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Flex (FLEX) Q3 Earnings Beat Estimates, Revenues Fall Y/Y

Zacks Equity Research

Flex Ltd. FLEX reported third-quarter fiscal 2020 adjusted earnings of 38 cents per share, which beat the Zacks Consensus Estimate by 15.2%. The figure increased 11.8% year over year.

Revenues declined 6.7% from the year-ago quarter to $6.461 billion but surpassed the Zacks Consensus Estimate by 5.4%.

Sluggish demand from China and soft demand from networking customers impacted the top line.

Flex Ltd. Price, Consensus and EPS Surprise

Flex Ltd. Price, Consensus and EPS Surprise

Flex Ltd. price-consensus-eps-surprise-chart | Flex Ltd. Quote

Segmental Performance in Detail

Communications & Enterprise Compute or CEC (29.1% of revenues) declined approximately 17% from the year-ago quarter to $1.881 billion. Sluggish demand from networking and telecom customers affected second-quarter results.

Consumer Technologies Group or CTG (20.85 of revenues) slumped 25% from the year-ago quarter to $1.346 billion.

Industrial & Emerging Industries or IEI (30.8% of revenues) were $1.989 billion, which increased 20% on a year-over-year basis. The segment witnessed solid demand across diversified markets, including lifestyle, energy, and home.

High Reliability Solutions or HRS (19.3% of revenues) revenues were $1.245 billion, up 3% from the year-ago quarter driven by automotive business, which grew 7% from the year-ago quarter. However, this was offset by a 1% decline in health solutions.

Operating Details

Non-GAAP gross margin expanded 60 basis points (bps) on a year-over-year basis and came in at 7.1% in the reported quarter, primarily attributable to favorable business mix and operational efficiency.

Non-GAAP selling, general & administrative (SG&A) expenses, as a percentage of revenues, expanded 30 bps to 3.1%.

Consequently, non-GAAP operating margin expanded 30 bps on a year-over-year basis to 4%. Stringent cost measures and improving IEI segment performance favored margin expansion.

Segment wise, CEC generated $53 million in adjusted operating profit, translating in adjusted operating margin of 2.8%.

CTG raked in $25 million in adjusted operating profit, exhibiting adjusted operating margin of 1.8%.

IEI reported $124 million in adjusted operating profit, reflecting adjusted operating margin of 6.3%.

HRS generated $82 million in adjusted operating profit, exhibiting adjusted operating margin of 6.6%.

Balance Sheet & Cash Flow

As of Dec 31, 2019, cash & cash equivalents were $1.789 billion, down from $1.816 billion at the end of the previous quarter.

Total debt (long-term plus short term) was $2.8 billion as of Dec 31, down from $2.990 billion at the end of the previous quarter.

Net cash outflow from operations was a negative $50.9 million during the reported quarter compared with negative $992 million in the previous quarter.

Free cash flow came in at $237.8 million compared with $187 million reported in the fourth quarter.

During the third quarter, the company repurchased over 5 million shares for $61 million.

Guidance

For fourth-quarter fiscal 2020, revenues are expected to be in the range of $5.8-$6.2 billion. The Zacks Consensus Estimate is currently pegged at $5.99 billion indicating a decline of 3.8% from the year-ago quarter’s reported figure.

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

Adjusted operating income is projected in the range of $220 million to $250 million.

Management guided adjusted earnings in the range of 30 cents to 34 cents per share. The Zacks Consensus Estimate for earnings is currently pegged at 33 cents.

For fiscal 2020, Flex anticipates adjusted earnings in the range of $1.25-$1.29. The Zacks Consensus Estimate for earnings is currently pegged at $1.24 per share.

Zacks Rank & Stocks to Consider

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

Microchip Technology Incorporated MCHP, Perion Network Ltd PERI and Itron Inc. ITRI are some better-ranked stocks in the broader computer and technology sector. All three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Microchip, Perion and Itron are set to report quarterly results on Feb 4, 12 and 24, respectively.

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