FOOL CONFERENCE CALL SYNOPSIS*
By Greg Markus (MF Boring)

Solectron Corp. (NYSE: SLR)
777 Gibraltar Dr.
Milpitas, CA 95035
408-957-8500
http://www.oakridge.com/Solectron

ANN ARBOR, MI, Jan. 2, 1997/FOOLWIRE/ --- After the close of the market on Dec. 16, Solectron Corp. announced results for its first quarter of fiscal 1997, ended Nov. 29, 1996. Sales of $808 million represented a 17% increase over the first quarter of fiscal 1996. Net income for the quarter, inclusive of a one-time, pre-tax charge of $4.0 million for transaction costs associated with the acquisition of Force Computers Inc., was $31.5 million, up 15% from the first quarter of fiscal 1996. Fully diluted earnings per share were $0.58, reflecting approximately $0.05 per share in non-recurring charges. Without the non-recurring charge, operating earnings would have been $0.63 per share, in line with the consensus estimate of analysts.

At quarter's end, Solectron had current assets of $1.31 billion (up from $1.14 billion the previous quarter), total assets of $1.62 billion (versus $1.45 billion), current liabilities of $457 million (versus $358 million), and total liabilities of $852 million (versus $752 million).

COMMENTS ON SALES

In the follow-up conference call, Solectron CFO Susan Wang noted that sales were relatively flat sequentially (as compared with the fourth quarter of FY96) and were perhaps 5% lower than expected, due in part to declines in some older projects at the company's Bordeaux, France, site and partly to quarter-to-quarter changes in the mix of "consignment" versus "turnkey" projects.

[Note: When a manufacturer contracts with Solectron on a turnkey basis, Solectron procures most or all of the components necessary for production, whereas in consignment projects the contractor supplies much or all of the needed components. Turnkey projects increase Solectron's top line and gross profits, due to the inclusion of the costs of component content; but it lowers operating profit margins, since margins on component procurement are lower than those on Solectron's higher value-added work.]

CFO Wang noted that revenues were strong in the North American region, representing 77% of total sales in the quarter, as compared with 73% in the preceding quarter. Systems assembly and testing grew to represent 12% of total sales in the quarter, as compared with 8% in the preceding quarter. Revenues from the datacom/telecom segment grew to 34% of total sales, up sequentially from 30%. PC volume was 17% of total sales, up from 15% the previous quarter. Work station business represents approximately 20% of sales.

Hewlett-Packard remains Solectron's top customer and should account for than 10% of total sales for the fiscal year. Other top customers include (not necessarily in order) Cisco, Bay, 3Com, Sun Micro, SGI, Intel, "and so forth."

Without the one-time impact of the Force Computer acquisition on first quarter 1997 results, operating margins would have been 6.5%, which is at the high end of Solectron's normal range. The comparatively high margin was said to be "due in part to the larger-than-normal mix of consignment business" relative to "turnkey" business. As the mix returns shifts back toward turnkey, operating margins should move back down "slightly." In response to a question, Wang clarified that in the quarter the company had not shifted away from turnkey to consignment programs but had added additional consignment programs as compared with the previous quarter.

Wang reiterated that despite somewhat lower than expected revenues in 1Q, "throughput was actually very strong," as earnings met expectations and the company's headcount increased by 1,000.

FORWARD LOOKING COMMENTS

CEO, President, and Chair Ko Nishimura noted in the conference call that during the quarter Solectron announced the opening of two new facilities, in Massachusetts and in Suzhou, China. The Massachusetts site is expected to commence operations during the current quarter, while the Chinese site should begin operation in 3Q of fiscal 1997.

In response to a question regarding high-volume "box-building," Wang replied that Solectron "believes the prospects are very strong and that we're in a very good position to be awarded business in high-volume as well as in our traditional strength in medium-volume and low-volume areas."

One question mark is whether the Malaysian government will extend Solectron's "tax holiday" for its operations there. Wang was of the opinion that the company is in "reasonably good shape" in that regard but that the final decision may not be made until February.

When asked if an investor "should disturb the full-year projections for revenues and earnings" in light of the revenue shortfall, Wang replied, "I think our overall objectives for the year would still be met, because we see strong indications that the back half will be ramping up." Backlog (defined as products shippable within two to four weeks) grew to $670 million in the quarter, and forward visibility has "improved."

Wang said that "the revenue outlook for the second quarter is strong," and that the company expects the recent Force Computer acqusition to contribute "approximately $35 million in sales in the second quarter." She that Street estimates for FY97 sales are in the range of $3.8 to $3.9 billion, and "we're quite comfortable with that."

In a follow-up statement on Dec. 17, Solectron VP of Finance Dick Gilpin reiterated to Reuters that the company remains "on-stream" to meet earnings estimates for its second quarter and for fiscal 1997. Specifically, he said the First Call consensus earnings estimate of $2.75 per share for fiscal 1997 was "reasonable" and the company was comfortable with the First Call mean EPS estimate of $0.65 for the second quarter.

Gilpin noted that, over the next two to three years, the company intends to increase the mix of its business that includes building complete "boxes," rather than just the electronic boards. "We expect to ramp that up over the next two to three years to where it will be 30 to 50 percent of our revenue over next two to three years," he said. Although that business carries somewhat lower margins compared with the company's other activities, Gilpin noted that it is a rapidly growing one and the company expects to maintain its return on investment levels "through higher asset utilization and inventory turn levels."

* A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. Note: Statements made by a company other than historical information may constitute forward-looking statements for which the company can claim protection under the Safe Harbor Act. Please consult the company's filings with the SEC for information on risk factors which might cause actual results to differ materially from the information contained in these forward-looking statements.