Sanmina Corporation (SANM) Q3 2011 Earnings Report, Transcript and Summary

Good afternoon. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina-SCI Third Quarter Fiscal 2011 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Ms. Paige Bombino, Director of Investor Relations. Ma'am, you may begin your conference.

Thank you, David. Good afternoon, ladies and gentlemen, and welcome to Sanmina-SCI's Third 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 in the slides posted on our website. Please turn to Page 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 and slides included today that we have provided you with statements of operations for the 3 months and 9 months ending July 2, 2011, on GAAP basis, as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, noncash stock-based compensation expense, amortization expense and other infrequent or unusual items to the extent material. Any comments we make on our call, as they relate to the income statement measures, will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in the conference call, when we refer to gross profit, gross margin, operating income, operating margin, net income and earnings per share, we are referring to our non-GAAP financial 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. Thanks for being here with us today. Joining me on today's conference call is also Bob Eulau, our Chief Financial Officer.

Good afternoon, everyone.

An agenda we have for you today is that Bob Eulau will review our financial results for the third quarter. Then I will follow with additional comments relative to Sanmina-SCI results and our future goals. Then Bob and I will open up for question and answers. And now, I'd like to turn the call over to Bob. Bob?

Thanks, Jure, and welcome again, everyone. It's a pleasure to be on today's call. Please turn to Slide 3. Overall, the third quarter results were better than we expected. Revenue of $1.67 billion was up 7% on a sequential basis and up 3% over the third quarter last year. This was at the high end of our guidance of $1.6 billion to $1.7 billion. Our gross margin came in at 8%, which is up 50 basis points from the second quarter. Operating margin also improved 50 basis points from last quarter to 3.9%. Non-GAAP EPS was $0.42. This was based on 83.1 million shares outstanding on a fully diluted basis. Non-GAAP EPS was above the range of our guidance, which we set last quarter. Finally, cash generation was strong this quarter with cash flow from operations of $51.3 million. I'll discuss cash and our capital structure in more detail in a few minutes. Please turn to Slide 4. Revenue was up 7% or $105 million from Q2 to $1.67 billion. From a GAAP perspective, we reported net income of approximately $7 million, which resulted in earnings per share of $0.09. This was down relative to last quarter and Q3 last year primarily because of debt extinguishment costs of $18.3 million associated with the debt refinancing that we completed during the quarter. Restructuring costs totaled $6 million for Q3. Restructuring was a little higher than normal this quarter due to the organizational change that was announced in Q2 and completed in Q3. Looking forward, we will continue to see some ongoing restructuring charges on our GAAP P&L of approximately $3 million to $4 million per quarter that primarily relate to real estate, which is being held for sale. This quarter, we sold about $15 million in real estate. We have property listed on the market at over $100 million. My remaining comments will focus on the non-GAAP financials for the third quarter. At $134 million, gross profit was up $17 million or 14% from the prior quarter. Gross margin came in at 8%, which was 50 basis points above the previous quarter. Gross margin was above plan, primarily due to good execution in several factories and ongoing progress in the components business. Component gross margin was above the corporate average and the highest level it has been in several years. Operating expenses were up $4.7 million for the quarter at $68.6 million. This was a couple of million dollars higher than we planned, which was primarily related to increased accruals for bonuses. At $65 million, operating income increased by 22% from the prior quarter. Operating margin was 3.9%, which was a 50-basis-point sequential improvement. The tax rate for the quarter came in at 16% of pretax income, which is also in line with what we had expected. On a non-GAAP basis, we earned $35.1 million in net income or $0.42 per share. Both net income and earnings per share were up about 40% from Q2. On Slide 5, we're showing you some of our key non-GAAP P&L metrics. As you can see, Q3 revenue was strong after a disappointing Q2. Compared to Q3 last year, revenue was up 3%. We also saw a nice rebound in gross profit in Q3. Our gross margin improved to 8%, which is slightly higher than where we were a year ago. It is reassuring that we accomplished this result while revenue in our high-margin defense business was down from last year. Our operating profit improved 22% to $65 million from last year. This led to an operating margin of 3.9%. EBITDA also recovered nicely from last quarter at $89 million, which was 5.3% of revenue. For modeling purposes, I want to mention that depreciation and amortization were $25 million for the quarter. Now I'd like to turn your attention to the balance sheet on Slide 6. Our cash and cash equivalents were $583 million. Cash was down $72 million from the previous quarter primarily due to the repurchase of $80 million in debt and the expenses associated with the refinancing of $500 million of debt during the quarter. Accounts receivable increased by $73 million, mostly due to growth in revenue. Collections performance was solid again just slightly below our record last quarter. Inventory increased by $66 million, which I'll discuss more in a moment. Accounts payable increased by $104 million for the quarter, which is primarily due to better linearity and material purchases and growth in revenue. Let's turn to Slide 7 to discuss our long-term debt situation in more detail. We completed our $500 million, 7% bond offering due in 2019. The proceeds, along with $80 million of our excess cash, were used to buy back all of the remaining $380 million of 6.75% Bonds due in 2013. And $200 million of the $600 million 8.125% bonds due in 2016. The transaction allowed us to increase the average life of our long-term debt outstanding from 3.4 to 5.7 years, as well as make a meaningful reduction on our leverage. At this point, our next long-term debt is not due until 2014. In conjunction with the transaction, we swapped the entire 2019 bond from fixed to floating rate. The swap rate will reset quarterly, but currently is in the area of 4.25%. The swap, along with the debt paydown, allowed us to reduce our net interest expense in the third quarter by about $2.5 million. On an annual basis, when compared to our net interest expense prior to the refinancing, we expect to save about $20 million. Please turn to Slide 8. Our cash position remained strong given our potential cash needs. The decrease in cash this quarter is largely attributable to the refinancing and debt paydowns that I just discussed. Cash flow from operations was $51 million. Net capital expenditures for the quarter were $13 million. The net capital expenditures included $15 million in asset sales during the quarter. This led to $39 million in free cash flow. Inventory remains a key focus. Inventory increased from $820 million last quarter to $886 million this quarter, while the inventory turns improved slightly from 7x to 7.2x. 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 down 1.4 days when compared to last quarter at 50.5. We saw a decrease in accounts receivable day sales outstanding from 56.4 days to 54 days, as a result of improved collection terms and better mix. Accounts payable was slightly favorable as days payable outstanding increased from 53.2 days to 53.7. Overall, cash cycle time decreased from 55.2 days last quarter to 50.8 days this quarter. Finally, ROIC recovered nicely to 15.8% for the quarter. We expect ROIC to improve over the next few quarters. Please turn to Slide 9. I'd like to share with you our guidance for the fourth fiscal quarter. Our view is that revenue will be in the range of $1.65 billion to $1.7 billion. We expect the gross margin will be in the range of 7.6% to 8%. Operating expense should be around $67 million. This leads to an operating margin in the range of 3.6% to 4%. Assuming no foreign exchange surprises, we expect that other income and expense will be in the range of $21 million to $22 million. We expect the tax rate to remain in the range of 15% to 17%, and we expect that our fully diluted share count will be in the range of 83 million to 84 million shares. When you consider all of this guidance, we believe that we will end up with earnings per share in the range of $0.40 to $0.44. Finally, for your cash flow modeling, we expect capital expense to be around $25 million, while depreciation and amortization will be around $25 million as well. Overall, we were pleased to see our financial performance back on track this quarter. 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. Good afternoon again, ladies and gentlemen. As you've heard from Bob, this was a good quarter for us, and I'm pleased at the progress our company made in the third quarter. We're continuing to benefit from our strategic transformation to a better business mix and higher operational efficiency. Our technology components continued to deliver better margins. Definitely, things are moving nicely in the right direction. In the third quarter, this business has delivered a higher margin than the corporate average, as Bob mentioned. We also expect these businesses to continue to bring higher leverage to the top and the bottom line. Now please turn to Slide 10. Let me review end markets with you for the third quarter and also talk about outlook in demand for the fourth quarter. We'll start with the Communication Networks that represented 48% of our revenue. That business was up approximately 8.6%. Overall, we had a good demand exiting -- existing and new projects. We had some weaknesses in our optical products, and other products came in per our expectations. As we look in the fourth quarter, we expect this business to be slightly up, maybe flat. We continue to diversify a new and -- new products with existing customers and also focus on our new accounts. We believe this market still has a lot of opportunity for us because we're well positioned in it. Enterprise Computing & Storage represented approximately 14% of our revenue in the third quarter. That was nicely up 10.7%. Overall, we had a strong demand, again driven by existing and new project. As we are looking at the fourth quarter of fiscal year 2011, we also believe these market segments will be slightly up. We believe we have stable demand for next quarter, and also, we continue to have some good opportunities going forward. Industrial, Defense and Medical represented approximately 24% of our revenue. That was slightly up, I would call it flat. Medical was up; industrial, slightly up; defense and aerospace was weak during the quarter. As we forecasting fourth quarter for this segment, we expect it to be flat, slightly down, mainly driven by defense and aerospace. We expect it to continue to be weak. Also, semiconductor capital equipment business expected to be weak in our fourth quarter. Medical, Industrial, we expect those 2 segments to continue to be stable in demand. Long term, we're very optimistic about this segment and we are focused on it. And the last segments, Multimedia, represented approximately 20 -- I'm sorry, 14% of our revenue. Third quarter was nicely up 8.4%. Overall, good demand. As we look in the fourth quarter, we're forecasting slightly up. Basically, this group we expect to continue to see stable demand. Also, overall, as Bob mentioned, quarter-to-quarter growth in total was 7%. Our top 10 customer represented 50.2% of our revenue. And we also had one customer approximately 10%, which came from Communication Networks. Now let me talk to you a little bit more about environment, our business environment for the fourth quarter and also mention a few things for December quarter, and that's mainly our first quarter of fiscal year 2012. Bookings in the third quarter were positive, 105:1. Our customer forecast for fourth quarter are looking stable at this time, and we also have a good pipeline of new opportunities. As we look out further, visibility looks fine for the December quarter. Again, that's our first quarter of fiscal year 2012. Now let me make a few comments relative to current economical environment. Current economical environment will continue to be somewhat choppy in the short term. As we remain cautious and optimistic about end markets, it is difficult to predict what impact the macro environment will have on our customers. As a result, a new program brings new customers, we have offset these markets and customer that remain soft. We've been able to stabilize our business. In this environment, we'll continue to focus on items within our control, and deliver exceptional products and services to our customers, making Sanmina-SCI the partner of choice. I'd like to also make a couple of comments regarding our well-diversified portfolio of products and services, breaking this down into basically 4 groups. Technology components includes 2 businesses. Interconnect system includes high-technology printed circuit boards, backplanes and cable assembly. And mechanical system group includes enclosures, plastic precision machining, ODM mechanical systems. Both of these businesses are well positioned for margin expansion. The second group, what we call products, include 4 businesses: Defense and aerospace, optical modules, memory modules, solid state drive and fourth business is for Enterprise Computing & Storage joint development and ODM products. In these 4 businesses, we continue to invest more in research and development and sales and marketing to drive the future revenue growth and margin expansion. And the last -- and the largest part of our business, what we call electronic manufacturing and global services. Let me make a couple of comments on electronic manufacturing. It came well positioned. We continue to focus on complex system build, including build-to-order and configure-to-order. We have plenty of capacity here for growth, and we don't have to put a lot of investment as it grow -- as we grow and do focus on margin expansion. Another part of this business is Sanmina global services, which includes repair and logistics and other customer services. We're well focused here. And our goal here is to grow and expand this business. So basically, our strategy is working. I believe we are in good position. Our long-term plans remain intact. We are focused on driving sustainable growth and margin expansion in each of our businesses. So in summary, overall, a good quarter. I am pleased with our operating performance, but still, we have more opportunities here. More work to be done before we'll be fully satisfied. Again, a lot of leverage in our business model for both top and the bottom line. Sanmina is well positioned to compete in our diversified portfolio of products and services and focused key markets and customers. This diversified portfolio should allow us to continue to provide best technology and manufacturing services to our customers. We're also cautiously optimistic about this economy. And at this time, we still expect to see a good growth in fiscal year 2012. Now I would like to say thanks to all of you for your support and your time you're spending with us today. And operator, we are now ready to open this line for question and answers.

[Operator Instructions] And your next question comes from Wamsi Mohan with Bank of America. [Technical Difficulty]

Your next question comes from Jim Suva of Citi.

Congratulations to you and your team. That operating margin is very impressive.

Yes, thanks, Jim, I think we're moving in the right direction. A lot of work left, but things are going in the right direction.

Yes. So my question I have is actually in Network that you plan on doing. When we look at your sales outlook and your operating margin outlook, it basically looks like your operating margins are not going to see more improvement or kind of at the same level. Is that just because now it's driven more by top line sales growth? Or I'm wondering, are the components operating at the optimal level? Or how come we're not going to expect to see some more margin improvement here because, to be honest, it's better than what I thought it was going to be this quarter. I'm just wondering is there more to go? Or it looks like we're actually starting to level out here?

Well definitely, we believe that we have a lot of opportunities, as I just said in the prepared statement. I think, operationally, things are moving in the right direction, but our job is not done. So let me give you a couple highlights. I think that the biggest pressure in margin today in the short term is the weakness in our defense and aerospace business, and we believe that's going to continue to be weak. When it comes to the components and other products that we have, there's a lot of leverage left. Our component business is not at the optimum yet. They got a long way to go. They're all profitable. That's positive. But there -- we have a lot of opportunities there. So the way I look it in the short term is to continue to make improvements assuming the economy is going to corporate for us. But the longer term, our still goal is to deliver the leading industry margins. So if I look at circuit board business, we're not there at where the industry leaders are. On mechanical systems, we're moving in the right direction, but a lot of room left, and so on and so on. So Jim, the way I would summarize it, still a lot of opportunities and that's where we are really focused on.

Great. And for my follow-up, there was a news announcement that Hon Hai is buying the set-top box business from Cisco, and I know you guys in your Multimedia sector do some set-top box business. Is that a sector that you get a little bit more concerned and may get a little more aggressive on pricing? Or how should we think about that from the competitive landscape, Jure?

Well, that sector always wasn't very aggressive when it came to the pricing, so I don't think there's anything new today. I think for us, we're going to continue to focus on our key customers that we have. I believe we have a very strong solution that we provide to these customers. We're going to continue to focus on that, but we don't see any impact on this deal between Cisco, in fact, on Sanmina-SCI.

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

Jure, within the Communication Networks business, outlook of flat to slightly up. Can you talk about some trends by the subsegment within that market place, areas of strength and maybe weakness?

Could you be more specific when you say subsegments?

So networking, optical, wireless infrastructure, just trends.

Okay, well, yes. What we have in that segment is networking, wireline, wireless. So I would say it depends on a customer-to-customer. But overall, I would say the wireless for us is very strong. Networking, we have some customers that are very strong, some are a little bit more flat. Wireline overall is performing well. At this time, we're very positive on this market. I think, the way we are positioned, our customer base, we're just a little bit more cautious.

Okay. And as a follow-up, can you talk about -- you mentioned choppy, short-term macro, but customer forecasts are stable. Any update on Japan, really how that played out? Was it in line with expectations and really where you stand today post-Japan?

Well, first of all, when that disaster happened, I mean, we're all worried a lot. We took a lot of steps to minimize that impact both from a customer's side and us. We worked together on some major project. I think we survived pretty well. Definitely there was an impact, but going forward, I believe it's a less and less. I don't really see any major impact on us when it comes to the revenue or any other things at this time.

Okay. Last one, if I could, for Bob. Just noticed the nice cash flow in the quarter. As you go forward, can you just talk about the use of cash whether it's for the leveraging or any M&A opportunities and what you plan to use the cash for?

Yes, hi Craig. It's basically what we've said in the past. They were, first and foremost, is to continue to have the cash we need to grow the business and run the operations. Secondly, we'll look at small, very strategic acquisitions that really allow us to continue down the strategy that we have. And then the third, uses deleveraging like what we did this past quarter and we'll continue to look for right points in time to do that as well.

And your next question is from the line of Sherri Scribner of Deutsche Bank.

Just thinking about your growth expectations going forward. It looks like the midpoint of your guidance suggests that fiscal '11 revenue growth will be about 4%. Just trying to understand, is that kind of the revenue growth rate that you would expect going forward for the company?

Well, first of all, our internal goal is a lot higher than that. We're not ready to forecast 2012, except that what we see today, we think it's going to be a growth year. We would expect what we have in our pipeline to meet double-digit growth in 2012. But we really like the reserve that to the next call.

Okay, that's fair. And then looking at the operating margin, I think in the past you talked about hitting the 5% operating margin, which is your goal by the end of the calendar year.

Right.

I don't know if those expectations are changed -- have changed. But with the September guidance, it looks like you're a little bit far away from doing that in December. Do you still expect to do that? Or can you give us something as to how that happened?

Well we have a big [indiscernible]. When we made that -- when I made that statement that was about 2, 3 quarters ago, really our defense business, at that time, was performing well. We have a very weak defense business today, which is our highest margin business. So definitely, we had challenge for us to hit those number in December. But as I mentioned earlier, when Jim from Citi asked that question, we feel still confident that in our strategy that we can hit our long-term goal. And I think when it comes to that getting to that 5%, definitely, the answer is yes. It's just the timing issue. And -- but we are really more focused driving all the businesses now to the highest margin. We believe that we can make up the weaknesses that we have in the defense business because I believe the defense will continue to be weak at least in the short term. So -- but we have a lot of leverage in our component businesses, which are really, today, refocused and I believe that we're in a good position to expand the margins. We also set, as I mentioned earlier, we created what we call product group, which consist of our 4 key businesses going forward. I believe that those products, basically, it's an ODM, and including defense product, will contribute a lot. So I like the position that we're in. I think it's the best position our company has been in the last 11 years. I think, we got a lot in front of us. Our customer relationships are very strong. I believe we can grow with our existing customer. So it's going to be all what happens to the economy. And I think if the economy cooperates, which I believe it will, that we have a lot of exciting things in 2012.

Okay. So just -- it sounds like defense, being weak, makes it more difficult, but you expect to offset that in other areas over the next couple quarters?

We're going to work very hard to find a way to offset that, yes.

And your next question is from the line of Sean Hannan of Needham & Company. Sean Hannan - Needham & Company, LLC: So question around the components business. Is there a way, Jure, you provided a little bit of color during the call. If you can help to elaborate around what you're seeing within your specific business for business trends there? How the book-to-bill for that group of businesses performed? And the book-to-bill, what it looked like for the quarter versus the rest of the company?

Yes, we don't, Sean, give those numbers out. As I said earlier, for our whole corporation, it's 105:1. But our overall business is as pretty similar. As you know a lot of these components that we've built go into assembly that we build or sell to other companies out there. So the business, overall, is -- I would summarize, yes, we have some choppiness. We have some customers up and down. But I think there's enough in the pipeline that we feel comfortable about our forecast. And I think we think that's going to continue nicely in December quarter. So we'll take 2 quarters at a time. We'll see how things shake up. But we are focused in our components businesses, Sean. We're investing a fair amount of -- into the business development. We created a lot more focus on that part of the business, and we want to grow our businesses there. They are higher-margin business. That's the whole idea about our models, and we changed our strategy 2 years ago that we're going to build a different company. And I believe that today, we're putting all those things together, that everyday, hopefully, will be a better day for us. And that's kind of what we feel internally. Sean Hannan - Needham & Company, LLC: Jure, in the absence of a number, is it at least -- is there, at least, a way to get a sense of directionally whether if those bookings were more better than the company average?

I would not say they were better than our company average. I think were -- close to the company average. Sean Hannan - Needham & Company, LLC: Okay. So when we look at the pieces of those -- of that components business, in the aggregate, when we break down the pieces, is there a way, if you can give us, at least, maybe a little bit more color because each of those, certainly, carries a different margin profile. Is there a way if we can get a sense of what you feel is on path to perhaps exhibit some stronger growth as we go through the remainder of the calendar year? And perhaps that gives a little better visibility around the margins.

Yes. Sean, let me go back to what I said in my prepared statement. If all these businesses are not -- or I -- maybe the first question that I think has been asked, are not performing at what they should be performing. So for example, if you look at the circuit board industry, a great company out there delivering around 15% operating margin. Believe me, we're not close there yet. If you look at mechanical system, a great company delivering well over 12% margin. So none of these businesses are there yet. Now all the restructuring, all the hard work, all the management changes, now all that's all behind us in that part of the business. So really for us, it's more than just how fast these businesses are growing because in short term, I think we have plenty of businesses to continue to improve the margins. We're really more focused where we're going to be in those businesses 6 months from now and a year from now because our goal is to bring everyone of these businesses to become a leader in our industry when it comes to the margins. I think technology we have, now it's all about rebuilding this, loading this plant up to its maximum and maximize the margins around the world. So our model is I don't want to -- not that just because even if we have a business today, it doesn't mean we'll be able to deliver those industry margins that we want to deliver. But I think as we look further, I believe we're moving in the right direction. But it's profitable. I mean, every one of our businesses is profitable.

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

Just maybe to reconcile something with the book-to-bill at 1.05 for the quarter and the guidance essentially a little bit more flattish. Did you see the book-to-bill get closer to parity, as you a exited the quarter and end of July?

Well, first of all, I don't think book-to-bill tells you everything. I think, it's more -- we have a lot of business that were booked, it's all really driven by the forecast. Some customer gives us a forecast. We have a contract that give us a forecast for a whole year and then gets updated on a weekly, monthly basis. So the demand is, for us, is more driven by the forecast than just the bookings.

Okay, that's fair. And then, in case I missed it, the gross margin is expected to be down sequentially. Is that a factor of mix? I know that was mentioned that you have some facilities do very well in the June quarter, maybe just kind of the sequential, potential for gross margin decline?

I -- we're just giving a range. We're not planning to have a lower margins. We just given the range. It's hard to forecast in any environment. So our goal is to find a way to make improvements.

Yes. I guess, if gross margins were to decline sequentially, is there one factor quarter-to-quarter that's going to be different, either mix or commodities or something of that nature?

The mix makes a big difference in our business. So driving the -- driving our, now the more diversified portfolio that we have. And really, when you look at Sanmina, you really -- we got -- what's come from the components, one comes from products, one comes from our EMS products. So the mix is very important. Even in that mix as a customer, what -- some customers will make more money. Some customers will makes less money. So the mix is the really the most important part.

And your next question is from the line of Lou Miscioscia of Collins Stewart.

Jure, maybe if you can go into the grouping that you talked about. It went through it a little bit quickly. Just what's really different now, is it the way that you're trying to go to the market? And maybe -- I don't know if you can help us break that out, given numbers of different component areas in the past.

Yes. Well, we used to run a company in one bucket. Basically, all operations were in one bucket, try to maximize it. We separate those in the groups, so that's why we say we have technology components group that includes 2 businesses. It's interconnect system, which includes high-technology printed circuit boards, backplanes and cables. And mechanical system, which includes enclosures, plastic precision machining, and we have some mechanical system ODM, some racks, the ODM racks. So that's what we call technology component group. We have those 2 groups are today in a very good position. They're making improvements, a lot of room to go, but they're making improvements so we expect margins to hopefully improve on a daily basis. Then we created a product group. We have a defense and aerospace. As you know, we provide a high-end product that it's a Sanmina design together with the government for Army and Marines and some other products that we're developing. Then we have an optical module. We acquired the company where we build a custom module. We can design and manufacture it for our customers to basically join development-type of a product. And then we had memory module business for long time. We really grown that and expanded it, including solid state drives. So that business is also in a very good position. And about year ago, we do got serious about really investing and expanding our Enterprise Computing & Storage product focusing mainly on joint development with our customers and ODM. As I mentioned on those prepared calls, we're really investing a lot -- a fair amount more in R&D. Just if you look at year-over-year difference, it's almost couple million dollars more per quarter than before. And also we're spending a lot in sales and marketing to really -- to drive and grow these businesses. And then, of course, our traditional EMS business in the third bucket, and also that bucket consists really of 2 businesses: Our EMS business, which include built-to-order and configured-to-order, and our, what we call Sanmina global services, which is basically repair, logistic and other customer services. That business, we're really focused on that trying to grow it and expand it. So that's kind of how we manage this today, Lou. And each of these businesses competes by itself. And I think we're in a really good position. And like I said earlier, we're the best position that we've been in the last 10-plus years to compete with anybody in those segments.

Okay. Can you give us a rough idea about the size and what you officially breakout the numbers for those over time?

Not at this time. We're going to review this stuff in the future, how we're going to report it. But at this time, we'll continue to report in the one bucket

Okay. Then it's fair to say none of them over 10%?

Yes. Well, yes, individually, yes could be more than 10%.

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

Could you breakout for us the segment? What percentage is roughly of your revenues comes from semi-cap equipment of the different industrial...

Well, we don't break that. It's --- that bucket itself, for us, I believe, it's 24% of our total revenue. Our figures, it's is not the biggest part of the market, but it's a substantial amount. But I think, if I look at that market, that's a temporary slowdown. If you look at forecast of some of those equipment and some of the projects that were involved, we expect that business for us to continue to do well especially as we go into 2012.

So would you -- following up on that commentary, would you expect the semi-cap equipment revenue to be up in Q4? Or we would expect that recovery in the business to be more of a Q1 event?

Right now, really, I would take one quarter at a time. I mentioned earlier that we expect that market in the fourth quarter to be down, which is our September quarter. So make sure that's clear. So September quarter, our fourth quarter, we expect the business to be down, slightly down.

So the commentary of the customer base is obviously, the same as it is with the investors that they do expect there to be a pause and then pick up?

Yes, yes. I would say that's a fair assessment if I have to use one word.

And your next question is from the line of Amit Daryanani of RBC Capital Markets.

Just sort of quick question on the Multimedia side, I think your expectation of this business to be kind of flattish in September. Normally, I think you see a pretty good ramp in September heading into year-end season. Is there a reason why you aren't seeing that uptick this time around?

No, it's just slightly up.

I mean, [indiscernible] up kind of high single-digits, but it's almost kind of 10% range, right, heading into year end?

No. I don't think -- I don't want to talk -- want to be to be specific because to be honest with you, Amit, I don't -- I can't be that specific. But overall, if you look at our guidance, we're guiding to $1.65 billion to $1.7 billion, I would call that slight or slightly up. And so it's really kind of mixes all our business I guess. Some business will be up, some are down. But really -- I don't really want to focus on Multimedia loan.

I got it. And them, I may have might have missed this. If you just clarify, OpEx looking up more than what you guys are expecting for June quarter. What drove that exactly in the quarter?

Amit, it's Bob. That was really driven primarily by increased accruals for bonuses.

And your next question comes from the line of Brian Alexander of Raymond James. Brian Alexander - Raymond James & Associates, Inc.: Jure, just to confirm what you said earlier on the revenue segmentation. It sounds like the only segments that you expect to be down sequentially in September are defense and semi-cap equipment. And so I'm just wondering, how big are those businesses? I know somebody just asked about semi-cap because I'm surprised that if the majority of your business is up, I think everything else you said should be up a little. Why the overall revenue guidance for September isn't up as well?

Well, I think we're guiding that slightly up, number one. Number two, defense and semiconductor, together, are a big part of the 24%. So that's -- it does affect. But at the same time, in other segments, I mean, if you look at our Communication Networks, we have our customers that are down. We have some ones that make it up and so on. So it's really a mix of the bunch of little things, Brian, that affect the quarter. Brian Alexander - Raymond James & Associates, Inc.: And then just back to the components business. Could you talk about which part of that portfolio improved the most in terms of profitability sequentially? Or was it really across the board? And then what was the improvement that you saw volume-driven or was it more execution-related?

Well, we're not going to -- we can't break it -- I'm mean, we're not going to break it down because we don't release that information. But I think the -- these are the businesses, as you know, we have a fair amount of issues. We believe a lot of those issues are behind us. So it's really more execution and getting the better product mix on this. If you look at our optical module -- I'm sorry, the memory module business, we made a tremendous job in the last 12 months going after the better product mix and also introducing a fair amount of new technology to the market. Our mechanical system made some nice improvement last quarter, as we also, had some good improvements in some of the plants in the circuit board business. So all these things are starting to add up. And most important, I believe, these businesses have momentum to continue to make improvements not to the level that we want it to be, but we believe that if things are moving in the right direction, they should continue to leverage to the bottom line. Brian Alexander - Raymond James & Associates, Inc.: Right. So you said there's a long way to go. I mean, if you had to take a stab at what percentage of the way there we are to where you want to be in...

As I said earlier, I mean, it's better than corporate average, okay? And if -- but we're talking about our corporate average is 8% gross margin, and these businesses should be producing well over 10% operating margin. So that's why I say a long way to go. So I think if you look at Sanmina today, you really have to look at it differently. All the hard work is done. I mean, if you look at just the overall company, we have a lot of capacity left. We don't have to buy a lot of equipment to grow a lot. But growth, alone, is not what we're really driving. We're really building a different company. Brian, I hate to use the word all Sanmina, but we're really a lot more disciplined when it comes to the focusing of the mixes that will give the sustainable growth and able to deliver the margin that are different than typically in this company. I know it's a long way to go, but that's really what we are focused on. And these components and products will let us get there. At the same time, when we look at our EMS businesses, we're going to focus on a high-end, high-mix type of product, even our EMS will allows us to do better. And we're going to expand by plant. So there's a lot of work to be done to hit the results that we are looking for. So what I'm trying to say here, and what I've really been saying is we're not happy with these results. And there's a lot of work left to do, but we like the work that we are in, and we expect to make good improvements. And -- so we should be making a lot more than a $0.42 a share.

And your final question comes from the line of Wamsi Mohan of Bank of America.

So my question goes back to the defense program that caused the weakness in the prior quarter, not the latest reported one. [indiscernible] during this product, Jure, do you have inventory of this product? And are you still confident the government will take possession of these products and that there won't be any write-downs associated with these?

Well, we feel, I mean, anything can happen and anything. So they can happen at any product that we have today. Based on everything that we know, of course, we have some inventory, but everything that we know, we believe we're in a good position to ship everything we have.

Okay. And you are continuing to manufacture those products. It's just the uptake from the government is at slower rates than it was before?

Well, it's a lot slower than it was before. It's a lot slower. And plus we have some new products that we're also introducing to the market that hopefully will be replacing some of these older stuffs. But you never know how it's going to take off and so one. So we're going to play very conservative on that side of the business. And that we feel -- but we feel very confident that's the business were going to focus on. That's why we separate and create a new division, brought on a new President. So a lot of exciting things in front of us, but a lot of work left.

And then one question for Bob. Bob, you mentioned that the bonus accruals were dealt between the higher OpEx versus guidance. To some degree, I mean, you obviously have some clarity around what those accruals are going to be. So how should we think about -- Jure also made some comments around increased R&D to ramp future growth. So what should we be thinking around over the next sort of few quarters from a stable OpEx level?

Well, on the R&D side, we've increased it quite a bit over the last year. And I think you'll see some ongoing modest increases there. From the other area of SG&A, I would expect it to be relatively flat.

Well, ladies and gentlemen, that's what we have for today. If you have any more questions, please don't hesitate to give us a call. Again, thanks for your support, and look forward talking to you 90 days from now. Goodbye.

Thanks, everyone.

Ladies and gentlemen, this does conclude the Sanmina-SCI Third Quarter Final Fiscal 2011 Earnings Call. Thank you for your participation. You may now disconnect.