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Sanmina - SCI Corporation (NASDAQ:SANM)

F3Q12 Earnings Call

July 23, 2012 5:00 p.m. ET

Executives

Paige Bombino – IR Director

Jure Sola – Chairman and CEO

Bob Eulau – CFO

Analysts

Wamsi Mohan – Bank of America Merrill Lynch

Jim Suva – Citi

Craig Hettenbach – Goldman Sachs

Brian Alexander – Raymond James & Associates

Sean Hannan – Needham & Company

Shawn Harrison – Longbow Research

Christian Schwab – Craig-Hallum Capital

Sherri Scribner – Deutsche Bank

Osten Bernandez – Cross Research

Amit Daryanani – RBC Capital Markets

Operator

Good afternoon. At this time, I would like to welcome everyone to the Sanmina-SCI third quarter fiscal year 2012 earnings conference call. [Operator instructions.] I would now like to turn the call over to your host Ms. Paige Bombino. Ma’am, you may begin.

Paige Bombino

Thank you operator. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI’s third 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 in the slide posted on our website. Please turn to page two, the Safe Harbor Statement.

During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company’s actual results of 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 reports filed with the Securities and Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements.

You will note in our press release and slides issued today that we have provided you with statements of operations for the three months and nine months ended June 30, 2012 on a GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financials 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 that relate to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, net income, and earnings per share, we 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, and welcome. Also thank you all for being here with us today. With me today on this conference call is Bob Eulau, our CFO. Our agenda: Bob will review our financial results for the third quarter. I will follow up with comments relative to Sanmina SCI results and future goals. Then Bob and I will open for question and answers.

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

Bob Eulau

Thanks Jure, and thanks again everyone for joining us today. Please turn to slide three. Overall, the third quarter was much better from a revenue perspective, but was challenging from a margin standpoint. Revenue of $1.55 billion was up 5.9% on a sequential basis, and down 7.5% from the third quarter last year. This was above the high end of our guidance of $1.475 billion to $1.525 billion.

Our gross margin came in at 6.8%, which was down 60 basis points from the second quarter. Operating margin declined 30 basis points from last quarter to 2.8%. Non-GAAP earnings per share was $0.26, which was at the low end of our guidance for the quarter. This was based on 83.6 million shares outstanding on a fully diluted basis.

Finally, cash generation was strong this quarter, with cash flow from operations at $48 million and free cash flow at $34 million. I’ll discuss cash in more detail in a few minutes. Please turn to slide four.

Revenue was up 5.9%, or $86 million, from Q2 to $1.55 billion. From a GAAP perspective, we reported net income of approximately $9 million, with results in earnings per share of $0.11. This was up relative to last quarter by $0.13. The GAAP results included a $4.2 million charge for the call premium and unamortized issuance costs associated with the redemption of $100 million of debt during the quarter.

Restructuring costs totaled about $3.9 million for Q3. The cost primarily reflect what we’ve been recognizing as expenses are incurred related to real estate. Looking forward, we will continue to see some ongoing restructuring charges on our GAAP P&L of approximately $3-4 million per quarter that primarily relate to real estate which is being held for sale.

My remaining comments will focus on the non-GAAP financials for the third quarter. At $106 million, gross profit was down $2 million from the prior quarter. Gross margin came in at 6.8%, which was 60 basis points below the previous quarter. Gross margin was lower than we had anticipated for the quarter, primarily due to lower profitability in the components business and a one-time foreign exchange exposure that was not fully hedged. The components business was a disappointment, and we are aggressively evaluating alternatives to quickly improve profitability in this business.

Operating expenses were down $1 million for the quarter at $61.8 million. This represents a 30 basis points improvement in operating expenses as a percentage of revenue. At $44.1 million, operating income decreased by 1.5% from the prior quarter. Operating margin was 2.8%, which was a 30 basis point sequential decline.

Operating income and expense was at $18.4 million, which reflects a reduction in interest expense offset by foreign exchange losses during the quarter. The tax rate for the quarter was 15% of pre-tax income, which was in the range we had expected. On a non-GAAP basis, we earned $22 million in net income, or $0.26 per share. Net income was down 3% from Q2, and earnings per share was down 2% from Q2.

On slide five, we’re showing you some of our key non-GAAP P&L metrics. Revenue was up $86 million from last quarter. Demand was particularly strong in the communications and the defense, medical, and industrial segments, which more than offset continued weakness in the multimedia segment. Compared to Q3 last year, total revenue was down 7.5%. The big challenge continues to be the components revenue, which was down 2% sequentially and 19% from Q3 last year.

Moving on to gross profit, we saw a 1.6% decline in gross profit in Q3 while gross margin declined to 6.8%, which was down 60 basis points from last quarter. Our operating profit declined 1.5% from last quarter to $44.1 million. This led to operating margin of 2.8%. Net interest expense declined by $4 million this quarter, as we continued to see the benefits of the ongoing deleveraging of our balance sheet.

Now I’d like to turn your attention to the balance sheet on slide six. Our cash and cash equivalents were $395 million. Cash was down $69 million from the previous quarter. The decline in cash was driven by $100 million in cash used to redeem long term debt, which was partially offset by free cash flow of $34 million.

Accounts receivable increased by $88 million, while accounts payable increased by $62 million. Cash benefited from a $35 million reduction in inventory during the quarter. Property, plant, and equipment was down $11 million for the quarter, due to low capital expenditures.

Please turn to slide seven. Solid cash generation, combined with some well-timed capital markets transactions, has allowed us to make great strides in our overall financial strength. Over the last four years, we’ve reduced our long term debt by $500 million. Today, we redeemed the remaining 2016 notes with significantly lower cost debt.

These collective actions have lowered our annual interest expense on a run rate basis to just under $60 million. Combining this with the fact that our next major debt maturity is in 2014, we feel very good about our capital structure. With all the progress that we’ve made in the last year, we still have room to improve the capital structure and balance sheet going forward, and we will look for those opportunities.

Please turn to slide eight, where we’ll review our balance sheet metrics. Cash was down $69 million from Q2, for the right reasons, as I just mentioned. Cash flow from operations for the quarter was $48 million, and net capital expenditures for the quarter were low at $13 million. This led to $34 million in free cash flow.

Inventory reduction and cash generation are an ongoing priority for our team. Inventory decreased from $862 million last quarter to $827 million this quarter, while the inventory turns improved from 6.1 to 6.8. Compared to Q3 last year, inventory is down $59 million.

We’re showing you cash cycle days, which combines our cycle time for inventory, accounts receivable, and accounts payable. Overall, cash cycle time decreased from 59.6 days last quarter to 55.2 days this quarter. The biggest driver was a decrease in inventory days of 6.1. The favorable inventory days were partially offset by a decrease in accounts payable of 2.3 days. Our accounts receivable days sales outstanding improved by 0.7 days. We are pleased to see progress on our overall cash cycle time.

Finally, return on invested capital was at 10.8% for the quarter, which was impacted by our lower profitability while asset utilization improved.

Please turn to slide nine. I would now like to share with our guidance for the fourth fiscal quarter of fiscal year 2012. Our view is that revenue will be in the range of $1.575 billion to $1.625 billion. We expect the gross margin will be in the range of 6.9%-7.3%. Operating expense should be $63-65 million.

This leads to an operating margin in the range of 3%-3.2%. Assuming no large foreign exchange surprises, we expect that other income and expense will be in the range of of $14 million to $16 million. We expect the tax rate to remain in the range of 14%-16%, and we expect our fully diluted share count to be around 84 million shares, plus or minus half a million shares. When you consider all of this guidance, we believe that you will end up with earnings per share in the range of $0.32 to $0.38.

Finally, for your cash flow modeling, we expect that capital expenditures will be around $25 million, while depreciation and amortization will also be around $25 million. We expect that we will generate positive free cash flow this quarter as we continue to adjust our working capital levels.

From a GAAP perspective, next quarter will likely mark three years of cumulative profitability in the United States. This event, together with our future expectations of continued profitability for our U.S. operations, means we expect to release a portion of our valuation allowance for income taxes in the fourth quarter.

The release will be recorded as a one-time benefit to income taxes. This means that we will likely see a major one-time improvement in profitability as we partially recognize the value of the deferred tax assets that are currently not reflected on our balance sheet. The total impact on the balance sheet and income statement could be $100 million or more, subject to the completion of the analysis.

Overall, we are navigating through a challenging macroeconomic environment. We will continue to focus on improving profitability in the components business, while we expect overall revenue to continue its recovery. We will focus on improving our performance in fiscal Q4, while we position ourselves for better results in fiscal year 2013.

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

Jure Sola

Thanks Bob. Ladies and gentlemen, I would like to add a few more comments relative to our results. I’ll review our business environment, first of all for the June quarter. I’ll talk about the short term business environment, September quarter. And then I’ll make a few comments about our outlook for the rest of the calendar year 2012.

So let me give you an additional recap on the third quarter. First of all, revenue for the third quarter was up nicely, 6%, as a result of growth in the number of our key markets. The key markets, communications, medical, industrial, defense, and aerospace, we saw nice growth. Enterprise computing and storage was slightly down, basically flat, and multimedia we had weak demand.

Let me make a few comments on our component businesses. We continue to experience weaker demand in the component businesses as Bob mentioned, such as memory modules, optical, printed circuit boards, and mechanical components. For the business, overall growth was driven by new demand from some of our key customers and new programs. And now please turn to slide 10.

As you can see on this slide, our top 10 customers represent 50.8% of our revenue. Also in this quarter we had two customers around 10%-plus of revenue. Let me make a few comments on this segment.

First of all, communication networks was nicely up, 12.9%. We had good demand from existing customers and also demand for our new programs. Enterprise computing, as I mentioned, was basically flat, 1.5% down. We had a few delays in our program, but overall a lot of new opportunities in that, and I’ll make more comments later.

Defense, industrial, and medical were nicely up, 8.6%. I think the only segment that was down in that group was the semiconductor, but as you can see, defense, industrial, medical were nicely up.

Multimedia continues to be weak for us, mainly driven by set-top boxes. We also had some negative demand in our automotive electronics part of our business.

So to make more comments about our segments, could you please turn to slide 11. Now let me give you some fourth quarter highlights. If you look at the communication networks group, we expect to see continued modest improvements in our fourth quarter. This can be mainly driven by some of the new opportunities with existing and new customers, and especially driven by our 4G programs and some other new programs in communication networks.

Enterprise computing and storage continued to be stable for us, and we expect it to be up for the quarter. We had a fair amount of opportunities for new projects, and we believe that these new products will drive growth for our fourth quarter.

Defense, industrial, and medical we are forecasting an up quarter. Let me break it down by each market. Defense we expect to be stable and improving slightly in the quarter. For industrial, we have a strong pipeline of new projects, so we expect it to be nicely up. Medical, we’re forecasting flat, but we do have some upside potential there. Again, the only segment in that group is the semiconductor that we are forecasting down for the fourth quarter. This market segment continues to be weak for us.

Multimedia for all groups we are forecasting down fourth quarter, mainly driven by the set top box business. On a positive side, other businesses are doing fine. Gaming equipment and other products are going to be up. We are also forecasting automotive to be flat, and we also have some nice upside potential in the quarter.

To continue with the rest of the calendar year 2012, as Bob mentioned, in this microenvironment we remain challenging for some of our end customers, and it is difficult to predict the future at this time. But on the positive side, we’re starting to see some positive activities. We are benefiting from new projects that are starting to ship at the higher rate now, and should continue for the rest of the calendar year 2012.

This is mainly driven by some key customers’ present forecast, new projects that are starting to drive revenue, and additional new projects in the pipeline should be starting to contribute soon. So, based on forecasts and new opportunities, we are cautiously optimistic about the rest of the calendar year 2012.

Let me make some more future market comments. First of all, starting with the component businesses, we are still experiencing a lot of inventory correction within our industry. Components inventory at our customers are at the lowest level I’ve seen in a long time. So based on this, and some improvements in the market, we do expect to see improved demand in our component businesses in the December quarter. Again, as Bob mentioned, for the component businesses in this environment, we are looking at all opportunities to improve profitability.

Now let me make a comment on bookings. Book-to-bill in the third quarter was positive, and book-to-bill for the fourth quarter we are forecasting to continue to improve over the third quarter.

So overall market opportunities remain attractive, and Sanmina is focused to drive sustainable growth in our key focus markets and where we provide competitive advantage for our existing and new customers.

And now please turn to slide 12. In summary, we had good revenue growth in the third quarter. Also, we have positive growth momentum for the fourth quarter, a strong pipeline of new projects that I just talked about. In this environment, we expect to continue to generate positive cash flow from operations and again, we are cautiously optimistic about our near term growth.

So ladies and gentlemen, now I would like to thank you again for your time and support. Operator, we are now ready to open the lines for questions and answers. Thank you again. Operator?

Question-and-Answer Session

Operator

[Operator instructions.] The first question comes from Wamsi Mohan from Bank of America Merrill Lynch.

Wamsi Mohan – Bank of America Merrill Lynch

It’s surprising that you had such a significant beat on the revenue line, and frankly your segments also came in more or less as expected, but the margins were quite different. And you alluded to two factors, component profitability and FX. I was hoping maybe you could tell us what the relative contribution of each of those were. And what specifically was different between components? I mean, given that segment revenues were more or less in line with what you had expected, how were the component revenues different from your expectation and what specifically are you doing to address the margin opportunity in components?

Jure Sola

First of all, as I mentioned, we’ve been going to inventory correction in the component side of the business, now basically what I would call the third quarter in a row. As Bob mentioned, if you just look at the comparison quarter to quarter, our component business is down over 20%. So that gets a big impact, because these are the businesses also that our margins are a lot higher.

As I said earlier, I’ve never seen more inventory correction in a short period of time as I’ve seen really in the last 90 days. So inventories are very very low in the pipeline right now. We are not forecasting huge upside in our component business during the fourth quarter, but as I mentioned earlier I believe we’re going to start seeing some demand in the fourth quarter and we expect those margins to come back. So with that, I’ll just turn it over to Bob for additional comments.

Bob Eulau

As I mentioned before, the components businesses are very high contribution margin. As of course you know, they’re also high FX cost. So year over year, revenue is down about 19% on the components side, and that puts a lot of pressure on our gross profit when that happens. What we told the team is everything is on the table. We need to figure out how to improve the profitability on these component businesses and not just wait for revenue to come back. We think revenue will come back, but we’re not going to wait. So we’re definitely going to be looking hard at things this quarter.

In terms of your first question, which I think was relative impact of the FX issue versus the components business, the components business was definitely the bigger of the two impacts. I can tell you the FX impact probably hurt us in the neighborhood of $0.02 to $0.03 per share this quarter. And components, I don’t want to quantify that specifically, but it was higher impact than that.

Operator

Your next question comes from the line of Jim Suva from Citi.

Jim Suva – Citi

A quick question on the prepared comments. I believe it was Bob mentioned looking at alternatives to improve the profitability in the components sector. That type of word carries a lot of potential routes that could be with it, all the way from closing the business, selling the business, or just new management changes or inventory correction. Can you walk us through are you looking at such severe actions? Or am I just taking that word out of context?

Jure Sola

First of all, you’re right. You can take that in a lot of different directions. I think for us we’ve had this correction of components now for multiple quarters here, and based on all the data, as I just mentioned, I believe that demand will be coming back, because the pipeline in inventory is very, very low. But at the same time, we want to make sure that we look at everything and we tune up and make the improvements necessary.

As you know, in our circuit board business, we invested a fair amount of money to grow our China factory. That factory is now finished, so for the long term, China is the place for us to be. And when we moved to China, we are really focused on high technology printed circuit boards. So the whole new factory is really set up to be able to do high technology.

So we’re just looking at all things. What is the most efficient way going forward, and what do we have to do to improve the margins, even if the demand doesn’t come. So with that, Bob?

Bob Eulau

Yeah, I guess just to echo Jure’s comments, we’re very committed to these businesses. We’re continuing to make long term investments in these businesses. We’re very committed to serving the customers in each of these areas as well. So don’t read too much into that. On the other hand, you can read into the fact we are not satisfied with the status quo. So we need to find ways to improve the profitability in this business and we intend to put a lot of energy into that over the next month or two.

Jim Suva – Citi

Okay, as a follow up, just a comment and then a follow up question. And the comment is, I know a lot of people are pretty worried. You’ve changed a lot of management there. So it seems like you’ve been focusing on it a lot. And so it seems like a renewed emphasis may mean something potentially a little more drastic. Or maybe I’m reading more into it.

But the follow up question is, is components largely tied to some of the segments more than others? Meaning, like, multimedia? And for example, the volumes and the quantities going through there have a disproportionate impact to components profitability than, say, in the industrial or defense segment?

Jure Sola

Let me answer your first comment there, with the management. We did not make a lot of management changes. As you know, about a year and a half ago, we made a change with the one key manager. So internally, we have a very strong management. A lot of the positions we’ve been filling from inside. So we’re very happy with what goes on. So there’s no management changes going on, and I don’t see any in the near term or long term today. So I just want to make sure that is clear.

To answer your second question, when it comes to multimedia, especially set top boxes, we do very little components, vertical integration. I should say, we don’t build boards for that. We do very little plastic or metal on that. Our component business has really more impacted in the enterprise side, and optical side, of the business. You know, solid state, memory side, and high technology printed circuit boards. And precision machining. So precision machining has been affected, of course. The semiconductor being down. It’s been affected in that area. So that’s kind of what the biggest impact is. But really it’s not related to the set top box at all.

Operator

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

Craig Hettenbach – Goldman Sachs

Jure, can you start with just the top line in the quarter, and the guidance. Is there any way for you to give some context around what you’re seeing from the end markets versus new programs? Because the top line results I think are better than some others out there.

Jure Sola

Well, first of all, we had a nice pick up with some existing customers during the third quarter. These are all newer programs, you know, LTE installations going on. So we have good programs there as I mentioned, 4G programs and so on.

If you look at also in other areas, both enterprise and storage, some of the other industrial side of the business we’ve been working with some of these new programs for a long time, so those are starting to contribute fairly.

We also have a strong pipeline, so we think at least what we see today… I mean, we’re taking it one quarter at a time, so we’re guiding up for this quarter, both on the top line and on the bottom line. And I expect, based on everything I see today, unless the whole world changes tomorrow, that that will continue through the December quarter. And then I guess 90 days from now we’ll be a little bit smarter to forecast longer term. But I like our chances.

As you know, we made the decision to go with the new strategy that is focused on a more complex type of product. Investments in these things take a little bit more money. So if you look at our defense business, we’re building on that. It’s not the sexiest market to be in right now, but we’re building for the future.

We’ve been investing heavily in our storage enterprise there. We’ve been heavily investing in some new technologies such as solid state drives in our memory module business. We’re investing a fair amount in our optical technology and optical capabilities. So a lot of these investments are starting to pay off, and hopefully the economy will cooperate.

As we have more demand for high technology products, I think we should see more benefit from that. So to summarize, yeah, I think a fair amount of demand is coming from the programs that we’ve had here for a few quarters, and also the new programs are picking up with some of the new wins with existing customers and new customers.

Craig Hettenbach – Goldman Sachs

And if I could have a follow up for Bob, when you look at the gross margin, the range of 6.9-7.3%, at what point do you think you can get back to the mid-7s, 7.5% or so. And would you consider cost actions to get there? Maybe you can kind of guide us through how you might get back to that level?

Bob Eulau

Again, we’re just providing guidance one quarter out. But clearly we’re counting on improved mix. We’re expecting some progress in the components business. We wouldn’t put the guidance out there if we didn’t think that was likely. We did get hurt a bit, as I mentioned, by a one-time FX impact in the current quarter. So I don’t want to speculate as to when we’ll be back to mid-7s or above, but we’re pretty confident in the range of guidance that we’re giving for the September quarter. And with the combination of the revenue coming back and hopefully finding some opportunities to improve our performance on the components side, and we should do even better.

Operator

The next question comes from the line of Brian Alexander from Raymond James.

Brian Alexander – Raymond James & Associates

First, to clarify, was the components business down 20% sequentially? Or 2% sequentially? I heard two different numbers. I know I heard 19% year over year decline, but I’m not sure sequentially.

Bob Eulau

Sequentially it was down 2%, and as you said, 19% year over year.

Brian Alexander – Raymond James & Associates

So I don’t understand why components were such a drag on gross margin, maybe 50 basis points or so, if the revenue was only down 2%. That doesn’t seem like a big drop. So it implies more of an execution issue than weak demand or inventory rebalancing. Or maybe I’m just missing something.

Bob Eulau

Actually, I would characterize it more as a mix issue within the components areas. And we obviously have a mix impact at every level in the company, and within components, it hurt us a bit.

Brian Alexander – Raymond James & Associates

Can you just elaborate on what you mean by that? Because when you talked about the parts of the components business - or maybe Jure mentioned it - that were weak, it sounded pretty broad based. I think you guys pretty much mentioned all the different sublayers. So what specifically was weaker than you expected, and was that driven by demand weakness or inventory? Or was it more Sanmina execution specific?

Bob Eulau

In terms of each of the component areas, I would say - and I’m doing this by memory - all of them were below what we had expected going into the quarter. And then within each of those areas, there’s a certain mix of product that we’re expecting to ship, and that was not as good as we had hoped as well. In terms of execution issues, you always have some issues here and there, but it’s kind of hard to blame the team on that. I think the bigger issue was just continued slow revenue and the mix of revenue that they saw.

Jure Sola

If I can add to that, if you look at it from an execution point of view, really that’s not an issue this quarter, as Bob said. In this business there’s always challenges, but that’s not the issue. It’s the mix issue, especially when you get into for example our memory business, like the solid state drives are very, very profitable. That business was down. Some of the custom memory modules were also down. You know, some of the optical components and additional to that, very weak circuit board demand on the high end boards. And our mechanical business was weak. So you add those four together, especially with the mix, that’s how we get impacted the most.

Brian Alexander – Raymond James & Associates

And did you lose money in components, just to clarify that?

Bob Eulau

We still have gross profit on the components side, although it was down a little bit from the prior quarter.

Brian Alexander – Raymond James & Associates

How much of the rebound in gross margin for September is being driven by the improved components margins? Because it doesn’t sound like you’re expecting the revenue to bounce back really until December. So just trying to understand why the gross margins would come up so much in September.

Bob Eulau

We’re expecting some improvement on the components side, and a slight improvement on the [EMS] side as well.

Operator

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

Sean Hannan – Needham & Company

I’m sorry to follow up around components here. It sounded like for some of the prior quarters there was some anticipation around some improvement within that business. You’re now talking about that later in the calendar year. Can you give us a little bit more detail around what gives you the confidence behind those improvements, either from a bookings standpoint - is there a tie to a given end market where you have more component content, where perhaps some of your new programs may be ramping and taking a greater pull of those components. Any clarity around the back end of the calendar year would be helpful.

Jure Sola

Let me try to answer that as directly as I can. First of all, if you really look at the components industry today, the circuit board industry, the precision machining, if you’re involved in semiconductor precision machining and military precision machining, and areas like that, demand has been pretty weak. So even then if you go into some of the custom memory, demand has also been weaker than normal. So that’s the same thing as what we’re experiencing here at Sanmina.

As we look at the fourth quarter, which for us is the September quarter, we see some stability, not a major upside. Hopefully the mix itself will be a little bit better. We see some mix based on the forecasts we see today. And then as I said earlier, based on knowing our customer base, knowing the programs that we are involved in, knowing what inventories are in the pipeline, in some of these key programs that we’re involved in, we expect things to improve. As I said earlier, unless the whole demand falls off the cliff. Based on what we see today, that’s what we are expecting to see in the December quarter.

So, in summary, again, some mix improvement in the September quarter, but more demand that will offset - not just the mix alone, but to fill the factories up. Because some of these factories, as Bob mentioned earlier, it’s a high fixed cost. So as demand goes up, a fair amount of that falls to the bottom line.

Sean Hannan – Needham & Company

And then also, just from a 100,000-foot perspective, when you look at the opportunity for growth within your business, when you look at September and when you look at December from June, those growth opportunities, would those really be coming much more from newly outsourced business to the industry? Or is this a matter of share gains? Because I think most of your peers, as well as when we look at the end markets, were looking at general sluggishness and stagnation. And so just trying to understand your ability to grow there and the dynamic that’s behind that.

Jure Sola

We’ve been diversifying our segment. We have a high percentage, 48%, this quarter, we just finished in communication networks, which includes networking, wireline, and wireless. So we’ve been really focused on expanding our storage business, including Sanmina’s products. We’ve been really driving the industrial side of the business, medical, aerospace and defense. These are all areas that we’ve been focusing on, and a lot of these things are really based on a mix. It’s customer driven.

So for us, in the short term, across our customer base, we see some upside. That’s why I say modest upside in September. And everything we see today we believe that upside will continue in December. We don’t know how much, but we definitely believe it’s going to be upside. So yeah, we have some existing programs that have been with us for a long time. They’re doing well. And also the new programs in the customer base that we have, and some of the new customers, are starting to drive the growth.

Operator

Your next question comes from the line of Shawn Harrison with Longbow Research.

Shawn Harrison – Longbow Research

Just wanted to delve into the multimedia business a bit. Maybe if you could just, in terms of particularly set top boxes, are we getting close to maybe seeing a bottom in the demand environment? And with it being down into the September quarter, how much is down? Is it mid-single digits? Is it greater than that?

Jure Sola

First of all, we don’t have a lot of customers in that business. The business, for us, long term, we think it’s going to be less and less. We believe it’s going to level off. If I had to forecast, probably next three to four months. But long term for us, it’s not a business that we’re going to see a lot of growth with our customer base.

Shawn Harrison – Longbow Research

Are you backing away from some business? Or is it just more a function of the end demand for the product?

Jure Sola

We usually don’t like to make a comment on that. We don’t like to talk specifically about our customers. They don’t want us to talk about it. I have to make sure that is clear. So I can’t make a comment on that.

Shawn Harrison – Longbow Research

And Bob, a quick follow up. Given no debt coming due until 2014, how do you look at incremental cash deployment going forward? Or is it just slowly building back to cash balance?

Bob Eulau

I’d say our priorities are what they have been for quite a while. First of all, make sure that we’ve got the cash we need to grow the business organically. And we’re really pleased to see the sequential growth this quarter, and still have the ability to generate cash. So I think that bodes well for the future. So it’s number one, have the cash we need to grow the business. Number two would be small, very related, tuck-in type acquisitions. Don’t expect anything dramatic there. It would be something that’s a very good fit with our existing strategy. And then third, we’ll continue to opportunistically look for opportunities to delever the company and make sure that we’re doing the best possible job we can to return value to shareholders.

Operator

Your next question comes from the line of Christian Schwab from Craig Hallum Capital.

Christian Schwab – Craig-Hallum Capital

Bob, were there any 10% customers in the quarter?

Bob Eulau

There were two customers above 10% this quarter.

Christian Schwab – Craig-Hallum Capital

Can you name them?

Bob Eulau

No, unfortunately we only do that once a year.

Christian Schwab – Craig-Hallum Capital

Okay. I figured that would be the case. Jure, when you look at the strong pipeline of new projects, would you categorize the recovery and growth momentum that you’re seeing as increased market share? Or would you say it’s more a ramping of a next generation product as an older generation product decreases? So in other words, we’re still selling to the same people, and before we were building 3G base stations, and that grew really nicely, and then that slowed down. And now 4G/LTE base stations, in essence, are increasing, and we’re just selling to the same customers but seeing increased demand because of acceleration in that product. I’m just trying to categorize how much is increased market share versus just customer demand for a next-generation product that you’ve always won, that’s finally going to ramp production.

Jure Sola

That’s an excellent question. I don’t like to use share gain, because people can read too much into that. We basically widened our customer base that we’ve been focused on for the last couple of years. We’ve been expanding and that pipeline is helping us today. And we also believe there is a fair amount in the new pipeline that we’ve been working on on these new opportunities that we’ve been working on. Some of these opportunities are existing customers, and some are these new customers.

But on top of that, your comment about how in the old days we were building a lot of 3G and now we’re building a lot of 4G base stations. So some of that is going on too. So definitely we had an existing customer base that has higher orders, but that alone wouldn’t get us where we need without new programs.

Christian Schwab – Craig-Hallum Capital

And my last question, are there any areas or segments that you can break out, further giving greater clarification to questions earlier, kind of about growth drivers into new markets, where you could say, you know, two years ago we weren’t in this category of industrial equipment, and now we’re doing $50 million a year. We weren’t making these types of servers two years ago, and now we’re doing $200 million a year. Is there anything like that you can clarify for people?

Jure Sola

Let me try to answer that a little bit differently. I think it’s important to kind of look at Sanmina, what we’ve been doing. As we’ve been diversifying our customer base, as we went in a new strategy, we’re going to focus on a more, what I called sustainable, predictable long term business, we have to walk away from certain businesses. So they did not show as much growth.

But I think the quality of the customers that we have today is improving, and I believe the pipeline, what we have across our key markets, including communication, enterprise computing, medical, defense, industrial, if you look at the pipeline, some of the wins that we got, and how we are positioned for the future, a lot more exciting. And I think they will be a lot more sustainable and predictable.

I think the biggest problem with our industry in the last five years is we’re not being predictable. And to me, because as an industry sometimes we chase the revenue without really focusing on quality of the customer, how sustainable it is, and are we going to make a little bit of money in the future.

We’ve been very disciplined trying to do this, and we’re really not focused strictly on what we’re going to do short term. It’s really what we think we’re going to do next 12 months, 18 months, 24 months as this environment hopefully improved that we are in today. We are in a challenging environment, but I believe that Sanmina is well-positioned as this environment improves. Hopefully that answers your question.

Operator

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

Sherri Scribner – Deutsche Bank

I just wanted to dig, again, into the components business. Just sort of back of the envelope, it seems like the components business was about a 20 basis point drag this quarter with FX being the rest of it. As we move into the fiscal fourth quarter, you’ve talked about aggressive plans to improve the components market, but you’ve said you don’t want to get rid of any of those businesses. And you also said that you didn’t see any execution problems with your components group. So I’m trying to understand, as we move into the fourth quarter, what improves. Is it primarily mix? Or are you also relying on an inventory refresh?

Jure Sola

First of all, let me answer your second part of the question, then I’ll give the first part to Bob, and he can make additional comments. First of all, as I mentioned earlier, in each business you have to really look at your customer mix, what mix it is, and so on. As I mentioned, when we say components, it really affects optical, memory module, which is both solid state and flash, the custom memory modules that we build, involved high technology printed circuit boards to [back plans]. In mechanical, it’s precision machining, large system, and so on.

We believe that the inventory, with the customers that we serve today, is very low, and based on that data, and assuming that the environment will improve in December for higher demand for components, it will help us to get out of this jam and start shipping more and hopefully deliver a better margin from this business. That’s really what we are saying.

At the same time, what we’re saying is we’re going to stay very aggressive, in the short term, because to run this business we can’t just wait until, let’s assume the big order’s going to come tomorrow. You’ve got to do both. We’ve got to tune up everything we have, make sure that we turn every stone. And at the same time, we’re going to be very aggressive, chasing every good order out there that is going to be available.

But we’re very positive on this business. We’ve been focused on this for a long time. I think if you look at the capabilities that we have in each of these businesses that I just talked about, they’re basically second to none. So these are great businesses. We just need more demand for them. So that’s my answer for the second question. I’ll turn it over to Bob to talk about margin.

Bob Eulau

As you know, we don’t do segment reporting, so there’s only so far I can go in terms of describing this business to you. I can tell you at the level of revenue we’re operating at today, the business is very, very high contribution margin. So as we see revenue come back, we should be able to drive very good gross profit. But I really can’t get into whether it’s 20 basis points or 50, or whatever. As we’ve outlined, you can rest assured that the biggest issue is components profitability, and that’s what we’re spending our energy on right now.

Sherri Scribner – Deutsche Bank

But it sounds like you’re primary driver to improve that margin is leverage and increased revenue. Is that right?

Bob Eulau

Yeah. Well, revenue, absolutely. It will help immensely.

Operator

The next question comes from the line of Osten Bernandez with Cross Research.

Osten Bernandez – Cross Research

The first question, when I think of the balance of how you get from the 6.8[%] in the June quarter, and the targeted range for your gross margin for the September quarter, how much of that would be as a result of the strategic decisions you’re considering versus, say, an uptick in revenue. And of that uptick in revenue, would you be able to give any type of direction? Do you expect it to be broad based in components? Or targeted toward any subsegments there?

Bob Eulau

Again, you have to bear in mind, as I said before, we don’t do segment reporting. One of the things that we had expected as revenue came back, we expected it would come back stronger on the components side. And that’s typically what we’ve seen in the past.

So this quarter, obviously we had very strong rebound in revenue overall, but that was not the case on the components side. So that is something that we’re analyzing and we’re understanding right now. That’s part of why we’re looking next quarter at is there something we could do that would make sense in addition to waiting on the revenue to come back.

And we may conclude that really there’s not a lot we can do. But as I said to that last question, as revenue comes back, it’s very, very high contribution margin. I think that’s unfortunately demonstrated in the wrong direction right now as revenue is down in that area. But as it comes back, it will generate a lot of gross profit, and we’re confident we’ll be able to get it growing again, just as we have on the EMS side.

Osten Bernandez – Cross Research

And then would you be able to comment with respect to the outlook you have for your communications business? Earlier in the year you commented that you were relatively bullish on a calendar second half ramp in demand, and the revenue you pulled in for the June quarter was a positive, and seems to be in line with what you were expecting there. Are you still confident on the full second half ramp for the calendar year for that business?

Jure Sola

Based on what we were hearing from our customers, and looking at the forecast and their inventory, what was going on, we basically expected the second half of the calendar year to better than the first half of our calendar year. That’s kind of what we said. And basically that’s what we are saying right now. What we see today, that we’re going to have a nice improvement in our September quarter. And based on everything I see today, I think that should continue through the December quarter. But again, we’re taking it one quarter at a time.

Osten Bernandez – Cross Research

And with respect to some of the thinking in the components business, the results you announced today, how do they change, if anything, your expansion plans in India and China that you highlighted during the last earnings call?

Jure Sola

First of all, at this time there’s no changes in India. I would say in China, that’s a center of excellence for us for high technology printed circuit boards. We continue to focus on that and grow that. Our long term goal is to be transitioning some more business there, and that’s part of the plan. And as our customer demand goes up, we’ll be putting more circuit board business in China.

In this business, every day we’re looking at where’s the best way to put it both from a technology point of view, cost point of view, and also the time to market point of view. So in our business you never go to sleep. You constantly adjust to it, and I can tell you we’re in a good position to do that, and we can move things around.

Operator, we have time for one more question.

Operator

And our last question comes from the line of Amit Daryanani from RBC Capital Markets.

Amit Daryanani – RBC Capital Markets

Two questions from me. One, can you just talk about the quarter that you guys had in June? Was the upside fairly linear through the quarter? And secondly, was the upside fairly broad-based, or was it more concentrated in a few customers?

Bob Eulau

One of the things we noticed right out of the gate last quarter is that demand was stronger, and it held up week by week throughout the quarter. So it was really not a surprise. You never know until it’s over, but it started out strong and stayed that way the whole quarter.

Amit Daryanani – RBC Capital Markets

And Bob, it was fairly broad-based? Or were there kind of two to four customers that helped drive a lot of upside?

Bob Eulau

You know, I would say, if I remember correctly, when I looked at our top 10 customers, I think eight of them were up sequentially. So I would characterize that as pretty broad-based.

Amit Daryanani – RBC Capital Markets

And not to keep going back to the component issue, but it sounds like you’re betting on revenues to rebound and it seems to be that inventory is fairly low in the supply chain right now. Could there be a dynamic where Sanmina’s maybe losing market share, and even if inventories improve, you don’t get the benefit of that? Could you just maybe talk about, maybe you’re sole source on a lot of these programs, so if you do come back, you win them? And in addition, you guys have struggled in the component business for multiple years now, I think. Why not look to maybe sell or divest that business and focus on core EMS, which honestly has been very well run for you guys?

Jure Sola

First of all, I think you are analysts, you follow this industry a lot better than I do, and you know that if you look at the component… Find me a circuit board company that focuses on high technology printed circuit boards today that is not hurting for revenue. So we’re going through the same experience right now. I think we’re well-positioned. Execution is better now than ever before. I think our customer is wide. I think we’re a lot more picky right now, which customers we’re going to do business with long term. So that’s the focus for us, the quality of the earnings.

We’re not going to be chasing just revenue for revenue’s sake in the short term. I think we turned the corner. I think we did all this restructuring. Now we have to really focus on tuning things up. And that’s basically what we said. We’re going to be very aggressive driving each of these businesses to make money. Fortunately, our components are making a little bit of money, but not what they should be.

And I think you’re strictly focused on, at least through your answers there, circuit boards and so on. But I have some other businesses, such as we just talked about, the memory module, custom memory module, optical businesses, our precision machining businesses. These are the businesses that generate a lot of margin in a reasonable market. But we just did not have a very strong demand, and especially in the last couple quarters. In this coming quarter, we are not forecasting huge upside in our numbers.

Now, we don’t know how things are happening three months from now, but we do expect, as I mentioned earlier, that we’ll have some inventory correction there, and I think we’re going to be in a position to do better. So that’s really what we are saying.

Well, ladies and gentlemen, first of all thanks again for your time. I appreciate it. Hopefully we answered most of your questions. If we didn’t, we’re available, and give us a call. With that, thank you very much.

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