Benchmark Electronics Inc. Q2 2008 Earnings Call Transcript

Jul.28.08 | About: Benchmark Electronics (BHE)

Benchmark Electronics Inc. (NYSE:BHE)

Q2 2008 Earnings Call

July 24 2008 11:00 am ET

Executives

Don Adam - CFO

Gayla Delly - President

Cary Fu - CEO

Analysts

Kevin Kessel - JPMorgan

Amit Daryanani - RBC Capital

Jim Suva - Citigroup

Sherri Scribner - Deutsche Bank

Sean Hannan - Needham & Company

Brian Alexander - Raymond James

Steven Fox - Merrill Lynch

Alex Blanton - Ingalls & Snyder

Brian White - Collins Stewart

Operator

Welcome to the Benchmark Electronics second quarter 2008 Earnings Call. (Operator Instructions).

At this time then, I'd like to turn the conference over to Mr. Don Adam. Please go ahead, sir.

Don Adam

Good morning. Welcome to the Benchmark Electronics conference call to discuss our financial results for the second quarter of 2008. I am Don Adam, CFO of Benchmark Electronics. Today, we will begin our call with Gayla Delly, our President; and Cary Fu, our CEO, providing a review of our second quarter results and our outlook for the third quarter. I will then continue with a discussion of our financial metrics in Q2 in greater detail. After our prepared remarks, Gayla, Cary and I will take time for your questions in our Q&A session. We will hold this call for one hour.

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 would like to caution you that those statements reflect our current expectations and that actual events or results may differ materially. We would also like to refer you to the Benchmark's periodic reports that are filed from time to time with the Securities and Exchange Commission, including the company's 8-K and S-4 filings, quarterly filings on Forms 10-Q and our annual report on Form 10-K. These documents contain cautionary language and identify important risk factors which could cause actual results to differ materially from our projections or forward-looking statements. We undertake no obligation to update those projections or forward-looking statements in the future.

Now I will turn the call over to Gayla.

Gayla Delly

Thank you, Don. Operationally our second quarter was challenging for Benchmark. Our second quarter results showed good operating metrics based on favorable mix and cost control, but obviously we are disappointed with the revenue weakness we saw.

Sequentially, when comparing to quarter ended March 31 to June 30, revenues for the industrial control sector increased 13%; revenue from the medical sector increased 7%; and revenue from the telecommunications sector increased 4%, while revenue from the computing sector decreased 6% and revenues from test and instrumentation decreased 12%.

You might note that traditionally the computing sector is stronger in Q2 and we had expected to be stronger again this year.

Let me step through some of the dynamics we saw in Q2 by industry, and I'll also let you know what we see looking forward in this current environment. First, in computing, as we indicated in our press release, a couple of our maturing programs were impacted by the current environment and declined more rapidly and dramatically than anticipated.

Along with this activity, we saw a shift towards lower ASP solutions in the computing sector. What this means is that we saw some programs with robust demand in terms of units even though we saw lower revenue numbers.

In the current environment you expect this trend to continue. We are maintaining our strong customer base and we have not lost business from our customers. What we do see is that some computing customers are trending a portion of their new solutions towards the low end. As a result, our revenues by industry mix will continue to trend toward the more balanced portfolio. We do continue to see strong program wins on the high end computing side.

Second, the test and instrumentation sector, we continue to win new programs also and are building our base. But in this sector we have been impacted by the overall industry cycle, which is down over 40% on a year-over-year basis. We do expect to continue to grow our base in this sector and are positioned to return to growth in this area when the cycle turns positive in test and instrumentation.

Lastly, on the bright side, you'll see our other industries, telecom, industrial controls and medical, we're continuing to see strong performance and see growth opportunities continue there. Our new bookings continue to be strong, but as we noted, the replacement rate of the new bookings offsetting the maturing programs has not been adequate, and thus, we have seen a decline in revenue.

As we previously indicated, our focus will continue to be on growth in the nontraditional markets which provides us a balanced market mix and also improved margin performance, albeit has a near-term revenue constraint. Our new programs, including the programs in the computing sector, have been gaining momentum, although not sufficient to offset the weaknesses as mentioned.

Our EPS results were within our range of guidance due to the benefits from our realignment effort completed in 2007, better product mix and our continued focus on efficiency improvements and cost controls.

Now let me turn it over to Cary.

Cary Fu

Thank you, Gayla. The current macro environment certainly provided headwind. However, our bookings activity remained strong for the quarter. During the second quarter, we booked 17 new programs with current estimate of annual revenue of $86 million to $123 million. This new program opportunity, our new customers that was the system customers and for the mix of our industry we serve.

We anticipate the revenue and the earnings benefit for this program will begin to realize beginning in 2009. During the last few months, we have seen a timeline for the new product introduction activity extended, although we have not experienced any improvement in cancellations at this point in time.

Because of our deterioration in the portion of the computer sectors that we serve, we are not providing specific full year 2008 guidance at this time. We are not reaffirming our full year guidance provided in the last quarter's press release.

Historically, Q3 demonstrates a soft comparison to Q2. Our guidance for Q3 is based on the outlook at this time from our business environment, new program rev as well as customer information. For quarter four, we expect the revenue and EPS to grow sequentially from Q3 which will lead to a modest EPS growth for the year.

Based on the current outlook we expect the third quarter revenue in the range of $650 million to $690 million. The corresponding earnings per share in a range of $0.32 to $0.37, excluding stock-based compensation expense of about $780,000 and acquisition intangible expense about $450,000. Please note that earnings per share guidance do not include the impact of the stock repurchase programs.

As we noted in the past, we'll continue to review our current capital structures. We have recently completed our stock repurchase plan, which was announced in 2007 for $125 million. Our cash and investment position ended June 30, '08 is approximately the same as we had prior to the initiation of the stock repurchase plan in 2007. And today, we announced a new stock repurchase program to purchase up to another $100 million in our outstanding stock shares. We plan to initiate a purchase under this program immediately.

We believe we are well positioned for growth when the market we serve has gradually recovered with a significant number of the new programs we have. We are focused on efficiency improvement and cost control. Along with a better product mix, we'll drive higher margins. And additionally, we are focused to driving additional revenue to achieve higher level of profitability.

At this point in time I turn the call back to Don to discuss the Q2 financial metrics in detail. Don?

Don Adam

Thank you, Cary. We completed the second quarter of 2008 with earnings per share of $0.35 excluding special items, which was within our guidance range and $682 million in revenues, which was below our guidance of $715 million to $750 million. Please note that the Q2 financial results contain two special items. They are as follows, stock-based compensation expenses of $1.3 million or $877,000 net of tax and amortization of intangibles of $447,000 or $285,000 net of tax.

To provide a more meaningful comparative analysis we present certain financial information excluding these special items during this conference call. We will call your attention to the fact that these items are excluded when we do so. In today's press release, we have included a reconciliation of our GAAP results to our results excluding these items.

Our operating margin for the second quarter was 3.6% excluding the special items noted earlier. This improved from 3.3% in the first quarter as we have seen the benefits from our 2007 realignment activity, improved product mix and cost control and efficiency efforts. This improvement was seen with flat revenues from Q1 to Q2.

GAAP net income for Q2 of '08 was $22.4 million compared to $25.9 million for Q2 in last year. This decrease is attributable to lower sales volume. Excluding special items, net income was $23.6 million compared to $28.6 million in Q2 of last year. Diluted earnings per share for Q2 were $0.33. Diluted earnings per share, excluding special items, were $0.35. Diluted earnings per share for Q2 '07 were $0.39, excluding special items.

Interest income was approximately $2 million for the quarter. Interest expense was $359,000 and other income, which was primarily foreign currency related, was $709,000. Excluding the special items, our effective tax rate was approximately 12.5% for the second quarter. On a GAAP basis, the effective tax rate was 11.2% for the quarter. Our tax rate has continued to benefit from favorable tax incentives on our expanded business levels in Asia.

Weighted average shares outstanding for the quarter were 67.7 million shares. Our cash and short-term and long-term investments balance was $344 million at June 30, which include $55 million of auction rate securities classified as long-term. These securities were classified to long-term during the first quarter because of issues in the global credit and capital markets that have led to failed auctions with respect to our auction rate securities.

Note that the balance of our auction rate securities has been reduced by approximately $22 million during the second quarter through redemptions in sales at par.

The unrealized loss on our auction rate securities at June 30 was $2.9 million due to changes in the market value of these securities over the last several months. Please note that the changes in the unrealized loss on these securities is reflected in accumulated other comprehensive income as a component of shareholders equity.

During the quarter we repurchased $30 million of common stock. Through July 21 we have completed our repurchase of a total of $125 million or 6.8 million shares under the approved program. As Cary noted earlier, we have announced a new stock repurchase program to purchase up to $100 million of outstanding common stock.

With the second quarter our cash flows from operations were approximately $2 million. During the second quarter our cash flows were impacted by the scheduling of inventory received early in the quarter and then the backend loading of shipments out to customers.

Our cash flows for the first half of the year were approximately $48 million. We anticipate for the balance of the year we will generate another $75 million to $100 million in cash flow resulting in cash flows of approximately $125 million to $150 million for the full year 2008.

Capital expenditures for the second quarter were approximately $10 million. Depreciation and amortization expense was $10.1 million. Receivables were $472 million at June 30, an increase of $19 million from last quarter.

Inventory was $393 million at June 30. Our inventory turns were 6.5 times for the quarter compared to 6.4 times in Q1. Current assets were approximately $1.2 billion and the current ratio was 3.1 to 1 in Q2 compared to 2.9 to 1 in Q1.

As of June 30, we have $12.3 million in debt outstanding, which is primarily a capital lease on one of our facilities.

Comparing the second quarter of 2008 to the same period in 2007, the breakdown by industry revenue is as follows; medical in 2008 was 14%, in 2007 it was 13%; telecommunications in 2008 was 17% versus 14% in 2007; computing 48% in 2008 versus 54% in 2007; industrial controls 16% in 2008 versus 12% in 2007; and finally, test and instrumentation 5% in 2008 versus 7% in 2007. During Q2 our revenues from our top customer were 17% of total revenue.

At this time I'd like to open the Q&A session. During this session we request that you limit yourself to one question and one follow-up question in order to allow enough time for everyone's questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question this morning comes from the line of Kevin Kessel with JPMorgan. Please go ahead.

Kevin Kessel - JPMorgan

Hi there, guys. My first question is when we look at the products that are maturing, is it very broad or is it just really concentrated amongst the largest customers?

Gayla Delly

Kevin, we have probably two to three programs that are maturing with two to three customers. So I guess, it's more than one but not broad.

Kevin Kessel - JPMorgan

Okay. And then, in terms of the China set that you guys have spoken about in the past, can you bring us up to date there in terms of where that stands in terms of the completion?

Cary Fu

The China facility will be online in Q3.

Kevin Kessel - JPMorgan

It will be online in Q3?

Cary Fu

Late Q3, early Q4. I'm sorry.

Kevin Kessel - JPMorgan

Okay. So you would expect then maybe some contribution from it at some point in 2008, it sounds like.

Cary Fu

Sure.

Kevin Kessel - JPMorgan

What's the focus going to be, Cary, on that site in terms of what end markets?

Cary Fu

Well, we're expecting the China capacity to provide a full range of the service, okay, including PCB modules as well as box built. We'll definitely see a continued shift in the business into the facility showing a pretty nice growth and the costs at that facility have been profitable after the first year. So it's continuing to be a very profitable operation for the company.

Gayla Delly

The most industries it serves and in the range of services it provides, it really addresses each of the markets, Kevin. So, it's a well diversified site for us.

Kevin Kessel - JPMorgan

Okay. And then, can you maybe give us a sense for like, I know typically your quarters are back-end loaded, but what was the linearity like this quarter? Was it different from prior quarters? And I guess I ask that question because my sense would be that maybe some of the increased weakness might have happened in the last month that may be more than typical?

Gayla Delly

I guess there are two ways to answer that, and I didn't mathematically compute it. But ultimately, clearly it was less back-end loaded than we had anticipated because, as you said, we typically do see very heavy shipments in some of the sectors in the back-end. So, since we didn't hit our revenue number it wasn't as back-end loaded as we had expected. But I don't have any determination as to what the percentages actually ended up being. I do know that we typically do see some stronger demand than we ultimately saw.

Kevin Kessel - JPMorgan

I guess, would the lack of back-end loading be the result of a lack of pulls out of hubs or a reduction in the forecast in the last month?

Gayla Delly

In essence we probably have a bit of both. We do have some hub situations. Some of our computing is direct order fulfillment. And to the extent that you see that, one of the things maybe I failed to note in our prepared comments was that we do not have as many of the computing customers involved in VAR arrangements or items where we would have a delayed reaction or delayed visibility into the inventory builds. We're doing a lot of direct order fulfillment which would mean that we see the order patterns from the end customers more rapidly. And so, there is a bit of hubbing, but it's also some direct order fulfillment activity.

Kevin Kessel - JPMorgan

Great. Thank you very much.

Don Adam

Thanks, Kevin.

Operator

Thanks. And our next question then comes from the line of Amit Daryanani with RBC Capital. Please go ahead.

Amit Daryanani - RBC Capital

Thanks. Good morning, guys.

Gayla Delly

Good morning.

Don Adam

Good morning.

Amit Daryanani - RBC Capital

Just to kind of follow-up on the linearity question from earlier. Last quarter we kind of had a similar issue of a $25 million to $30 million mess, but we saw that build up in the inventory number. This quarter it looks like inventories are actually fine, but we still have the sales softness. So, is it fair to think that the order cuts and the product mix shift were actually pretty consistent through the quarter and it's not something that surprised you in the month of June?

Gayla Delly

I think what really you see is is the industries that are represented. So to the extent that it's not direct order fulfillment activity and it's in the hub, then you're going to see the reaction in the quarter like you saw last quarter, the March quarter. And when it's impacted more by the direct order fulfillment programs, you're going to see it as you saw this quarter. So it really depends on, I guess, mix in the specific activities.

Amit Daryanani - RBC Capital

All right. And then September quarter, we're looking for sales to be flat to maybe down a few percent, and that's been the normal seasonality I think in the September quarter, things seem to be flattish or down. Do we read that as a sense that things may have bottomed down and will remain at the bottom for a few quarters?

Cary Fu

Like I indicated in my earlier comments, as you say, Q3 traditionally is a softer quarter compared to Q2. And we believe Q4 should have sequentially revenue EPS growth from Q3.

Amit Daryanani - RBC Capital

All right. And then, just finally from an SG&A perspective, you guys have done a pretty good job controlling the SG&A line with margins expanding 30 basis points on flat sales. Is there room to improve SG&A further or should we think about this $21 million, $22 million run rate on the SG&A as a steady state going forward?

Cary Fu

Our SG&A line is probably going to stay flat. We may have a little bit of opportunity to improve on that. But the focus right now is really in driving the new programs and as well as the new business generation. And as we talk about in earlier comments, in the opening remarks of the conference, we do see a much better mix with our new programs. And that's where we can maintain a pretty nice EPS, although revenue has some weaker revenue demand. And you can very easily see the margin improving.

It's a really comfortable model from the customer side. So as we're moving to more non-tech targeted customers, we'll definitely see a better opportunity for margin improvement. And like we said earlier, even with the softer demand for the topline, we'll probably still see a modest EPS growth for the year.

Amit Daryanani - RBC Capital

And just a final clarification and I'll hop off after that. I think, Gayla, you talked about the computing side and did you say there was no customer losses or incremental dual sourcing, anything that impacted the results, right?

Gayla Delly

Correct.

Amit Daryanani - RBC Capital

Perfect, thanks.

Gayla Delly

Thank you.

Operator

Thanks. And our next question then comes from the line of Jim Suva with Citigroup. Please go ahead.

Jim Suva - Citigroup

Thank you. Can you talk about the disappointment in revenues this quarter and the next quarter softness outlook? Is it more heavily weighted towards the mature programs rolling off and not netting off your wins or is it more so on macro factors?

Gayla Delly

I think it's primarily the maturing programs. Again, I probably don't have a specific impact statement to differentiate the two, because one probably drives the other. It's probably the softer markets that make people hesitant to buy maturing programs, but that's just my take on it. But it is clearly the maturing programs that are suffering, if you will.

Jim Suva - Citigroup

And then, Gayla, when is the crossover point as far as the rollout of those maturing programs and when we start to see net positive from your wins?

Gayla Delly

I think we really see the forward momentum begin in early Q4 and probably gain stride in early 2009.

Jim Suva - Citigroup

Okay. And as a quick follow-up I believe, Cary, you said you're no longer reiterating your full year outlook. I look at that statement, and last quarter you did talk about your full year outlook. Now we're basically only one quarter of way from the December quarter. Has the visibility just deteriorated that much more or why are you no longer like adjusting that downward or giving some sort of guidance there?

Cary Fu

When we entered the Q2, we did see a pretty good visibility based on the customer information. And we were surprised with weaker demand for the product we're serving in the computer sectors. And with that kind of background Q3 tended to be a software quarter, we projected a flat to slightly lower quarter for Q3. With the uncertainty of that particular sector, we decided not to give specifics to guidance for the year. However, we do see a rebounding in both EPS and the revenue in Q4.

Gayla Delly

I think, Jim, maybe for clarity, what probably gets difficult to see is the specific mix and the revenue guidance amongst the mix. We do probably feel a little bit better about understanding the EPS guidance, as Cary indicated, but not specifically the revenue guidance as to what that mix will turn out to be.

Jim Suva - Citigroup

Okay. Thank you very much, everyone.

Operator

Thanks. And our next question then comes from the line of Sherri Scribner with Deutsche Bank. Please go ahead.

Sherri Scribner - Deutsche Bank

Hi. Thank you. I wanted to get a little more detail on your free cash flow. The free cash flow, if I look at it, and I include the CapEx, it looks like it was negative this quarter. I know you talked about the inventory a bit, but could you maybe give us a little more detail there. And also, could you remind me what you said about the second half, what you expect for free cash flow for the rest of the year?

Don Adam

For the second half we had said $75 million to $100 million in free cash flow or cash flow from operations. For the first quarter and for the second quarter, really, the cash flow is impacted by the timing of receivables and payables. Our inventory was pretty consistent, but what basically happened, timing of inventory receipts earlier in the quarter coupled with typical back-end loading of receivables really caused it to be only $2 million for the quarter.

Now saying that, I think if you look at the first half we're up to about $48 million which is sort of in the range of what we thought we would be at the beginning of the year. So, we view it as sort of a one-time unusual timing event. For the full year we're expecting between $125 million to $150 million.

Sherri Scribner - Deutsche Bank

Okay. And that's cash flow from operations, not free cash flow?

Don Adam

Correct.

Sherri Scribner - Deutsche Bank

Okay. And just quickly on the tax rate, I think in the past you've said 14%. What tax rate should we be using now as we go forward?

Don Adam

On a non-GAAP basis or excluding the special items probably the 12% to 13% range.

Sherri Scribner - Deutsche Bank

Okay. And then I was hoping you'd give a little bit of an update on the medical division. It looks like that did well this quarter and it was up I think you said 7%. Is that improving and are you starting to see more demand in the medical segment?

Gayla Delly

Yes. We are seeing strong growth in medical, and as you pointed out, we did see good growth. So we are very positive on the traction we're getting and the growth of programs in the medical sector.

Sherri Scribner - Deutsche Bank

Okay, great. Thank you.

Gayla Delly

Thank you.

Operator

Thanks. And our next question then comes from the line of Sean Hannan, Needham & Company. Please go ahead.

Gayla Delly

Hi, Sean.

Sean Hannan - Needham & Company

Yes. Thank you. If I can just clarify what I thought I heard earlier, new program wins were 17 and the revenue range was $86 million to $123 million?

Cary Fu

Yes.

Sean Hannan - Needham & Company

Okay. So my next question is then it seems like the average per program, because if you go at the midpoint of that in terms of dollars for the wins, the average per program gets down to about the $6 million range, and is there a way to provide a little bit of color around how to think about these programs and the mix of the new wins?

Cary Fu

It is difficult to quantify the revenue for new programs. Of the 17 programs, those are engineering-related programs, which will lead to eventually some production revenue. But at this point in time, we're not including any production revenue in the projections because we don't have the development done yet. So we can probably give you a little more detail on what is the breakdown. We don't have it in front of us.

Gayla Delly

Yes. Sean, I think you point out something good. We don't have it in front of us right now, but it's probably a valuable piece of information to share.

As we have said over the last couple of years, we have really focused on growing our engineering talent base, and that engineering talent base is beginning to get some very good traction in the design phase. And those wins come in as simply engineering revenue. And until we actually launch the product and get the program win we don't have that in as program revenue. So what we probably need to begin doing is breaking out the number of engineering programs versus the number of production programs involved in that.

So thank you for the comment, but I don't have that ready information in front of me today. But that is what is making the number of programs seem to be larger without seeing the commensurate increase in the revenue base.

Sean Hannan - Needham & Company

Okay. So then I suppose when we look at September, reaching your goals and visibility into your revenues in the last two quarters has been a little challenging and can you help to explain perhaps what gives you the level of confidence in guidance and where are the downside risk is that you may have factored in arriving at these estimates?

Gayla Delly

No doubt when we have missed a quarter like this quarter and going into a softer quarter, we probably approached it with a little bit more of a conservative view. But we have not really changed our approach to it. Probably more the attentiveness to trying to drill through the numbers, understand exactly the information that's being shared with us. Taking into consideration the maturing programs, taking into consideration the ramp that we have scrubbed and try to get to the numbers that are clearly achievable and that we have given guidance accordingly.

Sean Hannan - Needham & Company

Okay. And then lastly, if I can just ask and I'm not sure what the answer might be on this. But when do you expect to become active with this new buyback program?

Cary Fu

Like we said earlier, we'll be initiating the buyback immediately.

Sean Hannan - Needham & Company

I'm sorry. I didn't catch that.

Gayla Delly

We'll begin to take action on it after blackout ends. We'll start enacting on a program similar to the way we did in the last program.

Sean Hannan - Needham & Company

Okay. Thank you very much.

Operator

Great. Thank you. And our next question then comes from the line of Brian Alexander from Raymond James. Please go ahead.

Gayla Delly

Hi, Brian.

Cary Fu

Hi, Brian

Brian Alexander - Raymond James

Gayla, can you just clarify for the programs with the two or three customers that are maturing, are you retaining the customers but just building lower end versions of the previous product, or have those products just gone end of life completely or are you disengaging altogether with the customer because these new products don't meet your profitability thresholds? I'm not sure which of those scenarios you're discussing?

Gayla Delly

We're doing 100% of the production for each of the programs, but the volumes that were expected to be achieved have declined. And so, that's why I indicated earlier I was unclear on how much the current macro environment may be impacting the decision making amongst our customers' customers as to which generation of product they go with. But we're doing 100% of the volume and the volumes are decreasing on those programs.

Brian Alexander - Raymond James

Okay. And then just one follow-up. Can you just talk about your existing capacity situation and the likelihood of any potential facility closings or other asset write-downs? I ask this because your stock is trading at your tangible book and I'm sure investors are wondering how sound the asset base is.

Gayla Delly

We do not have any restructuring plans in place and don't see the need to adjust our footprint. I think we've got a very solid footprint. And in fact, you saw the margin improvement with the change in mix and we continue to see good program wins. So now, its execution and our earnings per share growth we believe demonstrates the ability to perform with the given infrastructure that we have and with the program wins. It's kind of a rebalancing that we have going on. And while we have maintained good, strong customer relations, there's a rebalancing in the product mix. And in some ways I think it's a very healthy thing for us to have undergone and we can see the favorable impact in the operating results.

Brian Alexander - Raymond James

Maybe just one follow-up. On the test and instrumentation segment, you mentioned we're going through a pretty serious correction, I think you said down 40%. What forward-looking metrics do you use or should we use to monitor that segment to determine when that might turnaround?

Gayla Delly

Now that's a tough one. That one I don't think is healthy. I think that one definitely needs a shot in the arm. But I don't have a crystal ball there. We obviously are in constant communication with our customers, trying to understand the marketplace they see. And I believe they would be the first to tell you that what they have seen is probably split out as far as a recovery. I think at one point that was expected to be second half and it's probably going to be first half of next year.

So we don't have a crystal ball there, but again, we are expanding programs there and doing the right thing supporting customers for when their markets recover.

Brian Alexander - Raymond James

Okay. Thanks very much.

Operator

Thank you. And our next question then comes from the line of Steven Fox with Merrill Lynch. Please go ahead.

Steven Fox - Merrill Lynch

Hi, good morning. Just to clarify, in terms of the new program ramp delays, are you saying that its demand related or is it engineering related? I'm just trying to understand further the details. And if you could also talk about what the timeline is for the delays; are we talking months, are we talking a couple of quarters, that would be helpful.

Gayla Delly

When we say delay, it's probably not specific a program delay. It is the velocity to offset the decline in the maturing programs. So I haven't seen programs where they've gotten long in the tooth on the actions by either us or the customers to bring up the new programs. It's that the velocity is not sufficient to offset the maturing program.

Steven Fox - Merrill Lynch

So Gayla, really the program ramps are not that much out of sync with what you would have thought a quarter ago then?

Gayla Delly

No. I mean there's always some slip and slide, but there's not an action pattern that we see out there by any means. There are always some that you expect it here or there, but there's not any activity that indicates that people are truly delaying or canceling or doing anything different. So we aren't seeing that. In fact, we see a lot of activity to do exactly the opposite where NPI is taking the front seat. And in fact, that may be the other factor, the third factor that's impacting maturing programs is that more emphasis by the sales force is probably being put on new programs.

Steven Fox - Merrill Lynch

Okay. That's helpful. And then just one question on the mix, just so I'm clear. The computing mix you mentioned has gotten weaker, but then you mentioned also that the mix should start to improve. Are you saying the mix away from computing and that within computing the mix from here on out stays about where it is? If you could clarify that a little bit that would be helpful.

Gayla Delly

You kind of confused me on your question, but let me try to explain what our view is. So, we do is see our mix amongst and between industry becoming more balanced so that we are not heavily loaded. As you recall, we've been in excess of 50% coming from computing. Within the computing sector we see a greater increase in the high-end computing portion of that sector continuing to grow, we're adding new programs. So, it's volumetrically probably not the same. So as a result, the revenues will come down in dollars and we'll have a better balance amongst and between the industries.

Steven Fox - Merrill Lynch

Okay. Thank you very much.

Gayla Delly

Thanks.

Operator

Thanks. And our next question then comes from the line of Alex Blanton with Ingalls & Snyder. Please go ahead.

Alex Blanton - Ingalls & Snyder

Good morning. I was off for a minute. What is the business that's down 40%?

Gayla Delly

I'm sorry, what?

Alex Blanton - Ingalls & Snyder

You mentioned a business that was down 40% or a market.

Gayla Delly

Test and instrumentation.

Alex Blanton - Ingalls & Snyder

Yes. So that's your particular business, that's not an industry figure?

Gayla Delly

No. Although I would say that you'd probably see the industry, depending on how you capture that basket, it's probably down 40% or greater.

Alex Blanton - Ingalls & Snyder

Are you talking semiconductor equipment?

Gayla Delly

Yes.

Alex Blanton - Ingalls & Snyder

So it really is semiconductor equipment, it's not tests and instrumentation?

Cary Fu

We classify it as the test and instrumentation sector, that's including semi equipment and some other equipment in the business.

Alex Blanton - Ingalls & Snyder

But it's mainly semiconductor equipment?

Cary Fu

That's correct.

Alex Blanton - Ingalls & Snyder

Okay. Because, I mean, clearly the instrumentation business as a business is not down.

Gayla Delly

You are correct. In fact, some of our customers within that segment are seeing good growth. So it is a mixed bag except significant revenue dollars are coming from…

Alex Blanton - Ingalls & Snyder

Okay. Now, some of your competitors have been stressing in recent months because of the increase in energy prices transportation costs, logistics costs and labor costs in Asia that they see customers looking at moving production away from the Asian markets or the Asian production facilities to places that are closer to the end markets. So that is because the logistics and transportation costs are getting too high. Mexico has been mentioned as one of those production facilities that might benefit vis-à-vis China. for example. Can you comment on that? Are you seeing any of that and how does that affect your opening of your plants in China?

Cary Fu

You have to look at the type of product in the market you serve, okay. Yes, there is a higher cost related to labor as well as logistic costs in Asia. But at the same time, the demand for certain products are definitely shifting from the US to Asia; i.e., you look at the semi equipment business, a lot more semi test equipment businesses are moving to Asian sites. So you have been seeing two different forces in the marketplace. One is the product we serve in the US or Europe. If they're heavy, they're very expensive to move around. They tend to be moved back to either Asia or to the US as well as Europe.

So in that transcend you had the benefit in Mexico facility as well as in Eastern European facility. But for the product our increased demand in Asia, we still see those products stay in Asia because they have a benefit of a lower logistics costs, just produce the product in Asia.

Alex Blanton - Ingalls & Snyder

You're talking about products that are produced for use in Asia.

Cary Fu

Sure.

Cary Fu

But I'm referring to products that are produced in Asia for use in say North America or Europe.

Gayla Delly

Yes. You are, in fact, seeing the decision being made for certain of those products to get closer to the end customer base, because, again, when they look at total cost of ownership it makes sense to reduce freight and travel costs, etc.

Cary Fu

And also, as I indicated earlier in answering another question, our China facility is earmarked to be started in Q3 and Q4. The revenue ramps out very quickly and more and more products to be built and serve the China market. So we see a Chinese new facility as critical for continued growth.

Alex Blanton - Ingalls & Snyder

Thank you.

Operator

Thanks. And our next question then comes from the line of Brian White with Collins Stewart.

Cary Fu

Hi, Cary.

Brian White - Collins Stewart

Just on the maturing programs, you're doing the next generation or not?

Cary Fu

We do.

Brian White - Collins Stewart

You do. So I don't understand why that wouldn't make up for what was soft?

Cary Fu

It is the timing of product. And keep in mind we serve a lot of customers. We're not providing all the platforms for any particular customers. So therefore, they maybe have a different platform and the segment on a ship that may be shipped to a different platform and stay with ours. So, did I answer the question right?

Gayla Delly

I think, Brian, although we may be doing a next generation product, as you know, within any customer they have other competing products. And so, then the question is which solution do the end customers select? And as you know, sometimes we are the beneficiary of having "the right programs" and sometimes you're not. But ultimately we do have good, strong customer relationships that are going to continue to attract a subset of their programs and hopefully we'll have a good complement of programs. But at any point in time what you have seen over our history is that the off ramp and on ramp are never quite as efficient as you'd like them to be.

Brian White - Collins Stewart

Okay. And when we look into the September quarter, what type of declines should we expect from computing?

Gayla Delly

We don't forecast or give the revenue breakdown forecast by industry. But I think you've seen the decline and we'd expect that to continue to decline because normally computing is stronger in Q2 and Q4 than it is in Q1 and Q3.

Brian White - Collins Stewart

Okay. So it will decline. In test and instrumentation, is there any hope that that's going to rebound soon or not?

Gayla Delly

I don't think it will for Q3 or Q4, personally.

Cary Fu

We'll look at probably the first part of 2009.

Brian White - Collins Stewart

Okay. And if we just think about this year in terms of the best growing or top two growing markets, what should we think about? Medical being one of them?

Gayla Delly

Medical and industrial controls.

Cary Fu

As well as telecom.

Brian White - Collins Stewart

And telecom. Okay, thanks.

Operator

Thanks. And we do have a question then from the line of Kevin Kessel with JPMorgan.

Kevin Kessel - JPMorgan

Hi, guys. Just a follow-up. Two things. One is, Gayla, I think earlier you mentioned that on the maturing programs you have 100% of the volume?

Gayla Delly

Yes.

Cary Fu

Yes.

Kevin Kessel - JPMorgan

I'm just wondering, is that not inconsistent? I thought that the customer went through this whole process of dual sourcing across all product lines?

Gayla Delly

That was reversed.

Kevin Kessel - JPMorgan

That was reversed, okay. That was reversed, I guess, with no impact, meaning it never got to the programs that were maturing. In other words things didn't go away and then come back?

Gayla Delly

No. The programs were second source and the second sourcing decision was changed. And yes, the volume impacts on the maturing programs are still declining.

Kevin Kessel - JPMorgan

Okay. Now when I'm looking, just to understand I think then what Cary was mentioning or what you were mentioning earlier about the velocity, so you've got a couple of programs from a couple of customers. As they ramp down, you have the next generation of these products but they haven't picked up to the rate that you expected them to and there could be numerous reasons why. And I think you were just suggesting maybe if they have competing products within their platform that are built by others that essentially kind of being maybe out of position that way, not that it's something that you can control per se, but that could be one of the reasons or it could just be that it's just the buying patterns of the end of your customers end customer not deciding to upgrade fast enough and at the same time not investing in the maturing architecture.

Gayla Delly

Correct. And probably the third thing that, again, that we see generationally and computing products specifically is lower ASP, as I pointed out.

Kevin Kessel - JPMorgan

Lower ASP, true. I'm just wondering, to any extent, especially in your computing area, any impact that you can decipher here from the changing chip architectures? I mean, AMD only recently was able to introduce its quad-core chip and then you still have Intel. Your largest customer I know is working with Intel as well and I think that that's still a process that's very much difficult to predict in terms of timing. Could that have any impact on the velocity of how new programs pick up?

Gayla Delly

I don't think we would express that we have the expertise to sufficiently comment on that, Kevin. I think we're one or two steps removed from being able to really determine the impact of that.

Kevin Kessel - JPMorgan

Okay. And then, just lastly, housekeeping. The share count, what's the share count that's being assumed in the third-quarter guidance?

Don Adam

67 million.

Kevin Kessel - JPMorgan

Okay. You guys completed the buyback I guess in the third week or the third week of this quarter, of the September quarter. But that won't have any much of a noticeable impact there on the share count?

Don Adam

No, very small impact.

Kevin Kessel - JPMorgan

It was mostly done by the end of June. And then the blackout you guys mentioned, can you say when that blackout date ends?

Don Adam

Tomorrow. Tomorrow, we can resume Monday.

Cary Fu

The blackout ended on Monday, we can start transactions on Monday.

Kevin Kessel - JPMorgan

On Monday? Okay, guys. Thank you very much.

Operator

Thanks. And we do have a question then from the line of Brian White with Collins Stewart. Please go ahead.

Brian White - Collins Stewart

I want to be clear here on the maturing programs this is two to three programs or two to three customers?

Gayla Delly

Both.

Brian White - Collins Stewart

So it is multiple customers?

Gayla Delly

Yes.

Brian White - Collins Stewart

And if you had to look at demand by storage versus servers, which market appears stronger?

Gayla Delly

I don't look at it that way. I don't know. We have a mix of customers and some of our customers -- I don't have it broken down like that at all, Brian.

Brian White - Collins Stewart

How about the product transitions? Are they predominately server or predominantly storage?

Gayla Delly

I don't have it that way either. We have some customers that I would have to probably step back to say, we put it in the computing sector and I'm not sure where I would draw the line and call them. And so some of the maturing programs are in those product lines that I'm not sure what I'd call them. I know the information I just don't know how to articulate it specifically to something that would be understandable.

Brian White - Collins Stewart

Okay. Well, your biggest customer would be more server, right? I mean, I don't think it's storage?

Gayla Delly

Yeah. But as we said, we've got a portfolio of customers.

Brian White - Collins Stewart

Okay. All right. Thank you.

Operator

Thank you. And at this time then we have no further questions in queue.

Gayla Delly

Thank you, everyone, for joining us today and we'll be in the office for any follow-ups. Have a great day.

Operator

Thank you very much. And ladies and gentlemen, that does conclude our conference for today. Thanks for your participation and for using AT&T's executive teleconference. You may now disconnect.

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