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Flex (FLEX) Q2 Earnings Beat, Revenues Miss, View Tepid

Shares of Flex Ltd.FLEX declined around 35% on Oct 26, following the company's mixed second-quarter fiscal 2019 results, and a tepid third quarter and fiscal 2019 guidance.

The company delivered second-quarter non-GAAP earnings of 29 cents per share, beating the Zacks Consensus Estimate by a penny. It also increased 2 cents from the year-ago quarter's figure of 27 cents.

Revenues increased 7% from the year-ago quarter to $6.711 billion. This marked the seventh consecutive quarter of year-over-year revenue growth. However, the figure lagged the Zacks Consensus Estimate of $6.808 billion.

Robust performance across most end markets drove year-over-year revenue growth. The top line benefited from new business wins aided by the Sketch-to-Scale initiative.

Additionally, the company views exploring new emerging markets, including India, as a positive. Further, new bookings from medical group keep management optimistic.

Flex anticipates continued development of the long-term strategic partnership with Nike NKE which is likely to lead to profitability.

Markedly, the company's stock has lost 60.6% on a year-to-date basis, compared with the industry 's decline of 11.6%. This can primarily be attributed to the loss from Nike venture and unfavorable business mix.

Quarter Highlights

Communications & Enterprise Compute ("CEC") revenues grew approximately 13% from the year-ago quarter to almost $2.14 billion. Management had anticipated revenues to increase in the range 5-10%.

Expansion in cloud data center design capabilities and 5G network buildout led to better-than-expected results. Notably, the cloud data center offerings witnessed new customer wins, surging 20% on a year-over-year basis.

Consumer Technologies Group ("CTG") revenues advanced 2% from the year-ago quarter to $1.8 billion. Management had anticipated year-over-year growth to be in the range 10-15%.

Lower-than expected growth in this segment was primarily owing to weakness in core consumer products, India capacity constraints and loss from Nike venture.

Revenues from the Industrial & Emerging Industries ("IEI") segment were $1.6 billion, improving 8% on a year-over-year basis. Management had anticipated year-over-year growth to be in the range 5-10%.

Growth in industrial, home, lifestyle was a positive which more than offset weakness in capital equipment and energy.

High Reliability Solutions ("HRS") revenues were $1.2 billion, up 4% from the year-ago quarter, almost near the upper end of the guided range of flat to 5%. The segment comprises medical and automotive group.

Operating Details

Non-GAAP gross margin contracted 20 basis points (bps) on a year-over-year basis to 6.5% in the reported quarter. Higher start-up costs, lower operating margins and unfavorable business mix impacted gross margins.

Non-GAAP selling, general & administrative ("SG&A") expenses were $210 million, down 8.3% year over year. Moreover, as a percentage of net sales, SG&A expenses declined 60 bps to 3.1%.

Non-GAAP operating margin expanded roughly 30 bps on a year-over-year basis to 3.3%. Investments pertaining to long-term growth and profitability limited margin expansion.

Segment wise, CEC generated $63 million in adjusted operating profit, resulting in adjusted operating margin of 2.9%.

CTG raked in $31 million in adjusted operating profit, resulting in an adjusted operating margin of 1.7%.

IEI reported $66 million in adjusted operating profit and 4.2% adjusted operating margin.

HRS reported $90 million in adjusted operating profit, resulting in adjusted operating margin of 7.4%.

Balance Sheet & Cash Flow

As of Sep 28, 2018, cash & cash equivalents were $1.38 billion up from $1.26 billion at the end of the previous quarter. Total debt (long-term plus short term) was $2.93 billion at the end of the quarter under review.

Flex generated net cash from operations of $120 million during the quarter. Free cash flow came in at ($60) million.

During the second quarter, the company repurchased approximately 4.4 million shares for $60 million. The company intends to resume share buyback to return 50% or more of its annual free cash flow to shareholders.

Guidance

For third-quarter fiscal 2019, revenues are expected to be in the range of $6.6-$7 billion. The Zacks Consensus Estimate for revenues is $7.38 billion.

The company expects CEC and IEI to grow in the range of 5-15% and 5-15%, respectively, on a year-over-year basis. CTG is expected to decline in the range of 10-20%. However, HRS revenues are anticipated to remain flat to +/-5% year over year.

Adjusted operating income is projected in the range of $220-$250 million. Moreover, adjusted earnings are expected between 29 cents and 33 cents per share. The Zacks Consensus Estimate for earnings is 34 cents per share.

For fiscal 2019, Flex updated guidance. It now anticipates revenues in the range $26-27 billion (previously $27-29 billion). Adjusted earnings are now expected to between the range of $1.05 and $1.15 per share (previously $1.2 and $1.3 per share).

Notably, the Zacks Consensus Estimate for revenues and earnings for fiscal 2019 are pegged at $27.74 billion and $1.23 per share, respectively.

Conclusion

The company's CEC business is expected to improve on the back robust adoption of cloud data center products. New customer wins in telecom in relation to 5G demand is projected to bolster growth. Further, new programs across emerging markets are expected to propel CTG revenues.

IEI revenues are envisioned to improve primarily due to new program ramps across lifestyle and home verticals. Weakness in energy and capital equipment business is likely to impact the segment marginally.

Medical group is witnessing remarkable bookings. This robust adoption is a key catalyst enabling the company to register impressive fiscal 2020 and fiscal 2021 revenues.

However, stable bookings in automotive are expected to limit HRS growth. Moreover, increasing investments in data center, automation team, among others are likely to limit margins at least in the near term.

Zacks Rank & Stocks to Consider

Flex carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are NetApp, Inc. NTAP and Upland Software, Inc. UPLD , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here.

NetApp, Salesforce and Upland Software have a long-term earnings growth rate of 14.1% and 20%, respectively.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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