Shares of Flex Ltd. FLEX were up more than 4% yesterday, following the company's encouraging third-quarter fiscal 2019 results. Flex delivered third-quarter 2018 non-GAAP earnings of 34 cents per share, which beat the Zacks Consensus Estimate by 4 cents and improved 9.7% from the year-ago quarter.
Revenues increased 3% from the year-ago quarter to $6.945 billion and comfortably surpassed the Zacks Consensus Estimate of $6.779 billion.
Robust performance across edge and hyperscale computing end markets drove year-over-year revenue growth. The top line also benefited from new bookings from medical group.
Flex concluded wind down of NIKE NKE venture based out of Mexico.
Markedly, the company’s stock has lost 45.9% in the past year, compared with the industry’s decline of 7.8%. This can be attributed to the loss from Nike venture and unfavorable business mix.
Quarter in Detail
Communications & Enterprise Compute (“CEC”) revenues grew approximately 14% from the year-ago quarter to almost $2.26 billion.
Expansion in cloud data center design capabilities and 4G/5G network buildout led to better-than-expected results. Notably, the cloud data center offerings witnessed new customer wins, across both edge and hyperscale computing programs.
Consumer Technologies Group (“CTG”) revenues declined 12% from the year-ago quarter to $1.82 billion.
Sluggishness 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 $1.66 billion, improving 11% on a year-over-year basis.
Growth in industrial, home, lifestyle was a positive which more than offset weakness in semiconductor capital equipment and energy.
High Reliability Solutions (“HRS”) revenues were $1.21 billion, dipping 1% 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 11% from the year-ago quarter, Health Solutions domain was up 14%. However, strength in medical bookings could not negate weakness in automotive business.
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 scrap costs, softness in automotive revenues (primarily impacted HRS domain) and ongoing shift in overall business mix limited gross margin expansion. Changes in inventory owing to ramp of mobile programs across India also impacted gross margin.
Non-GAAP selling, general & administrative (“SG&A”) expenses were $196.8 million, down 15.2% year over year. Moreover, as a percentage of net sales, SG&A expenses declined 60 bps to 2.8%.
Non-GAAP operating margin expanded roughly 40 bps on a year-over-year basis to 3.7%. Stringent cost measures and improving CEC and IEI segments favored margin expansion.
Segment wise, CEC generated $63 million in adjusted operating profit, resulting in adjusted operating margin of 2.8%.
CTG raked in $39 million in adjusted operating profit, resulting in an adjusted operating margin of 2.1%.
IEI reported $79 million in adjusted operating profit, reflecting adjusted operating margin of 4.7%.
HRS reported $96 million in adjusted operating profit, resulting in adjusted operating margin of 7.9%.
Flex Ltd. Price, Consensus and EPS Surprise
Flex Ltd. Price, Consensus and EPS Surprise | Flex Ltd. Quote
Balance Sheet & Cash Flow
As of Dec 31, 2018, cash & cash equivalents were $1.50 billion up from $1.38 billion at the end of the previous quarter. Total debt (long-term plus short term) was $2.95 billion up from $2.93 billion at the end of the previous quarter.
Flex generated $273.6 million as net cash from operations during the reported quarter compared with $120.4 million in the previous quarter. Free cash flow came in at $118.6 million compared with ($60.1 million) reported in the second quarter.
During the second quarter, the company repurchased approximately 6.7 million shares for $64 million. With share buybacks, the company intends to return 50% or more of its annual free cash flow to shareholders.
Guidance
For fourth-quarter fiscal 2019, revenues are expected to be in the range of $6.2-$6.6 billion, whose mid-point of $6.4 billion is below the current Zacks Consensus Estimate of $6.53 billion.
The company expects CEC to grow in the range of 5-15%, on a year-over-year basis. However, CTG, HRS and IEI revenues are anticipated to remain flat to down in “high single digits”.
Adjusted operating income is projected in the range of $195-$225 million.
Moreover, adjusted earnings are expected between 25 cents and 28 cents per share. Notably, the mid-point of approximately 26 cents is below the current Zacks Consensus Estimate of 27 cents per share.
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 anticipated to bolster growth.
Strength in IEI bookings and new program ramps across lifestyle and home verticals holds promise. However, weakness in energy and semiconductor capital equipment business is likely to impact the segment marginally.
Medical group is witnessing remarkable bookings. This robust adoption is anticipated to aid the company to mitigate weakness in Automotive and register growth in HRS in the fourth quarter.
Notably, increasing investments in data center, automation team, among others are likely to limit margins at least in the near term. Automotive segment of HRS and semiconductor capital equipment domain of IEI are anticipated to be negatively impacted owing to uncertainty around trade war and tariff scenario.
Moreover, softness in CTG segment owing to restructuring initiatives, constraints in India and impact of loss from Nike venture remain major concerns.
Zacks Rank & Stocks to Consider
Currently, Flex carries a Zacks Rank #5 (Strong Sell), which might change considering better-than-expected results and its continued efforts to tap profitable opportunities.
Some better-ranked stocks in the broader Computer and Technology sector are Marvell Technology Group Ltd. MRVL and Cloudera CLDR, both 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 Marvell and Cloudera is forecasted at 9.4% and 15%, respectively.
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