Flex Ltd. FLEX reported third-quarter fiscal 2018 non-GAAP earnings of 31 cents per share, which beat the Zacks Consensus Estimate of 30 cents but declined 8.8% from the year-ago quarter.
Revenues increased 10.4% from the year-ago quarter to $6.75 billion. Moreover, revenues surpassed the higher end of the guided range by $50 million and beat the Zacks Consensus Estimate of $6.49 billion.
The year-over-year revenue growth can be attributed to robust performance across most segments. The top line benefited from new business wins driven by the Sketch-to-Scale initiative as well as continued development of the long-term strategic partnership with Nike NKE.
Shares have declined almost 3% in the last three trading sessions following the results.
Flex Ltd. Price, Consensus and EPS Surprise
Flex Ltd. Price, Consensus and EPS Surprise | Flex Ltd. Quote
Quarter Details
Communications & Enterprise Compute (CEC) revenues declined 5.9% from the year-ago quarter to almost $2.00 billion. The company continued to expand its datacenter capabilities during the quarter.
Consumer Technologies Group (CTG) revenues improved 11.2% from the year-ago quarter to $2.01 billion.
Revenues from the IEI segment were $1.49 billion, which surged 30.7% on a year-over-year basis. The segment benefited from robust demand across its diversified markets as well as the beginning of several Sketch-to-Scale programs.
HRS revenues were up a robust 19.7% from the year-ago quarter to $1.23 billion.
Operating Details
Adjusted gross margin contracted 40 basis points (bps) to 6.7% in the quarter.
Adjusted selling, general & administrative (SG&A) expenses were $232 million, up year over year. However, as a percentage of net sales, SG&A expenses declined 20 bps to 3.4%, primarily due to increasing design and engineering cost. Moreover, higher level of investment and under-absorbed overhead costs increased expenses.
Non-GAAP operating margin declined roughly 40 bps but expanded 30 bps sequentially to 3.3%.
Segment wise, CEC generated $50 million in adjusted operating profit and recorded adjusted operating margin of 2.5%.
CTG raked in $39 million in adjusted operating profit, resulting in an adjusted operating margin of 1.9%, a tad lower than the guided range of 2–4%. Sequentially, operating profit surged more than 26% primarily due to operational improvements related to the Nike partnership. However, lower contribution from new programs kept margins under pressure.
IEI reported $61 million in adjusted operating profit and 4.1% adjusted operating margin, within the targeted range of 4-6%.
HRS reported $101 million in adjusted operating profit, resulting in adjusted operating margin of 8.2%.
Balance Sheet & Cash Flows
As of Dec 31, 2017, cash & cash equivalents were $1.29 billion compared with $1.37 billion as of Sep 29, 2017. Total debt was $2.94 billion compared with $2.96 billion as of Sep 29, 2017.
Flex generated net cash from operations of $150 million compared with $142 million in the previous quarter. Free cash outflow was $11 million compared to free cash flowof $34 million in the previous quarter due to increased technology investments.
The company bought back roughly 2 million shares worth $35 million in the third quarter.
Guidance
For fourth-quarter fiscal 2018, revenues are expected to be in the range of $6.10–$6.50 billion. The company expects CTG, IEI and HRS to grow 5-10%, 15-25% and 10-20%, respectively, on a year-over-year basis. However, CEC is expected to decline between 5% and 10% year over year.
Adjusted operating income is anticipated in the range of $200–$230 million. Moreover, adjusted earnings are expected between 28 and 32 cents per share.
With a view to enable the company efficiently capitalize marketplace opportunities, management attempts to complete restructuring activities during its final quarter of fiscal 2018. It will cost the company a minimum of $50 million in the fourth quarter.
Flex remains committed to return more than 50% of annual free cash flow to shareholders.
Zacks Rank & Stocks to Consider
Flex carries a Zacks Rank #3 (Hold).
A couple of better-ranked stocks in the broader technology sector are Micron Technology MU and The Trade Desk TTD, 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 Micron and The Trade Desk is projected to be 10% and 25%, respectively.
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