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Flextronics International Ltd. (NASDAQ:FLEX)

F3Q08 (Qtr End 12/31/07) Earnings Call

January 29 2008 4:30 pm ET

Executives

Mike McNamara - CEO

Tom Smach - CFO

Analysts

Brian White - Jefferies

William Stein - Credit Suisse

Matt Sheerin - Thomas Weisel Partners

Sean Hannan - Needham & Company

Steven Fox - Merrill Lynch

Yuri Krapivin - Lehman Brothers

Kevin Kessel - Bear Stearns

Sherri Scribner - Deutsche Bank

Alex Blanton - Ingalls & Snyder

Lou Miscioscia - Cowen

Operator

Good afternoon and welcome to the Flextronics' third quarter results conference call. All lines will be on a listen-only until the question-and-answer session of today's conference. (Operator Instructions). Today's call is being recorded, if you have any objections, please disconnect at this time.

I would now like to turn call over to Mr. Mike McNamara, Chief Executive Officer. Thank you, sir, you may begin.

Mike McNamara

Thank you. Ladies and gentlemen, thank you for joining the conference call to discuss the record results of Flextronics' third quarter ended December 31, 2007.

To help to communicate the data on this call, you can also view our presentation on the internet. Please go to the Investors section of our website and select calls and presentations. You will need to click through the slides so we will give you the slide number we are referring to.

On the call with me today is our Chief Financial Officer, Tom Smach. I will turn the first part of the call over to Tom to go through the financial portion of our prepared remarks. I will then provide commentary along with guidance and then open it up to questions. So go ahead, Tom.

Tom Smach

Thanks, Mike, and good afternoon ladies and gentlemen. We'll start on slide 2 . Please note that this conference call contains forward-looking statements within the meanings of the US securities laws including statements related to the future revenue and earnings growth, expected improvements in operating margins, our expectation of continued growth in the current economic environment, the expected benefits resulting form our geographically diverse business and our broad base product portfolio, services and component technologies offerings, the expected benefits from our acquisition and long-term investment strategy and our expectations of the benefits, cost savings and revenues to be obtained from the Solectron acquisition.

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

In addition, throughout this conference call we will use non-GAAP financial measures. Please refer to the schedules to the earnings press release, slide 4 of this presentation, and the GAAP versus non-GAAP reconciliation in the Investors section of our website which contain the reconciliations that most directly comparable GAAP measures.

Slide 3. Revenue increased $3.7 billion, or 67% from the year ago quarter to a record high $9.1 billion in the December 2007 quarter. Adjusted gross profit increased 83% from the year ago quarter to $532 million while adjusted gross margin improved 50 basis points from 5.4% in the December 2006 quarter to 5.9 % in the December 2007 quarter.

Adjusted operating profit increased 86% from the year ago quarter to $300 million while adjusted operating margin improved 30 basis points from 3.0% in December 2006 quarter to 3.3% in the December 2007 quarter. Adjusted net income increased 84% from the year ago quarter to a $250 million while adjusted EPS increased 30% from $ 0.23 in the December 2006 quarter to $0.30 in the December 2007 quarter.

Slide 4. During the December 2007 quarter the company recognized pre-tax restructuring, integration and other charges of approximately $270 million, primarily related to the restructuring and integration activities resulting from the Solectron acquisition and other pre-tax charges of approximately $61 million related to the impairment and related charges for certain non-core investments.

The previously announced restructuring activities, which included closing, consolidating and relocating certain manufacturing and administrative operations, elimination of redundant assets and reducing excess workforce and capacity, will optimize the Company's future operational efficiency. As part of the previously announced acquisition related charges the company also wrote down at US deferred tax assets by $661 million during the December 2007 quarter.

Pre-tax intangible amortization and stock-based compensation amount to $23 million and $16 million respectively in the December 2007 quarter, compared to $9 million and $8 million respectively in the year ago quarter. GAAP net income amount to $119 million or $0.20 per diluted share in the December 2006 quarter compared to a net loss of $774 million or a loss of $0.94 per share in the December 2007 quarter.

Slide 5. Revenue from the computing segment comprised 17% of December quarter revenue, which represents an increase of $985 million or 168% over the year ago quarter, and a sequential increase of $828 million or a 111%. Revenue from the consumer digital segment comprised 15% of revenue, which represents an increase of $205 million or 18% over the year ago quarter, and a sequential increase of a $168 million, or 15%.

Revenue from the infrastructure segment comprised 35% of revenue, which represents an increase of $1.95 billion or 155% over the year ago quarter, and a sequential increase of $1.72 billion or 116%. Revenue from the mobile segment comprised 21% of revenue, which represents a decrease of $58 million or 3% over the year ago quarter, and a sequential increase of a $333 million or 21%.

And finally, Revenue from the industrial automotive, medical and other segment comprised 12% of revenue, which represents an increase of $569 million or 113% over the year ago quarter, and a sequential increase of a $457 million or 74%. Our top 10 customers accounted for approximately 55% of revenues in the December 2007 quarter with Sony Ericsson exceeding 10%. Our top 10 customers percentages decreased from 65% in the year ago quarter reflecting further customer diversification.

Slide 6. Return on invested capital improved 70 basis points to a record high 11.9% in December 2007 quarter from 11.2% last quarter.

Slide 7. We ended the quarter with $1.8 billion in cash and $3.1 billion in debt, with a debt-to-capital ratio of 27%. Including our revolver total liquidity was $3.5 billion at quarter end.

Slide 8. Cash conversion cycle came at 21 days achieving our objective in this very important metric. Inventory turns were 7.8 times in the quarter while days sales outstanding was 36 days and days payable outstanding was 62 days.

Slide 9. During the December 2007 quarter, we generated $534 million in cash flow from operations and free cash flow of $470 million after capital expenditures of $64 million. Depreciation and amortization amounted to $126 million in the quarter. Operating cash flow generated $1.05 billion and free cash flow was $840 million in the first three quarters of our current fiscal year.

Thank you, ladies and gentlemen. As you turn to slide 10, I will turn the call over to Mike McNamara.

Mike McNamara

Thanks, Tom. Before discussing guidance, I would like to provide some insights on some of the highlights of our operational performance this quarter and the current state of business. Overall demand in December quarter was better than expected as revenues and earnings exceeded the high-end of our guidance. Actual revenue in the December quarter was $9.1 billion versus our guidance of $8.5 billion and adjusted earnings per share was $0.30 a share versus our guidance of $0.26 a share.

We are extremely pleased with the operating results achieved this quarter, as we met or exceeded each financial commitment made for the quarter while establishing many financial records. We have successfully and fully integrated the acquisition of Solectron and as such, it is no longer separately identifiable inside of Flextronics, and we are no longer able to talk about Solectron results separately.

Ours teams management of the Solectron integration was nothing short of exceptional. Customer feedback is very positive, operational execution is high, and the original synergy target will be achieved this quarter with further potential upside. Our culture was very positively received and our people now act and operator as one. While we have had higher expectations for this integration, I believe the actual execution was nothing short of outstanding and we are operating the combined company business as usual.

Our financial position remains strong with $1.8 billion in cash. No significant short-term debt maturities and a conservative debt capital leverage ratio of 27%. This provide us with substantial flexibility to make synergistic investments in our business and infrastructure to enhance our competitiveness, expand our capabilities, drive revenue growth and enhance profitability, even in the current economic environment.

Operating cash flow was $534 million in the quarter and we have already exceeded our $1 billion fiscal year target. Free cash flow amounted to $470 million in the current quarter and $840 million in the first three quarters of our current fiscal year. We continue to believe we should generate at least $1.2 billion in cash flow from operations and at least $800 million in free cash flow in the next fiscal year ending March 2009.

I would now like to discuss the current state of business and economic environment. First, I would like to remind everybody that that we are not an OEM in the product business. We are in a service business that supplies many OEMs over a broad cross section of the economy.

Our services include manufacturing, product design, repair and distribution, mechanical products, as well as a broad range of components and other key technologies. With this broad service offering, we are very well-positioned to supply the OEMs with more and more services even in a slowing economic environment. In fact, we have historically found that the secular outsourcing trend actually increases during period of economic slowdown, as OEMs often reassess the need to have in-house manufacturing as they can reduce costs by outsourcing.

In addition, we have aggressively invested over the several years to expand our capabilities across more product categories, which increased the available market for us to participate in. As an example, we've added machining capability to more broadly penetrate the industrial sector. We have added over 15,000 design engineers across many new product categories, which have allowed us to expand our ODM, CDM businesses for markets in which we did not previously participate.

We have made significant investments to add component technologies in the areas of Flex power, touch-panels, Flex-oriented circuit, rigid-flex, assemblies, LCD or rigid-flex circuits, LCD displays as well as dramatically expanding our capabilities in mechanical technologies. We have diversified our product exposure by wining new business in areas that we did not previously participate in, such as servers, LCD TVs, set-top boxes, digital cameras, white goods and semiconductor equipments.

Just this week, we completed the acquisition of Avail Medical Products. This company has no electronics, but provides many new business opportunities in the medical field such as building catheters, wound closure systems and other disposable medical products which leverage a worldwide scale in plastics capabilities.

With the pending acquisition of Arima, we will significantly enhance our ODM server offering and more importantly leverage us into the rapidly growing notebook market, which will expand our current available market opportunity by another $80 billion of revenue. All pure upsides to Flextronic's current revenue base.

We have created an incredibly broad-base company that is geographically product and services diverse. Our strategy of expanding our product and service offering as well as our component technologies, all with a strong focus on outstanding execution is proving to be an exceptional business model. Not surprisingly our new win pipeline for organic business remains very strong. We are a diversified company that should still grow in a down market with robust growth expectations in an up market.

As Solectron acquisition has broadened our capabilities in the high-end telecom and datacom and computing markets while adding additional services capabilities. In addition, it has also allowed us to leverage our combined operating expenses. Through effective deployment of the best operational ideas of both companies, we are positioned to realize sustainable margin expansion through productivity gains.

Additionally, the cost synergies from the Solectron acquisition are exceeding expectations, which potentially provides substantial earning leverage above and beyond any topline earning contribution.

In summary, we couldn't be more pleased with our current competitive positioning and feel we are strategically well-positioned to perform positively in any market environment. With regard to the current market environment, we are not seeing any aggregate weakness in customer forecast, and therefore, we believe based on what we are seeing today that there was a disconnect in forecasted customer demand and the economic headlines of the stock market reaction.

Certainly, we are not totally immune from the cyclicality of technology or economic slowdowns and things can certainly change in the future. But given our diversification, we are not seeing any overall weakness in our customer forecast. The scale we have created in each of our market segments and resulting diversification not only enhances our ability to whether end markets, customer or product downturns, but also enhances our ability to win new customer programs.

Our pipeline of new business opportunities remains robust and we believe we have realistically forecasted the level of business, new customer program wins and the current market environment.

Lastly, please remember that even if we are underestimating the impact from an economic downturn on our topline, our cash flows would actually increase because of the compression of working capital as our cash flows our countercyclical.

Slide 11. We are reaffirming the previously provided March quarter revenue guidance of $7.5 billion to $7.9 billion and adjusted earnings per share of $0.22 to $0.24. GAAP earnings per share are expected to be lower than the March quarter guidance provided at year-end by approximately $0.5, as a result of quarterly intangible amortization and stock-based compensation expense and by approximately $0.19 to $ 0.27 per share as result of the previously announced remaining restructuring and other charges, primarily related to the Solectron acquisition in the amount of $160 million to $230 million.

Part of our stock-based compensation includes restricted stock grants to executive officers that vest each year in April and May. As a result, we would like to advice you that this will once again result in some income tax driven insider selling under 10b5-1 plans, and you should not interpret this as any indication of insider views on valuation or outlook. It is nothing more than insiders' monetizing the shares in part to pay the related income tax resulting from the vesting of restricted shares.

Slide 12. There are real risks of operating in this business, which include a macro-economic or technology slowdown among other things. Please pay particular attention to this slide in light of the current market conditions.

I will now turn the conference call over to the operator for questions. Please limit yourself to one question and one follow-up. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question then is from Brian White with Jefferies. Your line is open, sir.

Brian White - Jefferies

Hi, good afternoon. Mike, I'm wondering: if you could talk a little bit about the number of Solectron facilities that had been closed? And: how many we have to go yet?

Mike McNamara

Yeah. I think I may to have to think back my November Analyst presentation. I think we decided that all together, both from a Flextronics and Solectron standpoint, because we really try to rationalize the cumulative business, not each one individually. But I think we're looking to close around 14 or actually 19 facilities that included both, manufacturing and service facilities.

Some of those were Solectron and some of those are Flextronics, but we do not have any left to close. I mean it doesn't mean we won't close any in the future, but it will be a normal course of business and that will be minor in nature. So we've actually already completed the closure of the factories that we want.

Most of these factories were closed either on a three or six-month timeframe. And the timeframe, the clock started ticking in the first week in October. So most of these 19 facilities actually are no longer with us today, I'd say, about half are no longer with us today and I would say the remaining half are running out their course. And I would say: 90% of the facilities that we talked about actually have the lights completely turned off and people gone by the end of March. So there really isn't any additional work to be done at this point. All the work is in process.

Brian White - Jefferies

So half the facilities have been closed and you said the other half are in the process?

Mike McNamara

Well, half is like, I mean I literally got to the point that they are either sold or the lights are like completely turned off and there is not one employee left. And the other half, they are in their wind out mode. So typically, it takes about six months to relocate the business on these facilities, so anywhere from three to six months.

So there is no new event coming. There are no new announcements coming. It's just completing the job that we've already started at the beginning of October. And so -- and we anticipate that to be, I mean literally of those 19 facilities probably 17, maybe, even 18 will have the lights completely shut off by the time March 31st hits.

Brian White - Jefferies

Okay. And all the business would have been transferred except for the remaining two?

Mike McNamara

Right. Exactly.

Brian White - Jefferies

Okay. And just on end-market demand, you said exceptionally strong demand: what market? Because we don't have a comparison sequentially because Solectron skews it a bit, but: what markets are priced in the upside? What's the price in the downside?

Mike McNamara

Yeah. If we look at last quarter and look at some of the upsides, our computing market was very strong. Relative to our expectations, the mobile market was a little bit stronger than we anticipated and even infrastructure strengthened up a little bit and actually exceeded our forecast. So probably, more than anything else those three markets were a little bit stronger than we anticipated and -- but it's hard to say much beyond those market segments.

Brian White - Jefferies

Okay.

Mike McNamara

Everything else was pretty minor.

Brian White - Jefferies

And what was weak, Mike? Where we're weak?

Mike McNamara

Really nothing was weak. The rest of the market said that -- we think about the market being segmented in the seven different groups, and three of them really hit above expectation and it’s why we ended up hitting about $600 million more revenue than we anticipated, and the other four were substantially on forecast. So, I actually won't say any were weak.

Brian White - Jefferies

Okay. Thank you.

Operator

Thank you. Our next question is with William Stein with Credit Suisse. Your line is open.

William Stein - Credit Suisse

Thanks. I appreciate you guys reiterating the next quarter guidance, but I think we're all waiting to hear about fiscal '09: can you please comment on that?

Mike McNamara

Yeah. We are not going to make any comments about fiscal '09. During the November Analyst meeting, we put together the targets of where we were driving the company to and what we saw, we have the ability to go accomplish back then. And I would give you good view of we thought FY09 looks like. And actually all the additional guidance we're going to give, from now on will just hit quarterly guidance as per our normal way of operating. And then, next November or this coming November, we'll give you a fresh look of what we think the next year looks like. But I'd encourage you to go back, look at some of the FY'09 guidance that was delivered at the November Analyst meeting and that's where we were driving the company to.

William Stein - Credit Suisse

So is that -- so should we think of your comments just now is essentially reiterating that view that those are still the current goals of the company and: that's where your proposing investors look at and potential model? Or: is the economic uncertainty driving a lack of reiterating that guidance exclusively?

Mike McNamara

No. I think you should look at it as those are our targets, and that's where we are driving our company to, and we'll expect our managers to perform accordingly. But we're not reaffirming, and that's not guidance really per se, but it is our target and where we are driving the company to and we're going to keep driving to that target and expect our people to hit it.

William Stein - Credit Suisse

Great! Thanks very much.

Operator

Matt Sheerin with Thomas Weisel Partners. Your line is open now.

Matt Sheerin - Thomas Weisel Partners

Yes. Thank you. Obviously, you had a very strong quarter, but concerning your guidance, given the upside in December implies that there is perhaps some more sequential drop in some end markets in the March quarter. Is that just basically the fact that we're seeing more seasonality in your businesses? Or: do you think you are being conservative?

Mike McNamara

Well, I think the seasonality that you see with the guidance, I think its 7.7 and plus or minus $200 million. That's kind of a normal drop for us. If you look at our historical drops, it's very typical. So, we view it as being quite normal. It's actually where we expected to be several months ago. So we don't think the current economic environment has affected that at all.

So, we kind of view it as kind of very -- right on the mark in terms of our expectations. The only thing that was higher than expectations at this point was the December quarter, which we overachieved on revenue and EPS, and that was above expectations. But really the March quarter is always down for us and we view it as being a very normal downturn and very much predictable as what we were looking at for that quarter even three, four months ago.

Matt Sheerin - Thomas Weisel Partners

Okay. Great! And then there have been reports of major snowstorms in China disrupting some production there...

Operator

One moment please. We are getting back for you. One moment please. (Operator Instructions).

Mike McNamara

Maybe we should go into the next question.

Operator

Yes, I am -- what happened there? One moment please.

Mike McNamara

Maybe he got stuck in the snowstorm?

Operator

Here he is. Mat Sheerin, you are back open. Thank you for dialing back.

Matt Sheerin - Thomas Weisel Partners

Hi. Yes. So the question was: are you starting to see any disruptions from the snowstorms in China or from your suppliers?

Mike McNamara

No, actually none whatsoever.

Matt Sheerin - Thomas Weisel Partners

Okay. Thank you.

Operator

And one moment for our next question. Sean Hannan, Needham & Company. Your line is open now.

Sean Hannan - Needham & Company

Great! Thank you. So you provided a little bit of color around how some of your markets have performed, at least the strength that you saw in December. Now, that we are month into January: is there a way to perhaps talk a little bit around what you're seeing or what you're thinking of, in terms of your different markets for this March quarter on a specific basis? And then, if there is any added seasonality or stronger seasonal impacts that you maybe seeing in businesses such as either mobile or digital et cetera? Thank you.

Mike McNamara

Yeah. What I can say is -- from a high level standpoint, is that each of the markets are performing reasonably predictably. And again, I do want to emphasize the fact that how the markets perform is not a necessarily a function, how we perform because while our market maybe down that doesn't mean we can't book another piece of business or book additional services. So I do want to remember, we're not in the OEM and in the consumer market or in the digital -- or in the consumer digital market, in the mobile or whatever. We're actually in a services business.

But if we look at where we were, we actually saw some softness last year in places like telecom and industrial pieces of business that we thought were more home-related, those have not really become any worse. They have been very predictable. We think the adjustments were taken even back a couple of months of ago. The mobile market has remained very, very stable for us, even telecom infrastructure typically see the little bit of a seasonal slowdown in this first quarter. But that's very typical and we don't see that substantially out of whack.

The consumer business, we anticipate maybe being a little bit soft, but again we have such upside end-markets that we haven't historically participated in, such as LCD TV's. And we will do a lot more cameras and other products this year that, we actually, even in a softer market, we would expect our business to be actually going up in that business.

So computing has remained very, very strong for us: a real surprise upside for last quarter. So all in all, it’s been -- all of our markets have been very, very stable and very predictable. There were some softness a quarter ago and that really hasn't deteriorated much over the last few months. And as we get even now until the end of January we're not seeing a substantial downturn in any of our businesses.

Sean Hannan - Needham & Company

That's great. Also, then just a follow-up, you had talked about the strength in your pipeline: can you perhaps elaborate a little bit on that at least in terms of what's develop since your Analyst Day and as we forward with Solectron integrated into your operations?

Mike McNamara

Well, I can only hope, one of the things that we looked at in the Analyst Day or had a projection of what next year looked like is that we are actually anticipating virtually all of our markets having almost a double-digit growth rate. So last year, if you look at FY'07 to FY'08, we had every single market segment with the exception of mobile generate a double-digit growth rate. So it is one of the messages that we've been trying to get across in terms of the minor diversification.

Going forward, we also anticipate a very balanced portfolio going forward. We expect either mobile growth to grow into double-digits. We think, we maybe able to get -- we're anticipating consumer digital being maybe a little bit softer, but certainly above zero. And we would expect things like computing, industrial, medical and automotive all being substantially high, over a much higher double-digit growth rate.

So we've just -- and again next year, we would expect probably five out of seven of our market segments to be growing at double-digits even in this environment. So we have a pretty broad-based pipeline. It's hard to identify just one or the other. We'll have the biggest growth in the computing segment, because we've added -- we've been very, very successful in terms of bringing on additional server business as a result of IWILL acquisition and some of our ODM wins.

In addition, Solectron had a very strong position in computing, and we'll add the Arima acquisition this year, which will make notebooks and anything we do around the notebook space and desktops. It'd be pure upside for us. So we would expect that to be really robust growth. But we actually are driving our markets, every one of our market segments, to try to hit double-digit growth. And probably they will not hit it, but we'll probably get five out of seven to hit it.

Sean Hannan - Needham & Company

But that Arima lift is really not until the very back half of fiscal '09, correct?

Mike McNamara

Well, we'll probably complete the acquisition within the next two months, say, so we probably will get a full FY'09 revenue upside from Arima. Now, in terms of being able to create any additional value associated with adding it to Flextronics and leveraging our relationships with the customer and leveraging our supply chain and leveraging our worldwide position. It will probably take another year to really drive that forward. But effective April 1, say, as the target, we will have Arima's full revenue adding to Flextronics.

Sean Hannan - Needham & Company

Right, I thought. Okay. That's helpful. Thank you.

Operator

Thank you. Our next question is from Steven Fox with Merrill Lynch. Your line is open.

Steven Fox - Merrill Lynch

Hi. Good afternoon. Two questions: You mentioned not only in the quarter, but in your outlook that computing is stronger, but I am not 100% clear on: what specifically is driving that? If you could be more -- provide more details there and then secondly….

Mike McNamara

I am sorry. Could you repeat that question?

Steven Fox - Merrill Lynch

Yeah. On the computing business, you have mentioned that it was stronger than you were expecting and then for the outlook you said it was looking stronger as well. But I am not sure, specifically: why that's the case? Could you provide some more detail?

Mike McNamara

Yeah. Lot of our computing businesses is a function of new wins coming of a base that is extremely small and a lot of those customers actually outperformed. And I think some of the out-performers, I can't go into specific customers, but I would say virtually across the board, those customers actually did a little better than anticipated. Maybe we are a little bit of conservative forecasting the revenue as it came on. But we just didn't find any strength.

And with us the case is we don't, on the computing business, we do not really run off of the existing computing worldwide demand because a lot of the computing business that we brought on as Flextronics was pure upside. So one-year ago, we actually literally had no server business and very little computing business. So for us it was pure upside.

So what we're seeing is, is a lot of that growth as a result of new product wins as suppose to responding to economic upturns or downturns. And we have a lot of that going on into this next quarter as well, because we have lot of new wins as a result of the acquisition we did a while back in Taiwan called IWILL, where we brought on an ODM server manufacturer and we ended up getting a lot of wins of that new business, which is all going to kick into this year.

So to us it's all pure upside, because last year we really hardly had any ODM server wins. So it's just kind of pure upside for us and our business has gone well and as we try to penetrate into this server space, the customers have been very receptive to bringing us on.

Steven Fox - Merrill Lynch

That's helpful. And then just second question, you mentioned that your original synergy target could prove conservative, I am just wondering: what specifically will drive more synergies that you're seeing now with Solectron?

Mike McNamara

Yeah. Our original target was about $200 million and we thought we'd be able to realize that within 18 months or 18 to 24 at the beginning and then we move that into 12 to 18. It’s really a whole cross section of things. It was everything from what we anticipated the base revenue to do at Flextronics, all the way through to the SG&A, in addition into the savings that we can get at the supplier base.

And I would just say on an average across the board all of those are little bit better than anticipated. And really that thing that I really think its important is that the execution of the team in terms of bringing these synergies to bear, understanding what we needed from the Solectron, overhead structure and how to go leverage thinking of which factories to go shut, and how to go leverage that best operational practices of both companies was really outstanding. And we ended up just getting right to get those things fix very quickly.

One of the other things that I think was really beneficial was the cultural integration of Solectron was really exceptional. So you we really do act and run as one company. We're not fighting who is in charge. We're not dealing with a lot of cultural issues that lot of times you have with big acquisitions, and overcoming that and just getting right back to work and having a knowledgeable management team that knows how to get the cost out, I think has really proven itself. And so as a result, we're just heading in a little bit better, a little bit faster, kind of across the board.

Steven Fox - Merrill Lynch

Okay. I must have misunderstood. I thought you were saying that there were more measurable dollars synergies beyond $200 million.

Mike McNamara

Yeah. So as a result, there is more than -- there are $200 million available, but it's across a broad variety of things whether it's SG&A or less customer attrition, or savings in the supply base, or maybe we ended up getting more synergies out of the manufacturing plants that are closed. So I was trying to say is that the $200 million of synergies are going to be better, and it's just the combination of a whole host of different that we won and attacked.

Steven Fox - Merrill Lynch

Great! Thank you.

Operator

Our next is from Yuri Krapivin with Lehman Brothers. Your line is open.

Yuri Krapivin - Lehman Brothers

Good afternoon. I guess my first question also about China. China has implemented a new labor contract law as well as new tax law, effective this calendar year: could there be any negative impact on Flextronics profitability in China as a result?

Mike McNamara

Yeah. I think there are new -- a lot of laws. A good thing is we're pretty well-diversified. We run about just over 50% of our business in Asia. And even within Asia, we probably run only maybe 75% of that within China. So when we think about the impact, we are talking about an impact of about, maybe 35% or 40% of our cumulative business. And as these changes have gone in place, we think we have matched those changes with productivity improvements and the amount of people we have added relatively to revenue dollars that we've brought on over the last year has been exceptional.

There's been less and less people to bring on those incremental dollars, and at the same time some of that we are able to pass back on to the customer, because a lot of the labor cost impact can be picked up as the next generation product comes for quote. And typically in consumer driven kind of products that are more likely to be in China, those product life cycles are a little shorter. So we are able to recover some of that.

But we view this as an advantage, a lot of our competition is in Asia. Lot of our competition has 90% of its workforce in China that are affected by this. We have maybe 35% of our cost structure affected by this, and we actually view it as an advantaged relative to our main competitors. So at the end of the day if add all that up and you do that math, it's negligible. So you should not see an impact.

Yuri Krapivin - Lehman Brothers

Okay, great. And then: do you have a target for operating cash flow for the March quarter? Because I believe your target for the full fiscal '08 was about $1 billion in terms of operating cash flow, and I think you are already at $1 billion for the first nine months.

Mike McNamara

Yeah, so cash flow from operations for the March quarter we are projecting somewhere in the $100 million to $150 million range.

Yuri Krapivin - Lehman Brothers

Okay. Thank you.

Mike McNamara

Thank you.

Operator

Thank you very much. One moment please. Our next question is from Kevin Kessel with Bear Stearns. Your line is open.

Kevin Kessel - Bear Stearns

Great, thank you very much. I just wanted to go back Mike to that question earlier on your comments about the four synergies. But I think you said that the four synergies which I guess is a target of $200 million should be realized now in the March quarter, which is again a little bit sooner than expected. But that I guess would imply about $50 million in cost savings that would flow through the March quarter P&L. Is that right?

Mike McNamara

Yeah, and may be they won't be exactly linear, but what we anticipated is $200 million yearly synergy target and we think we already in that period of that first year where we will realize the $200 million plus more. So if the revenue rises, it's just $50 million in the March quarter.

Kevin Kessel - Bear Stearns

Okay. And then when you alluded to still being positioned for future upside, I just want to understand better: what exactly would be driving that? I mean: the plants that were part of the plan are well in the way to being close if not already closed, and so I would think from SG&A point of view, may be would be somewhat limited. May be there is more efficiency gains to happen in potentially underperforming sides that are still being looked in the Solectron network or even the Flex network, I am not sure, but: can you just help us understand where would those comes from? And: is it something that would be significantly meaningful in the longer term perspective? Or: is it just little bit here and there?

Mike McNamara

Well there is still some synergies that we haven't hit yet at, but more and more vertical integration is one of the ways, one of the reasons, one of the places where it takes quite a bit of time to go pick that up.. SG&A is continuing to flow out of the company, we did have a big transition to work here and we did have people in workout programs, but that's why as we close these factories that business is going to other Flex sites ideally, and a lot of that business going to other Flex sites is going to create SG&A leverage in those sites and take it out of what's normally a more higher cost side that's been closed down.

Some of the purchasing power and some of the benefit associated with having a little bit less competition, the supply base takes time to workout, both with the supply base and also with the customer base as we look to kind of tweak our portfolio of how we are going to manage the customers and as well how soon we're able to really burn off the inventory, and try to take advantage of additional purchasing power.

So I think there are still a number of different places that we can pick up, and one of the biggest things that I do want to emphasize is the fact that we are working really hard to grind productivity out of each with a different operations.

The idea of taking the best idea out of both of these companies that, it doesn't matter if it's a Flextronics site or a Solectron site, we just want to take the best idea to climb across the board and grind out some productivity improvements. All that is going to be really a multi-year benefit, so I think there is still a lot of places and we'll continue to work.

It gets to be less and less value as time goes on I think, because there is right upfront, there is a big opportunity to go safe. But there are still a lot of opportunities left, and we'll hope to use that opportunity to drive our margins up overtime.

Kevin Kessel - Bear Stearns

Okay, and then just lastly. I think also to go back to kind of the prior question, and I think probably maybe one of the concerns that I have been hearing on this call is, you guys deliver very good quarter, you leave the March quarter as it is and when you spoke about seasonality it's stable, it's pretty much inline with normal Flextronics which I agree with.

Our Flextronics on a standalone business was typically down 14%, 15%, and I think your prior guidance was looking for seasonality in this percentage terms more like in the order of 10%, and Solectron as a standalone use to see very limited seasonality, at least in it's February quarter, I know there were up cycle. So that's decks the question again. Is Flextronics being conservative? Or: does it go back to what you were saying earlier Mike about the fact that there is a disconnect? And: you guys maybe are expecting at some point to see, to see some responsible customers?

Mike McNamara

Yes. All I can say is three or four months ago we were modeling about $7.7 billion for the March quarter plus or minus, and we are still seeing the same. So this is month after month after month, we are rolling up a very, very similar forecast. So I actually view it as being quite typical. Flex has always seen more than a 10% downside in its cycle, in the March cycle, and maybe we just had excess revenue than we didn't anticipate in the December quarter which makes our seasonality look a little bit more. But we have been rolling up about the same number for this March quarter for several months now.

So we are very comfortable that we are not having a big deterioration, we view it as being right on target. This is the same number we are rolling up when we put together the targets back in November. So we view this as being very predictable, very stable, very consistent. I think when we put together those numbers in November and put together the forecast for March, I think we were thoughtful about where we thought the economy was going and what some of the pros and cons were, and we continue to be very predictably hitting the numbers that we have expected.

So I mean I….. we just don't view it as a sandbag or being conservative or not being aware of the market going down. We just view it as we are like right on target. And again to reiterate, we will go drive to those November forecast - not forecast but those November targets.

Kevin Kessel - Bear Stearns

Well, that's very helpful. And then just Tom: can you just give us an idea, in terms of interest expense, on what the expectation is? We have dealt in to the model for both that and tax rate for March.

Tom Smach

Sure. So for March I think interest and other expense will be somewhere around $45 million, and the tax rate, my guidance is always been 7% to 10%, and I think March will be probably right in the middle of that range. So probably about 8.5% on the tax rate is the best number I could give you today.

Kevin Kessel - Bear Stearns

And that's what you just did right in December?

Tom Smach

And that is just what we did in December.

Kevin Kessel - Bear Stearns

And that step up in interest expense is a result of taking another debt?

Tom Smach

Right, exactly. It is the refinancing of some of those the lower coupon debt, and we've got some acquisitions payment for instance we just purchased Arima. So, just a change in the cash flows from debt refinancing and working capital changes and acquisition payments and so on and so for.

Kevin Kessel - Bear Stearns

You mean Avail right?

Tom Smach

I am sorry Avail, excuse me.

Kevin Kessel - Bear Stearns

All right, thank you very much.

Operator

Our next question comes from Sherri Scribner with Deutsche Bank. You line is open ma'am.

Sherri Scribner - Deutsche Bank

Hi, thank you. I was just wondering: if you could comment a little bit on your customer response to the acquisition in terms of revenue loss from customers versus what you've expected? I think you comment it a little bit on it in terms of synergy, but: may be just little more detail.

Mike McNamara

We've given some updates over the last few months, the customer response has been better than anticipated. The customers think this is healthy, they kind of like where Flextronics is heading and some of the strategies of Flextronics. So on average I would say that they view it very, very positively. And as far as separating out revenue loss we just can't do it anymore, and the reason is, we actually see as much upside as we do downside in this thing and it's just getting harder and harder to separate out what the issue is.

But the only thing I can tell you is, our customer response on this thing has been a away above our expectation. And I think that's going to come through in terms of what our revenues are, and when you think about what's the impact, just think about what our topline looks like now for this last quarter, think about what we're forecasting, think about what we said in the November Analyst Day, and I think it gives you a good sense.

But we've kind of gotten into the point where we can't separate, I mean, Solectron is one with Flextronics. And our customers are long over the issues associated with this. And I think there are 90% of them are extremely happy with the acquisition and I'd say 90% of them are like shocked with how low it went.

Sherri Scribner - Deutsche Bank

Okay. Great! And then just: can you give a little more detail on the mobile business and your expectations this quarter? I think last quarter you said there were some product transition issues. Just maybe: a little more detail on that piece of the business.

Mike McNamara

Yeah. We normally have a change in our mobile business. I guess our normal downside is anywhere from -- usually by 20%, is a typical seasonality in the normal market. And we would kind of expect the same for this March quarter. We expect to be very typical, very normal, and nothing out of the ordinary. So to us that mobile market looks kind of like business as usual.

Sherri Scribner - Deutsche Bank

Okay. Great! Thank you.

Operator

Our next question is from Alex Blanton with Ingalls & Snyder. Your line is open.

Alex Blanton - Ingalls & Snyder

Hi. Good afternoon.

Mike McNamara

Hi.

Alex Blanton - Ingalls & Snyder

Some of my questions have been asked, namely: how much business was lost? Solectron doesn't look like much at all, but: could you just elaborate on a little bit in terms of how you are helping them market? Did they have that -- and have always had the strongest capability at the high-end? The most complex and most difficult to make products? Their manufacturing has been superior to anybody's in the world all along, since the company was founded in the 1980s and you said yourself, when you announced the acquisition, that this was one of the reasons for buying the company.

So you bring some marketing and some balance sheet stability and so forth to that equation. Could you just elaborate a little bit on that? How you are -- some of the success that you might be having at marketing, doing a better job of marketing the Solectron capabilities than they were able to?

Mike McNamara

Yeah. So the one thing I want to say is thanks for saying that because I would like to add that as Solectron is now no longer there. I would like to say Flextronics has unquestionably the highest, highest and broadest, strongest capability on the high-end marketplace. I think that's true.

We thought that would be the case when we picked up Solectron and it in fact is overwhelmingly been a positive experience in terms of understanding what Solectron has and what we brought on. Flex is very aggressive marketing. They are very aggressive in terms of investing in new technologies and related technologies that can create additional values for the customer, the pieces around the edges whether they be ODM design or mechanical technologies, or power systems, or whatever the case maybe and we view when you put both those together, it creates even a more formidable offering.

So we are actively, actively, actively working and selling those combined capabilities. I would like to thank we came out of the gate in October with that attitude and with that go-to-market strategy and I think we're having a lot of success in the marketplace making sure that we are positioned and stay positioned on the high-end and win more than our fair share of business.

So I think it's moving right along really well. I think the strengths of the two companies complement each other extremely well. And I think everything has gone really well. Everything on that is not just the high-end technology in terms of test technologies and things like that Solectron brought, but also some of the lean practices that were leveraging into the Flex factories is going really well. And I would almost say actually a rapid adoption is going on to take on some of those best practice out of Solectron and putting into the Flex factory.

So absolutely, those are being worked. I can guarantee they were being worked in October. And hopefully, you'll see as a result, some nice wins come in on the heels of the existing business and it will be just be even a stronger offering. So we are working it very hard.

Alex Blanton - Ingalls & Snyder

Thank you

Mike McNamara

And have been.

Alex Blanton - Ingalls & Snyder

Just could you give -- thank you for that; that was very good explanation. Could you give us an update secondly on global services? Solectron global services add a quite bit to your service offering, however, they had had a problem last year that drove their gross margin down and it was centered in global services had to do with one laptop repair contract that hadn't been properly bid. So that open the possibility of some extra earning when that problem got solved and I understand it got solved this summer before you acquire the company. So: is that a source of some additional upside here that we're looking at? And: could you just update us on global service?

Mike McNamara

Yeah. So global service is, there are a number of different elements to their global service. So I would say, some were broken and some were not. We've changed that business pretty dramatically, we've changed how we run and operate it, to give it more focus on the parts that were good, and to actually give it more focus on the parts that where not so good.

We close some of the business. We close a number of different sites. We also discontinued some of the businesses; I mean: just literally different kind of business models that we did not view had a good return on investment we eliminated those. There were some contract problems that you mentioned, that Solectron was in process of working with even before the completion of the acquisition. So those continue to be worked. I think those are a multi-month problem as opposed to just being able to get out of those.

And I think there was one whole element of it, or one whole section of that services business, which was just kind of broken. And we have that on our program, and we'll work to get that. And we view that as being something like a six-to-nine-month improvement plan, where we'll bring that bring that back into a normal margin structure. So I would say it's a real broad-based attack at dissecting the problem, understanding the problem, figuring out better ways to go market it, figure out better ways to go focus on different aspects of the business, killing some of the parts of the business that we did not view as appropriate business models going forward, fixing a few contracts, it's a little bit of everything.

But what I can tell you is, I think we're on track, and without question this will be one of the things that will fuel some additional margin expansion at Flex.

Alex Blanton - Ingalls & Snyder

Thank you.

Operator

Thank you. Our next question is with Lou Miscioscia of Cowen. Sir, your line is open now.

Mike McNamara

This will be our last question as well, Lou. So you're the last one.

Lou Miscioscia - Cowen

Okay. I only have one question in 10 parts. So Mike, you had said that there were three areas that were stronger in the quarter. And obviously, you said that computing, mobile and infrastructure was better in your expectation. Did you mean: that those were the three areas other than that were the ones that were than above expectations, the other four then came in as forecast?

Mike McNamara

Yes. Exactly.

Lou Miscioscia - Cowen

Okay.

Mike McNamara

We are reasonably anticipating about $8.5 billion in revenue. We actually hit $9.1. And if you look at what changed, or what are the incremental amount come from, it really came from computing, mobile and infrastructure. The rest were pretty much on track.

Lou Miscioscia - Cowen

Okay. Great! A quick question for Tom: When do you think you might get back to the 70 days table that you did mention at the analyst meeting? I know that you are; I think it came in at 60 this quarter.

Tom Smach

Yeah, boy that's a point of contention inside in our company, Lou. So I think when we were at kind of at the 70 days payable, it was just a little too much. I think we were exploiting the supply base maybe a little too aggressively. So, I think it's doubtful that we will get back at that level. I think maybe there is a little bit of room to go above the 62 days certainly. But 70 days I think is just not sustainable. I think that's too aggressive. I think certainly room for improvement above the 62 days today.

Lou Miscioscia - Cowen

Okay. And Mike, you mentioned a very strong pipeline. Maybe give us some kind of idea, I don't if you can frame it or not, because obviously a lot of brethren out there, just don’t seem to be doing that well obviously with revenue growth.

Mike McNamara

Yeah. I mean: all I can say is the strategy lends itself to a strategy in good execution, from the team lend itself to some good operating results last year. We probably grew the business a good $3 billion organically across in every market segment except one, I think had mentioned had double-digit growth rate. It's really a broad penetration across each one of these different market segments.

In medical in FY 2007, we only did $260 million and 90% of that was with two customers and this year we will do $900 million and have a portfolio of 25 or 30 medical customers. In automotive in FY '07 we did about $200 million, maybe about $250 million, and this year we also expect to do about $900 million over this go forward year, this FY '09. The computing business is straight up. We entered in to the server business in the ODM server business and we are now going into the notebook business.

To me it's just straight up. Things like consumer digital on our consumer business, while even if there is a little bit of a slow down and some of the market categories, we'll still have to see what that looks like in terms of the channel and the sell through, what it really looked like. We are adding new categories, so we will have substantial increase in business any things like LCD displays and in MP3 players and in digital cameras.

So, we are expanding across really everything. when Alex talked a little about infrastructure in the high-end, and you take some of Solectron’s really good high-end confidence and now you layer into some of the verticals that Flex has, some of the marketing Flex has in the combined team, which is even a stronger team then to go to manage the capability, and even that segment has the ability to grow nicely.

So we are driving our business to have every single market segment have double-digit growth, and that’s as simply as I can put it, and that’s our objective, that’s so we dive our guys to in, and I don’t know for, like I said earlier, I don’t know that we'll get all seven out of seven segments to grow double digits, but we'll get pretty close.

Lou Miscioscia - Cowen

Okay, last question is just on China again. Does there need to be “a next China” for the manufacturing industry? Or: do you think that the benefits that China has are there to stay for, let's say, the next 12 to 24 to 36 months?

Mike McNamara

Yes I think you can move pieces of manufacturing in different places, but I don’t think there is such thing as: “the next China”. That supply base is so well developed and there is so much investment and there is so much end-market demand potential going into the future, that I think its hard to go replicate that. So I think we'll have models where we put plants and locations in another places to go either chasing their market or chase a little bit lower cost structure, but I don’t know it's going to be a while before you get something that can be competitive with China.

Lou Miscioscia - Cowen

Good luck on the new calendar year.

Mike McNamara

All right. Thank you very much.

Tom Smach

Thanks everybody for joining.

Operator

Thank you, everyone for participating in today's conference call. You may disconnect now at this time.

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Source: Flextronics International F3Q08 (Qtr End 12/31/07) Earnings Call Transcript
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