While EMS provider Flextronics incurred a net loss in the first quarter of fiscal year 2010, its operating income beat Wall Street estimates. Meanwhile, Flextronics management said it expected second-quarter revenue to be below analysts’ estimates. Flextronics shares fell after hours.
Management said first-quarter revenue was $5.78 billion, vs. $8.35 billion one year ago, reflecting roughly a 30% drop in revenue.
According to some financial analysts, Flextronics is expected to show growth in the second quarter in the consumer, computing and infrastructure segments while the other markets remain flat.
Meanwhile, some on Wall Street indicate there are signs that the mobile and computing markets may be bottoming have continued. On its Q2/09 conference call, Nokia said that it believed the handset market has bottomed and that inventory destocking is now finished. At the time, Nokia maintained its annual forecast for the handset market to fall 10% in C2009.
For the same quarter one year ago, Flextronics earned roughly 18% of the outsourcing industry’s mobile phone revenues according to Michael Palma, senior research analyst electronics manufacturing services (EMS) for IDC.
“For this quarter, mobile phones represented 21% of Flextronics’ total revenue compared to one year ago where it was 19%”, adds Palma.
While Flextronics is seeing more stabilization across its end-markets, its flat guidance reflects some of its struggling customers such as Nortel, Sony Ericsson and Motorola, which is being offset by ramping new programs Research In Motion and Hewlett-Packard.
This is leading to uncertainty in forecasting and management continues to provide a wide range for guidance. While Flextronics is unable to control the end-market demand and its customers’ success, it is doing a good job of cleaning up its operations through restructuring, improving working capital metrics and driving free cash flow.
“Our execution around restructuring and other discretionary spend control was excellent this quarter, and our operating margins benefited from our efforts in this area,” said Paul Read, chief financial officer at Flextronics. “In addition, we further reduced inventory by $325 million, achieved a cash cycle of 19 days, generated free cash flow of $68 million, and strengthened our capital structure through our senior debt reduction of $200 million. We remain focused on positively impacting all areas within our control.”
See Figure 1 below for a detailed perspective of Flextronics inventory levels.
Figure 1
Flextronics will require an improvement in end-markets to drive revenue growth and significant operating leverage beyond what it is getting from its restructuring actions.
End-market review
Investment analysts Todd Coupland and Sean Peasgood with CIBC offered up some deeper insight into Flextronics’ end-markets. The growth this quarter came from the consumer electronics segment, which was up 16% quarter-on-quarter after being down over 50% in Q4.
This quarter, Research In Motion was a 10% customer for the first time. Flextronics is benefiting from new programs ramping with RIM as it expands into new geographies and into the consumer segment of the smartphone market. Flextronics had no 10% customer last quarter.
In the past, Flextronics has indicated it believes some of the computing customers could become 10% customers later in the year (Hewlett-Packard). As a reminder, before Flextronics acquired Solectron, Solectron’s largest customers were Cisco Systems and Hewlett-Packard.
Computing
Flextronics’ computing segment was up 11% quarter-on-quarter and represented 19% of sales (18% in Q4/F09). Computing revenue was $1.1 billion. The sequential growth was due to ramping new notebook programs including Hewlett-Packard, which should continue to growth through out 2010.
Flextronics reiterated it expects this business to be operating at a $1.5 billion to $2.0 billion run rate by the end of F2010. Servers remained weak in the quarter but have started to stabilize.
Mobile
Flextronics’ mobile segment represented 21% of sales (20% in Q4/F09), and grew 7%
sequentially to $1.2 billion. Flextronics is benefiting from new programs with Research In Motion, offset by weakness at Motorola and Sony Ericsson. Once again, smartphone demand is helping to offset the weakness in the lower and mid end of the market.
Consumer digital
Flextronics’ consumer digital segment increased 16% quarter-on-quarter and represented 11% of sales this quarter (versus 13% in Q4/F09). Revenue in this segment was $646 million down from $1.61 billion in Q3/F09. This segment rebounded after declining over 50% last quarter due to weak consumer demand.
In FQ2, management expects some seasonal pick-up heading into the back-to-school and holiday season, however this is expected to be weaker than normal.
Industrial, auto, medical and other
This segment represented 17% of sales (versus 16% in Q4/F09) and was down 7% quarter-on-quarter contributing $964 million in revenue. Flextronics continues to diversify this segment and has won new business in the solar, self-service kiosks and disposable medical product markets.
Infrastructure
This segment represented 32% of sales (versus 33% in Q4/F09) and was flat quarter-on-quarter to $1.86 billion in revenue. This quarter Flextronics saw some strength in networking and optical, which helped to offset the weakness at Nortel. Flextronics believes that after the sale of these Nortel assets, it will be able to maintain this business. Nortel was not broken out this quarter by Company management but represented $244 million in Q4.
See Figure 2 below for a detailed perspective of Flextronics revenue by end-market.
Figure 2
Additional information
Adjusted operating income for Flextronics for the first quarter ended July 3, 2009 was $90.2 million with an adjusted operating margin of 1.6%, compared to adjusted operating income of $50.6 million and an adjusted operating margin of 0.9% for the prior quarter.
Adjusted net income for the first quarter ended July 3, 2009 was $63.1 million.
In connection with Flextronics’ previously announced restructuring plans, the Company expected to recognize between $220 million and $250 million of pre-tax restructuring charges, with total cash expenditures expected to be between $130 million and $150 million.
During the first quarter ended July 3, 2009, Flextronics recognized $65 million of pretax restructuring charges comprised of $33 million of cash charges primarily related to employee severance costs and $32 million of non-cash asset impairment charges.
As of the quarter ended July 3, 2009, the cumulative charges of the restructuring plans were $215 million comprised of $128 million in cash and $87 million in non-cash charges. Flextronics expects remaining charges to be incurred over the course of fiscal year 2010.
Flextronics management also stated interest income and taxes will revert to normal levels, which could indicate a possible ramp in gross margin. Management explains this by pointing to restructuring benefits, and an expected revenue mix shift to more components and less assembly.
Source: Flextronics, VentureOutsource.com July 2009
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