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Flextronics shakes off doubts over Solectron acquisition

Posted: 04 Feb 2008 ?? ?Print Version ?Bookmark and Share

Keywords:Solectron acquisition? Flextronics revenues? EMS provider?

Flextronics International Ltd in Q4 shook off doubts its recent acquisition of rival Solectron Corp. could hamper its activities in the event of integration difficulties or other operational problems.

The world's second-biggest electronics manufacturing services (EMS) provider by revenue unveiled Q4 results that easily exceeded analysts forecasts, putting to rest concerns that it was rapidly falling behind market leader Foxconn International Ltd.

"Flextronics' integration of Solectron is going very well," said Kevin Kessel, an analyst with Bear, Stearns & Co. Inc., in a report. "While Flextronics' stock is off 15 percent year-to-day on concerns over the macro economy and technology in general, Flextronics' results tell a different story."

The Singapore-based EMS company reported a net loss of $774.4 million, or 94 cents per share, for the fiscal Q3 ended December 31, compared with a net loss of $118.6 million, or 20 cents a share for comparable year-ago quarter.

The latest quarterly loss included, however, several one-time charges related to its acquisition of Solectron, Excluding those charges, Flextronics posted net income of 30 cents a share, beating the consensus analysts' estimate of 26 cents a share.

Stronger than expected
Revenue growth was even stronger than most analysts were expecting. The company reported sales for the December quarter of $9.1 billion, compared with $5.4 billion for the comparable quarter of 2006. On average, analysts expected the company's revenue would be approximately $8.4 billion.

The latest results included contributions from the Solectron acquisition.

That transaction had been expected to pose a major hurdle for Flextronics due to its size and potential integration problems associated with convincing Solectron customers to remain with the new entity.

Flextronics seemed to have performed better than expected, smoothly closing excess sites, transitioning customers to new facilities and cutting costs to justify the transaction.

"Ours teams' management of the Solectron integration was nothing short of exceptional," said Mike McNamara, Flextronics' CEO, during a conference call to discuss the latest results with investors.

"Customer feedback is very positive, operational execution is high and the original synergy target will be achieved this quarter with further potential upside," he added.

Excluding special charges, Flextronics' gross profit margin improved to 5.84 percent, compared with 5.34 percent in Q4 2006.

"The company also delivered best in class working capital metrics and generated $470 million in free cash," said Matthew Sheerin, an analyst at Thomas Weisel & Partners LLC in a report to investors.

"The company is well positioned to further leverage the Solectron acquisition, as well as its vertical-manufacturing strategy to continue taking share and drive operating margins higher," Sheerin added.

Areas of concern
There are areas of concern, however. For instance, Flextronics left its March quarter revenue guidance unchanged, a conservative bent that caused some analysts to worry that the recent sales growth may not be sustained.

The company is projecting sales of $7.5 billion to $7.9 billion for the quarter and earnings per share between 22 cents and 24 cents.

"We still believe that some investors may not like or hesitate on Flextronics because it left its March quarter guidance intact, rather than raising it," said Bear, Stearns' Kessel.

"We understand this concern; however, we chalk it up to Flextronics' conservatism more than anything else," he said.

- Bolaji Ojo
EE Times




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