Flextronics International Ltd. (
FLEX
)
reported strong second quarter 2013 results with earnings of 26
cents, which beat the Zacks Consensus Estimate by 4 cents. The
better-than-expected result was primarily driven by robust margin
expansion in the quarter.
Quarter Details
Total revenue plunged 23% year over year to $6.17 billion,
inching past the Zacks Consensus Estimate and was within the
management's guided range of $5.9 billion-$6.3 billion.
The year-over-year decline was primarily due to change in
business mix as a result of Flextronics' exit from the ODM PC
business in fiscal 2012. Flextronics continues to wind down the
assembly business with its largest mobile customer
Research In Motion (
RIMM
)
, which also significantly hurt revenue growth in the
quarter.
The Integrated Network Solutions segment was the largest
revenue contributor (44% of total revenue) in the quarter,
despite a 9% annual decline in revenue. The decline was primarily
due to a weak demand trend in the telecom sector.
High velocity solutions (29% of total revenue) segment revenue
declined a massive 48% from the year-ago quarter, reflecting the
lack of revenue from the ODM PC business and continued reduction
of business from Flextronics' largest mobile customer.
The significant year-over-year decline in these two segments
were partially offset by strong performance from Industrial and
Emerging solutions (16% of total revenue) and High Reliability
Solutions (11% of total revenue), which improved 3% and 9%,
respectively from the year-ago quarter.
The year-over-year improvement in Industrial and Emerging
solutions revenue was primarily due to healthy double-digit
growth in the appliances business and better-than-expected
performance from capital equipment and kiosks, which fully offset
a weak performance from the energy-related business.
High Reliability Solutions segment revenue jumped owing to
improving performance from medical and automotive (up 20% year
over year) business.
The ongoing transition to low volume high margin business
helped Flextronics to expand its gross margin in the reported
quarter. Although gross profit (including stock-based
compensation but excluding amortization) decreased 1.5% from the
year-ago quarter to $366.8 million, gross margin expanded 120
basis points ("bps") to 5.9%.
Further, significantly lower selling, general and
advertisement expense (down 8.6% year over year) helped operating
income (including stock-based compensation but excluding
amortization) to jump 7.7% year over year to $174.6 million.
Operating margin improved 80 bps to 2.8% in the quarter.
Net income (including stock-based compensation but excluding
amortization) was $167.4 million or 25 cents compared with $144.8
million or 20 cents in the year-ago quarter.
Flextronics exited the quarter with cash and cash equivalents
of $1.56 billion compared with $1.29 billion at the end of the
previous quarter. Total debt was $2.10 billion versus $2.19
billion in the previous quarter.
Outlook
For the third quarter, management expects earnings in the
range of 18 cents to 22 cents per share. Currently, the Zacks
Consensus Estimate is pegged at 23 cents. Total revenue is
expected in the range of $5.8 billion to $6.2 billion.
Management expects stable revenue growth for High velocity
solutions and High Reliability Solutions. However, the other two
segments Industrial and Emerging solutions and Integrated Network
Solutions are expected to decline in mid-single digit range.
Our Recommendation
We believe that strong new bookings will continue to boost
top-line growth over the long term. However, macro-economic
concerns and weak end-market demands are the major concerns in
the near term. Moreover, the portfolio realignment is also
expected to hurt Flextronics' top-line growth in the near term.
Further, increasing spending related to new program ramp-ups will
hurt profitability going forward.
We have a Neutral recommendation on Flextronics over the long
term. Currently, Flextronics has a Zacks #4 Rank, which implies a
short-term Sell rating (for the next 1-3 months).
FLEXTRONIC INTL (FLEX): Free Stock Analysis
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RESEARCH IN MOT (RIMM): Free Stock Analysis
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