EBITDA margin rose by 10 basis points to 4.4%. Our last 12-month EBITDA expanded to 1.24 billion increasing 28% from the prior year period. Our adjusted EPS rose $0.21 from $0.16 in the prior year March quarter an increase of $0.31.

Please turn to slide five. Focusing on the income statement items below the operating line, adjusted net interest and other expense was $7.6 million, down from $24.1 million last quarter due to overall lower interest cost, stronger than anticipated FX gains primarily on certain Chinese renminbi position, and realization of a $13.2 million loss on early extinguishment of our 6.25% subordinated notes that were recorded last quarter. We anticipate our net interest and other expense in the $15 million to $20 million range for this June quarter.

The adjusted tax expense for the fourth quarter was $19.2 million, reflecting an adjusted tax rate of 10.6%, above last quarter’s tax rate of 7.5% and was inline with our stated guidance for the quarter of 10%. For our upcoming quarter guidance we once again modeling 10% tax rate.

Finally, turning to the reconciliation items between our GAAP and adjusted EPS, stock based compensation was $13 million in the quarter, slightly below last quarter’s $13.8 and represented $0.02 EPS impact. Intangible amortization net of tax was $14.1 million in the quarter, down from $15.2 million last quarter and also represented a $0.02 EPS impact.

Please turn to slide six, inventory held roughly 33.5 billion. However, the decrease in sales sequential resulted in inventory turn decreasing 4% to 7.3 times from 8.3 times last quarter. While there remain some uncertainties around Japan on component availability which could cause inventory levels to run above optimal levels in the near term, we are still confident that fiscal 2012 will see continued improvements in our inventory management and our inventory turns will trend back up throughout the year.

Our cash cycle rose six days to 20 days as a result of the six day increase in inventory days. We believe we can manage our cash conversion cycle in the mid to high teens range going forward.

Now turn to net working capital chart in the top right hand side of the slide, overall net working capital was consistent quarter-to-quarter. However, our net working capital as a percent of sales rose to 5.7% from 5% stemming from the decrease in sales. We believe we are well positioned to manage our net working capital to around 5% of sales going forward. The seasonally lower profitability drove our return on invested capital to 25% from 33.6% last quarter and 28.8% last year. Overall, ROIC in fiscal 2011 was 30.5%, the highest level in the company history.

Please turn to slide seven, cash flow from operations was a positive $275 million during the quarter. Net capital expenditure for the quarter was $66.5 million and free cash flow amounted to $208 million. For fiscal 2011 we generated $857 million in cash, cash flow from operations and after investing $394 million in CapEx, we generated $463 million in free cash flow.

Please turn to slide eight, we ended the quarter with $1.75 billion in cash, up $150 million versus the prior quarter, principally reflecting free cash flow generation offset with $32 million in cash payments to repurchase stock.

Total debt remained constant at $2.2 billion. Our net debt decreased to $472 million from $633 million last quarter. Our debt-to-EBITDA level ended the quarter at 1.8 times, a slight improvement versus last quarter of 1.9 times and down from 2.3 last year.

The chart at the bottom of the slide shows our significant debt maturities by calendar year compared with our current liquidity. Our next material debt maturity is in 2012. Overall fiscal year 2011 was a very good year with healthy growth in revenue and EPS, return to good quality of earnings, and our balance sheet and capital structure in excellent shape as we move forward.

With that, I will turn the call over to our CEO, Mike McNamara.

Mike McNamara – Chief Executive Officer

Thanks Paul and thanks to everyone who dialed in for our call. Throughout the past fiscal year I have highlighted an overall healthy business environment and our broad based growth across all of our market segments and business units. As Paul mentioned we achieve double-digit growth in all of our market segments in fiscal 2011. I remain confident of this theme as we head into the next fiscal year.

In fiscal 2001, we grew sales over $4.6 billion or 19% organically. We were able to effectively leverage this top line growth through our adjusted operating income which rose 38% from fiscal 2010 levels and adjusted earnings per share which rose 64% versus our prior fiscal year.

Perhaps most importantly fiscal 2011 marked numerous historic achievements for our company regarding our quality of earnings as we said records for both GAAP net income and GAAP earnings per share.

I’ll touch on some of these annual highlights again in a few minutes, but let me now turn to March quarter specifically. March quarter was lower than expected, but it was still a strong growth quarter year-over-year. We prepared and staffed to a higher revenue level, but orders from various OEMs were lower than forecast. We did not anticipate this to continue into the following quarters and instead expect a steady pickup in orders in fiscal 2012.

Before moving onto our segments and business units, I’d just like to explain briefly the impacts of the crisis in Japan. For Flextronics specifically, we have two facilities in Japan, a manufacturing site in Ibaraki and a services site in Koriyama. Neither site experienced material damage, however, both sites and employees were faced with business disruptions that lasted roughly one week due to the infrastructure and logistics issue. The supply side situation is clearly the more difficult one to assess and certain parts of our business are more impacted than others.

Our global procurement organization have been actively managing and reducing our exposure to inventory that maybe constrained, however, we still can’t say with certainty what the ultimate impact will be as many constraints are further down in the supply chain. Overall, we anticipate only a modest impact to our business at this time.

Please turn to slide nine. Communications infrastructure remained our largest segment at 27% of sales. Infrastructure sales were $1.9 billion and declined 12% sequentially. This was below our expectations for flat revenue. We experienced delays in new program ramps and some unexpected softness in customer orders.

We view this as temporary and expect improvement in this segment beginning this quarter. While this was below expectations, the communications infrastructure segment had been growing very rapidly for us in the second half of 2010 writing 17% in the six months preceding this quarter. The segment grew 11% for the year and its recent March quarter levels were 6% above the prior March quarter.

Our June quarter outlook indicates high single or possibly low double-digit revenue growth. We still see sales in fiscal 2012 rising more than 10% and (indiscernible) along by continued strong bookings with both existing and new customers. Industrial, automotive, medical and other comprised 23% of total sales, up sharply from 18% last quarter. The segment had a strong rebound from last quarter rising 8% sequentially. This was our fastest growing segment for fiscal 2011 and a 31% growth for the year illustrates the quality of capabilities we have put in place.

Let me now break this group down in order to better understand the dynamics. Our industrial segment saw positive growth trends with solid single-digit quarter-over-quarter growth driven by strength in office equipment, semi-cap equipment, smart meters, and clean tech. For the year, industrial grew over 25% driven by strong outsourcing momentum.

Industrial business development activities remained very successful during the quarter as it booked new business wins totaling over $300 million bringing its total for fiscal 2011 to roughly $1.3 billion and providing for a strong growth momentum from fiscal 2012. These new program wins were spread across the diversified base of customers in markets. For next quarter, we see continued strong performance and high single-digit revenue growth.

Our medical segments performance in the quarter was in line with our expectation, most impressively medical ended fiscal 2011 with over $1 billion in sales for the first time in history. This translated to a 31% year-on-year growth from fiscal 2011 versus 2010. During the quarter, we performed well in diabetes, drug delivery, and medical equipment markets. We saw multiple new design wins throughout fiscal 2011, which bodes well for our pipeline of business going forward.

Overall, the segment booked over $250 million in new wins during fiscal 2011. In the size of its sales pipeline more than doubled with a couple of large new manufacturing opportunities. We see single-digit revenue growth from medical next quarter and we believe fiscal 2012 will be another strong growth year for the business. Our automotive group marked its sixth consecutive quarter of sequential growth. It achieved over 10% sequential growth and what is normally a seasonally challenged quarter.

For fiscal 2011, automotive grew approximately 50%. We continue to see strong trends in in-car connectivity, ambient lighting and LED electronics, power electronics, and electrical vehicle markets. Our backlog of booked business in automotive has continued to grow and we expect mid single-digit growth next quarter.

By mobile segment, March quarter sales declined 15% sequentially, which was in line with guidance reflecting a normal seasonal decline. They were 24% above a year ago level. Total sales are very strong for fiscal 2011 rising over $1 billion and growing 23% from fiscal 2010, only 10% customer this quarter is in this segment and was RIM. For next quarter we see the segment experiencing softness driven primarily by reductions in demand from Japanese based mobile phone customers partially offset with market share gains for smartphone customers outside of RIM. As a result, we are expecting a roughly 10% sequential decline.

In computing we posted 1.2 billion in sales which were 17% of our revenue down slightly from 18% last quarter. The segment declined 15% sequentially which was below our expectations for single digit decline. During the quarter our personal computing business grew but not as much as we forecasted due to some supplier delays causing some slippage in new program ramps. Overall our computing segment grew sales by 10% in fiscal 2011 versus 2010. Our fiscal year growth was driven by multiple new ramps in the first computing part of our business, which will partially offset with declines in our enterprise server business.

We expect the volumes associated with the delays in our personal computing programs ramps in the fourth quarter to be made up in our June quarter where our computing business is expected to rise over 35% sequentially. These ramps are now without challenges as we are experiencing significant cost to ramp to new production levels in these programs and we are encountering inflationary pressures and component pricing as challenging on profitability.

Consumer digital group grew 27% from fiscal 2010 driven by strength in new programs for game consoles, peripherals and printers. Revenues for the March quarter were 844 million or 12% of our total sales and 35% higher than at the same point last year. On a sequential basis, this segment declined 30% which was inline with our expectation. For the June quarter we are currently forecasting a mid-teens decline primarily driven by lower game console demand followed by a strong ramp period. Partially offsetting this are new program ramps with the readers and printers.

Our component businesses which include Multek, Vista Point and FlexPower declined sequentially by high single digits as expected. While these businesses continue to experience significant impacts from commodity price increases and high labor costs, we again managed to make improvements in reducing the operating loss of this group and we entered the quarter just below breakeven. Looking forward we expect these businesses to continue to improve on a sequential basis through fiscal 2012 towards the target of the 4% operating margin exiting fiscal 2012.

Multek experienced 30% growth in revenue in fiscal 2011. And this revenue expansion will lead to margin expansion and factory utilization is increasing rapidly. Multek flexible circuit board or PC business saw record high Multek incoming orders in March and overall FPC demand remains very solid. This combined with multiple new wins across various market segments point to a very good year ahead for Multek.

FlexPower grew sales over 25% in fiscal 2011 and continuing to make good progress on its move inland to Guangzhou as we mentioned in the past. However, this business remains negative impacted by rising labor rates and increasing commodity cost that we are working hard to pass onto our customers. FlexPower has booked numerous new wins and tablet servers, mobile and networking markets.

Vista Point more than double its sales in fiscal 2011 and some of its quarterly revenue remain in record levels and its operating loss substantially reduced, driven by improvements made in manufacturing yield and efficiency. Our services business focusing on the aftermarket activity such as logistics, repair, warranty, and service logistics that business continues to grow operating profit on a quarterly basis, establishing another all-time high in this quarter in operating margin. This business also saw some new traction with new services expanded into the tablets and new breeder spaces.

Please turn to slide 10. In fiscal 2011 we achieved strong year-over-year growth that was broadly distributed across all of our market segments. Each segment grew double digits and overall for the company we delivered 12.6 billion in organic growth. This was 19% above fiscal 2010, above our targeted range of 10% o 15% and was encompassed with no material acquisitions. This growth was achieved with CapEx spending trending below depreciation and therefore a key contributor to our company achieving record ROIC for the year. Our capital efficiency is at record levels and we anticipate this to continue in the fiscal 2012.

Adjusted operating income grew twice as fast as revenue in fiscal 2011 achieving 38% growth. Adjusted earnings per share grew even faster 64% for the year. All this was accomplished while posting the best GAAP net income and GAAP EPS in the company history. We generated 208 million in free cash flow for the quarter and $463 million for the year. We deployed 400 million on this free cash flow to buy back shares at an annual cost of $6.12, but an impact was a 6% reduction in

The net impact was 6% reduction in shares outstanding versus a year ago. Today is announced $200 million stock buyback authorization from the Board of Directors prove our firm's are commitment to return value to shareholders and improve financial management and free cash flow generation.

Now turning to our guidance on Slide 11. Our orders and forecasts according to healthy sequential growth in next quarter over our guidance reflects wider range given some supply chain uncertainties that still exists as a result of the crisis in Japan. As a result, our guidance is for a range between $7.1 billion to $7.6 billion, which corresponds to a sequential increase ranging from 4% to 11% growth. We expect our adjusted earnings per share to be in the range of $0.20 to $0.23.

Quarterly GAAP earnings per diluted share are expected to be lower than the adjusted earnings per share guidance I just provided by approximately $0.03 for intangible amortization expense and stock-based compensation expense.

Lastly, before I turn my call over to the operator, I would like to mention that we will be hosting our Investor and Analyst Day in New York City on May 24th at the Hilton on 53rd street. Investor Relations will email all the registration information early next week. Please note that we changed the location of the meeting from the previous save the date of the NASDAQ market site due to venue size limitation.

Thank you for listening and now I would like to open up the call for Q&A. Operator?

Question-and-Answer Session

Operator

Yes, sir. Our first question comes from Sherri Scribner with Deutsche Bank. Your line is open.

Sherri Scribner – Deutsche Bank

Hi, thank you. Thank you for the detail Mike. I just want to get to a sense of in the communication segment it seems like we’ve heard a lot of from lots of different companies of that segment has been weak. Just wanted to get a sense of was that one particular customer for you. I know you’ve got a couple of strong growing customers at least you have with us couple of quarters. Was that primarily one customer did you see broad based weakness or maybe a little bit more detail on communication?

Mike McNamara

Hi, Sherri. We have quite a few customers just in I know I heard noise in the past about optical, people talking about the optical market. We have 11 different customers that are in the optical space. We have such a broad portfolio. We have a lot of ups and we have a lots of down. Suffice to say, we were expecting a pretty much of flat results of the December quarter we ended up getting 12% down.

So, we were a little bit surprised. I think our customers were little bit surprised. It’s more than just one customer. It’s a bundle of customers. But the comment that I made were also that we don’t expect that to continue and we actually expect to recover all that March downside in the June quarter. So, we think its coming back and we don’t think that structurally the end-market place is weak.

Sherri Scribner – Deutsche Bank

So, there is potentially an inventory correction or correction you really only see it is being one quarter?

Mike McNamara

Yeah, it’s hard for us to say and going in to the March quarter and January we thought we would have much large number. So, it’s hard for us to say, but usually we’re pretty accurate on these and I would say it’s going to come back this quarter and I’d guess it’s to be a little bit of inventory correction. We also had to be fair two or three different product ramps that we are expecting that slowdown a lot of our business on the very, very, high end of the marketplace and some of the product ramps on the very high end. We are slower than anticipated or few delayed too. So there were a couple of product transitions that slowdown a little bit. But I think fundamentally that communication segment is actually reasonably healthy and I think it will comeback rest of the year.

Sherri Scribner – Deutsche Bank

Okay. That’s helpful. And then just quickly I want to ask you about the notebook business. I think there has been some speculation in the press that you guys are not committed to the notebook business anymore. It sounded like you are still committed to the business, but want to know, are you still committed and do you still expect to double that business this year?

Mike McNamara

Yeah, we have been on this track to do one, two, four, I think everybody knows that the foray would be this FY12. We have enough orders to go and we will do that 4 billion. So, we hit our objective of what we thought was kind of a minimum level that was necessary to be relevant in the business and to have any sort of scale to have a high quality business.

So, going forward we don’t have a strategy of going one, two, four, eight. There is no objective of that. You never heard us communicate another step. So, our strategy going forward is that and it has been for some time is that it is our objective to have a broad penetration in to all the electronic markets and then once we have a strong enough position then its our objective to balance our business between margins and return on capital. So in the end, the objective is to look across all our businesses and run them, so that we deliver value to the shareholders. So in summary, what that means is we’ll portfolio manage our business in a very active way and some business units will try to push on the accelerator and other businesses will slowdown. So, I wouldn’t say we’re not committed I would just say that we are going to manage our overall portfolio of businesses to optimize cash generation return on capital growth.

Sherri Scribner – Deutsche Bank

Okay, thank you.

Mike McNamara

Welcome.

Operator

Our next question comes from Matt Sheerin with Stifel Nicolaus. Your line is open.

Matt Sheerin – Stifel Nicolaus

Yes, thanks. So just wanted to follow-up your comments on the notebook business Mike, you’ve talked about getting to breakeven at the $4 billion revenue, but you also talked about a lot of headwinds, materials costs, labor costs, etcetera. Are you still looking at breakeven at that 4 billion revenue mark? And also when do you expect to get there, it sounds like you’re hedging a little bit, because you are talking about you’re managing profitability versus growth, but when would you expect to get there?

Mike McNamara

Yeah. So right now, we’re in a significant transition period. So we’re literally between March when we really started ramping and June will mostly go from a $2 billion run rate to a $4 billion run rate. So I would call the ramp they want is pretty severe, so that in itself creates – is creating some losses for us. Not too typical about ramping any program too fast or real fast. So that’s a ramp kind of scenario.

Now, what we didn’t anticipate is that the commodity prices are driving the significant amount of price escalation in the commodity business. And I would say that we find that price escalation of commodities higher in the notebook business than we find in any other parts of our business. I think on average the market or that entire business tends to be a little bit stressed from a performance standpoint and I think it’s put a lot of pressures over the years on a lot of the component suppliers. And I think a lot of them as they see the labor wages going up and the commodity prices going up, it’s putting a lot of pressure on them to raise prices. So we didn’t anticipate as much headwind on that as when we went into that, we went – than two quarters ago. So for sure that’s an additional headwind.

So I’d say we – so and as a result of that, we’re looking and I think you’ve seen some of this data in some of the other presses that over time we’re going to need to be raising prices on these products. So we do have some additional headwinds that we didn’t anticipate. And yes, we did expect to be breakeven at $4 billion, so the question is will we get there with the headwinds that we are seeing now. If we did it wouldn’t be this next quarter, because we are on the [subject] ramping and we have incremental operating expenses as a result of the ramp, but by the end of the year when we hit the $4 billion is when we would have expected to be at breakeven.

Matt Sheerin – Stifel Nicolaus

Okay. And then it looks like you’re obviously growing pretty rapidly in the industrial “other markets” auto, medical, etcetera. And you would think that the margins in those – the margin profile in those segments would be larger than the or higher than the company overall yet, you’ve been stuck at this 2.8%, 2.9% operating margin for a few quarters here. Is that – do you think that’s going to continue to drive operating margins for the company higher or they are just other headwinds in things like components and the ODM notebook business that’s going to continue to be headwinds and keep you from getting pass 3% number?

Mike McNamara

So those businesses do carry higher than company average operating margins and I would expect that to continue into the future and I would expect that the growth rate that we have in those businesses to continue. The headwind we had last year that really kept that flat was really the component businesses more than anything else. And those things we said again, we said last year that we thought by the end of this year in 2011 we had hoped that those businesses would turn above breakeven and start contribute that didn’t happen. As we look at those businesses now, the components businesses now, we expect them to be back up to 4% by the end of the year. So, we have to go prove that. We can go make that happen, but that’s again what it looks like there is a lot of structural changes that are quite different than last year. So that was a headwind last year. Right now, the headwind we’re seeing there is, we’re having these additional computing ramps, which are significantly below the company average. And I think it’s offsetting all the incremental good news associated with higher and higher revenues associated with higher margin businesses. So I’d say we’re stood in the corner on components. We have an additional headwind with components with computing and still keeping it pretty much flatted our as a result we’re achieving that pretty much that we are which pretty much flat.

Matt Sheerin – Stifel Nicolaus

Got it. Okay, thanks.

Operator

Our next question comes from Steve O'Brien with JPMC. Your line is open.

Steve O'Brien – JPMC

Hey thanks for taking my question. We talked a little bit more about the mobile devices outlook I think Mike were answered number of questions and puts and takes there that seems like there is a little bit less seasonality than we would have normally seen for June quarter?

Mike McNamara

You mean June quarter would have been higher than.

Steve O'Brien – JPMC

(indiscernible)

Mike McNamara

Yeah. I think that’s right. I think maybe few of our programs are little bit in transition in terms of one product to the next product. And one of the other things I’d did mention is we had a number different Japanese customers. We have several and some of those are seen some of that volume either slowdown or maybe they’re tying to do in their own factories, whatever the case might be. I think it’s a little bit different for each one.

But that’s in a little bit of headwind. That’s not necessarily represented at the market. So I think between those two it’s quite a little bit of slowdown. Now that being said, as we look at over our forecast on the September and the December quarter those numbers get significantly higher. So I think on the yearly basis we would still expect to continue to grow that business nicely. But there is no doubt to correct that the June expectation that we have is below or normal seasonality is.

Steve O'Brien – JPMC

Are these transitions maybe with some of your existing customers or maybe customers are really impacted by ODMs entering the Smartphone market you’re seeing pressure there that’s maybe inhibiting growth and inhibiting margin?

Mike McNamara

No. I don’t see that as. No, we don’t see that at all as a threat. Not as a threat. We don’t see that impacting anything, no.

Steve O'Brien – JPMC

I can just ask quick question on the share count this quarter maybe there was the function of share price or something else. But Paul maybe you can help us understand the sequential in share count was fairly flat even compared to the first, this quarter the purchases in the prior quarter?

Paul Read

Yeah, like I said we repurchased the remaining balance of that $200 million programs. So we took about $32 million, 4.5 million shares. So the share count was fairly flat because every quarter there is sequential increase in the stock options. And so that in addition and then you take that away with the amount of shares that we repurchased and you get a flat number for this quarter.

Steve O'Brien – JPMC

Yeah I understand that and I guess I thought that option exercises in the past were sort of running in the $2 million in a quarter range and maybe I’m getting too granular or precise here. But maybe you could help us understand going forward what do you think the quarterly or annual dilution from awards would be?

Paul Read

We tend to model about 3 to 5 million in a quarter for that and so 12 million, 15 million, 20 million depends on the share price, of course, throughout the year.

Steve O'Brien – JPMC

Thanks.

Operator

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

Jim Suva – Citi

Great. Thank you very much gentlemen. If we take a look at the bigger picture and as the quarter progressed Mike and Paul maybe can you walk us through about was the kind of linear downtick in the demand softness as you progressed or was that kind of backend loaded with the share loss or was the double orderings that are now back into equilibrium or just true end-market softness. Just trying to get a grasp around the linearity of it and then what gives you the confidence going forward.

Paul Read

Well, if you look at the sequential numbers for each one of the different market segments you see kind of a broad product if you think about it. I think the only market segment that was up was one of them and that was industrial. So, outside of that every one of them went down a little bit, (indiscernible) went down, mobile went down, infrastructure went down way more than anticipated. And it wasn’t reasonably linear. It just seemed as slow as the quarter went on and almost felt as the GDP kept getting weaker and weaker and just seem like our numbers kept getting weaker and weaker. It’s just kind of trended down a little bit.

But I think it was kind of across the board. It wasn’t really one thing or another, if we add up our segment. You can see and look at some of the big investments were in infrastructure, some of the big investments were in really in lot of different segments. So, I don’t know that it’s just one thing, it’s not one customers, it’s, I don’t think it’s market share because I think we’ll still see 10% to 15% growth this year for the entire year. So, we are not coming off that number. I just think it was just the little slower and I think it comes back. And as we look at our forecast for the next two quarters, it looks quite strong again.

Jim Suva – Citi

Great. And then switching gears from my follow-up question on the PC sector, with the tablet share gains and a lot of the other manufacturers in the PCs getting more aggressive on pricing, I believe it was, industry was getting close to 3% margins for the PC sector. Now it’s looking like it’s less than that. Does that cause you to reevaluate your efforts there or shift gears or how do you, your executive management team look at something you are going after and that target has now deteriorated it its industry profitability?

Mike McNamara

Yeah, there is no question the target has deteriorated, Jim, so that’s for sure true. And the way we look at it is and maybe there are some revenue that’s going to coming out of the industry going forward because of tablets and other things. But one thing keep in mind going after that target also enables you to go after tablet as well, so there is a switch in products that are certainly possible and available. But as we think about it, the way we think about it at Flextronics is our computing business on a go forward basis is $4 billion out of whatever you want to call the number. I think the analysts have us down for 32 billion this year. It’s a small part of our business. And it is our objective that, and our objective is to run this diversified portfolio. So, if one market segment like our personal computer starts to deteriorate and become less valuable, hopefully we can switch our energies and effort and put more efforts into another area of the business.

So, that’s kind of the objective having diversified portfolio. We are happy that we are not like the PC ODMs that have, could have 60%, 70%, 80% of their business in the personal computer market. And we are fortunate to have the diversified portfolio. But certainly the world is going to change on a regular basis and it is for sure our objective to continually change with it and try to optimize our ability to generate cash and earn a return on our money.

Jim Suva – Citi

Thanks for the detail and we look forward to seeing you in a few weeks at your Investor Day.

Mike McNamara

Thank you.

Operator

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

Lou Miscioscia – Collins Stewart

Okay, great. Maybe if you can talk about if you are willing to give a projection for free cash flow for fiscal ’12. Maybe then also tie that back into the buy back in the sense of obviously you’ve just come out with a $200 million one. Is there any chance that the stock is weak, here in the first half that you could materially increase that given the1.75 billion of cash on the balance sheet?

Paul Read

Yes, you have seen us being fairly opportunistic on the price 400 million at $6 I think is a great accretion for us going forward for sure. We generated over 400 million of free cash in fiscal ’11 as expectation to continue those levels of cash generation. I think share repurchases that we may do would he coming out of free cash. And if we weren’t generating the free cash flow we probably wouldn’t be buying back our stock. So that’s the way we look at it. We’ll continue to look at it that way. We have regular dialog with the Board about these issues and to-date you’ve seen us to be pretty active. So, we just got a new program approved by the Board and we just gotten here. So, we’ll look forward to what the year brings and share price etcetera and make our decisions as we go.

Lou Miscioscia – Collins Stewart

Okay, but there is no -- in the past at times there have been some restrictions, but there is no real restriction from Singapore law or something else?

Paul Read

No, we have 10% a year allowed. We’ve roughly spent about 6% and so we have enough of the program left to spend the remaining $200 million, which would take you 10% up to about July when we have a new AGM which would re-up another 10% for us. So we have no restrictions in front of us now to repurchase the other $200 million.

Lou Miscioscia – Collins Stewart

Okay, great. And realize when we all model and you all give guidance, a lot of it is sequential, but it sounds like from what Mike said that a lot of the business is bouncing back and I realize you’ve given guidance number, but excuse me, in comparison to what the street was modeling before somewhere for June around 7.6. Is there – what is the likelihood or odds that you could actually hit the high end or maybe just go through the dynamics that would get you there, because it did seem like Mike was suggesting a lot of stuff should bounce back pretty quickly?

Mike McNamara

Yeah, we do. We think that apart from on the consumer and the mobile side, we think there is a strong bounce back on the other sectors, albeit industrial actually had a strong sequential growth anyway in March. So that’s going really well. We’ve given you a wider range this time of some 500 million representative of two things Japan being one which can quantify that in terms of risk to that number. Computing ramp is huge for us and we missed it a little bit in March. We think we’ll get it back in June. So there is some risk there. But no, I think that we’ve come out of this, we realized that we were below the guidance range and we want to make sure we can hit our numbers in the June quarter. So I think the range that we’ve given is appropriate and we will look to end up somewhere in between those numbers I hope.

Lou Miscioscia – Collins Stewart

Okay, thanks guys. Good luck.

Mike McNamara

Thanks.

Operator

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

Amitabh Passi – UBS

Okay, thank you. Mike, sorry not too hard from this, but just wondering why should we committed to the computing business, I mean I thought at one point we were looking at breakeven margins at $2 billion, we’re now looking at breakeven around $4 billion. And just wondering what the sort of rationale as to stay committed to this segment? And then related to that at one point I think we were also looking at a 3.5% operating margin goal. Is it more realistic now to essentially assume a 3% type target for the rest of fiscal ‘12?

Mike McNamara

Yeah, I mean, all I can answer to say kind of the same thing that I said before the world changes, I mean, let’s talk about the computing first. As the world changes, there is different profitability levels associated with this thing. There are different margins. There is new products that come on the marketplace like a tablet that could be disruptive to an existing product category like a PC. And as those things happened, it will be our objective to shift with them. So three years ago we went into the business, the PC market was growing very rapidly and mostly operating margins were 3% and the ROICs in the industry were between 20% and 25%. And being a $30 billion company, we want to go participate in that growth and we thought we should be in it and we said the goal (indiscernible) and then we decided we’ll see where we go from there, because that’s the minimum level required to be in the business with any sort of capability and competence.

So as we move forward as the world changes, it doesn’t matter if its competing or if its any of the other businesses as the world changes we’ll evolve with it. And what we are trying to do is in our company, you have to have enough diversification that when the world changes we can go change with it. So I would say we’re committed to the business in so long as we can earn a return on capital that is consistent with the rest of our business. And if we don’t know the return on capital consistent with our business, we’ll spend more time on other markets. So that’s – and that goes the same whether it’s competing or anything else. So as competing comes under pressure, we’ll obviously spend more time trying to understand if whether or not we can earn an appropriate return on capital or not and then move accordingly, but certainly moving more into tablets and other products which may yield a better return we’ll certainly do that.

Amitabh Passi – UBS

Okay, but perhaps related to that can you just update us in terms of where you are on tablet opportunities, I mean, there seems to be a slew of them coming to the market, one of your largest mobile customers has already launched one, but I don’t believe you are engaged to that opportunity. So maybe you could just update us where you are at with respect to just the opportunities with tablets?

Mike McNamara

Yeah, well we delivered one tablet to the marketplace. We’ll deliver a second one to the marketplace somewhere around the October timeframe. So we have kind of two that would be coming out of our ODM design group. But additionally lot of that penetration, we’re getting a lot of penetration in tablets, because the multi-printed circuit board this is the exact same technology that use. So we probably have three or four different tablet manufacturers where we’re building boards for or building flex circuits for or doing power charges for us and also doing services for us. So we’re actually starting to build a very nice portfolio of new wins on the tablet market, in addition to just doing the assembly. So this is actually a more attractive market for us and for our verticals. So, we’re also engaged in the design of products at the same time, so which have – which we’ve been out with one and we’ll be out with the second one shortly.

Amitabh Passi – UBS

Okay, thank you.

Operator

Our next question comes from Brian Alexander. Your line is open.

Brian Alexander

Yeah, thanks Mike. I think you said you are still expecting to hit your double-digit growth objectives for FY ‘12. Just wondering if you still expect double-digit growth in all segments ex components, which I think you said last quarter or has the composition of growth changed in terms of individual markets maybe being below double-digits versus a quarter ago and just overall confidence level in getting to double-digit growth given you’re starting the year kind of low double-digits and the comparisons get tougher as we move throughout the year?

Mike McNamara

Yeah, I would agree. Yeah, at this point we’re driving to have balanced growth. We don’t want everything to be driven by one thing like in computing for instance. We don’t consider that to be selling balanced growth. We drove our businesses last year that every market segment in terms of how they structured their business plans and how they grew is that we expect them to grow double-digits. We think the same thing going forward. We actually think that at this point in time we would like to see every one of our market segments grow in a double-digit format. We’ll probably have some – we may have some more detail on that when we get to the Analyst Day and when we talk a little bit more detail about each of the segments and their strategies. But that’s for sure the expectation at this time is that every one of them grows in the double-digit way.

Brian Alexander

Okay. And then maybe just a follow-up on computing, but a non-notebook computing question, how much of the revenue shortfall that you saw in the March quarter was driven by other computing area, server storage, etcetera? And when I look at your June quarter guidance, it looks all of the sequential growth in that category is coming from notebooks and what I’m really asking is what are you expecting to see out of the enterprise server storage space for June?

Mike McNamara

Well, that whole infrastructure business, we actually expect to grow and we would expect the enterprise, where I’m not sure I know the answer of that for June, but we don’t expect it to be down. So, and as far as the March quarter how much of it was out of the first computing market, not as much as you would think. I mean, that was a contribution that like multiple other product category, so all of our downside in revenue in the March quarter was not computing, it was partially computing, but we did have some other softness as you know that we mentioned across infrastructure in other product categories.

Brian Alexander

Okay. Just one last follow-up, just on profitability, is there anyway you guys could Paul, maybe quantify the total losses that you saw from both the components business and the PC business, so we can just get a sense for how much of a drag that was on operating profits for the quarter?

Paul Read

Yeah, certainly it’s significant for us, lesser on the components side, we saw some improvements from December to March. We were disappointed we didn’t hit the breakeven. We weren’t far short, but we’ve got, we had good progressions through the March quarter on components which is encouraging for June. Computing is having these headwinds Mike talked about. They’re significant. It’s a big program run for us. But I can’t quantify for you the absolute numbers on these areas. It’s not something that we breakout. But, nevertheless it’s closing some headwinds on the margin side for us.

Brian Alexander

Okay. Thank you very much.

Paul Read

Thanks.

Operator

Our next question comes from Craig Hettenbach with Goldman Sachs. Your line is open.

Craig Hettenbach – Goldman Sachs

Yes, thank you. Just on the computing market and discussion of tablets as a new category. Any reason to think that market to longer term won’t be challenged in terms of profitability? We’re seeing it originally in desktops and in notebook, just what your thoughts are on that type of categories’ ability to generate attractive margins longer-term?

Mike McNamara

Well, I think that’s certainly a good thought. But even if like cell phones themselves and I wouldn’t expect them to be any different than a cell phone for example. They actually match the cell phones cost structure and our profitability much more than a computer because they are much less complicated. But if you think about cell phones the profitability on those products and smartphones, and profitability on those products are much less as well, but alternatively the ROIC may be very, very strong. So we still can do, two points profit on the cell phone and if you do 12 inventory turns, it’s still a very, very nice ROIC. So, I think tablets can fall into that category. But I think the attractiveness in tablets to us as well as is we don't have to participate in the assembly which drives the margins down. We can participate where it makes sense. And then hopefully be able to do things like power and printed circuit boards as flex circuits and services and the kind of things that generate higher margins.

So that’s kind of our objective and let’s figure how to penetrate the tablet market in a smart way. But I think you can get higher, you could still get a very reasonable ROIC on theses different products. And I think there is way to penetrate and earn money without necessarily doing the assembly and doing the components only.

Craig Hettenbach – Goldman Sachs

Okay. And if I could followup just on the commentary on Japan in the prepared remarks mentioned a modest impact and you do have a wider range. Anyway within that wider range whether it’s a percent of sales or anything else to quantify how you are thinking about Japan?

Mike McNamara

Yeah, as we look through, we obviously track every partner working out of Japan and what the implication is and it continues to get better. So, is there a way to track it? It’s hard for us to say. So, the answer is no. We really can’t. And it’s because the top tier is above, the top tier component supply base is only partially the question is, also but some components. And those are really, really hard to understand how they get impacted and how their capacity is consumed. So I’m uncomfortable putting a range on it except to say we just think it's pretty modest.

Craig Hettenbach – Goldman Sachs

Okay, thank you.

Operator

Our next question comes from Wamsi Mohan with Bank of America Merrill Lynch. Your line is open.

Wamsi Mohan – Bank of America Merrill Lynch

Yes, thank you. Mike, the reasons for the pressure on margin improvement for the components business were somewhat similar to what you mentioned last call as well on inflationary environment, commodity cost increases, rising labor cost. So, now starting with a lower revenue base in absolute dollars versus where you thought you might start of the year, can you give us some more detail around what you are doing more specifically that can give us some comfort on your path to the 4% margin deciding fiscal ‘12 and how linear do you expect that progression to be? Thanks.

Mike McNamara

So 4%, our first goal and objective is to get us into 3.5%. We think that the business model that we have has penetrated the markets that we are currently after generates, they can generate whatever things run well at 3.5% margin. So that's really our near term target and something that we always hold as a mid-term target. Once you get to 4% you probably need to change the business mix. So, what I mean by that is we can get to 4% but maybe we have to not participate in certain market segments, so we would have to take that away. Now that being said, the important part is to keep the whole return on capital and cash generation in balance and our model is built around the 3.5% when everything runs well and at that 3.5% we believe we can generate a 30% return on capital. In fact we think we can generate a higher return on capital than that.

So, if we move to a 4% model then we would have to exit certain businesses. So, in our business you can kind of dial in the operating profit that’s desirable based on the mix of product categories you go after. But that doesn’t mean we can’t go after 3.5% business model that generates higher return on capital in the industry.

Wamsi Mohan – Bank of America Merrill Lynch

Right, I guess my question was not on aggregate company margin, but more or so specifically for components.

Mike McNamara

Components, yes, sorry. So, what we need to do is have 10% growth in Multek and we probably that’s one category. And we see no problem in getting a 10% in Multek at this point in time based on notebook business. Camera modules we just have to run reasonably flat year in terms of revenue and maintain the existing performance in terms of operating yield. So, I think that will fill in and ours a little bit of more of a challenge. We have to continue with the movements to Guangzhou that’s probably another six months.

As we do that full transition into Guangzhou and we have to get some price increases for customers, which we are working real hard on and we probably need a little bit of our portfolio shift in that business. We are very heavily weighted in the charger and adaptor market and we need to move that portfolio a little bit more towards the higher end products. This carry a higher margin. So that business has matures need a little bit higher margins. But every one of those activities is in high gear, we believe Multek is probably the easiest to turnaround as mentioned by the 35% growth last year just completely different in last year.

When you load up the, what are mostly fixed cost factories with a lot of volume you can move that operating profit needle pretty rapidly. So, we will see that turnaround very nicely. And the other businesses need a little bit of work, but every one of these activities is in process. So, we are a little more comfortable than last year.

Last year we grew that whole business Flextronics came down to grew well over 100%. It grew actually over 200%. The Multek group grew about 35%. The power grew about 25%. There are in heavy growth modes often based that was much lower and our management confidence much lower. Now management confidence a lot higher, we have got major initiatives on the way above moving inland and other initiatives and we have the more stable business environment in front of us and most importantly probably, we have Multek, which is loading up fixed cost kind of base of equipment.

So, it’s a little bit different and as a result much more comfortable as we look about what we see going forward, but once again we didn’t see it. We saw execute on it. We saw to have some the demand called in, but we will probably way more comfortable than having many, many more variables eliminated this year than last year.

Wamsi Mohan – Bank of America Merrill Lynch

And just a follow-up on that, so you would expect components to sort of be about breakeven next quarter and then can you comment your thoughts on linearity heading sort of through the end of fiscal 12?

Mike McNamara

Yes, I mean it’s kind of our objective. It will probably be a reasonably linear increase all the way through the year. That’s correct. We expect breakeven next quarter and then we expect to literally improve. We expect the breakeven this quarter, we probably shouldn’t picked March quarter to be call in for the breakeven because March quarter, where we again kind of a seasonally downturn in revenue in those business. A lot of them are feeding the Smartphone market and call phone market and consumer markets. So, a lot of them go down in that quarter.

So, June will probably hit the breakeven and then we will probably see a linear upside to four points over the next two quarters.

Wamsi Mohan – Bank of America Merrill Lynch

Okay. Thank you.

Kevin Kessel

Operator one last question.

Operator

And our final question comes from Shawn Harrison with Longbow Research. Your line is open.

Shawn Harrison – Longbow Research

Hi, thanks. Hopefully just a few clarifications. The doubling in the ODM competing business to the $4 billion run rate that’s the September quarter the timeframe or the December quarter.

Paul Read

It occurs over the period from March when we start ramping this all the way through to maybe July. So, over that four month timeframe.

Shawn Harrison – Longbow Research

Okay. And then the second, on the components business it gives another side of the equation, it terms like there is a lag going on this year, you are facing some labor rate increases, but I guess you are seeing any supply chain issues right now either with Multek type just input costs or just getting different raw materials from Japan or within the Vista business, where the power supplies business anything there just Japan related disruption that could create a potential hurdle going in to the June quarter.

Mike McNamara

Well, that’s a hurdle in the March quarter, it’s lot of these labor rates have been going up, but the commodity price increases have been significant and a lot of the components are going up in price. So to me that’s already part of our results in March. It’s for sure going to be part of our results in June and that’s something and so part of it is Japan, but part of it also is just the commodity cost just keep going up. So I think that’s a real term. I think it’s important. It’s a real effect, but it’s already in our March numbers, and for sure, it will carryover to the June and maybe in the September. So this is – we are seeing a reasonably inflationary environment in a lot of different commodities that we buy.

Shawn Harrison – Longbow Research

Okay. With those commodities, there is no issue in getting different components that would be either required to make the power supply or the camera module?

Mike McNamara

Yeah, I mean, there is some. I mean, we are experiencing some trouble getting foiled for example, for like a flex circuit or there are some subcomponents that are getting in the way of our ability to deliver. So these are part of the Japan challenges. We still have hundreds if not thousands of risk items associated with Japan. And partly the implication of that is going to be higher prices as well. So that for sure is something that we are working on on the continuous basis. It’s why we give a wider range. So it’s still a real problem. I just think the response of the marketplace to – as it relates to Japan has been very, very rapid. I think it’s been impressive about how supply chains have moved around. And I think a lot of the risk is coming out of the system. We haven’t seen that impact in terms of revenue yet, because there is probably enough supply in the supply chain that last through May, where they call it a three months window by which we can move those things, move those parts, but I think the risk continues to get lower each month.

Shawn Harrison – Longbow Research

Okay, thanks a lot for taking my questions.

Mike McNamara

Okay, thank you. Kevin?

Kevin Kessel – Vice President, Investor Relations

Sure. So, thanks for joining us on our call today. You can access a replay of this call and obtain the transcript on our Investors section of our website which will be posted by tomorrow. As Mike mentioned also we planned to send out registration information for the May 24 Analyst and Investor Day early next week. If you have any questions, please contact me directly. Thank you and this concludes the call.

Operator

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

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