Jabil Inc. (JBL) Q3 2011 Earnings Report, Transcript and Summary

Good afternoon. My name is Lacey, and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter earnings call. [Operator Instructions] Thank you. Ms. Beth Walters, you may begin your conference.

Thank you. Welcome to our third quarter of fiscal 2011 earnings call. Joining me on the call today are President and CEO, Tim Main; and our Chief Financial Officer, Forbes Alexander. This call is being recorded and will be posted for audio playback on the Jabil website, jabil.com, in the Investors section. Our third quarter press release and corresponding webcast with slides are also available on our website. In those slides, you will find the financial information that we covered during this conference call. We ask that you follow our presentation with the slides on the website, beginning with Slide 2 now. During this conference call, we will be making forward-looking statements, including those regarding the anticipated outlook for our business, our currently expected third quarter of fiscal 2011 revenue and earnings results, our long-term outlook for the company and improvements in our operational efficiency and financial performance. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties are identified in our annual report on Form 10-K for the fiscal year ended August 31, 2010, on filing subsequent reports on Form 10-Q and Form 8-K and our other securities filings. Jabil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Today's call will begin with our third quarter results, some comments and highlights from Forbes Alexander on the results, as well as guidance on our fourth quarter of fiscal 2011. Tim Main will then follow with some macroenvironments and Jabil-specific comments about our performance, our model and our current outlook. We will then open it up to questions from all call attendees. I'll now turn the call over to Forbes.

Thank you, Beth, and good afternoon, everyone. I would ask you to refer to Slides 3 and 4. Net revenue for the third quarter was $4.2 billion, an increase of 22.3% on a year-over-year basis. GAAP operating income was $152.5 million. This compares to $96.5 million of GAAP operating income from revenues of $3.5 billion for the same period in the prior year. Core operating income, excluding amortization of intangibles and stock-based compensation, increased 34.8% to $177.8 million and represents 4.2% revenue. This compares to $131.9 million or 3.8% for the same period in the prior year. On a sequential basis, revenue increased 7.6% in the third quarter, while core operating income increased 5.6%. Core diluted earnings per share were $0.58, an increase of 45% over the prior year. Please refer to Slides 5 and 6 where revenue mix and core operating income by each of our segments for the third fiscal quarter. I would also like to remind you that the third fiscal quarter results include a full quarter of results from operations related to the sites we acquired in France and Italy late last quarter. On a comparable sequential basis, these sites impacted the overall gross margin negatively by approximately 15 basis points and core operating income negatively by 20 basis points in the quarter. Let's turn into our segments. Our Diversified Manufacturing Services segment grew 9.4% sequentially. On a yearly basis, this segment grew 44%. Revenue was approximately $1.5 billion, representing 36% total company revenue in the third quarter. Core operating income expanded sequentially by 10 basis points to 6.2% in the quarter. The Enterprise & Infrastructure segment grew 11.8% sequentially. On a yearly basis, this segment grew by 15.5%. Revenue was approximately $1.4 billion and represented 33% of total company revenues in the third quarter. Core operating income was 3.9% of revenue. This segment includes the results of operations of the sites we acquired in France and Italy, which had a negative impact of 50 basis points on core operating income for this segment. Without these operating returns, the segment remains at the high end of our overall operating margin targets. The High Velocity segment increased 1.7% sequentially. On a yearly basis, this segment grew by 10%. Revenue was approximately $1.3 billion, representing 31% of total company revenue in the third quarter. The core operating income was 2.2% of revenue, an expansion of 20 basis points. Our top 10 customers in the quarter accounted for approximately 63% of our revenue. And now I'll ask you to refer to slides 7, 8 and 9, which accompany my commentary on elements of our third quarter operating and balance sheet performance. Selling, general and administration expenses were $134.1 million. It represent 3.2% of revenue. Part of the $12 million sequential increase is associated with the operations we acquired in France and Italy. The balance of costs represent costs started faster than we anticipated to support margin growth across our Diversified Manufacturing Services segment. Research and development costs were $6.5 million in the quarter. Intangibles amortization was $5.2 million, and stock-based compensation was $20.1 million in the quarter. Our net interest expense for the quarter was $26 million, and the tax rate on net core operating income was 15.2%. Our sales cycle in the quarter was consistent with the previous quarter of 11 days, and improved by 5 days from the same period a year ago. Days in inventory decreased by 2 days, while turns remained consistent at 7. Core return on invested capital for the quarter was 28.5%, cash flow from operations was $158.8 million, and cash and cash equivalents were $911.1 million. There are no outstanding balances on our revolver at the end of the third quarter. Depreciation in the quarter was approximately $77.3 million and core EBITDA was $255.1 million or 6% of revenue. Our capital expenditures during the quarter were approximately $113.6 million, as we continue to invest in infrastructure to support the targeted markets and capabilities. Approximately $71 million was associated with our Diversified Manufacturing Services segment, $21 million with Enterprise & Infrastructure, $8 million in High Velocity and $13 million in installation technology and infrastructure. We remain very well-positioned to continue to produce free cash flow within our fourth fiscal quarter and through fiscal '12. And with this in mind, we are pleased to advise that our Board of Directors has authorized the repurchase of up to $200 million worth of common stock during the next 12 months in open market transactions. I'd now like you to refer to Slides 10 and 11. In summary, we are pleased with the results of the third quarter and are extremely well-positioned to meet our overall fiscal '11 goals. In the third quarter, our Diversified Manufacturing Services segment represented 36% of company revenue versus 31% for the same period a year ago. Our overall company core operating income margins have expanded from 3.7% to 4.2% over the same period. Capital investments year-to-date and for the fourth quarter have and shall be focused in the Diversified Manufacturing Services segment. 60% for the full year's capital expenditure investments have been committed to expanding the Diversified Manufacturing Services segment, supporting our stated goals to fundamentally shift the revenue and income profile of the company to provide overall sustainable operating performance and free cash flow generation. I'd now like to provide you with our fourth quarter fiscal 2011 guidance and ask that you refer to Slides 13 and 14. We expect revenue in the fourth quarter on a year-over-year basis to increase by approximately 9% from the range of $4.1 billion to $4.3 billion. The Diversified Manufacturing Services segment is expected to increase by 7% sequentially, with growth across all areas of business in this segment. The Enterprise & Infrastructure group are expected to increase by 3% sequentially despite the ongoing wireless networking product ramps, and our High Velocity segment is expected to decrease 13% sequentially, solely as a result of the late new product introductions and eroding demand from a major Mobility customer. Our core operating income is estimated to be in the range of $165 million to $185 million, core operating margin in the range of 4% to 4.3%, and core earnings per share in the range of $0.52 to $0.60 per diluted share. Selling, general and administrative expenses are estimated to remain at 3.2% revenue in the fourth quarter. We didn't expect selling, general and administrative expenses to move back to 3% of revenue in fiscal 2012. Research and development costs are estimated to be $7 million in the fourth quarter, and tangibles amortizations approximately $5 million; stock-based compensation $20 million; finally interest expense, $26 million in the quarter. Based on the current estimates of production, the tax rate on core operating income in the fourth quarter is expected to be approximately 17%. Our capital expenditures in the fourth quarter are estimated to be approximately $100 million. As I previously noted, a majority of these expenditures are associated with investments in Diversified Manufacturing Services. At this point, I'll hand the call over to Tim Main.

Thank you, Forbes. I'm referring now to Slide 15. The company is exceeding its long-term growth targets since fiscal 2011. We'll post revenue based on the midpoint of our guidance for Q4, revenue of approximately $16.4 billion, roughly a $3 billion growth rate over the previous year. About $500 million of that growth has come in High Velocity, representing about a 10% growth rate year-over-year. $800 million will come from the Enterprise Infrastructure area, representing about an 18% growth rate year-over-year. And looking at the Diversified Manufacturing Services area, healthcare and its mutation should grow year-over-year about 31%, Industrial & Clean Tech about 18%, and Specialized Services, 64%, resulting in overall growth in Diversified Manufacturing Services year-over-year of $1.7 billion or 40%. We're very pleased with this performance. Please move to Slide 16. With this growth in Diversified Manufacturing Services, in particular, the company believes it is differentiated and resulting in a much more sustainable portfolio of businesses. This chart indicates the progression of the percentage of business of the 3 business areas: High Velocity, Enterprise & Infrastructure and Diversified Manufacturing Services over the course of Q1 2010 over the 8-quarter period to the midpoint of guidance for Q4 2011. Our largest segment now and for the past couple of quarters is Diversified Manufacturing Services, which is well on its way to being 45% to 50% of our overall business, and we have a high levels of confidence that this will result in more resilient and sustainable business for our company in future years. Please turn to Slide 17. Let's talk about Diversified Manufacturing Services a little bit further. We believe we're now the premier player in the Diversified Manufacturing Services. Right now, it's that our competitors don't group their businesses this way. We think this is a very rich diversified area for Jabil's differentiation and business model capabilities, and its 33% comp annual growth rates since fiscal 2009, growing to an almost $6 billion business for us in fiscal 2011. On a standalone basis, I think it's interesting to note that on a standalone basis, this would be the fastest-growing business and a top 5 player in terms of the North American EMS industry. So we're very happy with the performance of Diversified Manufacturing Services. There's a lot of questions about how sustainable this is and how differentiated, how can we sustain this type of growth and expectation going forward. Please turn to Slide 18. Let's talk a little bit about differentiation in Diversified Manufacturing Services. In the Materials Technology Group, I think we're uniquely differentiated in materials technology, not only is that helping that part of our business grow at very rapid rates, it's providing excellent synergistic value to targeted markets, such as healthcare and other areas. We believe we're the strongest player in the Aftermarket Services with excellent depth and our capabilities, and we're taking these capabilities and diversifying into new geographies and markets. In Healthcare & Instrumentation, we're well beyond the electronics core in healthcare. We're focused on product development and full systems, and we're really focusing on the high-growth areas of healthcare. It's well beyond the electronics envelope in this business area, and this happens to be a segment where a high mix, high complexity manufacturing is extremely important. And based in our business size and our success here, we believe that our company is the premier high-mix, high-complexity manufacturer. Over 70% of our production is produced in large quantities of less than 100, and that's for the overall business. And it's certainly much higher mix and higher complexity in the Healthcare & Instrumentation segment on its own. In Industrial & Clean Tech, we're early mover in the Clean Tech business and have broad participation in the entire investor and Clean Tech ecosystem, and our intent is to continue to build on that strength. Slide 19. Our number one priority as a company is to deliver excellence in customer service. We think we're making progress in that area in our operational performance. Our scale is advancing in targeted markets. We believing we have differentiated services and capabilities, focused on Lean and productivity. It allows us to continuously reduce costs to a point where our operating margins and EBITDA margins lead the industry. You can see from the chart on the right that from fiscal '09, our core operating margins at 2% this year. We'll run the full year, it will be our -- in the fourth quarter, it will be our fifth consecutive quarter of core operating margins above 4%. And at least, our fourth consecutive quarter of EBITDA margin is above 6%. In essence, with Jabil, you're getting Tier 1 scale, with EBITDA margins at 200 basis points above the Tier 1 bracket, and operating margins that are significantly higher, 50 to 100 basis points higher than our Tier 1 brother. So Tier 1 scale at niche-player margins. Turning to Slide 20, the company is increasing cash generation. This is very important. We believe we're in business to produce cash flow for our shareholders, and we're moving through an inflection point wherein free cash is expected to continue increasing. This free cash flow funds CapEx, acquisitions, dividends and share repurchases, such as we've just -- as Forbes has just talked about. I think it's interesting to compare the 9 months ending 5/31/2011 with the 9 months ended 5/31/2010. Cash flow from operations has increased $380 million from $142 million to $524 million. Our free cash flow has gone from a negative $96 million to a positive $226 million. We're well on the way to producing $1 billion of EBITDA in fiscal 2011 and this is starting to accumulate cash, which allows us to do things like do share repurchases and continue to invest in high-growth areas of our company. Slide 21. The results of an improving portfolio mix, a sustainable business model based on differentiation, free cash flow is beginning to produce shareholder return metrics that I think are enviable. Our GAAP return on equity and GAAP return on invested capital are both in the mid-20s, very consistent with S&P 500 metrics. We do expect free cash flow this year of approximately $330 million based on the midpoint of our Q4 guidance. We will continue to pay approximately $60 million in dividends. I mean, we are in a position where we can fund up to a $200 million share repurchase at our discretion over the next year. Slide 22. When we look at the population of companies that can put up this type of growth in cash flow and earnings over a long period of time, I think it's interesting to compare us to Fortune 500 companies. Our company's IPO was in 1993, and since our first full year as a public company through 2010, we are one of just 5 Fortune 500 companies that have posted a 16-year comp annual growth rate of 25% or better in both revenue, EBITDA and pays regular dividends. We're happy to be in this elite and record-setting group of companies, and it's our intent to continue to run the business to be able to produce those types of results over the next few years. Thank you.

Operator, we're ready to begin the question-and-answer period.

[Operator Instructions] Your first question comes from the line of Matt Sheerin of Stifel, Nicolaus. Matthew Sheerin - Stifel, Nicolaus & Co., Inc.: A question on the High Velocity segment, you did guide that down. Do you expect a negative leverage in kind of what operating margin you're expecting in that group? And I asked that because your margin guidance for it was basically flat, sequentially, if you look at the midpoint, yet mix shift worked in your favor with diversified manufacturing in the E&I Group growing at a faster rate. So I'm trying to figure out what kind of negative impact are you expecting from the High Velocity? And as a follow-on to that, as you look to the November quarter, are you expecting to see that ramp up sequentially again and will that help margins there?

Yes...

[indiscernible] the first part of that question.

Yes, I'll take the first part of the question, in terms of the overall margins for the High Velocity. Actually, we got it done 13% sequentially. So yes, we will see some impact to the margin for that segment, and our targeted range is 2% to 2.5% this quarter, somewhere in the midpoint of that target. So yes, it's going to be towards the lower end, perhaps a little bit below the lower end there, because I should point out, we are seeing some great strengths in our Diversified Manufacturing Services arena of 7% sequential growth, and some nice growth in Enterprise & Infrastructure. So you'll see expansion in terms of contribution of margin of those for Diversified Manufacturing Services, Enterprise & Infrastructure and some declines in High Velocity. But certainly, I'd expect those margins to come back as we move into Q1.

When we look at fiscal Q1, we will be through some very significant roles. We'll be in a more mature state of some very significant programs that are ramping in both Enterprise & Infrastructure and in Healthcare. And we do expect to see significant growth in that Q1 in Diversified Manufacturing Services, probably steady growth in Enterprise & Infrastructure. And we don't see any reason why High Velocity would not exhibit its normal seasonal pattern of high growth in fiscal Q1, excluding the impact of a major mobility customer in the High Velocity area. So we put that together, and we were actually very excited about the prospects for fiscal Q1 and would expect to see margin performance consistent with that. I'm actually pretty pleased that we can get a very, very short-term air pocket and continue to put up 4.2% operating margins. And we've had Japan, we've had the acquisition of the sites in France and Italy, we've had some near-term disruptions from the High Velocity segment, and then the company is still turning pretty good numbers. So I'm actually pretty pleased with it. Matthew Sheerin - Stifel, Nicolaus & Co., Inc.: Okay, great. And then just my quick follow, did you have any 10% customers in the quarter?

Yes, there were 2 10% customers.

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

Yes, Forbes, if I can just start with buyback authorization, that appears to be a change in tone. Historically, the focus has been predominantly on the dividends, as well as may be some M&A. So if you can just talk about the buyback, what that means? And then also as it relates to free cash flow generation you expect going forward?

Sure, in terms of the first part of your question, I want to be clear that in terms of the share repurchase, this is not a signal that we're not actively looking or interested in terms of acquisition, where it makes sense, particularly in the Diversified Manufacturing Services area. And so, that's all intact and part of our overall operating model. We saw a second sequential of some significant cash flow from operations this quarter, free cash flows are being generated year-to-date after capital expenditures and the dividends payment of $45 million, somewhere in the region of $200 million of free cash flow had generated through the 9 months today. As we move into the fourth fiscal quarter, given our sequentially consistent revenue stream at the midpoint of our guidance, we will continue to see some significant free cash flow generation in the fourth fiscal quarter. So as the management team and as our Board, we saw it's appropriate to look at it in a more holistic way capital structure here, and I saw an opportunity to put forward a modest share repurchase and help minimize some of the dilution in terms of the share count as we move forward here. But as we look into fiscal '12, we continue to see significant cash flow generation and allow us to fund internally our growth, be that organically or with some modest investments and acquisitions.

And if I could follow up, Tim, any update in terms of how the Green Point business is tracking to expectations? And then also, any color on just the customer diversification within that business?

It is tracking to expectations, both from a revenue and earnings standpoint and I'm pretty pleased with the level of synergistic value that the Materials Technology Group brings to our other business areas, notably areas like Healthcare and Clean Tech. And we'll continue to press that advantage. And short-term, Craig, I mean, it's tough to claim significant customer diversification in these arbitrary 90-day windows. But I think the path that they're on, they're doing business with some of the best smartphone companies in the world. They are engaged in tablets and the entire ecosystem around Mobility and the Mobility Internet and doing business with the leaders, and that's an indication of the technology they have and the differentiation they can bring those customers. So we'll continue -- we will continue to see customer diversification and the new market during today, and we'll continue to see synergistic value we add to the other target segments, particularly as we get into fiscal 2012.

Your next question comes from the line of Wamsi Mohan of Bank of America.

You're continuing to post very solid year-over-year growth in EMS, but when you look at the percent of revenue, you've been increasing roughly at the rate of about 1 percentage point a quarter, so from 34% on 1Q to 36% here in about 4Q. So at this rate, you'll be somewhat short of your 45% goal for the full year of 2013 unless the pace of those accelerates. So is your expectation that the rate of change in your mix towards DMS will actually accelerate over the next few quarters? And what area within DMS do you think will be the key driver of that acceleration?

Yes, I beg to differ with you on that, Wamsi, because part of the headwind in getting Diversified Manufacturing Services to a higher percentage of overall business in fiscal '11 in the other areas would increase fast, too. Enterprise & Infrastructure will be up 18% for the year. High Velocity will be up 10% for the year, and if they moderate to the long-term growth targets of 5% to 10% and we continue to deliver 20% to 30% growth in Diversified Manufacturing Services, we should end up right about where we sat in the analyst meeting in the first week of May, that by 2013, our Diversified Manufacturing Services would end up at around 45% of our business. And so, I look at it, I think we're on track. We just had a little stronger growth in High Velocity and Enterprise & Infrastructure this year. We'll take that when it comes up, and there's opportunity for us to grow the business. You asked about, particularly, business areas. We're very excited about all 3. I hate to be such a so-nondescript in terms of what areas are stronger than others, but we have great things going on in healthcare. And if you look at the Healthcare & Instrumentation, there's a very significant resumption in growth in that area in the third fiscal quarter. We are investing significantly in that area, both from an SG&A, product development and new program ramp standpoint. Forbes indicated that a little bit. So over the next few years, we're very excited about that business area. That's a tougher area to grow. It takes more investments, more infrastructure, more focus. The individual program wins are tend to be a little bit smaller from a revenue standpoint, and they take a longer time to get into the revenue stream. I think that's consistent with probably the narrative that you heard from some of the other players that have a significant Healthcare business though. So we're very excited about it. It grew 31%. They're expected to grow 31% based on the midpoint of Q4 guidance in 2011 and continue to be excited about 2012 and 2013. Industrial & Healthcare, good growth in 2011 and I expect to get, at least, consistent growth in 2012, 2013. And then Specialized Services, I think it's been such a huge year of growth in Materials Technology Group. I wouldn't expect to double the size of that group again in 2012 and again in 2013, but I expect it to continue to see growth there and we're looking to create opportunities for additional growth in the Aftermarket Services. We think we have a great solution there. We've grown that business strictly organically, and we may turn our attention to ways to accelerate the growth there. So we expect all 3 business areas to contribute, and we feel like we're right on track to have Diversified Manufacturing Services end up at 45% to 50% of our business by the time we get into 2013 timeframe.

Thanks a lot. I appreciate the color there. As a quick follow-up, when you incorporated it within your guidance, is there any impact, a, from Japan and, b, from the recently acquired sites in fiscal fourth quarter guidance?

Yes. I think the negative impact of the sites in Western Europe will be consistent with the third quarter. So there will be continued dilution in Enterprise & Infrastructure associated with that area. We may see margins pick up just a tad, but very consistent with what happened in Q3. And there is a continuing effect from Japan, although that has been incorporated into the guidance.

Your next question comes from the line of Lou Miscioscia of Collins Stewart.

Maybe going back to the SG&A line and the extra $6 million, in the past, you usually turn that into profit pretty quickly. Maybe just a comment about the extra spending there and how quickly you expect to get a return on that?

Yes, as I said in my prepared remarks, from earlier resources associated with ongoing ramps in diversified manufacturing. Tim just mentioned, punching another question, basically, resources in our healthcare. So I would certainly expect that to move into the first fiscal quarter of '12. So let's get through the next 7-year old belief here of the balance for this quarter, and we'd expect to see effectively returns coming from that in the first fiscal quarter, in the November quarter of this calendar year. So very, very quickly, so a little bit ahead of ourselves here, but well-positioned and good growth coming in that first fiscal quarter.

Switching over to Tim, can you maybe just give us some thoughts just what you're seeing out there from an organic demand standpoint? Maybe differentiate a little bit from the new wins that you have had? Obviously, always concerned from investors as to how demand's going to come and play in, and especially I guess over the last month, with a lot of gyrations going on in Europe and a bit here in the U.S., too, in terms with the macro slowing?

Yes, you know what, it's a great question Lou. When I think about the overall macro environment, I mean, just generally a note, I apologize if these statements are so general, if they're worthless. I think they're valuable, GDP growth in our country was 1.9%, I guess, in the first calendar quarter. If I look at demand patterns and the way customers are behaving today, I don't see any big change. And I don't see any big change in Europe, I don't see any big change in North America. I think Asia continues to be relatively robust, Latin America continues to be pretty robust. So I'm not seeing a lot of changes. I mean, we absorbed the kind of deceleration of GDP growth in the developed world over the course of the first calendar quarter. And I don't know of any significant changes to that kind of tone. And if anything, anecdotally, I'd say that people are becoming a little bit more optimistic about late 2011 and prospects in 2012. I know that doesn't quite square with CNN, and particularly Fox, but that's kind of the way that I see it in the real world. So our healthcare demand is good. Instrumentation demand is okay. Industrial Clean Tech and the other areas seem to be good and Diversified Manufacturing Services. Enterprise & Infrastructure is a little bit more of a mixed bag for us. We see very good demand in Storage, and our Telecommunications business seems to be in pretty good shape. And then High Velocity, actually, things are okay. And with the exception of the one business area that Forbes mentioned, everything seems to be tracking as planned. So I think we're in the midst of a slow, somewhat choppy economic recovery that continues to seem sustainable from our vantage point.

And then just one quick follow-up on what you just said on the High Velocity, in the next quarter, do you expect a decent rebound across the board in High Velocity? Because you only talked about normal seasonality and expecting some new programs to sort of ramp up?

I think in terms of fiscal Q4 or fiscal Q1?

Well, Q1.

Yes, so I mean you have to take Q4 for what it is. When we look at fiscal Q1, based on the health of the other areas of High Velocity, we think it's reasonable for investors to expect that our normal seasonal uptick in High Velocity will occur in November quarter, and that quarter would typically be up 15% to 20% in that business area. So if you excluded the Mobility area from High Velocity as an area of concern and uncertainty, the balance of High Velocity, we would expect to see normal seasonal patterns in our November quarter.

Your next question comes from the line of Amit Daryanani of RBC Capital Markets.

Just a question on the DMS margins. Could you start with the performance you had in this quarter and would you've expect the margins I guess to be a little bit better than the 10-basis-point expansion given the revenue growth in the quarter? And then what does it take for the segment to get to the 7% of margins, which is the midpoint of the range?

Right, I think it was up 10 basis points quarter-over-quarter. And I think it's a bit of a justified call out, but the SG&A expenses, we talked about in terms of ramping with healthcare programs and additional. When we provide you operating margins per segment, that's fully allocated. All corporate, all SG&As, all product development resources, I mean the whole thing. So when we overshoot SG&A by $4 million, $5 million, $6 million and a lot of that is because of investments and in target markets, that's going to have a near-term impact to operating margins. So again, I look at it, these 90-day periods, I wouldn't dwell on that entirely. It is up 10 basis points, it is in the target range of 6% to 8%, and we continue to see margin expansion. The Diversified Manufacturing Services will need to see more of the pipeline of activity that we expect, particularly for fiscal '12 to come into the revenue stream and to get into mature levels of production.

Could you get to 7% op margin? Is it a question of just absorbing the cost function that's out there or is it more, do you guys take some internal issues there?

Well, let's talk about whether 6.2% is an issue. We don't believe that's an issue. So there's no need for us to get to 7% operating margins in Diversified Manufacturing Services. Based on the way things are laid out right now, yes, we overshot SG&A. If we hadn't overshot SG&A and made important investments in new programs and new capabilities, then the margins would have been higher in the short term and lower in the long term, with lower growth opportunity. So we're investing in the short term, and that infrastructure will get absorbed as programs that we're winning move into the revenue stream over the course of fiscal '12.

Got it. And then just similar, I guess on the enterprise side of the 50 basis points has been rough because of the European site, is there a timeline on when that gets completely absorbed or that headwind gets taken out? Or should we just recalibrate the longer margins there?

We're going to have to go to work on that. We don't want you to recalibrate your margins expectations long-term because the 4% to 4.5% is a good range. But it's going to be, over the next quarter or 2, it's going to be tough for us to move back into the high end of that range. And we're just going to have to move more business into those sites. We're going to have to find business opportunities for them and create some additional revenue, and we're hard at work on that, plus the business is performing really well, so...

Your next question comes from the line of Brian Alexander of Raymond James. Brian Alexander - Raymond James & Associates, Inc.: Sorry, if I missed this earlier, but what's driving the bigger-than-normal guidance range for revenue and EPS? It sounds like demand is generally good across your segments. Is this really more around the uncertainty in the Mobility segment? Is it more tied to Japan, supply chain issues? Or have you seen some choppiness in the near-term bookings patterns? Then I have a follow-up.

No, we think, given the fact that we're guiding High Velocity down by 13%, I mean we'd like to think that's as conservative as a reasonable person would make it. But there is additional uncertainty because of that. We think we've done an appropriate job of handicapping the full impact of Japan. I wouldn't call that an uncertainty that is -- it gives us a lot of concern. We just think it's a smart time for us to be a little bit more conservative, open up the range a little bit, and given the environment and what you read in the newspaper and everything else, that that's appropriate. And if you look at the guidance ranges of other people in our business or even customers on a percentage basis or anything else, this is not a wide range. Brian Alexander - Raymond James & Associates, Inc.: Okay, and Forbes, I think you mentioned earlier a 3% SG&A ratio for FY '12 that you would target. If I back out the loss from Europe in the third quarter results, I think your gross margins would have been -- I think you said 15 basis points higher. So 7.7%-ish. And I know you don't manage the business to gross margin, but is there any reason you can't sustain that kind of gross margin level for FY '12, given the mix shifts you're seeing in the business? Because obviously, if you did, your operating margins would be up in FY '12 versus FY '11.

Yes, I don't see any reason, Brian, that we can't sustain operating margins in the areas you just discussed. We would expect to see continued overall core operating margin expansion in fiscal '12 over fiscal '11. We're not going to provide guidance today, but certainly, we don't see anything that would prohibit it, in fact, we've seen core operating margin expansion in fiscal '12.

Your next question comes from the line of Sean Hannan of Needham & Company. Sean Hannan - Needham & Company, LLC: So question around the margins in Italy and France, since this is -- we noticed to be a drag and thanks for calling that out, specifically today. What should we be expecting from these regions? I know you gave a little bit of a comment around the next quarter, but is there a specific plan in place around how we drive this to corporate levels and to what extent we can either think of this linearly or how long we might anticipate this?

I think you need to, at least, plan for the next couple of quarters. We have internal plans that are in place. I can't provide you any information at this point on what the progress is, not because I don't want to, just because it's early in the process. Sean Hannan - Needham & Company, LLC: Okay, and then just shifting gears, from a very high level, when you look at what you're doing within your DMS business, is there a way, perhaps, Tim, if you could elaborate on what's some of your more recent learning points have been as you shifted that strategy and how would you characterize the adjustments or that you've needed to make or perhaps that are requiring a more scrutinizing eye in order to reach the goals that you've set forth over the next year or 2?

We have a lot of fun doing it. Of course, you learn a lot as you go along. And I'll answer the question, if I haven't answered the question, you can follow up before we go to the next person. But we're having a lot of fun with it, because we get to doing really nifty products. We're doing new things with capabilities that we haven't had before, and I think one of the things that we've learned is that, that, particularly in areas like healthcare and in such life services. Gosh, sometimes, it takes a different level of infrastructure than the generic EMS industry approach and to really drive the differentiation. It takes investment, it takes better people and a higher level of expertise, and it is common in the industry. And so, that's part of the investments that we're making, particularly in healthcare, part of the big CapEx plan that we've had over the last 12 to 18 months, to build up specialized services. And we're just learning that to talk about differentiation, a lot different than being differentiated, and being differentiated takes a lot of hard work for the big people and really focus investment. And gosh, we're having fun doing that and honing [ph] as we go, and we'll continue to focus on that.

Your next question comes from the line of Steve O'Brien of JPMorgan. Steven O'Brien - JP Morgan Chase & Co: Looking at the HVS, High Velocity margins going into the next couple of quarters, I mean, when we looked back last year with customers here sort of firing on all cylinders and the business was maybe 1% operating margin, how things change now that's allowing Jabil to capture -- it might be slightly below the target range, but still kind of near 2% margin when you have such volatility in certain customers' demands?

So yes, I think we have been happy with the March performance in High Velocity. I will take this one. We've been very happy with the progression and performance in High Velocity, and I think that comes down to a lot of the focus we put on Lean activities and efficiencies in manufacturing. So a lot of effort has gone into that. Basically, for the last year, where this whole High Velocity arena was the low-targeted margins. And as you point out, it's a difficult business to manage for the volatility that one sees in this area. But with the processes we have in place, our real focus in terms of Lean activity and Six Sigma processes, it's bringing it home into the targeted ranges.

We have some great customers in that business area. People tend to focus on the marquee customers and focus on the negative side of volatility, but there's a lot of really great positive things in that business area. Our printing relationship is in great shape, and we do a lot of set-top boxes and point-of-sale systems, and we've actually been pretty pleased with those customer relationships and our ability to execute. So as Forbes said, it's really fundamentally about better execution and not wasting a lot of time and effort on suboptimized relationships in areas of the business that represent waste. So it's primarily an execution, an improvement in execution is responsible for the improvement of almost 100 basis points of margin in that area year-over-year. Steven O'Brien - JP Morgan Chase & Co: So again, next quarter, is the HVS business relying on a real uptick in the third month in August to get to that down 13% sequential and to get to that kind of near-ish 2% margin?

I'm not sure we understand that question. Steven O'Brien - JP Morgan Chase & Co: So is it really back-end loaded quarter for HVS in the fiscal fourth quarter, is that the expectation?

No.

It's a fairly sleepy time in High Velocity. So things are going along pretty well with the exception of the business areas we've already talked about. Steven O'Brien - JP Morgan Chase & Co: And one more quick one, if I could, or maybe not so quick. But inventories, they're up a little bit this quarter. Can you comment on your -- on Jabil's inventory position and then what you're hearing from customers in terms of inventory and if you get any feedback on some distributors who I know have been pointing to elevated inventory?

Jabil grew by $90 million, 2 days out from last quarter sequentially. I think we're about 3% or 4% sequentially, while revenue grew at 8% or 9%. So overall, satisfactory. So from what we do from the management team's perspective, we are targeting 8%, and we're at 7%. So overall, we're okay with the performance. We've taken a couple of days out, as I said. In terms of feedback from customers or suppliers, we're not hearing anything that is any different than they have done over the last 2 or 3 quarters. I think demand patterns we've seen are pretty steady as we move throughout our quarters. Obviously, there will be some seasonality in the Christmas quarter. But otherwise, it does appear to be business as usual. Steven O'Brien - JP Morgan Chase & Co: I should have mentioned the conversion cycle did improve, but thanks.

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

Congratulations to you and your team there at Jabil. Earlier in the conference call, you'd mentioned that you thought it was a good idea to add a bigger range in your sales and EPS. Traditionally, sales has been about $100 million and EPS about $0.04, and now it's $200 million, $0.08 or double that. You thought it might be prudent to do so, is that because visibility has declined or more because of your Mobility issues that are going on with your customers getting delayed? Or exactly, what's the reason about why now we're doing bigger sales in EPS ranges and should we just expect that to be the new norm for Jabil?

Jim, I just have to take exception with this traditionally, we've guided this way. It was a very tight range last quarter, and I don't think this is out of character for Jabil or the industry or indicates any lack of visibility or increasing uncertainty or anything of that type. We know when you guide a business segment down 13% that there's some uncertainty but it is contained in a very, very small area. So I feel like maybe we've been providing guidances too tight. And gosh, why do that in a marketplace like this? No, it has nothing to do with visibility. No, it's got nothing to do with uncertainty. And I would contest the statement that traditionally we've always been at that certain range.

Okay, and indeed, you are accurate, just in the past few quarters and I would concur that you've just been a little tighter with the guidance the past few quarters. And historically, going back further than that, indeed, it is back to what you've kind of given today. So both those statements I think were both accurate. When we think about also tracking towards, you actually opened up the discussion talking about fiscal Q1, about how you expect High Velocity to be more seasonal. One has to ask if one of your customers is missing a little bit of a new population [ph]. Shouldn't that segment actually be stronger than expected in the November quarter?

Stronger than expected in the November quarter?

I think seasonal.

I think we're just acknowledging that this could end up to be a little bit of modeling dilemma. So we're trying to provide some help without providing guidance for fiscal Q1. So we're not providing guidance for fiscal Q1. But if you look at the High Velocity area, and you can do what you want with the Mobility area of High Velocity. I mean, if you'd like to assume that it's going to be better than that in the November quarter because of whatever your reasons are, that's great. I think the main point is that's a high level of uncertainty for us, and the balance of the High Velocity area is actually in very good shape, and we would expect normal seasonal patterns to show up in our November quarter. And we would regard that normal seasonal pattern to be something in the nature of 15% to 20% sequential growth in the High Velocity segment, excluding the uncertainty with the customer you talked about. And when you talk about Enterprise & Infrastructure, not necessarily a seasonal area, but we continue to see some growth there. In Diversified Manufacturing Services, we've seen excellent growth there. No reason to think that growth will slow down. And keep in mind that there is an area of Diversified Manufacturing Services that will probably see a seasonal uptick in the Materials Technology Group. So in any case, that could actually see some acceleration of growth in that area, depending on how other things go.

Your next question comes from the line of Joe Wittine of the Longbow Research.

It's Joe calling for Shawn Harrison. First off, lead times for equipment, have you seen any hiccups there in the supply chain as it relates to the investments you're making in DMS, CNC machines, et cetera?

No, we haven't.

And then, second, kind of going off of what Jim was just speaking about in High Velocity, at this point, it seems like -- and I appreciate the commentary on how the November quarter could trend or, at least, directly could trend right now. Looking on to next year, is it smartest for us to not too get aggressive and model sales, I guess, below or at the bottom end of your long-term target growth rate? It seems like, to just hit that 5% to 10% vote you have over the long term, it's going to be very difficult, at least, for fiscal '12. So am I looking at that business right? How that's talking about guidance too specifically for fiscal '12.

Yes, I think the appropriate way for us to talk about that when we talk about Diversified Manufacturing Services, kind of the midpoint of the long-term target growth range of 20% to 30%, probably the same for Enterprise & Infrastructure of 5% to 10%. And sure, that might be in High Velocity, that might be a little more difficult to be nearer the high end, modeling the low end of that range is probably more appropriate.

Your final question comes from the line of Sherri Scribner of Deutsche Bank.

Tim, with the changes in the business, the way that you're reporting it, I just wanted to get a sense of what you think typical seasonality is in the Enterprise & Infrastructure business and in HVS for the August and the November quarter?

The August guidance we've given you, so that's what we would typically see, this is anecdotal. I'm not going to quote 4, 5 years of numbers. If you go back a few years, Sherri, and you're in the Great Recession, so everything is kind of distorted by cycles of 10s [ph], but we would typically not see much of a seasonal increase in High Velocity or Enterprise & Infrastructure in the August quarter or the November quarter. So we've already made some comments about the November quarter for actually all 3 business areas. Normal seasonal patterns in the Consumer Electronics area for us is, we would think, in the 15% to 20% range in the November quarter. Not much of it is seasonal impact on Enterprise & Infrastructure, and Diversified Manufacturing Services tends to be pretty steady. Again, in Diversified Manufacturing Services and the Materials Technology Group, there is some reason to think that the November quarter would be seasonally stronger because of the business mix there. So Diversified Manufacturing Services should be pretty consistent.

Okay, so when I put that together, it sounds like the guidance that you're giving for the August quarter is relatively in line with typical seasonality for you in E&I and HVS other than the product delays with one of your big customers. Is that the way that we should think about it?

That's correct.

And then looking at the buyback, I don't know if you had mentioned earlier, but do you have plans for how quickly you expect to do that buyback. That's something you want to do relatively soon? Or is that something that will be spread out over the year?

The authorizations open for a year, but we will certainly take a view on that in the next week or so. But I would expect to see some activity here as we move forward in this quarter.

Okay. Thank you, everyone, for joining us on the conference call today. And as you usual, we'll be available for any follow-up questions for investors or analysts throughout the week. Thank you.

This does conclude today's conference call. You may now disconnect.