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Sanmina-SCI Corporation (NASDAQ:SANM)

F1Q2012 Earnings Call

January 18, 2012; 05:00 pm ET

Executives

Jure Sola - Chairman & Chief Executive Officer

Bob Eulau - Chief Financial Officer, Executive Vice President

Paige Bombino - Investor Relations

Analysts

Wamsi Mohan - Bank of America

Craig Hettenbach - Goldman Sachs

Sherri Scribner - Deutsche Bank

Jim Suva - Citi

Brian Alexander - Raymond James

Shawn Harrison - Longbow Research

Louis Miscioscia - Collins Stewart

Amit Daryanani - RBC Capital Market

Osten Bernardez - Cross Research

Christian Schwab - Craig-Hallum Capital

Operator

Good evening. My name is Courtliz (ph) and I will be your conference operator today. At this time I would like to welcome everyone to the Sanmina-SCI, first quarter fiscal 2012 earnings call. (Operator Instructions).

Mrs. Bombino, Director of Investor Relations, you may begin your conference.

Paige Bombino

Thank you, Courtliz (ph). Good afternoon ladies and gentlemen and welcome to Sanmina-SCI’s first quarter fiscal 2012 earnings call. A copy of today’s release is available on our website in the Investor Relations section. You can follow along with our prepared remarks and the slides posted on our website.

Please turn to the Safe Harbor Statement. During this conference call we may make projections or other forward-looking statements regarding the 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 operations 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 report filed with the Securities and Exchange Commission. These documents contain and identify important factors that could cause the actual results to differ materially from our projections or forward-looking statements.

You’ll note in our press release and slides issued today, that we have provided you with the statements of operation for the three months ended December 31, 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 slides posted on our website. In general, 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 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 our gross profit, gross margin, operating income, operating margin, net income and earnings per share, we are 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. Thank you for all of you being here today with us. On today’s call I have our CFO, Bob Eulau.

Bob Eulau

Hi everyone

Jure Sola

The agenda today we have is that Bob will review our financial results for the first quarter of fiscal year 2012. Then I will follow-up with additional comments relative to Sanmina-SCI’s results and future goals. Then Bob and I will open for questions-and-answers.

And now I would like to turn this over to Bob. Bob.

Bob Eulau

Thanks Jure. It’s a pleasure for me to be joining you on today’s call. Please turn to slide three. Overall the first quarter was challenging, but not significantly different from what we had expected. Revenue of $1.5 billion was down 11% on a sequential basis and down 10% from the first quarter last year. This was at the low end of our guidance of $1.5 billion to $1.6 billion.

In some cases, like the communications network segment we suffered from week demand and in other cases we had reasonable demand, but we suffered from supply issues to the floods in Thailand.

Our gross margin came in at 7.3%, which was down 50 basis points from the fourth quarter. Operating margin declined 80 basis points from last quarter to 3.3%. Non GAAP- EPS was $0.28. This was based on 82.7 million shares outstanding on our fully diluted basis. Finally, cash generation was a challenge this quarter with cash flow from operations at negative $13 million. I’ll discuss cash in more detail in a few minutes.

Please turn to slide four. Revenue was down 11% or $195 million from Q4 to $1.5 billion. From a GAAP perspective we reported net income of approximately $9 million, which results in earnings per share of $0.10. This was down relative to last quarter by $0.12.

Restructuring costs totaled about $4 million for Q1. The cost primarily reflects what we have been recognizing as expenses that are incurred related to real estate. Looking forward, we will continue to see some ongoing restructuring charges on our GAAP P&L of approximately $4 million to $5 million per quarter that primarily relate to real estate which is being held for sale. This real estate is listed on the market at over $100 million. Over the last two years we have sold over $50 million in real estate.

My remaining comments will focus on the non-GAAP financials for the first quarter. At a $110 million, gross profit was down $23 million from the prior quarter. Gross margin came in at 7.3%, which was 50 basis points below the previous quarter. Gross margin was at the low end of the range we had anticipated for the quarter.

Operating expenses were down $2.1 million for the quarter at $60.1 million. This was due to the cost controls that we put in place during the quarter, including time-off that most employees took during the holidays at the end of December. At $49.9 million operating income decreased by 29% from the prior quarter. Operating margin was 3.3%, which was an 80 basis point sequential decline.

The tax rate for the quarter was favorable at 15% of pre-tax income, which was at the low end of the range we had expected. On a non-GAAP basis we are in $22.8 million in net income or $0.28 per share. Both net income and earnings per share were down 41% from Q4.

On slide five we are showing you some of our key, non-GAAP P&L metrics. Lets start with revenue, which was a key driver of our financial results this quarter. We were impacted by at lease four factors.

First, we had general softness in demand across all segments. As you’ll see in a few minutes, every segment was down on a sequential basis. Second, as we expected we saw significant softness in the communications area. Third, we saw a larger decline in the components areas and fourth, while our factory in Thailand was not directly affected by the floods, supply constraints due to the floods constrained our shipments by $30 million to $40 million.

All of this was a disappointment after a strong revenue in Q3 and Q4 last year. Compared to Q1 last year revenue was down 10%. We also saw a decline in gross profit in Q1 following solid performance in Q3 and Q4. Our gross margin came in at 7.3%, which is the lowest it has been in a number of quarters. The revenue decline and the mix of revenue were the primary drivers in the decline in gross profit and gross margin.

We experienced revenue decline in most areas, but it was particularly pronounced in the component areas. With a high contribution margin in the component products, when we have declines in these product areas, it has a disproportion impact on our gross margin.

Our operating profit declined 29% to $49.9 million from last quarter. This led to operating margin of 3.3%. EBITDA also declined from last quarter to $74.4 million, which was 4.9% of revenue. For modeling purposes, I want to mention that depreciation amortization were $25 million for the quarter.

Now I’d like to turn your attention to the balance sheet on slide six. Our cash and cash equivalents were $604 million. Cash was down $36 million from the previous quarter. The decline in cash was largely a result of a drop in the revenue forecast within lead-time for material purchases. Accounts receivable decreased by $83 million, while accounts payable decreased by $125 million. Inventory increased by $13 million, which I’ll discuss more in a moment. Property, plant and equipment were unchanged for the quarter.

We are very pleased with the ongoing strength of our cash position. We expect to generate cash in Q2 and have decided that now is the time to further reduce our outstanding debt. Our plan is to call $150 million of our long-term debt, which is due in 2016. We expect the call date to be March 1 and we expect to save about $12 million in interest expense on an annual basis as a result of this transaction. With the current outstanding share count, this will improve our EPS by about $0.14 over the next year.

Lets turn to slide seven. Cash was down $36 million from Q4 of FY’11. Cash flow from operations for the quarter was negative $13.3 million and capital expenditures for the quarter were $24.3 million. This led to negative $37.6 million in free cash flow. As I mentioned, we expect to generate positive free cash flow in Q2.

Inventory reduction and cash generation are a key priority this quarter for our team. Inventory increased from $891 million last quarter to $904 million this quarter, while the inventory turns declined from 7 to 6.2. This deterioration was primarily the result of customers pushing out deliveries within the component lead times.

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 up seven days when compared to last quarter at 51.8. We saw an increase in accounts receivable, day sales outstanding from 54.5 days to 58.3 days as a result of changes in payment terms and the fact that we look at this measure on an average basis.

Accounts payable was favorable as days payable outstanding increased from 56.7 days to 60.4 days. This was primarily a result of purchases declining faster than cost of sales and the fact that we look at this measure on an average basis. Overall, cash cycle time increased from 49.7 days last quarter to 56.7 days. Finally, ROIC was 12.1% for the quarter.

Please turn to slide eight. I would now like to share with you our guidance for the second quarter of FY‘12. Our view is that revenue will be in the range of $1.45 billion to $1.55 billion. We expect that gross margin will be in the range of 7.1% to 7.5%. Operating expense should be $61 million to $62 million, which leads to an operating margin in the range of 3% to 3.4%.

Assuming no large foreign exchange surprises, we expect that other income and expense will be in the range of $20 million to $22 million. We expect the tax rate to remain in the range of 14% to 16% and we expect our fully diluted share account to be around 83 million shares, plus or minus 0.5 million shares. When you consider all this guidance, we believe that we will end up with variance per share in the range of $0.24 to $0.30.

Finally, for your cash flow modeling, we expect that capital expense will be around $20 million, while depreciation and amortization will be around $25 million. We expect that we will generate significant free cash flow this quarter as we have time to adjust our working capital levels.

Overall, we are navigating through a challenging period with our business mix. We took action to reduce our comp structure last quarter and we will continue to focus on controlling costs. We have a big opportunity to generate cash and we continue to reduce our outstanding debt. We will focus on improving our performance in Q2, while positioning ourselves for better results in the second half of fiscal year ’12.

At this point I’ll turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Jure Sola

Thanks Bob. Again ladies and gentlemen, welcome and I would like to add a few comments relative to what Bob said regarding our results. Let me talk to you about the business environment that give you some additional upside, I mean information on the December quarter; talk about the short term business environment and demand from March quarter. I’ll also talk a little bit about visibility for the rest of the calendar year 2012. Then I’ll summarize and give a quick overview of our strategy.

As Bob mentioned, on November 1 in our fourth quarter conference call we talked to you about in the short term that we did expect environment to be challenging and unfortunately that’s basically what we saw during the first quarter. We did experience week demand in communication networking segment and the biggest impact came from the wireless access products.

We also experienced continued inventory correction from end customer in the industrial, medical and multimedia markets. Defense and aerospace actually stabilized during the quarter and we expect that business to continue to be stable and long term to grow again.

In addition to our week market demand we have a supply constraint as Bob mentioned caused by Thailand floods. Supply constraint reduced potential shipments. You know have at the end of the day, as Bob mentioned we had a factory in Thailand that fortunately stayed dry, but we have to work a fair amount of overtime to make the shipments. But at the same time some of the parts that we couldn’t do affected our revenue for the first quarter between $30 million and $40 million. That was a majority coming from enterprise computing markets and multimedia markets.

Again for our second quarter, short-term business environment will continue to be challenging as Bob mentioned. We do expect business demand continue to be stable though at this level. In addition to this challenging environment we all know that typically the second quarter, what we call the March quarter, it’s normally seasonally a down quarter, but after the second quarter we do expect things to start normalizing and improving.

Now please turn to slide nine. As you can see here, top 10 customers represented approximately 49.1% of our revenue and we also have one customer around 10% of our revenue. Let me now give you more information on each market segments.

Communication network, which consists of networking wireline, wireless infrastructure product, at the beginning of the quarter we knew this market’s going to be down and in actuality came down 15.6%. This is a major market for us, represented last quarter 45% of our revenue with a lot of push outs and again, most of these push outs came and were driven as I mentioned earlier, 85% was driven by wireless access market. We see a lot of inventory correct by our customer’s customers. We have also in this market experienced as I mentioned earlier some shortage in optical component that were caused by the floods, but it wasn’t a major amount.

As we look in the second quarter we believe at this level this business is stabilized. We are starting to see some upside. Again, we do have a well and diversified customer base here. In addition to that, we still continue to see a fair amount of new opportunities. We also have some new programs that we won quarters ago, like LTE programs that we expected to be shipped in sooner, but we started to see actually a little bit more positive news on that and we should see some more shipments in the future on LTE programs again.

Also we won some new optical wins that should help us as I look out over the next couple of quarters. Again, and if you just talk to our customers, what we’re getting is that overall year-to-year they feel positive about it and I’ll make more comments later on on that.

The next market segment that I’m going to talk about is enterprise computing and storage and that was approximately 16% of our revenue. We did expect that market to be flat, but actually it was mainly driven by shortages of the disk drives and some inventory corrections that we saw with a few customers.

As we look at the second quarter, while we are forecasting to be stable, slightly up, we expect to continue to win new projects. I think we got some good projects that we are working on, some fair amount of new opportunities and again, we still expect this market to be up year-to-year as we look at the whole 2012.

Next market I want to make a comment on is industrial, defense and medical. That represented 25% of our revenue. Again, at the beginning of the quarter we thought that business is going to be flat, slight down, actually it came in 5.7% down. We continue to see weakness in semi conductor capital equipments.

As I mentioned earlier, defense and aerospace, part of the business stabilized during the quarter and medical was slightly down, mainly driven by inventory correction and some slower demand on a few programs that we have. As we look at the second quarter, we’re forecasting a stable environment here. Semiconductor will continue to be week. We think we’re going to continue to see weaknesses there for at least the next couple of quarters.

Defense and aerospace will continue to be stable, maybe slightly improved. Long term we continue to invest a fair amount in this market, especially in product development with the government of research and development and we believe that we have a fair amount of good new opportunities in the future.

Medical business for us will continue to be stable. And again, if you look at this market in total, we expect this market to have a fair amount of new opportunities in 2012. Multimedia represented 50% of our revenue. We did forecast that market to be flat to down. That actually came 15% down.

Number one, it was driven by the shortages of the disk drives in our set-top box business. That’s improving, but it was really like I said, affected a lot in our last quarter and also weaker demand across other markets that we have, including a slight decline in automotive.

As we look at the second quarter, we expect multimedia to continue to be down slightly. We continue to see some shortages of disk drive in the second quarter and yes, things are getting better, but we’re still having a problem getting enough to what we need today. Automotive, we are optimistic about that one for the year. We do have some new programs coming up. I mean we expect things in that market to really improve.

Now let me talk to you about visibility and outlook for the June quarter and the rest of the calendar year 2012. The forecast from our customers for the June quarter, at this time I would say visibility is getting better and our customers expect this demand to start improving. And again, most of these customers still have optimistic outlook for second half of the calendar year 2012.

So as we look at the 2012 and despite a lot of headwinds in a global economy, in this environment you focus on things that is in your control. We are going to continue to reduce cost as Bob talked about tuning of our efficiencies cost, all our systems and operations; continue to build our strong relationship with our key customers and continue to invest in the future. We are focusing heavily in technology innovation, resource and development on the new products and continue reviewing and investing in our business development sales and marketing.

So again, as we look at the global economy, there is still a lot of uncertainty in this economy today, but I can tell you that Sanmina is ready for any economical environment. During our business transformation we had a lot of moving parts. The good thing is all that is now behind us. Now we are in a great position and looking forward to some growth as the economy improves.

The company has a strong liquidity. We expect to continue to generate strong positive cash flow in the next couple of quarters and we have a strong infrastructure in place to compete in each of our focus segments. And as Bob mentioned, we will continue to reduce our debt.

Again, we are well positioned for the upside and a better future as the market demand improves. Even in this market there is a still fair amount of opportunities that we are working on. Our book-to-bill for the first quarter was slightly positive, nothing to brag about, but it was positive, but we are expecting to continue in the second quarter that our book-to-bill to be positive again.

So please turn to slide 10. I just want to talk to you a little bit about our strategy and how we are positioned and how we are going to compete. I can tell you that we are building a strong foundation for success. We are focused on key markets, basically on infrastructure type of product. We are strong competitor in this type of market. We offer sound depreciation and leadership and communication networks, enterprise computing, medical assistance, defense and aerospace, industrial semiconductor, green technology markets and multimedia.

Please now turn to slide 11. Our new strategy has been well received by our customers. This new strategy really provides a lot more value to our customers. We focus on our company strengths. We focus to maximize value in each of our businesses as we separate these businesses to be independent. We are going to continue to invest in the higher margin opportunities markets. The goal here is to drive sustainable growth for many years to come and we believe that our model, especially the way we’re set up today has a significant leverage as the market improves.

So to continue with my summary in the short term, when you look at the first six months of our fiscal year 2012, we definitely see it’s yes, a challenging business environment, but we believe things will improve. Basically this is a short-term scenario, because we are starting to see some positive visibility from our customers as they are looking at the third and fourth quarter of our fiscal year 2012. So that’s why we expect the second half to improve nicely in components, because components typically gets hit first in this type of environment and products and also we expect our EMS business overall to improve nicely.

We are well aligned with our key customer. Sanmina-SCI is a very valuable partner with each of these customers. We will continue to stay cautious in this economical environment. We are going to remain well disciplined and focused on our financial metrics and our customers.

Now I’d like to take this opportunity to say thank you for all of you for listening to us today and giving us support. And operator, we are now ready to open these lines for questions-and-answers. Thanks again.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from Wamsi Mohan of Bank of America.

Jure Sola

Hello Wamsi.

Wamsi Mohan - Bank of America

Hey Jure, hey Bob.

Bob Eulau

Hi Wamsi.

Wamsi Mohan - Bank of America

Jure, you know that weakness from the Thailand flooding. I think Bob said $30 million, $40 million from shortages in the fiscal first quarter. Can you share how that was split across multimedia and enterprise computing and storage and what are you baking into your guidance in the second quarter from supply constraints.

Jure Sola

Well, if I just look at the -- most of that came from multimedia set-top box business I would say, as much as 60% of that and then the second was a storage product and the third one was an optical.

Going forward you know it’s hard to put a real number on it. We are still hoping to get some of these parts. Some of our customers are going out there and allowing us to pay more for these parts, so we did factor -- I mean as we give you guidance we took some of those numbers out of it, but we’ll see how things shape out. But definitely if I would have to kind of put the number on it today, that I would say could be anywhere from $20 million to $30 million.

Wamsi Mohan - Bank of America

Okay, thanks Jure. And Bob can you -- I know you don’t break this out explicitly, but can you give us some sense of how much component revenues were down quarter-over-quarter, maybe relative to the total company. I’m just trying to understand how much of the gross margin shortfall was mix driven versus revenue driven.

Jure Sola

Yes, that’s a good question. Let me try and frame it for you this way. If we look at the components areas in total, they were down about 17% sequentially and as I said in my prepared remarks, the contribution margin is really high in that area, so revenue is down 17%. We actually saw gross profit down by almost 50%. So it’s just really hard when we start to see the slowdown there.

What we’ve experienced over time is we get hit first and hardest with components and then as things start to get better, I’d see that will see the recovery in first and obviously with the contribution margin that will help us for one.

Wamsi Mohan - Bank of America

Okay thanks, I appreciate the color. And last one from me, Jure, you noted in your prepared remarks that you have input from customers that suggest that the second half should see some improvements. Are there particular end markets where you feel more confident that there will be a recovery in the second half? Which segments do you think there is a higher probability and regarding the June quarter, do you actually think that the June quarter can grow year-on-year or is that too optimistic? Thank you.

Jure Sola

Well, first of all Wamsi, as I said earlier, the biggest impact that we had, if you compare our revenue from our fourth quarter, which will be our September quarter to December quarter, came in at wireless access product. We believe that was mainly driven by a correction of inventory at end customers, so those things cannot -- have been used up and we continue to have our basically flat quarter right now.

So what we see from our customers, the demand for those type of products will start to pickup in our June quarter and that’s a substantial amount of business for us. So we expect that that’s one of the reasons.

If you look at our other businesses, you know these smaller, what I’d say more diversified customer base, those seems like they are going to be worst case flat and up. So when you look at in the total, we expect to really grow from here, where we are today in the June quarter.

Wamsi Mohan - Bank of America

Okay. (Inaudible) all the best.

Operator

Your next question comes from Craig Hettenbach with Goldman Sachs.

Craig Hettenbach - Goldman Sachs

Yes.

Jure Sola

Hi Craig.

Bob Eulau

Hi Craig.

Craig Hettenbach - Goldman Sachs

Just a follow-up on the end market and expectations. As we go through the year demand improves. Anything you can point to, whether it’s backlog or new design wins or programs that you have that gives you confidence that revenue growth in the June quarter and beyond improves?

Jure Sola

Well, demand for us is as I said earlier; forecasted economy today, still the challenge is there and I don’t want you guys to think that I know exactly how an economy is going to shake up. You always focus on things you control.

As I said, I think there is a lot of positive stuff that we are working on new programs across all the markets. But I think if you go look at the markets that affected us the most in this first six months of this fiscal year 2012, we believe those were mainly driven by extra inventory in the pipeline and some pushed out programs. For example LTE, we got some new programs that we won on LTE. But insulation in some of those systems have been delayed.

As we talk to our customers we believe some of those programs look promising, especially if you look out, let’s say two or three quarters out, things like that. We talked about the defense and aerospace, I mean that business stabilized. We don’t expect the DOD business to come back overnight, but we are continuing to -- expect it to be stable, but in the meantime we are investing heavily, both in our engineering and business development in that business, so we expect some improvements.

The weak markets that we also have already, I talked about the semiconductor equipment. We expect that thing to continue to be flat through at least first half of the 2012, but we do see some positive signs there that that business might get a little bit better in the second half of 2012.

So those are some of the examples, but again, we will continue to tune things up and we are fighting for everything that’s out there, but we like what we have. I mean, it’s not a time to panic. We are not panicking and we will focus on things we control and just be ready so that we have a quick recovery, especially in our component business. We have a lot of upside once the main comes in and as the inventory gets flushed out, we expect our component businesses to come back a lot faster.

So I don’t know if I answered your question there, but I’m trying to give you a little bit more on what’s going on.

Craig Hettenbach - Goldman Sachs

Okay, and then independent of the macro, can you talk about or maybe rank by end market where you feel best when new program activities for you are going through the year?

Jure Sola

First of all let me talk about the market opportunity. Communication networking for us is still the biggest amount of dollars opportunity as I look at the rest of the year. But if I look at it from a new programs, I mean I’ll say our storage product has a lot of opportunity for new product wins that we are working on and has a lot of upside, assuming that some of these programs that we work on become what they are suppose to be.

Craig Hettenbach - Goldman Sachs

Okay and then Bob, on the component margin outside of just a snapback in that business and some better leverage there with some improved sales, anything else the company is working on to try to get margins up on the component side?

Bob Eulau

Well on the short-term, across the company we are focused on controlling costs and taking care of everything we can in a short timeframe. We don’t believe there is a need to do any restructuring right now, because we don’t think the demand is a long-term trend. We think that things will be coming back. So it’s basically get as lean and efficient as we can in the short-term and really take advantage of a recovery when we see it.

Jure Sola

And if I can add to that, I think if you just look at our components, we’re really working, that’s in our circuit board side of the business; we are really focusing out at some of the newer technology product. We do a lot of quick turns of the new programs that it would, as market improves we’ll be well qualified. We try to bring some new customers in to get qualified and those type of things are positive.

If you look at for example our memory module product, we are coming with a lot of new technologies and capabilities there. We expect that business to help us move as the demand goes up. And then our mechanical systems group, again, they’ve been impacted heavily by that big heavy semiconductor industrial business. But if you look at the new programs that we are working on, there’s a lot of upside once these things turn up.

Craig Hettenbach - Goldman Sachs

Okay, thank you.

Jure Sola

Thanks again.

Bob Eulau

Thanks Craig.

Operator

Your next question comes form Sherri Scribner with Deutsche Bank.

Jure Sola

Hi Sherri. Sherri?

Operator

And Sherri, your line is open.

Sherri Scribner - Deutsche Bank

Hi, can you hear me?

Jure Sola

Yes, we can Sherri. How are you?

Sherri Scribner - Deutsche Bank

Sorry, I’m having technical difficulties. I wanted to ask about your outlook for revenue growth for fiscal ‘12. It seems like with the declines that we’ve seen in December and then the outlook for March, it’s going to be hard to get revenue growth for the full year in fiscal ‘12. Do you expect revenue to come back pretty significantly in the second half so that we do see some revenue growth or is this going to be a down year and we recover in fiscal ‘13 after starting to see some improvement in the communications market or what are you thinking about?

Jure Sola

Well, first of all, we don’t forecast that, we forecast one quarter at a time, but I would say as I just said earlier Sherri, is that if we are right that demand is going to come back, I think the company is in position to have a quick recovery. But I don’t think that I would like to at this moment forecast what that recovery is going to be, but I personally believe that it’s going to be better than what we’re shipping today.

Sherri Scribner - Deutsche Bank

Okay. And then in terms of the shortages of parts, I think you ran through it, but I just want to clarify. Primarily the impact that you saw was related to hard drive shortages and then you saw some optical components. Was there anything else that you had a hard time getting in the quarter?

Jure Sola

There were some other few things, but mainly for us it was really the disk drives and some optical products.

Bob Eulau

Yes, there were semiconductors. There were a number of parts, but the material items are really the optical in the drives.

Sherri Scribner - Deutsche Bank

Okay, and then it sounded like you expect the set-top box business to see some additional drag, some difficulty getting parts in the second quarter, but the server and storage market, that is probably going to be okay. They are not going to have a hard time getting drives?

Jure Sola

Well, we have some challenges in our storage market too. I mean, we are focusing on more higher-end storage product there and the customer in some cases -- in a fair amount to these cases you can get storage, the problem is how much you want to pay for it. In some of these higher-end markets, customers are willing to pay a little bit more and we think we have less challenges there.

On the positive side I think overall supply is starting to improve nicely. I personally believe it’s better than what was anticipated by the industry 30 days ago.

Sherri Scribner - Deutsche Bank

Okay. And then in terms of the real estate that you have on the market, it seems like we’ve had that real estate on the market for a pretty long time. I mean I know the whole time that I’ve covered you, you guys have talked about the real estate. Isn’t there a way to reduce the price and just flush through that real estate and finally be done with it. I mean, I’m just curious why we still have that real estate for sale?

Bob Eulau

You’re right. I mean we’ve had offers on almost every property and we could liquidate it very quickly if we were willing to drop price. We are trying to make sure that we take our time and get a fair value for each of the properties. So this is our judgment comp in terms of the length of the time we’re taking.

Jure Sola

But we have been selling approximately $25 million to $30 million per year in the last couple of years, right Bob.

Bob Eulau

Yes, that’s right.

Sherri Scribner - Deutsche Bank

Okay, thank you.

Jure Sola

Thanks Sherri.

Operator

Your next question comes from Jim Suva with Citi.

Jim Suva - Citi

Thank you gentlemen. This is Jim Suva here.

Jure Sola

Hi Jim.

Jim Suva - Citi

Hi, how are you? Happy New Year.

Jure Sola

Happy New Year to you.

Jim Suva - Citi

You made a comment about components are first hit and then rebound. The question I have is, if you hypothetically stay at these levels, sales levels, revenue levels for components, would you see more gross margin pressure or would it be consistent at these levels?

Bob Eulau

I think at this level the margins would stay consistent, and we are expecting that we have about bottomed out here.

Jim Suva - Citi

Can you give us some details around your confidence in why you feel you have bottomed out here?

Bob Eulau

Well, as Jure said, book-to-bill was slightly positive, where it’s discussions that our teams are having with customers and we have let our finger on the pulse and we know the way the supply chain works and when people start to put inventory back on the shelves, the biggest impact is going to be at the component area and that’s going to be, and it is going to happen fastest there.

Jure Sola

Just to add to that Jim, we are starting to at least draw out channels, starting to see there is less inventory in the pipeline and we are starting to see some people where they need -- they are starting to expedite some of these, what we call click turns.

Jim Suva - Citi

Is there the risk that one of your customers such as Nokia Siemens Network, especially that one or just in general speaking, because you don’t like to talk about customers and it may not be appropriate, who is going through some very material structural changes and breaking their company up and selling lots of units. If that business could go to some of your competitors and put us in another step down for the components in the EMS profitability and sales rate of the company.

Jure Sola

Well Jim, that’s I mean always risk in our business with any of our customers at any time. So since you mentioned that customer, I can tell you that our relationship is very strong and I think we are in a very strong position based on our performance and cost structure that we know we can compete and we’re delivering a great solution for our customer. So, today we don’t see any major risk in our customer base.

Jim Suva - Citi

Great and my last little picky question. Restructuring, are you guys pretty much done now or do you kind of take another look at things here?

Jure Sola

I think we definitely believe that things are going to get better than what they are today. We did all the major restructuring. In our business there is always tune up going on, but there is nothing major planned on at this time, unless we’re 100% wrong and we are miss forecasting what’s in front of us. But we think demand will improve and as I mentioned earlier, we are building a company for our future and each of our markets that we believe do have a lot to offer and our customer relations, anything is going to grow.

Jim Suva - Citi

Thank you and again, Happy New Year guys.

Jure Sola

Thanks Jim.

Bob Eulau

Thanks Jim.

Operator

And your next question comes form Brian Alexander with Raymond James.

Brian Alexander - Raymond James

Yes, thanks guys. Could you just talk more specifically, where in the component segment you saw the weakness in the December quarter. I know you talked about 17% sequential decline in components revenue. Was it almost entirely an optical or was it more broad-based in that printed circuit boards etcetera? I’m just trying to understand, if the components weakness is really just optical and the optical is related to flooding or is it bigger than that and more demand related?

Jure Sola

Okay first of all, our optical -- make sure that Brian there is no misunderstanding. The way we kind of report number today, our optical business it’s in a EMS bucket right now, okay. What we have in the component bucket, the way we report today is really printed circuit boards, backplanes, all the mechanical system, enclosures, plastics, then we have memory modules in there, so that’s what we call component.

If you look at the business, the biggest impact in our component business has really been in printed circuit boards, backplanes and our mechanical group’s enclosure business.

If you look at optical business for us besides some shortages that we experience because of the flood, that business for us is stable and I said in my prepared statements, if anything, some of the new wins that we are winning in optical today, we are lot more optimistic that optical business has bottomed out and its moving in the right direction.

Brian Alexander - Raymond James

So then maybe just expand on the 17% sequential decline in components. It sounds like it’s more related to PCB and backplanes, was it broad based or end market, end customers?

Jure Sola

It will be printed circuit boards. It is more in the printed circuit boards and mechanical enclosure business that has majority of that.

Brian Alexander - Raymond James

Right, but was that broad based across end markets and customers or was it relatively concentrated?

Jure Sola

That was across really all the broad based on all the customers.

Brian Alexander - Raymond James

Okay. And then just on the gross margins, you talked about 7.3% gross margins lowest in several quarters and I understand the components business had a big impact on that decline, but looking forward, what revenue level do you think you need to achieve to get gross margins back around that 8% level, which you’d been hovering around a couple of quarters ago? Thanks.

Bob Eulau

Yes. Well, I think yes. I think you almost answered the question. If you look at a couple of quarters ago we were between 1.6% and 1.7% and definitely think that 8% is achievable at that kind of revenue level. It depends very much on the mix of the business.

Brian Alexander - Raymond James

Okay, thanks.

Jure Sola

Thanks Brian.

Operator

Your next question comes form Shawn Harrison with Longbow Research.

Shawn Harrison - Longbow Research

Hi.

Jure Sola

Hello Shawn.

Shawn Harrison - Longbow Research

Just a clarification first; I just wanted to make sure, with the gross margins down sequentially that much in the components business, was it still profitable in the quarter on an EBIT basis?

Bob Eulau

From a gross profit standpoint it was definitely profitable and we don’t allocate all the costs out. I can’t really answer the EBIT question.

Shawn Harrison - Longbow Research

Okay, but definitely below the corporate average?

Bob Eulau

Yes, the gross margin was below corporate average this quarter.

Shawn Harrison - Longbow Research

Okay. And then when looking at the expectations for cash flow into the March quarter, where would you expect the cash cycle to be? And is that where you would expect it to hold for the rest of the year? Would you see further improvement in the cash cycle beyond the March quarter?

Bob Eulau

Well we think -- part of what happened to us in the first quarter is the change in demand happened too fast for us to react and to get all the inventory out of the system. So we think we’ll capitalize on that here in the second quarter and generate pretty strong cash in Q2 and then remainder of the year is going to be very much a function of growth rate and we’ll see what the working capital requirements are, dependent on the business that we’ve got.

Shawn Harrison - Longbow Research

Okay. I guess the use of $13 million of operating cash, would you expect to at least fully recover that or would it be something significantly higher in terms of the cash generated?

Bob Eulau

My expectation is we’ll do significantly better than that.

Shawn Harrison - Longbow Research

Okay, thanks so much.

Jure Sola

Yes Shawn.

Operator

Your next question comes from Louis Miscioscia with Collins Stewart

Jure Sola

Hello Louis

Louis Miscioscia - Collins Stewart

Hey guys. Let me go back to the hard disk drive situation in Thailand. Generally hear that the retail areas is what is getting hit due to the lack of availability; obviously it came through in your numbers in multimedia. You know given it’s going to be possibly a $30 million drive shortage, would multimedia end up being weak again sequentially or are you starting to see that area get more allocation?

Jure Sola

You know basically, let me talk about our brackets that we are talking about in my prepared statements, although I did forecast the next quarter, the multimedia for us to be down.

Louis Miscioscia - Collins Stewart

In a similar level that we just saw now, double digits…

Bob Eulau

Well, it’s maybe not as similar level, it’s a little bit less, but definitely if you compare it quarter-to-quarter it will be slightly down.

Louis Miscioscia - Collins Stewart

Okay and then switching over to OpEx, had a nice OpEx performance this quarter, but ticking up a bit, just given the tough environment, what’s driving the tick-up. I thought you would have thought well maybe you’ve been able to hold it a little bit tighter?

Bob Eulau

Well, the main thing is the team did a great job in the first quarter and we shut down a number of facilities right at the end of December with the holidays and we won’t be repeating that this quarter and that’s probably the biggest change we will see quarter to quarter.

Jure Sola

But we expect our debt to stay kind of flat.

Louis Miscioscia - Collins Stewart

Okay, thank you. That’s it from me.

Bob Eulau

Thanks Lou

Jure Sola

Thanks Lou

Operator

Your next question comes form Amit Daryanani with RBC Capital Market.

Bob Eulau

Hello Amit.

Amit Daryanani - RBC Capital Market

Two questions, one just on the communications side. I mean it sounds like you saw obviously a fair amount of softness there. Was it pretty steady throughout the December quarter? Was it fairly late and was it both on the EMS and component side?

Jure Sola

Well, first of all, just overall communication, demand for us at the beginning of the quarter, we knew that things were soft, but during the quarter it continued to even get softer and mainly it was driven by that wireless access product in our case.

But the components, because we do business, the component is a lot more diversified than any of our businesses. I mean, when you look at circuit boards, it’s across hundreds and hundreds of customers, even the customers we don’t do any EMS or mechanical or plastic and so on. So that customer base is a lot more diversified than EMS.

So we definitely -- based on our analysis, if you look at the whole circuit board industry today or some of the enclosure factories, plastic factories, if they focus on infrastructure product like we are, typically demand was pretty weak and again, mainly driven what we see by inventory. Their inventory flushes out. We expect that business to come back a little bit sooner than the system business.

Amit Daryanani - RBC Capital Market

Got it. Then maybe just going back on the OpEx question, the way I was almost looking at this was if I look year-over-year for Q1, OpEx was basically flat at $60 million, but revenues are down 10%, 12% year-over-year. I would have thought OpEx would have gone down at least in line with revenues. Could you help me understand why did that not happen or what the OpEx maybe were?

Bob Eulau

Again, we’re down in OpEx probably about as lean as we can get here in the December quarter. If you look at last year at Q2, Q3, we were in that $63 million, $65 million range. So we’re continuing to make investments. We are investing in areas like R&D. We are not going to jeopardize the long-term by cutting back in some of those areas and we’re also continuing to invest in business development and making sure that we are bringing in business. So I think OpEx is actually pretty lean here.

Amit Daryanani - RBC Capital Market

All right. And then just finally on the debt deal that you had announced, $150 million, that would add about $0.03 on a quarterly basis in the June quarter and beyond. Is that roughly the right math to think about?

Bob Eulau

Yes, that’s about right. I think I said on an annual basis its $0.14.

Amit Daryanani - RBC Capital Market

All right, fair enough. Perfect. Thank you guys.

Jure Sola

Thanks Amit.

Bob Eulau

Thanks.

Operator

Your next question comes form Osten Bernardez with Cross Research

Jure Sola

Hello Osten.

Osten Bernardez - Cross Research

Hey there. Good afternoon. Thank you for taking my question. I just have one quick question. Would you be able to provide a breakdown for the sequential decline in your gross margin?

Bob Eulau

Break down, you mean by product area or by market area or…

Osten Bernardez - Cross Research

Yes.

Bob Eulau

So we really don’t drill down a lot. I try to give some indication in terms of what’s going on with the company and what’s going on in the components areas, but we don’t give a lot of information beyond that.

Osten Bernardez - Cross Research

Okay, understood and lastly just to clarify, with the near term weakness that you’re expecting within your semiconductor business, is that more a market call or is that a timing specific or customer specific, depending on what you’re hearing?

Jure Sola

Well, we are trying to be experts in the markets, but Osten we try to really kind of look at our customer base. We’re well diversified in that market alone. So when we talk, we really, we talk about our customers.

If you look at our competition, we all have different customers in some cases, but even if you have a same customer, most of us are involved in different programs. So we all get affected a little bit differently. So we try to give you as much of information as we can about our business and so the way we analyze things is that with our customers, when we say we look more optimistic, it’s with what we are seeing from our customers and based on that information, based on the forecast that we look every day, we kind of adjust our decision making and how it is.

That’s what I said of what we see today is that the second half for us looks a little bit more promising and if that’s the case, we should deliver a lot better results. We believe in those, but in the mean time we continue to focus on improving the things that we can work every day on.

Osten Bernardez - Cross Research

All right. Thank you.

Jure Sola

Thanks. Operator, we have time for one more question.

Operator

Okay. And your next question comes from Christian Schwab with Craig-Hallum Capital.

Christian Schwab - Craig-Hallum Capital

Great, thanks for -- good afternoon Jure. A couple of quick questions. Just following-up on the previous gentlemen’s question, on the semi cap equipment you guys described that that business would, you know you think will be weak obviously in March, but it might be challenged for the next couple of quarters after that, did I hear that right?

Jure Sola

No, I think it was the opposite I said. It might be challenging for the next quarter, but I think as we come in on the last two quarters of the year, we could see some improvements based on the programs that we are involved in.

Christian Schwab - Craig-Hallum Capital

Okay. Then you talked a couple of quarters ago when business was a little bit stronger, that you thought new product design wins in a stable economy could lead to double-digit year-over-year revenue growth; obviously that is not occurring. I’m just trying to get and I’m sure everyone on the call is, an idea of what the slope of this recovery is going to look like.

So if March is the bottom, I mean, let say we do $1.5 billion. What would it take to do $1.7 billion again, like September of last year? How do we get $200 million in revenue? Do you see a path to that? I mean disk drives become available; we call it $50 million back. Where would the other $150 million come from?

Bob Eulau

Christian, I mean as you know, we really give guidance out one quarter at a time. What we are trying to do is give some indication. We feel the second half is going to be stronger than the first half has been and as you said and we think that probably the March quarter is the bottom. We’re sort of at the same level we’ve been at here in the December quarter and there are early indications from our customers across several of the market areas that those things are going to get a little better. But we can’t control that, so it’s awfully hard for us to give you a specific roadmap on what we think revenue is going to be in the June quarter right now.

Jure Sola

But to add to that Christian is that company, assuming that demand is there, the company is ready to execute on that immediately and that’s kind of what we are positioned and that’s why our overall SG&A, we’re staying flat here, because we still believe there is a lot of a upside for us, a lot of opportunities and we still believe what’s in front of us, we are excited about the future. Of course we don’t control economy, but ones the economy turns it on, we have a lot of opportunities to grow this business.

Christian Schwab - Craig-Hallum Capital

Right, and then my last question. On the Enterprise computing and storage business, last year we faced some headwinds with some larger programs, changes in the way to new programs that began to ramp. As you go through fiscal year 2012, are you aware of any large programs that are transitioning away to newer programs that could cause disruption?

Jure Sola

Well first of all, if we look at that segment for us, I think we are a lot better positioned today for upside in that market than we were let say a year ago. For a couple of reasons, we developed a strong technical capability to drive that growth. We are shipping a fair amount of new projects. Some of these projects have good opportunities. We are working on some new exciting projects that are in front of us; it all depends how this thing shake out. But yeah, I’m positive of what’s in front of us, especially if I look at the later part of 2012.

Christian Schwab - Craig-Hallum Capital

Great. No other questions. Thank you.

Jure Sola

Thanks Christian.

Jure Sola

Ladies and gentlemen, that’s all we have for today. I appreciate your support and if anymore questions, especially the ones that we didn’t answer, please give us a call. With that, thank you very much.

Bob Eulau

Thanks. Bye-bye.

Operator

And this concludes today’s conference call. You may now disconnect.

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