Flextronics Marginally Beats - Analyst Blog

A leading designer and provider of electronics manufacturing services, Flextronics International Ltd. (FLEX) reported strong first quarter 2011 results with both the revenues and earnings marginally beating the Zacks Consensus Estimate. Revenues and earnings both exhibited strong growth sequentially and year over year.

Earnings per share including stock based compensation but excluding intangible amortization and restructuring charges increased a whopping 183.3% year over year to 17 cents from 6 cents. Sequentially, earnings per share increased 21.4% from 14 cents. The strong growth was driven by higher revenues and increased operating margin. However, earnings beat the Zacks Consensus Estimate of 16 cents by a penny. Shares were down $0.21 (3.20%) after hours.

Revenues

Revenues increased 14% year over year and 11% sequentially to $6.6 billion, driven by a strong growth across the entire product portfolio. This was above the Zacks Consensus Estimate of $6.4 billion and was at the high end of management’s guided range. The growth in revenues was driven by strength from outsourcing programs and favorable trends from mobile, consumer digital and computing business.

However, Flextronics continued to face component supply constraint in the quarter, which had a negative impact of approximately $200 million on revenues.

Segment wise, Infrastructure (28% of total revenues) decreased 3.5% year over year to $1.8 billion, primarily due to component shortages in the quarter.

Industrial, Automotive, Medical and other (22% of total revenues) leaped 51.1% year over year to $1.5 billion. Flextronics won a new program in the Industrial segment worth $300 million in the quarter.

Moreover, a strong demand for medical equipment and new product brands in the Medical segment aided the first quarter results. Flextronics booked more than 70 million of new medical programs in the quarter.

Flextronics signed a number of significant partnerships with Sun Power, Pythagoras and Petra Solar in clean technology in the quarter, which will provide a boost to its top-line.

Mobile revenues (20% of total revenues) increased 11.1% year over year to $1.3 billion, driven by new program wins. Computing (19% of total revenues) increased 13.7% year over year to $1.3 billion. Consumer digital climbed 10.8% year over year to $716 million.

Margins

Operating income, including stock based compensation, but excluding one time items, shot up 135.3% year over year to $175.1 million. Operating margin increased 190 basis points to 3.0% in the first quarter of 2011, primarily driven by a strict cost control.

Selling, general and administrative (SG&A) expense grew 6.6% year over year to $195.7 million. As a percentage of revenues, SG&A was 3% versus 3.2% in first quarter 2009.

Balance Sheet

At quarter end, cash and cash equivalents were $1.73 billion as compared with $1.93 billion at the end of previous quarter. Total debt was $2.39 billion at the end of July 2, 2010 versus $2.74 billion at the end of Mar 31, 2010.

Net Cash from operating activities was $88.8 million in the first quarter of 2011 as compared with $49.2 million in the fourth quarter of 2010, and $106.9 million in the first quarter of 2010.

Under its $200.0 million stock buyback program, Flextronics repurchased shares worth $135 million in the quarter.

Outlook

For the second quarter of 2011, Flextronics expects revenues to be in the range of $6.8 billion to $7.2 billion. Earnings per share on a non-GAAP basis are expected to be in the range of 19 cents to 21 cents.

Flextronics believes problems related to component supply shortages will gradually decrease going forward and expects a strong sequential growth from all of its markets. Flextronics expects Infrastructure to achieve double-digit growth by the end of fiscal 2011.

Management expects to achieve a strong growth in Industrial segment based on a recovering capital equipment market and clean technology such as smart meters, solar modules and inverters, office equipment and kiosks.

For the second quarter of 2011, Flextronics forecasts low double digit sequential growth in Computing business. The company expects program ramps for its new products and anticipates that an increasing demand for existing products will drive double-digit revenue growth in the Consumer digital segment.

Recommendation

We maintain a Neutral rating on Flextronics on a long-term basis (for the next 6 to 12 months) due to the short supply of components that could impact revenue growth going forward. Moreover, FLextronics continues to face tough competition from Celestica Inc. (CLS) and Jabil Circuit Inc. (JBL).

However, a robust product portfolio, recovering infrastructure, industrial and automotive businesses, new program wins, huge client base and increasing focus on emerging clean technology will drive the shares in the long term.

Currently, Flextronics has a Zacks rank of # 3, which implies a short-term Neutral rating (for the next 1-3 months).