It has been about a month since the last earnings report for Flex (FLEX). Shares have lost about 2.3% in that time frame, outperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Flex due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Flex Q1 Earnings In Line, Revenues Lag Estimates
Flex reported first-quarter fiscal 2020 adjusted earnings of 27 cents per share, which came in line with the Zacks Consensus Estimate. Notably, 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.
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.
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 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.
For fiscal 2020, management anticipates adjusted earnings to come in $1.20-$1.30 range.
How Have Estimates Been Moving Since Then?
Estimates revision followed a flat path over the past two months. The consensus estimate has shifted -131.92% due to these changes.
At this time, Flex has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Flex has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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