Jabil Inc.
Q4 2006 Earnings Call Transcript

Published: 27 Sep 2006

[Operator:]

Good afternoon. My name is Jodie and I will be your conference operator today. At this time, I would like to welcome everyone to the Jabil Circuit fourth quarter and fiscal year 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Miss Walters, Vice President of Investor Relations and Communications. Please go ahead, Madam.

[Beth Walters:]

Thank you. Welcome to our fourth quarter conference 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 in the investor section, along with today’s press release and a slideshow presentation on our fourth quarter and fiscal year. The slides complement the presentation today and you can join me now by going to the slideshow and turning to slide one. Our call today may contain forward-looking statements, including those regarding our unaudited fourth quarter and fiscal year 2006 net revenues and certain other financial measures, our currently expected first financial quarter 2007 and full fiscal year 2007 net revenues, the anticipated date we will file our Annual Report on Form 10-K, the anticipated outlook for certain aspects of our business and our long-term outlook for our company, our industry, our business sectors and our realignment of our manufacturing capacity and the related costs and timing. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include, but are not limited to

[Forbes Alexander:]

Thank you, Beth. I will now ask you to turn to slide 2. Revenue for our fourth fiscal quarter ’06 was at the upper end of guidance at $2.955 billion. On a year-over-year basis, the quarter represents a 45% growth in revenue, and on a sequential basis, revenues increased by 14%. Please turn to slide 3. Revenues for fiscal year 2006 were $10.267 billion, representing a 36% growth over fiscal 2005. Now I will ask you to turn to slide 4. Fourth quarter revenues increased 14% over the third quarter. Production levels in the automotive sector decreased 4% from the prior quarter, reflecting seasonal lower levels of production. The computing and storage sector increased by 14% over the third quarter as a result of higher production levels than we had forecast. Consumer products sector decreased by 5% from third quarter. Instrumentation and medical sector increased by 7% from the third quarter. Networking sector, levels of production there increased by 141% from the previous quarter. This increase reflects the results of our partnering with one of our communications customers in new lean manufacturing initiatives. The peripherals sector decreased by 10% in the previous quarter, and finally, the telecommunications sector increased 6% over the third quarter. Now I will ask you to turn to slide 5. Reviewing our sector information for the quarter and the fiscal year in percentage terms, they were as follows -- I will cover the fourth quarter first

[Timothy L. Main:]

Thank you, Forbes. Revenue for the quarter was on plan, as were other important elements of our business. Excluding the impact of lean inventory initiatives during the quarter, organic revenue growth was approximately 4% to 5%. Revenue growth in our November quarter will be 33% year over year, 27% excluding the impact of lean initiatives. We expect fiscal 2007 to be another solid year of growth across all dimensions of our business. From a segment perspective, computing and storage, consumer, instrumentation in medical, networking, peripherals, and our services group all expect revenue growth well above end market growth rates in fiscal 2007. Our diversification strategy and deeper penetration to each of our segments are contributing to a greatly enhanced value proposition for customers and a sustainable growth engine for our company. On a quarterly run-rate basis, we are now the third-largest EMS provider in the world. During fiscal 2007, growth will continue to come principally from the trend to outsourcing, expansion of our services, and market share growth. Geographically, we will continue to expand our low-cost footprint in Eastern Europe and Asia. Functionally, we will continue to grow our end-to-end supply chain services, including configure-to-order services, product development, and electro-mechanical capabilities. These services and product offerings will increasingly be tailored to specific market segments, differentiating Jabil solutions from other offerings in the market place. We suffered through some growing pains in fiscal 2006, and highlighted some distinct operational issues impacting our fiscal Q3 2006 results. We are confident that we have these previous issues under control and expect them to steadily diminish in importance to our results over the first half of fiscal 2007. A rationalization plan is also proceeding according to plan. The net result of these actions, combined with our continued revenue growth, should deliver solid results for fiscal 2007. Finally, I regret not having the ability to provide full financial details of the quarter due to the continued review of the company’s stock option grants practices and our accounting for the same. We are fully cooperating with the review process and assisting in every way we can. As part of the ops review process, we have restored over 340 back-up tapes through forensic computer experts. Searches of this restored data and other documents have generated a database of 175,000 documents, with over 850,000 pages of data. There have been extensive interviews of numerous relevant persons involving several nationally recognized law firms and accounting experts. Over 13,000 option grants were issued in the period being reviewed, and this has entailed thousands of man-hours and time, and over $3 million in expense to the company in the fourth quarter alone. The investigation is not under management’s control, but at this point, we believe we should be in a position to file our 10-K on time. That is our objective. I can promise you all this -- as soon as the review process is complete and we are able to publish GAAP numbers, we will do so and we will schedule an additional call to review those results.

[Beth Walters:]

Operator, we are now prepared to take some questions on the [show] that was presented.

[Operator:]

(Operator Instructions) Your first question comes from Steven Fox with Merrill Lynch.

[Steven Fox:]

Good afternoon, a couple of questions. On the top line, can you talk about networking and consumer trends, specifically if you took out the Cisco lean transfer, what was networking looking like, up sequentially or was it flat? Why was consumer down 5%?

[Forbes Alexander:]

With regard to the lean initiative, sequentially that was up approximately about 8% or 9% if we take out the lean initiative, quarter over quarter.

[Timothy L. Main:]

Consumer was down principally due to some inventory corrections from several of our customers, principally in Europe, primarily in home entertainment products.

[Steven Fox:]

Talking about the full year guidance of 20%, it sort of assumes a slowing growth rate as you go through the year based on your first quarter outlook. Can you talk about the level of conservatism in saying 20%, and what could turn that into a higher number?

[Forbes Alexander:]

Your initial observation is correct. What I would point you to and caution investors on is that our first fiscal quarter is typically a very large quarter for the company, in particular with the element of consumer business we have. We were 36% last year and continued growth in that sector, so we are seeing the seasonal demand. The shape of our year may turn out better than we are looking at here in terms of this 20% guidance, very much dependent upon how we see consumer demand responding in the latter part of the November timeframe and into December and January. Over the last couple of fiscal years, we have seen that consumer business -- I assert it as the tail, but certainly holding there in terms of the demand profile for the company. But certainly, from where we sit now, 20% seems like a very reasonable number with the visibility we have, and yes, there is opportunity to grow that beyond there.

[Timothy L. Main:]

Really, Steve, if you look at fiscal 2006, it was really an extremely hot year. I mean, the kind of revenue growth we put up was extremely high. It has not been that high since -- probably since the dot-com communications explosion. We started 2006 with an expectation that was quite a bit below where we ended up. I mean, it was about a $9 billion year. We ended up at 10. The previous year, I think our initial guidance was $5.7 billion to 6.2, we ended up at over 7. Given the macro-economic trends, I think it is appropriate to be relatively conservative. The focus this year probably will not be on revenue growth. The management focus this year will be earnings growth, capital efficiency, and making sure that the revenue that we have generated predictably delivers better profitability and return on invested capital than we had in ’06.

[Steven Fox:]

Fair enough, and then one last question. Could you -- I know you cannot talk specifically about gross margin trends and you said that the operational issues are improving as planned. Outside of that, was there anything else impacting gross margins that you could sort of preview?

[Timothy L. Main:]

I don’t think so. I think -- again, we are not a gross margin focused company, but even from an operating margins standpoint, what is happening, with these operational issues behind us, one of the dynamics in our business we have talked a lot about is that we have a lot of production in low-cost locations. That continues to increase. Most of the revenue growth is occurring in low-cost locations. In addition to that, the material content in our business continues to increase. What that is going to mean is that gross margins are going to fluctuate based on how much material content is in our business, but it is still our intent to have operating margins improve over time through leveraging operating expenses, SG&A expenses, and being very efficient in the capital we use in the business.

[Steven Fox:]

Fair enough. Thank you very much.

[Operator:]

Your next question comes from Louis Miscioscia with Cowen.

[Louis Miscioscia:]

Thank you. Tim, I was wondering if you could maybe help us out a little bit with the -- I guess not putting out financials and going back and mentioning the new SEC guidance. Going back to the analysts meeting, I would have thought if there was no financial impact because there was no back-dating of options that the new guidance from the SEC wouldn’t really make a difference one way or the other, or is it the concern that some options do have to be adjusted somewhere?

[Timothy L. Main:]

It would be grossly -- by the way, this is the first time I think the operator has your name right, so I think that is a good omen for all of us for fiscal ‘07. It would be very inappropriate for me to comment on the investigation and why there is an expense or there isn’t an expense or why there is delay. One of the reasons I pointed out the number of documents that have been generated, 175,000 documents, 850,000 pages of data, 13,000 option grants issued in the period being reviewed, $3 million in expense to the company -- the scale of this review process is very comprehensive, and it is not under our control how fast it moves. Part of the review process is an independent committee that has their own schedule and we are not in control of that. When that review process is complete, we will publish numbers as rapidly as we can. I can only promise you this -- that we, as soon as those results are available, we will schedule another call and we will go through the financial results in detail, including the explanation of anything that has come out of the review process. Until that time comes, then we cannot comment.

[Louis Miscioscia:]

Maybe we can just switch over to the three issues last quarter. I know you did have a comment that they should be diminishing in the first half. Can you maybe give us a little bit more help on the quarter that just finished? Also, you had talked about getting back to 4%, I think it was, operating margins in the November quarter. Are you still very much on track with your prior thoughts after the last quarter, and basically everything would be close to what we expected, or any other comments here would be helpful.

[Forbes Alexander:]

In terms of the operational issues we identified last quarter, I think it is fair to say that we are on track in that regard. With regard to -- in terms of guidance, in terms of income or margins of any sort, I am afraid I cannot answer that question.

[Louis Miscioscia:]

Okay, thank you for taking my questions.

[Operator:]

Your next question comes from Shawn Harrison of Longbow.

[Shawn Harrison:]

Good afternoon. My first question just has to deal with the restructuring actions, and maybe you could possibly now go into a little bit more detail in terms of the timeline for the savings to fall into the bottom line, the 40 to 50 [bibs] you talked about last quarter.

[Forbes Alexander:]

Absolutely. As we commented, we have accrued costs associated with the realignment or restructuring activities in the first fiscal quarter. The keyword there is accrued. Those are accrued under U.S. GAAP. There were no cash outlays in the fourth quarter with regard to that restructuring activity, and we do not anticipate really much of that would be diminished in the first half of the fiscal year ‘07. In other words, those activities will not commence until the back-half of the fiscal year, i.e. personnel will not be leaving the company until that timeframe in fiscal Q3, and wrapping up capacity. So it will be the third fiscal quarter and we will start to see more of the full effects of that in the fourth fiscal quarter of 2007 and beyond. We will also see some impact there in 2008 as we move through that fiscal year. It is a little bit early to talk about yet, depending on consultation, how we move through this in a satisfactory requirement, but certainly you will start to see the impact in our fiscal Q3 and the full brunt of that in fiscal Q4 of ’07.

[Shawn Harrison:]

My second question has to deal with the use of cash in ’07 just in terms of beyond capital expenditures, maybe where you would look for acquisitions in 2007, by a geographic basis or maybe end markets.

[Timothy L. Main:]

Our acquisitions are relatively opportunistic and pointed to expansions in customer relationships, geographic footprint or services. From a geographic footprint standpoint, we are clearly interested in Asia, and from a service standpoint, I mentioned configure-to-order services, design, product development, and electro-mechanical capabilities. Those would be areas that are of interest to us and, of course, anything that is rational from a customer relationship standpoint, an expansion of helping OEMs convert from a vertical to an outsource model. We always have a high interest in that, provided there is a rational economic model and not a lot of high-cost capacity in the deal. We always keep our rifles nice and shiny, well-oiled and loaded with ammo. If we see good opportunities come up, we have the benefit of a good balance sheet and plenty of cash and, more importantly, cash generation above what our capital needs are, to be able to fund rational acquisition activity.

[Shawn Harrison:]

Thank you.

[Timothy L. Main:]

Having said that, the organic side of this business is very, very strong and we do not need to make any acquisitions for there to be excellent growth, certainly well above end-market growth rates. We feel very positive about the prospects going forward.

[Shawn Harrison:]

All right, thanks a lot.

[Operator:]

Your next question comes from Jeff Rosenberg with William Blair.

[Jeff Rosenberg:]

First question I want to ask, I am still trying to figure out what the lean, I think you had said you expected it to add about $150 million to $200 million per quarter, and it looks like it was more like $300 million. The delta there I do not think is explained by the organic growth. Could you talk a little bit about whether that was higher than you thought it would be?

[Forbes Alexander:]

Let me try to explain that. The number you quoted there, remind me, that was 150 to 200?

[Jeff Rosenberg:]

Yes, that is what I had in my notes.

[Forbes Alexander:]

Okay, that is correct. That is on a -- how can I phrase it -- that is on an effective 90-day period. If you recall in the third fiscal quarter, we removed approximately or we did not recognize approximately $50 million, rough numbers, of revenue or inventory associated with that lean initiative in our third quarter. So you saw a networking sector, I do not have the number in front of me, but it declined quarter over quarter.

[Jeff Rosenberg:]

Yes, it is down about $60 million, I think. So you are saying --

[Forbes Alexander:]

$50 million to $60 million, right.

[Jeff Rosenberg:]

Start to finish then, you are up more like 260, and that makes more sense. Okay.

[Forbes Alexander:]

Right, right. Does that make sense to you?

[Jeff Rosenberg:]

Yes, it does.

[Forbes Alexander:]

Back into the previous quarter, of course, it is the number.

[Jeff Rosenberg:]

Yes, yes, and that makes more sense.

[Forbes Alexander:]

So we did see some sequential growth there of 8%, 9%, if you strip out that lean initiative.

[Jeff Rosenberg:]

Yes, I know, it gets a lot closer. Then, can you just talk about whether or not the working capital worked out the way you expected it too? In other words, the amount of inventory we had and was it completely offset by increases in payables?

[Forbes Alexander:]

Yes, it was. It was -- it turned out as we expected, as you correctly point out. We did assume inventories associated with that lean initiative, and correspondingly, the payable matched to that, yes it did.

[Jeff Rosenberg:]

My other question was -- I do not know if you gave us this directly or just gave us the pieces to know what free cash flow was if we back out the share repurchases, the dividend, and then maybe -- I do not know if there was any cash element of the restructuring, but if you net all that out, what was free cash flow in the quarter?

[Forbes Alexander:]

I would love to, Jeff, but unfortunately, my hands are tied in that regard, given that we are not in a position to provide any GAAP or operating numbers here.

[Timothy L. Main:]

I know it does not seem like a GAAP number, but you have to start with earnings to get cash flow.

[Forbes Alexander:]

So I apologize.

[Jeff Rosenberg:]

Yes, I thought maybe we could just do it from the balance sheet. Okay, thank you.

[Operator:]

Your next question comes from Michael Walker of Credit Suisse.

[Michael Walker:]

Thank you. Just one more question on the margin front, I probably know what the answer is. You had said that you would be able to do at least 4% operating margins in the November quarter. Are you able to continue to endorse that?

[Timothy L. Main:]

We are -- our hands are kind of tied on that. I cannot -- we cannot give you core guidance without giving you GAAP guidance, and that would be -- and to go back and even validate something I said before would be a validation of one metric over the other. I can tell you this; I think the business is on track, it is moving in the direction we thought it would move. We do not see any major distortions to our business and we feel pretty good about the track we are on and the trajectory we are on. As soon as we are in a position to provide you GAAP earnings, we will go through all the core numbers as well and bring you completely up to speed.

[Michael Walker:]

Just on the telecom guidance, down 30% sequentially. I heard you say that you are seeing demand reduction, but it is still a pretty sharp reduction. I want to make sure there is not a lost customer or a program that you walked away from, or anything like that.

[Forbes Alexander:]

No, absolutely not. There is no loss of customer. That customer is a good customer. That is a strong customer. We have not walked away from any piece of business. We are their provider for their product set, but they did see a demand reduction in their business outlook in our first fiscal quarter and certainly from the visibility we have, that makes a nice recovery as we move through fiscal ’07 and beyond.

[Michael Walker:]

Just a final question, just so I can understand the strictures that are on you guys right now. Tim, you know, back at the analyst day in May, which was after the whole options thing had started, you showed us the dates of the board logs when the options were recorded. You were pretty adamant at the time that there was simply no back-dating that took place. I just want to make sure I understand correctly that you are not necessarily walking away from that position, but you are saying that you are simply not allowed to have a position on whether back-dating took place or not.

[Timothy L. Main:]

I am allowed to have a position because I am in control of my own speech process and thought process, but at this point, the review process is not complete. It is just inappropriate for me to comment until that review process is completely done. I think you should appreciate and help your investors appreciate that what is contemplated as a review process at one point in time can change. The number of documents that have been reviewed and the number of people and man hours gives you an appreciation for the comprehensiveness and the scope of this review process. That is not changing anything I have said in the past, but for me to validate or update my comments would be inappropriate until the review process is complete.

[Operator:]

Your next question comes from Matt Sheerin of Thomas Weisel Partners.

[Matt Sheerin:]

Thank you, just one quick question. You talked about the expenses related to the whole option issue amounting to about $3 million. Is that something that is going to flow through the income statement?

[Timothy L. Main:]

Yes.

[Matt Sheerin:]

So we will see --

[Forbes Alexander:]

That $3 million is for the fourth fiscal quarter. Obviously we are now into our first fiscal quarter and the inquiry is ongoing, or the investigation is ongoing. We anticipate further costs.

[Matt Sheerin:]

But you cannot -- can you give us an estimate at this point?

[Forbes Alexander:]

I cannot at this point, no. I would say the investigation is pretty much out of management’s hands. I am unable to do so.

[Matt Sheerin:]

If I can take another stab at the operational issues, it sounds like things are going as planned, but could you rank for us in order of the most progress of the three issues? Could you give us an idea of which issues are going better than others?

[Timothy L. Main:]

I think our services business is the most rapid turnaround. The Americas issues are in progress and the rationalization process is actually a part of improving profitability in the Americas, but with this specific issue we identified as something that takes a little bit longer to resolve, and then electro-mechanical tooling operation we said in the last call would take at least the first two quarters of fiscal ’07 to completely resolve, or at least to have it diminish in materiality to our financial results. That is on track, but that is the longest pole in the tent with regard to those three issues.

[Operator:]

Your next question comes from Brian White of Jefferies & Company.

[Brian White:]

Forbes, I am wondering, could you talk a little bit about inventory and the sequential increase that you saw there?

[Forbes Alexander:]

Again, my hands are tied a little bit in that regard, in terms of the inventory dollar growth, but our turns’ about eight. We did anticipate or we discussed bringing on inventory from the lean initiative, which was in the range of $150 million. Certainly the revenue was around about eight turns for the quarter.

[Brian White:]

Okay, and would we expect inventory to go up in the November quarter, sequentially?

[Forbes Alexander:]

That would very much depend upon how we see the consumer forecast and volumes as we move into the December period, but certainly I would hope to hold that flat to see some of those burn that off, as I say. We are pre-positioning for some healthy growth here in our first fiscal quarter, but certainly we should hope to see that level off and just come down a little bit. One of the things I would point out in terms of why I cannot give you specific dollar numbers around inventory payables and receivables, the cash cycle did improve by five days in the quarter, so there was some good working capital management during the course of the period.

[Brian White:]

Tim, if you look at the different markets in ’07, what market do you think will grow the fastest?

[Timothy L. Main:]

For Jabil, even with the lean initiative, we will see, on absolute dollar basis, the networking segment grow quite a bit during the year. I would expect to see organic revenue growth in the segment, even excluding the lean initiative. I think we will still see very strong growth out of the instrumentation and medical segment. I think we will see strong growth in consumer, and I think in computing and storage, which is growing as a segment, we will see high double-digit or high-teens, low-twenties type of year-over-year revenue growth in that segment. That happens to be a very strong segment for us and we are making significant progress in enterprise computing and storage, and that is a great segment for us.

[Brian White:]

When you talk about 20% growth for the year, what are you assuming in terms of end markets?

[Timothy L. Main:]

It is a fairly conservative view of end markets. It does not discount the recession, to state the obvious. We are looking for very moderate, slow-to-moderate GDP kind of growth.

[Operator:]

Your next question comes from Shawn Severson of Raymond James.

[Shawn Severson:]

Thank you. Good afternoon. Tim, could you just give a little color on the organization itself, and maybe how -- has this whole options thing been incredibly distracting? I know you said you spent a significant number of man hours on it, but have you felt that it has weakened any other part of the organization from a distraction standpoint, or do you think it has been pretty well isolated to people not involved in the day-to-day operations of the company?

[Timothy L. Main:]

We try to keep that pretty well isolated from rank-and-file employees. They did not have anything to do with this and they have a full-time job, as we do. I do not think it has dispirited the organization, either. Jabil is kind of a stand-up-and-fight organization culturally. When this stuff started to happen, my inbox was just full of hundreds of e-mails from folks pledging support and continued commitment. I have not felt that waver at all, so I do not think it has dispirited. I think people are a little bit frustrated, as investors are and analysts are, that it takes as long as it has to fully resolve, but other than that, I think people have gone about their business, along with customers and everybody in the organization to continue to run the business as we have in the past. It has taken up a lot of executive management’s time, but that is just something we have to put up with.

[Shawn Severson:]

You found everything, from a compliance standpoint, you know, IT systems and the information that you need, I assume this was a pretty good test of the IT systems in terms of financial reporting and such. Has that been -- you know, any additions or changes you wanted to make there, or has it been pretty solid?

[Timothy L. Main:]

I think that has been pretty solid.

[Forbes Alexander:]

I concur. Pretty solid.

[Shawn Severson:]

Thank you.

[Operator:]

Your next question comes from Yuri Krapivin of Lehman Brothers.

[Yuri Krapivin:]

Good afternoon, everybody. Could you comment on your supply chain situation? We keep hearing from different companies that the supply chain overall remains tight and lead times for certain components are still extended. What has been your experience lately?

[Timothy L. Main:]

I think generally speaking, lead times are relatively stable. From a supply chain management standpoint, logistics costs we expect will continue to increase as energy and fuel prices go up. Lead times extended a little bit earlier in the year. They have stabilized somewhat. There are certain organizations in memories and other devices that are in periodic short supply, particularly in this time of year when the consumer electronics business is starting to ramp up. I think it is a very maneuverable, livable component marketplace.

[Yuri Krapivin:]

Can you provide an update on your relationship with Phillips? Your regional agreement with them expires soon and I believe you have been negotiating new terms with them.

[Timothy L. Main:]

I think the Phillips relationship is in good shape. The expiry of the initial agreement will occur in October. We would expect Phillips to continue to be a significant customer for Jabil. I do not expect any significant disruptions of our business. I think that investors should take a look at the value of incumbency when they look or think about what the ramifications of the initial contract period will be. Generally speaking, companies that have engaged in that type of activity have enjoyed a continuing relationship following the expiry of the initial agreement. That has been true of our competitors as well as Jabil, so we would expect volumes to fluctuate based on how Phillips does in the marketplace and how we do competitively, and that can change from time to time, but we think Phillips is a great company and a good customer. I think we will have a very solid business relationship with Phillips in ’07.

[Operator:]

Your next question comes from Tom Dinges of JP Morgan.

[Thomas Dinges:]

Forbes, a quick one for you -- just a point of clarification here that the cap-ex that you are expecting for next year, $200 million to $250 million, that is inclusive of the roughly $40 million that you are going to spend for the two buildings. Is that correct?

[Forbes Alexander:]

That is correct, yes.

[Thomas Dinges:]

Is the function of why cap-ex seems a little bit lower than I think some of us were expecting is that some of the equipment from some of the sites you are downsizing can be moved to other sites on an as-needed basis, and therefore not as much new equipment that you are having to purchase?

[Forbes Alexander:]

There is some of that, but really, if you look at our capital expenditures in fiscal ’06, we were approximately $280 million, or roughly about 10% of the additional revenue we added. That is typically a good measure in terms of our capital expenditures. Our guidance we have given, we are adding just over $2 billion in fiscal ’07 over ’06, so it is in the range there. Last year, we did add capacity in China, a site in India as well, which were roughly, in terms of building costs, in the same type of region, $35 million to $40 million.

[Timothy L. Main:]

And getting more, better productive capacity and utilization of existing assets in place.

[Forbes Alexander:]

Absolutely.

[Thomas Dinges:]

Then, just a quick one for you, Tim, along the lines of the distractions, perhaps, that have been caused by what is going on with all the investigation and so forth, but a slightly different way to ask the question, which is as you guys look forward, you are now at the end of your fiscal year. Obviously this is the time of year where you go through and evaluate compensation and the mix that you are going to have between cash compensation, equity-based compensation, and various forms of equity-based compensation. Is it fair to say that there is a shift inside your organization there that perhaps weighs that a little bit more towards the cash compensation now, given some of the things that have happened? Or is it really expected to be no change? Essentially, if it is option-based or it is cash-based, it is all falling through the income statement now.

[Timothy L. Main:]

That will be, in the end, up to the compensation committee of the company. We have not established that yet. I do not anticipate any major shifts. The people on the management team I think would rather have equity than cash. Cash is good, but for many years, the philosophy of the company has been that the primary objective of management should be weighted to long-term shareholder wealth and long-term value of the company. We are big believers in that. I do not think any of these short-term issues that are very important for us to deal with and require our attention, I do not think any of that should detract from how we have been set in management and how we have run the business in the past. We want to grow operating income. We want to have efficient use of capital. We want to grow cash flow. We want to build our market share. We want the senior management team in as tight alignment with shareholders as they can. The best way to do that is to have their compensation weighted significantly to the equity side.

[Operator:]

Your next question comes from Todd Coupland of CIBC.

[Todd Coupland:]

Good afternoon, everyone. Just a quick question on consumer. The growth that you saw in this quarter and anticipating, I guess, for next quarter in 2007, could you comment on how much of that is market growth versus outsourcing, or is there still a long way to go in terms of some of the ramp up in outsourcing you have seen with a couple of those key customers?

[Timothy L. Main:]

I think this is -- in terms of our sequential experience this year, it is principally existing customers and seasonal patterns with those customers, as opposed to a major new customer moving into the revenue stream. There are new customers that I think will contribute significantly in 2007 and will be probably a material part of our results when we look at Q1 of ’08, but they will be home entertainment products and other consumer electronic products that will be commencing during the course of 2007, and we would expect it to be significant contributors to 2008. This particular year, it is principally going to come from existing customer relationships.

[Todd Coupland:]

You talked about the growth that you expected in computing and storage. Is there any additional color there you can provide in terms of market growth or new programs, market share wins, new outsourcing? Just talk a little bit about that.

[Timothy L. Main:]

I think demand has been pretty good. Consumer spending has been fairly flattish, but enterprise spending overall has been surprisingly robust, in my opinion from patterns that we have seen in the past. I think the end market strength has been a little better than I originally anticipated when I look back at the beginning of the year. Having said that, we are engaging in configure-to-order services there. We are doing more product development work. We have a couple of new customer relationships that are showing significant growth and we really love that sector. It is a very rich segment in terms of the number of services that Jabil can bring to bear -- complex design, complex MPI printed circuit board production, full-scale product integration, configure-to-order services. It is a complete end-to-end supply chain solution. I think we have a very attractive offering from a service standpoint for that space. We are going to place a lot of emphasis in that area over the next couple of years.

[Operator:]

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Your last question comes from Jim Suva of Citigroup.

[Jim Suva:]

Thank you very much. Tim, can you give us a little bit of clarity on, as you are working through the resolution of the electro-mechanical tooling item, is that more a function of getting additional business in the door, or gaining share at existing customer or operational issues? How do you exactly work through that challenge?

[Timothy L. Main:]

It is primarily a loading issue now. I think we know how to build the product, how to make the product. It is principally a loading issue now. I think we will get that resolved and as we go through Q1, Q2 and into Q3, we will deal with that issue. I think we will probably stop talking about it, because it will no longer be a material item to our results.

[Jim Suva:]

For that loading, can you reach it with existing business or are there new businesses that will fill into that loading requirement?

[Timothy L. Main:]

We could reach that loading with the existing customers in the site. We do not have to perform any miracles in terms of finding new customers and creating business development miracles. We could do that with the existing customers for the site today.

[Beth Walters:]

Thanks, everyone, for joining us on the call today. As Tim has mentioned several times throughout this call, we will look forward to sharing our full results when we are able to publish them. Thank you.

[Operator:]

Thank you. This concludes today’s Jabil Circuit fourth quarter and fiscal year 2006 conference call. You may now disconnect.