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Flex (FLEX) Q1 Earnings Match Estimates, Huawei Woes Linger
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Flex (FLEX - Free Report) reported first-quarter fiscal 2020 adjusted earnings of 27 cents per share, which came in line with the Zacks Consensus Estimate. The figure improved 12.5% from the year-ago quarter.
Revenues declined 3.5% from the year-ago quarter to $6.176 billion, lagging the Zacks Consensus Estimate of $6.288 billion.
Sluggish demand from China, soft demand from networking customers, and weakness in semiconductor capital equipment impacted top line. These factors are impacting the company’s stock performance. Shares of Flex have fallen 20.8% in the past year, against the industry’s rally of 29.3%.
Segmental Performance in Detail
Communications & Enterprise Compute (CEC) revenues declined approximately 5% from the year-ago quarter to almost $1.859 billion. Sluggish demand from networking and telecom customers affected results.
Consumer Technologies Group (CTG) revenues slumped 16% from the year-ago quarter to $1.502 billion. Sluggishness in this segment was primarily owing to expenses pertaining to restructuring activities. Markedly, Flex intends to reduce exposure of highly volatile, short-cycle, low-margined business across India.
Revenues from the Industrial & Emerging Industries (IEI) segment were $1.637 billion, which improved 13% on a year-over-year basis. The segment witnessed solid demand across its diversified markets, including lifestyle, energy, and home, which significantly mitigated weakness in semiconductor capital equipment vertical.
High Reliability Solutions (HRS) revenues were $1.178 billion, declining 3% from the year-ago quarter. The segment comprises medical and automotive group.
Imposition of tariff and uncertain trade relations between the United States and China impacted automotive revenues. While Automotive business declined 8% from the year-ago quarter owing to sluggish demand from China, Health Solutions domain was up 4%. However, strength in medical bookings could not offset weakness in automotive business.
Operating Details
Non-GAAP gross margin remained flat on a year-over-year basis at 6.5% in the reported quarter. Softness in automotive revenues (primarily impacted HRS domain), restructuring initiatives in CEC segment, and ongoing shift in overall business mix limited margin expansion.
Non-GAAP selling, general & administrative (SG&A) expenses were $195.7 million, down 13% year over year. Moreover, as a percentage of net sales, SG&A expenses declined 30 bps to 3.2%.
Consequently, non-GAAP operating margin expanded 50 bps on a year-over-year basis to 3.4%. Stringent cost measures and improving IEI segment performance favored margin expansion.
Segment wise, CEC generated $26.1 million in adjusted operating profit, translating in adjusted operating margin of 1.4%, down 100 bps year over year.
CTG raked in $30.1 million in adjusted operating profit, exhibiting adjusted operating margin of 2%, up 50 bps year over year.
IEI reported $95.5 million in adjusted operating profit, reflecting adjusted operating margin of 5.8%, up 220 bps year over year.
HRS reported $87.2 million in adjusted operating profit, exhibiting adjusted operating margin of 7.4%, down 30 bps year over year.
Balance Sheet & Cash Flow
As of Jun 30, 2019, cash & cash equivalents were $1.920 billion up from $1.697 billion at the end of the previous quarter. Total debt (long-term plus short term) was $3.238 billion up from $3.054 billion at the end of the previous quarter.
Flex generated $236.9 million as net cash from operations during the reported quarter compared with $245.6 million in the previous quarter. Free cash flow came in at $113.7 million compared with $119.6 million reported in the fourth quarter.
During the first quarter, the company repurchased approximately 5 million shares for $52 million.
Huawei Blacklisting Headwinds
On May 16, 2019, the Bureau of Industry and Security (BIS) added Huawei Technologies Co., Ltd. and 68 of its affiliates to the “Entity List” maintained by U.S. Department of Commerce. This decision restricted Flex from supplying products to Huawei and its affiliates, which compelled the company to reduce business with Huawei.
Per China’s daily, GlobalTimes, post the blacklisting, Flex, and held Huawei’s approximately $102 million worth equipment and new materials in its China-based factory. This is likely to put Huawei’s relations with Flex at risk. The daily reveals that this move might put Flex in Beijing's entity list, which remains a major concern.
Flex anticipates Huawei headwinds and reducing exposure in India to limit quarterly revenues by $300-$400 million.
For second-quarter fiscal 2020, revenues are expected to be in the range of $6.1-$6.5 billion. The Zacks Consensus Estimate is currently pegged at $6.61 billion.
The company expects IEI revenues are anticipated to grow in “mid to high-single digits” on a year-over-year basis. CEC revenues are anticipated to decline 5-10%. HRS revenues are anticipated to decline in low-single digits to improve in “low-single digits.” However, CTG revenues are projected to decline 15-25%.
Adjusted operating income is projected in the range of $220 million to $250 million.
Management guided adjusted earnings in the range of 29 cents to 33 cents, whose mid-point of 31 cents is higher than the current Zacks Consensus Estimate for the period of 30 cents.
For fiscal 2020, management anticipates adjusted earnings to come in $1.20-$1.30 range, whose mid-point of $1.25 is higher than the current Zacks Consensus Estimate for the period of $1.24.
Zacks Rank & Stocks to Consider
Currently, Flex carries a Zacks Rank #5 (Strong Buy).
Long-term earnings growth rate for Alteryx, Rosetta Stone and Cadence is currently pegged at 13.7%, 12.5% and 11%, respectively.
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Flex (FLEX) Q1 Earnings Match Estimates, Huawei Woes Linger
Flex (FLEX - Free Report) reported first-quarter fiscal 2020 adjusted earnings of 27 cents per share, which came in line with the Zacks Consensus Estimate. The figure improved 12.5% from the year-ago quarter.
Revenues declined 3.5% from the year-ago quarter to $6.176 billion, lagging the Zacks Consensus Estimate of $6.288 billion.
Sluggish demand from China, soft demand from networking customers, and weakness in semiconductor capital equipment impacted top line. These factors are impacting the company’s stock performance. Shares of Flex have fallen 20.8% in the past year, against the industry’s rally of 29.3%.
Segmental Performance in Detail
Communications & Enterprise Compute (CEC) revenues declined approximately 5% from the year-ago quarter to almost $1.859 billion. Sluggish demand from networking and telecom customers affected results.
Consumer Technologies Group (CTG) revenues slumped 16% from the year-ago quarter to $1.502 billion. Sluggishness in this segment was primarily owing to expenses pertaining to restructuring activities. Markedly, Flex intends to reduce exposure of highly volatile, short-cycle, low-margined business across India.
Revenues from the Industrial & Emerging Industries (IEI) segment were $1.637 billion, which improved 13% on a year-over-year basis. The segment witnessed solid demand across its diversified markets, including lifestyle, energy, and home, which significantly mitigated weakness in semiconductor capital equipment vertical.
High Reliability Solutions (HRS) revenues were $1.178 billion, declining 3% from the year-ago quarter. The segment comprises medical and automotive group.
Imposition of tariff and uncertain trade relations between the United States and China impacted automotive revenues. While Automotive business declined 8% from the year-ago quarter owing to sluggish demand from China, Health Solutions domain was up 4%. However, strength in medical bookings could not offset weakness in automotive business.
Operating Details
Non-GAAP gross margin remained flat on a year-over-year basis at 6.5% in the reported quarter. Softness in automotive revenues (primarily impacted HRS domain), restructuring initiatives in CEC segment, and ongoing shift in overall business mix limited margin expansion.
Non-GAAP selling, general & administrative (SG&A) expenses were $195.7 million, down 13% year over year. Moreover, as a percentage of net sales, SG&A expenses declined 30 bps to 3.2%.
Consequently, non-GAAP operating margin expanded 50 bps on a year-over-year basis to 3.4%. Stringent cost measures and improving IEI segment performance favored margin expansion.
Segment wise, CEC generated $26.1 million in adjusted operating profit, translating in adjusted operating margin of 1.4%, down 100 bps year over year.
CTG raked in $30.1 million in adjusted operating profit, exhibiting adjusted operating margin of 2%, up 50 bps year over year.
IEI reported $95.5 million in adjusted operating profit, reflecting adjusted operating margin of 5.8%, up 220 bps year over year.
HRS reported $87.2 million in adjusted operating profit, exhibiting adjusted operating margin of 7.4%, down 30 bps year over year.
Balance Sheet & Cash Flow
As of Jun 30, 2019, cash & cash equivalents were $1.920 billion up from $1.697 billion at the end of the previous quarter. Total debt (long-term plus short term) was $3.238 billion up from $3.054 billion at the end of the previous quarter.
Flex generated $236.9 million as net cash from operations during the reported quarter compared with $245.6 million in the previous quarter. Free cash flow came in at $113.7 million compared with $119.6 million reported in the fourth quarter.
During the first quarter, the company repurchased approximately 5 million shares for $52 million.
Huawei Blacklisting Headwinds
On May 16, 2019, the Bureau of Industry and Security (BIS) added Huawei Technologies Co., Ltd. and 68 of its affiliates to the “Entity List” maintained by U.S. Department of Commerce. This decision restricted Flex from supplying products to Huawei and its affiliates, which compelled the company to reduce business with Huawei.
Per China’s daily, GlobalTimes, post the blacklisting, Flex, and held Huawei’s approximately $102 million worth equipment and new materials in its China-based factory. This is likely to put Huawei’s relations with Flex at risk. The daily reveals that this move might put Flex in Beijing's entity list, which remains a major concern.
Flex anticipates Huawei headwinds and reducing exposure in India to limit quarterly revenues by $300-$400 million.
Flex Ltd. Price, Consensus and EPS Surprise
Flex Ltd. price-consensus-eps-surprise-chart | Flex Ltd. Quote
Guidance
For second-quarter fiscal 2020, revenues are expected to be in the range of $6.1-$6.5 billion. The Zacks Consensus Estimate is currently pegged at $6.61 billion.
The company expects IEI revenues are anticipated to grow in “mid to high-single digits” on a year-over-year basis. CEC revenues are anticipated to decline 5-10%. HRS revenues are anticipated to decline in low-single digits to improve in “low-single digits.” However, CTG revenues are projected to decline 15-25%.
Adjusted operating income is projected in the range of $220 million to $250 million.
Management guided adjusted earnings in the range of 29 cents to 33 cents, whose mid-point of 31 cents is higher than the current Zacks Consensus Estimate for the period of 30 cents.
For fiscal 2020, management anticipates adjusted earnings to come in $1.20-$1.30 range, whose mid-point of $1.25 is higher than the current Zacks Consensus Estimate for the period of $1.24.
Zacks Rank & Stocks to Consider
Currently, Flex carries a Zacks Rank #5 (Strong Buy).
A few better-ranked stocks in the broader technology sector are Alteryx , Rosetta Stone and Cadence Design Systems (CDNS - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Long-term earnings growth rate for Alteryx, Rosetta Stone and Cadence is currently pegged at 13.7%, 12.5% and 11%, respectively.
Biggest Tech Breakthrough in a Generation
Be among the early investors in the new type of device that experts say could impact society as much as the discovery of electricity. Current technology will soon be outdated and replaced by these new devices. In the process, it’s expected to create 22 million jobs and generate $12.3 trillion in activity.
A select few stocks could skyrocket the most as rollout accelerates for this new tech. Early investors could see gains similar to buying Microsoft in the 1990s. Zacks’ just-released special report reveals 7 stocks to watch. The report is only available for a limited time.
See 7 breakthrough stocks now>>