Sanmina Corporation (SANM) Q2 2011 Earnings Report, Transcript and Summary

Good afternoon. My name is Kristin, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Sanmina-SCI Second Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] Ms. Bombino, you may begin your conference.

Thank you, Kristin. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's Second Quarter Fiscal 2011 Earnings Call. A copy of today's release is available at www.sanmina-sci.com in the Investor Relations section. You can follow along with our prepared remarks and the slides posted on our website. Please turn to Slide 2, the Safe Harbor Statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operation may differ significantly as a result of various factors, including the state of the economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change. We refer you to our quarterly and annual reports filed with the Securities & Exchange Commission. These documents contain and identify important factors that could cause actual results to differ materially from our projections or forward-looking statements. You'll note in our press release issued today that we have provided you with statements of operation for the 3 months ended April 2, 2011 on a GAAP basis as well certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also available in our press release and is posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense and other infrequent or unusual items to the extent material. Any comments we make on this call as they relate to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to our gross profit, gross margin, operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP information. I would now like to turn the call over to Jure Sola, Chairman and Chief Executive Officer.

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome to our second quarter earnings call. Thank you again for being here today with us. Also joining me on this conference call today is Bob Eulau, our Chief Financial Officer.

Good afternoon, everyone.

On today's agenda, we'll have that Bob will review our financial results for the second quarter of fiscal year 2011. Then I will follow with additional comments relative to our results and future goals. Then Bob and I will open this conference call for question and answers. And now I'd like to turn this call over to Bob. Bob?

Thanks, Jure, and thanks again, everyone, for joining us today on the call. Please turn to Slide 3. Overall, the second quarter and particularly the last few weeks of the quarter were very challenging for the reasons we discussed in our March 17th conference call. Revenue of $1.57 billion was down 6% on a sequential basis and up 3% over the second quarter last year. This was in the range of our revised guidance of $1.56 billion to $1.6 billion. Our gross margin came in at 7.5%, which is down 30 basis points from the first quarter. This was below what we had planned at the beginning of the quarter, primarily due to our inability to quickly reduce costs in line with the revenue reduction and the mix of business with the revenue decline. Operating margin declined 80 basis points from last quarter, to 3.4%. The decline in operating margin was impacted by increased operating expenses from a low Q1 number combined with the decline in revenue. Non-GAAP earnings per share was $0.30. This was based on 83.9 million shares outstanding on a fully diluted basis. Non-GAAP EPS was in the range of our revised guidance, which we communicated in March. Finally, cash generation was very strong in this quarter, with cash up $106 million over the prior quarter. Please turn to Slide 4. Revenue was down 6%, or $93 million, from Q1 to $1.57 billion. I'll now make a few comments on the GAAP numbers. For the second quarter, we reported a GAAP net income of approximately $13 million, which results in earnings per share of $0.16. This is down from Q1 and up from last year. Restructuring costs totaled $4 million in Q2. Looking forward, we will continue to see some minimal restructuring expenses on our GAAP P&L of approximately $3 million to $4 million per quarter that relate to costs for past restructuring actions that are booked as incurred in accordance with GAAP. These expenses primarily relate to real estate which is being held for sale. We expect these expenses to decline over time as properties are sold. These properties are listed on the market at over $125 million. My remaining comments will focus on the non-GAAP financials for the second quarter. At $117 million, gross profit was down 9% from the prior quarter. Gross margin came in at 7.5%, which was 30 basis points below the previous quarter. Gross margin did not meet our expectations. As the quarter progressed, the challenges became more broad-based. Revenue declined in all market segments, and when we exclude the Components business, the mix was also poor. From a gross margin perspective, the one bright spot for the quarter was component gross margin, which was above the corporate average and the highest level it has been in several years. All the areas of the Components business recorded sequential progress in gross margin. Operating expenses were up $3.9 million for the quarter at $63.9 million. This is in line with what we had expected. You may recall that last quarter, operating expenses were abnormally low. In the first quarter, operating expenses were down primarily from a change in estimate for bonus expenses that had been previously accrued. At $53.3 million, operating income declined by 23% from the prior quarter. Operating margin was 3.4%, which was a 80-basis-point sequential decline. The tax rate for the quarter came in at 16% of pretax income, which is also in line with what we had expected. Based on our current profit mix assumptions for FY '11, we believe that our FY '11 tax rate will be in the range of 15% to 17%. On a non-GAAP basis, we earned $24.9 million in net income. Please turn to Slide 5. Here we are showing you some of our key non-GAAP P&L metrics. While we had expected revenue in the first half to be sluggish, Q2 was much worse than we had anticipated at the beginning of the quarter. As we expected, revenue growth has slowed in the last couple of quarters after very strong growth last year. But nonetheless, our first half revenue was up 7% over our last year's first half. After improving dramatically in the second half of our last fiscal year, gross profit has not met our expectations. Operating expenses were up 1% from the second quarter last year. With relatively flat operating expense and a 2% decline in gross profit, operating profit declined by 5% since the second quarter of last year. During the last year, operating margin has declined from 3.7% to 3.4%. EBITDA was up 1% over Q2 last year. Our EBITDA for the second quarter was $77 million and our EBITDA margin was 4.9% for the second quarter. For modeling purposes, I want to mention that the depreciation and amortization were $25 million for the quarter. I'd like to turn your attention to the balance sheet on Slide 6. Our cash and cash equivalents were $655 million. Cash was up $106 million from the previous quarter for several reasons, which I'll come back to in a moment. Accounts receivable improved by $37 million, mostly due to lower revenue levels and strong collections. Inventory declined for the third quarter in a row by about $13 million. Accounts payable increased by $15 million for the quarter, which is primarily due to better linearity in material purchases. Let's turn to Slide 7 to discuss some of the balance sheet metrics. Our cash position remains strong given our potential cash needs. The increase in cash this quarter is largely attributable to accounts receivable. Collections were outstanding for the quarter. Cash balances were also helped by lower inventory, increased accounts payable and a reduction in restricted cash. Cash flow from operations was $107 million and net capital expenditures were $18 million for the quarter. The net capital expenditures included $3 million in asset sales during the quarter. This led to $88 million in free cash flow. Inventory remained the key focus. Inventory declined for the third quarter in a row, but our inventory turns declined to 7 due to our unexpectedly lower revenue level. Our goal is to see solid improvement next quarter, at least to the level we have seen in recent quarters. In the lower-left quadrant, we are showing cash cycle days, which combine our cycle time for inventory, accounts receivable and accounts payable. Inventory days were up 2 days when compared to last quarter, at 51.9. We saw an increase in accounts receivable days sales outstanding from 54.7 days to 56.4 days. This was primarily driven by unfavorable revenue linearity and term changes. Past-due AR was excellent. As I mentioned earlier, accounts payable was slightly favorable as days payable outstanding increased from 52.4 to 53.2 days. Overall, cash cycle time increased from 52.2 days last quarter to 55.2 days. Finally, ROIC was 12.7% for the quarter. This was adversely impacted by the reduction in our net operating margin. We don't like to have this measure decline, but it is still above our cost of capital. We expect ROIC to improve over the next few quarters. Please turn to Slide 8. I would now like to share with you our guidance for the third fiscal quarter. Our view is that revenue will be in the range of $1.6 billion to $1.7 billion. We expect that gross margin will be in the range of 7.5% to 7.9%, with operating expense in the $66 million range. The increase in operating expense is primarily the result of increased investment in R&D and sales. This leads to an operating margin in the range of 3.5% to 3.9%. Assuming no foreign exchange surprises, we expect that other income and expense to be in the range of $26 million to $27 million. We expect the tax rate to remain in the range of 15% to 17%, and we expect our fully diluted share count to be in the range of 83 to 84 million shares. When you consider all of this guidance, we believe that we will end up in the range of $0.33 to $0.37 per share. Finally, for your cash flow modeling, we expect that capital expense will be in the range of $30 million to $35 million, while depreciation and amortization will be around $25 million. In summary, this was a very challenging quarter. But based on the visibility we have today, we should produce better results for the rest of the fiscal year. At this point, I'll turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks, Bob. Again, good afternoon, ladies and gentlemen. As Bob mentioned, I'd like to make a couple of comments relative to our results and also review our revenue breakdown by end markets for second quarter fiscal year 2011, and also I will give you a forecast for the third quarter of fiscal year 2011 by markets. And then I'll talk a little bit about our business environment for third quarter and also what we see today for the rest of the calendar year 2011. Approximately 90 days ago, we had a call like this, and I told you at that time that our fiscal year 2011 revenue growth is going to be flat first six months. And also I told you that the second half, we expect revenue to move in the right direction to have a nice growth. As you know today, and as Bob mentioned, our second quarter results came in below our estimates. Again, mainly affected by weaker demand across all markets, but significant impact came from Communication Networks and Aerospace and Defense market. Again, I am personally very disappointed in our revenue and margin performance for the second quarter fiscal year 2011. And at the same time, there was really no time to adjust for a big demand. On a positive side, today, we can still tell you that the demand is starting to improve, and we believe today that the second half of fiscal year 2011 will be stronger than the first half. As Bob mentioned, our outlook for the third quarter of fiscal year 2011 looks better, and based on our customer forecast, what we see today, we expect to see improving business environment for the rest of the calendar year 2011. Now, I would like you to turn to Slide #9. On this slide, you should see a revenue breakdown by end markets. I can tell you that we have 1 customer that is at 10% of our revenue. That customer came from Communication Networks. And also, I can tell you that our top 10 customers represented 49% of our revenue. Now let me talk to you a little bit more by the markets itself. Communication Networks, which includes the networking, wireline and wireless infrastructure, is the largest part of our business that represented 47.2% in our second quarter. Also beginning of the quarter, we did forecast to you at that time that Communication Networks will be kind of flat, slightly down. Actual results came down 7.2%. This weakness came across, basically, most of our Communication Networks customers. But at the same time, I can tell you this market, when you measure it on year-to-date, grew approximately 49%. So we're still very strong position in this Communication Networks. Communication Networks going forward, we're forecasting third quarter to be up. Basically, we expect a stronger growth and is to be improve across all the segments of networking, wireline and wireless infrastructure. Also in this market, we are well positioned with diversified customer base to end products. Our networking and wireless infrastructure group should do really well, especially being driven by the latest technology demand for optical 3G and 4G infrastructure. I can also tell you that we are winning new business around the world on the new projects in this Communication Networks. The next segment that I like to talk to you about is Enterprise Computing & Storage. That represented 13.5% of the revenue. We also forecasted last quarter that market to be flat. Offshore results came down. The market came down for us 5.1% on a quarterly basis. Basically, that was driven that the new programs that we have started to ship but did not ship as much as we expected at the beginning of the quarter. As we look at the forecast for this market for next quarter, we see this business slightly up, driven mainly by these new programs that we have in place. Also, Sanmina ODM product in the storage side, here again, our new programs should revive the growth for us in this segment. Now let's go to Industrial Defense and Medical, which represented 25.5% of our revenue. We also forecasted that market to be flat-up, slightly up. Actual results came slightly down, around 2%. I can tell you that Industrial and Medical were strong, that was up. But Aerospace and Defense business were disappointing for us. As we look at in the third quarter, Industrial, Defense and Medical as a group, we're forecasting to be up. And basically, demand for all the segments should improve, including Aerospace and Defense segments, but in the short term, I just want to make a note here that we have some significant uncertainty in Aerospace and Defense industry. I think in the long term, we believe that we are well positioned in Aerospace and Defense markets, and we expect to see good margins and growth contribution in the future. The rest of the segments in this group, Medical, industrial, semiconductor, clean technology, should continue to grow nicely in the third quarter, and we should see -- continually see nice improvement for the rest of the calendar year. The last group is Multimedia. That represented 13.8% of our revenue. We also did forecast that group to be flat. Actual results, that group came down 7%. In that group, automotive did well. The demand was very strong. Other segments were down. Demand was weak, and we did not expect this recovery to go up until the third quarter, which is this quarter we are right now. So as of today, we are forecasting third quarter also to be up for Multimedia, to improve slightly, and we also believe that the forecast are showing us today that we should see some improvement for the rest of the calendar year. Now let me talk to you more about our business environment that we are operating in today for the third quarter and also talk a little bit about visibility for fiscal year 2011. In the short term, demand and visibility is improving. And we believe this should continue for the rest of the calendar year 2011. We have some few major customers that their demand for their products in the last six months was very weak. With the same customers, we're starting to see a recovery especially in the next 2 to 3 quarters. So we expect to see a higher demand from these customers. We also continue to renew projects with our key customers as we are continuing to invest in even a bigger partnership with these key customers for our future growth. During the quarter, we did expand our customer base, and we won some new projects with existing and new customers. The key to our success is driving our business mix. We believe this should help us drive our sustainable margin improvements for many years to come. Bookings for the second quarter 2011 were also positive, 1.03:1. Our customer relationships are strong and improving as we are delivering better solution and experience for our customers. Now what I'd like to do is talk to you a little bit about our new management structure. As we reported to you on March 17, 2011, that our Chief Operating Officer left the company. Going forward, I personally now will be more involved running our business, and again, based on what I have seen in the last 2, 3 weeks, it's becoming a lot more exciting because we have a lot of opportunities, and I'm really excited to lead this team again. We have a strong and experienced management team in place. First, our company has a bright future. Also, we keep our structure pretty simple: number 1, we're going to empower our management, give them more authority over decision-making; number 2, we're going to restore the sense of urgency, growth and innovation; and number 3, management to deliver consistent and predictable results. When I'm talking about simple structure, we basically have a business development organization that is responsible for business development, marketing; and then we have a technology components group, which includes Printed Circuit Boards, mechanical system and so on; core EMS; then we have products and services and then aftermarket services. I am very confident in our management team and in these leaders. These leaders have been with the company for many years. Our average tender with most of these managers being over 15 years, looking forward working with them. So in summary, second quarter fiscal year 2011 from revenue and margin results point of view, we are disappointed. On a positive side, we had a few positive things, as Bob mentioned. And I just want to add to that, we won some new customers, we generate cash, our component gross margin improved and we're starting to see nice improvement for third quarter, and we believe that forecast, what we see today, are looking good for the rest of the calendar year 2011. Our strategy is in place, and I believe the company is in a great position. It's the best position we've been in the last 10 years. For us, it's all about the growth now. We are focusing and providing leading-edge technology and business solution to our customers and our partners. This is what we're investing time and money. And we'll going to continue to focus driving sustainable growth and margin expansion. We're trying to pick up the businesses that will give us that and the businesses that will be with us for many years to come. We also have a lot of new opportunities in front of us, which are very exciting. So with that, I would like to now say thanks for all of you and your support and your time you spend with us today. I would also like to say thanks to our employees for their hard work, their dedication and support to us. And now, Operator, we are now ready to open this line for question and answers. Thank you again.

[Operator Instructions] Your first question is from Craig Hettenbach with Goldman Sachs.

Given the unexpected setback last quarter, can you just talk about some of the things that gives you the confidence of the resumption and growth this quarter, whether it's firm bookings from customers or any particular end-market growth drivers?

Well, number 1, I would say that the backlog is solid. We're hoping that what happened last quarter was a bump in the road. We had a few customers that demand basically stopped. And we believe the demand for those customers is back. And we talked to these customers in details about these projects, so we're pretty optimistic what's in front of us right now, and that's 1. The second thing, we got a lot of new programs in our pipeline that, as the time goes on, should benefit us a lot more than what we had in the second quarter. I think our overall customer base has continued to expand. And also, some of these new products that we've been introducing to the market and really being focused on, I believe, that's going to help our growth and, most importantly, margin expansion. When I look at those things together, I believe they add up to a lot more confidence.

And just on those new program ramps, are they weighted towards any particular end market?

Well, definitely, Communication Networks for us is still a very, very strong group, and we got some really good programs that we've been working on, and we expect those to move in the right direction. As I mentioned, the enterprise computing, that market for us has been kind of on decline for almost a year, but we believe that we have enough programs in place to revive that market again. Industrial side is pretty strong. Medical, we have a lot of programs and I talked about that even last quarter. Some of those programs are maybe moving slower, but definitely, as time goes on, I expect these programs to move at a faster rate. So yes, it was a tough quarter from a revenue point of view, but from a business development, from the new opportunities that we have, it was a very positive quarter.

Okay and for my follow-up, can you talk about the impact post-Japan, just what you're hearing from customers and suppliers on both the component as well as EMS side?

Yes. Craig, I personally spent a lot of time talking to our top customers regarding Japan, and let me tell you we're working very close. Our supply chain basically gives us a report for that on daily/weekly basis. So in the short term, we don't see major impact. I think we're scrambling. We're finding a way to get these critical parts in the short term. The longer term, we're still analyzing that together with our customers. We are concerned on certain part numbers that could affect us, especially as we go into the fourth quarter or even the first quarter of next year. So we are really working very close to our customers to minimize the impact, especially the longer term impact. There's still lot of unknowns there to really be able to be an expert on this, but we are following it very, very close.

Okay. And then last one if I could, Bob, just the comments on the component gross margin sounded positive, highest level in a few years. Can you talk about what's driving that in the sustainability there?

Yes. So I think really what happened is those businesses have always had high contribution margin. Last quarter, we struggled because the revenue went down. This quarter, revenue came back a bit, gave us a lot of wind in our sails. And as I mentioned, across the board we showed sequential improvement in gross margin. We had very strong contribution margin in the components areas. And the key for us there, as I've said before, is just to continue to make sequential progress. We're not going to turn around overnight, but we're encouraged by this quarter.

Just add to that, still a lot of work. A lot of positive news, but we're not there where we need to be.

Okay, thank you.

Your next question is from Wamsi Mohan with Bank of America Merrill Lynch.

Yes, thank you. Have the order patterns in Defense started to improve yet? And what are you baking in your guidance with respect to the Defense program that you alluded to in your March call? It appears you are not baking in much, given the margin guidance, but could you maybe give us some color with respect to that?

Yes, Wamsi, this is Jure. Let me add a little bit to that, and Bob, you're welcome to add to it. First of all, as I said, we still have a fair amount of certainty there because of the budgets and so on. On a positive side, the projects that were completely on hold 3, 4 weeks ago, they started to take some of that product, and they'll continue to take some of the product in the March -- I'm sorry, in the third quarter here. But not at the level that we were hoping for. But at the same time, we've been investing a lot more into this business. We are a lot more focused. So we have a lot of opportunities as this budget stabilizes. I think we are involved in a very critical type of our products that we think the longer term will have a demand for our products. And we really want to grow that side of the business, because that's the most profitable part of our business that we have. And we are putting a major effort to grow that at a faster rate. But I think in the short term, we're not that -- too optimistic, let's put it that way, especially when I'm talking short term next 3, 4 months. Bob?

I think that was pretty accurate. I mean we're expecting some modest improvement in the third fiscal quarter. We did get 1 incremental order between our pre-announcement in the end of last quarter, so that gave us some confidence there. But we're really not expecting things to get significantly better until fourth quarter or first quarter. We think the next big issue is going to be the [indiscernible], and we're worried that things will slow down in Washington again in advance of that issue. So we're going to be pretty cautious through the summer on the Defense side.

Okay, thanks, that's helpful. And then on the Communication Networks side, down 7% sequentially. It sounded from your comments today that it was more demand-related and quite broad-based, but on the pre-announcement call, you had spoken about some limited ability to ship because of the strike that you had. Could you sort of maybe share how much of this was inability to ship any product versus what was end-market slowdown? And when did you really see start to see that slowdown?

Yes. Well, first of all, when we had that call, we still have our strike in India going on. We had a few people that came back at that time, but then basically a few days after that, that was settled, behind us. And most importantly, I think we have, hopefully, no major issues going forward, that's everything we know. I think we're on a very stable ground. We're able to make up a fair amount of that stuff. So there was some impact. It was really -- the biggest impact was in our customer. And because we missed some shipments to them, so that was very disappointing, and we worked around the clock to make up on that. It costs us extra money to catch up. So it did make an impact on the bottom line, because we spent a lot more that we did not recover from the customer, because it was in our fault, so -- but addition to other stuff, the whole telecom customer base especially, we talked in that call about optical type of product. These are all the leading-edge type of products we had a delay in shipments. But on a positive side, we think a lot of the demand is starting to come back, and hopefully, we'll see a lot of that in Q3.

And so, Jure, just to clarify, the optical orders have picked up and the inventory correction is done in your opinion?

Well I don't know if it's all inventory -- correction is all done yet, because we have a wide optical type of -- all the way from networking side of the product or a few optical components product. On the critical components, we still see some shortages out there, but on our off-the-shelf type of products, there's still inventory out there. We're hoping by sometime this quarter that things will work out.

Okay, thanks a lot.

Your next question is from Jim Suva with Citi.

Thank you. A quick question, Jure, when you look at Q2, can you tell us, really, do you feel like demand has rebounded? Or is it simply because that fiscal Q2 was so disappointing, and it just feels better?

No. Well I think for us, it's the real orders are better. Because the orders that we had originally in the forecast basically were pushed out. So you can see the -- if you look at the real demand, what customers are pulling today and what they're trying to pull the rest of the quarter and also what they're telling us they're going to do in the fourth quarter. So you got to look at kind of both quarters to really see, is this a real or, just like you said, is a feel better. I will say the real demand is up.

Okay, Jure, then just a follow-up. If, indeed, these new orders are now coming through in the June quarter, one would expect your June quarter guidance to be materially higher than seasonal. And it looks like it's more in line with seasonal. Can you help us bridge that?

Well, I think there's other businesses that are not doing as well as they wanted to. We can't just look at the Communication Networks. So I would say that the guidance that we have in there, we feel, at this time, very comfortable with, and hopefully, we can do more. But really, we need more time to be able to send a message out there. But things are looking good -- better, and I think, I think, especially when you look at into the fourth quarter, the forecast is starting to improve.

You may notice, Jim, we put a larger-than-normal range out there, $1.6 billion to $1.7 billion, and that's because we do think there's a fair amount of uncertainty here. We've talked about some of that already, including the Defense side, the -- what's going on in terms of the communications market, et cetera. So we still think there's a lot of potential this quarter, but we're putting a wide range out there.

Okay. And my last clarification point. In the past you've been very confident about gross margins of 10% and operating margins of 6%. Given all the changing factors and the push-outs and things, is it fair to say that that's now kind of off the table?

Well, I would say that our long-term strategy is as we're building the business, we'll building it to that model. In the short term, basically what I said about 6, 4 months ago, 6 months ago, that our goal is still to get operating margin in December quarter around 5%. That was driven, a lot of it, on our Defense and Aerospace business. If Defense and Aerospace business doesn't come in, that will be more difficult. But I just want to make sure that we're not backing off from our long-term strategy and the way we are building our company and we're investing in the project that should allowed us to eventually deliver the margins that are better than industry average and they're sustainable long term. So that's why it's important we continue to improve our Component businesses and also some of these products that we're introducing, including memory module and solid-state drive, storage products, our ODM storage product, our optical product and, again, our Defense and Aerospace product. Those are the product that will allowed us to go over that goals that, that is out there for us.

Great. Thank you very much, gentlemen.

Next question is from Sherri Scribner with Deutsche Bank.

Hi, thank you. I just wanted to dig in to the gross margin this quarter. It's a little bit of a disappointment and also for the guidance. Just thinking about the gross margin, I mean, comparing it year-over-year, you had similar revenue levels. You probably did a little bit better on revenue this quarter versus last year, and yet the gross margin's down about 30 basis points despite the fact that you did about the same level of business in the Industrial segment and also you improved the Components business. So I'm trying to understand where that disconnect is coming from and why the gross margins were so weak.

Yes, this is Bob. I'll take the question. The margin was down primarily for the reasons I mentioned in my prepared remarks. The revenue decline was, obviously, sharper than we had expected. We did forecast some revenue decline this quarter, but it was more severe. And so we really were not able to reduce costs as quickly as we otherwise would have, so that hurt us from a margin standpoint. And then the second factor is really mix. And the Defense business is very high-margin business for us, and so when it's declining, and it's certainly declined year-over-year, it has a pretty pronounced effect on our gross margin.

Okay. So would you attribute -- so it sounds like a decent amount of that is related to the Defense business?

It's a combination of those 2, I'd say it's the revenue decline and then, broadly speaking, mix, with Defense being a big factor in the mix.

Have you brought expenses into the business model over the past year that you weren't able to sort of ramp down because of the revenue miss?

Well, we were operating 2 quarters ago at a $100-million-higher number per quarter. So yes, we brought some spending ends, and we can make the proper corrections, as you know. I mean, now we're forecasting to be back up again in the third quarter, so we think we'll be able to cover that.

Okay. And then I felt like I heard you say that the demand worsened at the end of the quarter, and that would've been after you had the conference call in the middle of March. Is that correct? Did you see things worsen, and have things improved since then? It sounds like you're saying they have, but just trying to understand that comment.

Well, I mean, we normally see quite a bit of strength at the end of the quarter, and I would say it was a little softer than we normally have right at the end of the quarter. But again, we believe that we're off to a reasonable start here in Q3.

And that's one of the reasons we pre-announced.

Right, but it seems like your comment was related to after you pre-announced, that it's weakened at the end of the quarter before you closed the quarter. That's what I was trying to understand.

It might have been a little more broad-based than what we talked about in the pre-announcement, but the softness was already emerging at that point.

Okay, great. Thank you.

Your next question is from Louis Miscioscia with Collins Stewart.

I'd like to ask you about the ODM business. If we go back a couple of years when you had a new ISYS [ph], that didn't work out. How are you actually running that? I mean, are you getting paid for it up front? Just given that it is a tough business to compete with some of the really big OEMs out there.

Yes, well, first of all, we are creating, we've created a special group that has now been functioning for almost 2, 3 years. And we've been producing the product where is the customer pays for design, so it's a joint design where we guarantee manufacturing, but you get a lot better margins. And we are also selling our own box directly to end users. These are all high-end storage products, so there's a fair amount of customization that goes into these boxes. You're right. It's a competitive, but definitely, it's a lot better business than a pure EMS business.

Okay, and could you describe the profitability for that? Because customers are co-designed to --

Well I think in any type of products that we have, anything less than 20% margin for us is not acceptable. Because you got to pay for R&D on that.

So they pay for the R&D up front on that?

It depends on the project. Some customers, yes. Some customers don't.

Okay. Switching over to -- it sounded, obviously, like the Component business was better. But any worry about rising price for Commodities when you look at that business, which can very often hit profitability?

Yes, well, actually, that probably hurt us in the last quarter. We're trying to do a lot better job and communicate that, because, as you know, Commodities been raising like crazy, and I'm questioning if we are getting back to our customers quick enough. I think our system right now is better than it was 90 days ago, to make sure that we get back to our customers immediately on these things. So we are very concerned. A lot of attention is now paid to that.

Okay, good luck getting back on track.

Our next question is from Christian Schwab with Craig-Hallum Capital.

As we look at the segment breakdown, I'm just looking for just a little bit more clarity in your conviction of strength this quarter and strength throughout the rest of the year. I think -- and thank you for all the detail on the segments and kind of highlighting how you did miss your initial forecast for every segment of the business. As we look to Q3, is it the bookings number that you highlighted being above 1 that gives you into the -- gives you greater conviction as a strength, the new programs where the initial orders have come? Is it recovery and the leading customers in each of those divisions? Just a little bit more clarity on that if you have it would be great.

Yes. First of all, as you know, the bookings were slightly positive. We had a fair amount of bookings came in end of the quarter. So overall, I think we're happy what we won and, most importantly, we got the programs that we were planning to win, and these are the right programs. I think number 1 to that, let me make it more clear, if I wasn't clear earlier, is that our backlog, it's there, and most importantly is that our customers are a lot more, how do I say, confident about their end demand. So when you look at these customers, we look at the third quarter, and also we're looking at the fourth quarter. In both of these cases, you can see there's a nice continuity going on from today to third quarter into the fourth quarter. So that confidence is there better than before. And also some of these new programs that we have, we expect them to start be shipping more in the third and fourth quarter than what we had in the second quarter.

That's great. No other questions. Thanks.

Your next question is from Sean Hannan with Needham & Company. Sean Hannan - Needham & Company, LLC: So, Jure, separate from your outlook on your programs already under your belt, you talked a little bit around some of the expectations around the remainder of the year just directionally. But if we can talk about the new business environment and basically the business opportunities versus, say, a quarter or 2 ago, can you provide perhaps a little bit of color, again, on a relative basis, what is it that you're seeing in terms of new business bookings for 1 segment versus another? Where are we seeing some relative strength at least emerge incrementally?

Yes, as I mentioned earlier in my prepared statement, in our Communication Networks, last quarter was 47% of our revenue, that's the biggest part of the market that we are involved. I believe we're well positioned and we won some good new programs in there, and most importantly, I think demand for our key players, or key customers, I should say in that group, it seem like to stabilize it, and we expect it to improve. There's a lot of demand for a new technology, both from optical, some old 3G, which still depends what parts of the world people use a lot, been install a lot, and then, as we're going to the 4G, the good thing is that we are well positioned with all the leaders in those programs. And we believe that Communication Networks will expand nicely for the rest of this calendar year, and we should benefit nicely from that. So that's the biggest group. As I mentioned on our Enterprise Computing & Storage, I think we got a fair amount of new programs. We'll see how those things work. We are in the short term expecting those likely to be up on a quarterly basis. I think on Industrial, Defense and Medical, again, Industrial and Medical, which includes for us semiconductor equipment, some industrial, clean technology, medical, should we have enough programs in there, we want enough programs, I expect those to move in the right direction. Only, again, significant question that we can say is Aerospace and Defense in the short term. But I think it's important that any other EMS company out there with that position in that business, we have our own products that we deliver directly to the government, we are investing more in R&D, probably, than anybody else in that field. So it's a longer-term investment for us. Back to the Multimedia, in Multimedia, we had a few customers that've been really down in last six months. We expect those customers to be coming back. So things are better. And that's why we are more optimistic about the third quarter, and hopefully, that will be a stepping stone to the great fourth quarter. Sean Hannan - Needham & Company, LLC: Let me see if I can ask this just quickly from a different angle. So when you think about the dollar opportunities internally about new business bookings, when you think about that type of number, on a relative basis, how are you seeing those bookings trend in the current quarter versus, say, the last 1 to 2 quarters? Are we consistent? Are we getting stronger? Is it, perhaps, a little bit weaker, tied to some of the broader demands? What are we seeing there?

Well, if you mean in a segment that I just talked about? Sean Hannan - Needham & Company, LLC: Yes.

Okay, for example, I have to really look at my customer base. As I said, I think in a Communication Network, in both in absolute dollars, we believe the programs that we are involved in should improve substantially. And we are also, we believe that we are in a position to win some more new programs that we don't have today. So that's -- so if I just look at it on a percentage basis, I believe that each of our segments should start contributing in the right direction. Sean Hannan - Needham & Company, LLC: Okay, thank you.

Your next question is from Shawn Harrison with Longbow Research.

Maybe a few clarifications. With the Components business, I think the statement was made that it was above the corporate gross margin for the quarter. Was that all the divisions within the vertical Components business? Or maybe can you tell us how many were above the corporate gross margin for the quarter?

Well, we haven't been going into a lot of detail there. But in aggregate, the Components businesses were above corporate average. And the other thing that I mentioned was in all cases, they improved sequentially.

Okay. I guess with that sequential improvement juxtaposed against the guidance, where incremental gross margins look good but maybe not as robust as kind of the incremental margins you saw in the March quarter, could you maybe talk about some of the factors there limiting margin expansion going into the June quarter? Is it mix? Is it just kind of the slowness in the recovery in the medical or in the military program?

Yes, I mean we're definitely being cautious with the mix right now. And as I mentioned, within mix, I mean, Defense is the area that has the biggest impact.

Okay. And then the last question is, do you think the Components business exiting the, I guess, the fiscal year, could have an aggregate of double-digit gross margin?

Yes. We're not ready to forecast that yet, but we want to get there as quickly as we can. And again, the key is every quarter, we expect to have sequential improvement. And we have been doing that until last quarter, and now we're back on track again. So we're going to keep pushing.

Okay, thank you very much.

Thanks, Shawn.

Your next question is from Brian Alexander with Raymond James.

This is Nabil Hanano in for Brian Alexander.

What was the name?

Nabil Hanano. Can you just talk about the leverage going forward in the operating model? Do you expect to manage to the $66 million, say, $67 million range for the next several quarters? Or should we expect that to trend up?

You're talking about the operating expense?

Yes.

We think we can manage in that $66 million, $67 million range. We've had in the last 6 months, as you probably know, some pressure on that number due to the weak dollar, and then we've made some investments, I think I mentioned earlier, in R&D and sales. But we don't expect that number to move up very much.

And then on the optical side, was it all attributable to kind of weak demand and then inventory adjustment? Or did you have any issues with BreconRidge that contributed to weakness? And then can you also just comment on the overall integration of that business?

Yes, this is Jure. From integration of that business, there was no weaknesses. I mean, we have, I think, of all the acquisitions that we did in the last couple of years, that was a great acquisition. It was very strategic, and some of the business we moved out of the Canada into other operations around the world. Our Canadian operation continued to focus on what we call research and development and new technology development. So that is doing well. But no, that operation really helped us a lot during this environment, and we expect our optical business for us to come back. I think a lot of this optical stuff was inventory-driven. We didn't lose any orders. So for us, I think it's just a timing issue.

And then just one last question. Do you guys have any update on what you plan to do with your long-term debt?

No, we don't have any update, and we continue to be focused on de-levering over a long period of time, but we don't have any specific update there.

All right. Thank you very much.

Well, thanks. Well, ladies and gentlemen, again, we want to thank you for participating in this conference call with us today. Hopefully we answered most of your questions. If not, please give us a call. Thanks again.

Yes thanks, everyone. Bye-bye.

. This concludes today's conference. Thank you for your participation. You may now disconnect.