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Flex (FLEX) Earnings Beat Estimates in Q2, Revenues Miss

Zacks Equity Research

Flex FLEX reported second-quarter fiscal 2020 adjusted earnings of 31 cents per share, which beat the Zacks Consensus Estimate by a penny. The figure also improved from 29 cents reported in the year-ago quarter.

Revenues declined 9% from the year-ago quarter to $6.088 billion, lagging the Zacks Consensus Estimate of $6.265 billion.

Sluggish demand from China, soft demand from networking customers, and weakness in semiconductor capital equipment impacted the top line.

Flex Ltd. Revenue (Quarterly)

 

Flex Ltd. Revenue (Quarterly)

Flex Ltd. revenue-quarterly | Flex Ltd. Quote

Segmental Performance in Detail

Communications & Enterprise Compute (CEC) revenues declined approximately 19% from the year-ago quarter to almost $1.729 billion. Sluggish demand from networking and telecom customers affected second-quarter results.

Consumer Technologies Group (CTG) revenues slumped 21% from the year-ago quarter to $1.385 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 $1.786 billion, which improved 14% on a year-over-year basis. The segment witnessed solid demand across diversified markets, including lifestyle, energy, and home, which significantly offset weakness in semiconductor capital equipment vertical.

High Reliability Solutions (HRS) revenues were $1.189 billion, declining 2% from the year-ago quarter. The segment comprises medical and automotive group.

Automotive business increased 1% from the year-ago quarter owing to ramp up of new business across its portfolio. Health Solutions domain was down 5%.

Operating Details

Non-GAAP gross margin increased 30 bps on a year-over-year basis and came in at 6.8% in the reported quarter. The year-over-year expansion can primarily be attributed to favorable business mix and operational efficiency.

Non-GAAP selling, general & administrative (SG&A) expenses, as a percentage of net sales, declined 10 bps to 3.1%.

Consequently, non-GAAP operating margin expanded 30 bps on a year-over-year basis to 3.7%. Stringent cost measures and improving IEI segment performance favored margin expansion.

Segment wise, CEC generated $32 million in adjusted operating profit, translating in adjusted operating margin of 1.8%.

CTG raked in $27 million in adjusted operating profit, exhibiting adjusted operating margin of 1.9%.

IEI reported $111 million in adjusted operating profit, reflecting adjusted operating margin of 6.2%.

HRS generated $83 million in adjusted operating profit, exhibiting adjusted operating margin of 7%.

Balance Sheet & Cash Flow

As of Sep 27, 2019, cash & cash equivalents were $1.816 billion up from $1.920 billion at the end of the previous quarter. Total debt (long-term plus short term) was $2.990 billion up from $3.238 billion at the end of the previous quarter.

Flex had a negative $992 million as net cash outflow from operations during the reported quarter compared with $236.9 million in the previous quarter. Free cash flow came in at $187 million compared with $113.7 million reported in the fourth quarter.

During the second quarter, the company repurchased approximately shares for $60 million.

Guidance

For third-quarter fiscal 2020, revenues are expected to be in the range of $6-$6.3 billion. The Zacks Consensus Estimate is currently pegged at $6.44 billion.

The company expects IEI revenues are anticipated to grow in the range of 10% to 15% on a year-over-year basis. CEC revenues are anticipated to decline 20-25%. HRS revenues are anticipated to be flat to 5%. However, CTG revenues are projected to decline 25-30%.

Adjusted operating income is projected in the range of $230 million to $255 million.

Management guided adjusted earnings in the range of 32 cents to 36 cents. The Zacks Consensus Estimate for earnings is currently pegged at 34 cents.

For fiscal 2020, management anticipates adjusted earnings to come in $1.20-$1.30 range. The Zacks Consensus Estimate for earnings is currently pegged at $1.22 per share.

Zacks Rank & Stocks to Consider

Currently, Flex carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector are Splunk Inc. SPLK, Vonage Holdings Corp. VG and Taiwan Semiconductor Manufacturing Company Ltd. TSM. Each of the stocks flaunt 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 Splunk, Vonage and Taiwan Semiconductor is currently pegged at 31.2%, 5% and 10.4%, respectively.

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