Flextronics Beats on Higher Revenue - Analyst Blog

A leading designer and provider of electronics manufacturing services, Flextronics International Ltd. (FLEX) reported strong third quarter 2011 results with both revenues and earnings beating Zacks Consensus Estimates. Revenues and earnings both exhibited strong sequential and year-over-year growth.

Earnings per share including stock-based compensation but excluding intangible amortization and restructuring charges increased 53.3% year over year and 9.5% sequentially to 23 cents. This marks the fifth consecutive quarter of EPS growth. The strong growth was driven by higher revenues across all of its segments. Earnings beat the Zacks Consensus Estimate of 22 cents by a penny.

Revenues

Revenues increased 19.5% year over year to $7.83 billion, driven by strong growth across all of its segments. Reported revenue was above the Zacks Consensus Estimate of $7.62 billion and was above the high end of management's guided range of $7.5 billion to $7.7 billion. The company witnessed growth from outsourcing programs, market share gains and favorable trends from mobile, consumer digital and computing business.

Segment-wise, Infrastructure (27% of total revenues) increased 21.0% year over year to $2.12 billion, primarily on low volume and business mix, strength across its existing customer base and continued new market share wins. For fiscal 2011, management expects infrastructure to grow more than $1 billion in incremental sales, signifying a 10% to 20% growth rate over 2010.

Industrial, Automotive, Medical and other (18% of total revenues) increased 20.0% year over year to $1.42 billion. Although the segment did not increase sequentially, management expects the segment to witness low double-digit growth sequentially in the fourth quarter. The Industrial segment of Flextronics won a new program worth $450 million in the quarter.

Moreover, a strong demand for medical equipment and new product brands in the Medical segment aided the third quarter results. Management expects medical revenues to surpass $1 billion, which could translate to a 30% year-over-year growth in 2011.

Mobile revenues (22% of total revenues) increased 20.0% year over year to $1.69 billion, driven by seasonality in new program wins. Research in Motion (RIMM) was the only customer that represented above 10% of Flextronics' revenues. For the fourth quarter, management expects Mobile segment to decline in the mid-teens sequentially due to seasonality.

Computing (18% of total revenues) increased 6% year over year to $1.40 billion, driven by new program wins that was partially offset by server declines. Consumer digital (15% of total revenues) climbed 35.0% year over year to $1.20 billion.

Margins

Gross profit margin improved 10 basis points year over year to 5.6% on a non-GAAP basis. Operating income on a non-GAAP basis increased 23.0% year over year to $232.3 million. Operating margin increased 10 basis points year over year to 3.0% in the quarter.

Selling, general and administrative (SG&A) expense grew 19.8% year over year to $203.8 million. SG&A was slightly above the company's targeted range of $190 million to $200 million due to increased discretionary investments and higher design and engineering expenses, and general infrastructure costs. As a percentage of revenues, SG&A was 2.6% flat with the previous quarter.

For the quarter, return on invested capital (ROIC) increased to a record 33.6% from 30.1% a year ago.

Balance Sheet

At quarter end, cash and cash equivalents were $1.60 billion compared with $1.79 billion at the end of previous quarter. Cash conversion cycle was 14 days at quarter end, in sync with the previous quarter. Inventory declined $116 million or 3% sequentially and inventory turns improved to 8.3x from 8.1x.

Total debt was $2.23 billion at the end of December 2010, same as the previous quarter. Net debt (debt less cash) came in at $633 million in the quarter versus $444 million in the previous quarter. Debt to EBITDA ratio was 1.9x at quarter end. Net cash from operating activities was a negative $14.7 million in the quarter. This resulted in a negative free cash flow of $120.3 million at quarter end.

Outlook

Management issued better-than-expected fourth quarter guidance. For the fourth quarter of 2011, Flextronics expects revenues in the range of $7.1 billion to $7.4 billion. This is a sequential decline of 5.5% to 9% due to seasonality. Earnings per share on a non-GAAP basis are expected in the range of 21 cents to 23 cents.

Zacks Consensus Estimates for revenue and EPS were $6.98 billion and 19 cents, respectively, for the fourth quarter, at the time the company reported third quarter results.

Flextronics believes problems related to component supply shortages will gradually decrease in 2012, which is expected to emerge as a profitable year.

FLextronics continues to face tough competition from Celestica Inc. (CLS) and Jabil Circuit Inc. (JBL). However, a robust product portfolio, 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 #2 Rank, which implies a short-term Buy rating (for the next 1-3 months). Over the long term, we have a Neutral recommendation on the stock.

 
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