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Flextronics International Ltd. (FLEX - Snapshot Report) reported first quarter earnings of 16 cents per share, which surpassed the Zacks Consensus Estimate by 4 cents but declined from 21 cents reported in the year-ago quarter.

Revenues

Revenues declined 3.1% from the year-ago quarter to $5.79 billion, slightly short of the Zacks Consensus Estimate of $5.47 billion. Revenues were slightly higher than management’s guided range of $5.3 billion to $5.6 billion. The year-over-year decline in revenues was primarily due to sluggish demand in the telecom business.

The Integrated Network solutions segment, the largest revenue contributor (44.0% of revenues) in the quarter, declined 9.0% from the year-ago quarter to $2.53 billion. High velocity solutions (26.0% of revenues) segment revenues remained flat on a year-over-year basis at $1.55 billion.

Revenues from the Industrial and Emerging Industries (16.0% of revenues) declined 7.0% year over year to $906.0 million. High Reliability Solutions revenues (14.0% of revenues) improved 20.0% from the year-ago quarter to $807.0 million.

Margins

Gross margins remained flat on a year-over-year basis at 6.0%.

Selling, general & administrative (SG&A) expense as percentage of revenues increased 60 basis points (bps) from the year-ago quarter to 3.8%. As a result, operating margin contracted 60 bps to 2.2% in the first quarter.  

Net income as a percentage of revenues was 1.8% compared with 2.4% in the year-ago quarter.

Balance Sheet

Flextronics exited the quarter with cash and cash equivalents of $1.28 billion compared with $1.59 billion at the end of the previous quarter. Total debt was $2.06 billion versus $2.07 billion in the previous quarter.

Guidance

For the second quarter, total revenue is expected to be in the range of $6.1 billion to $6.4 billion. Adjusted SG&A is expected to be $215.0 million, while operating income is expected to be in the range of $150.0 million to $175.0 million. Management expects adjusted earnings in the range of 19 cents to 22 cents per share.

Flextronics forecasts Integrated Network solutions and Industrial and Emerging Industries segment revenues to increase in low single digits on a quarter-over-quarter basis.

High Reliability Solutions revenues are expected to remain flat sequentially.  High Velocity Solutions is expected to rise approximately 25.0% to 30.0% due to higher contribution from the acquisition of Google’s Motorola manufacturing unit in Brazil and Tianjin China.

Recommendation

Flextronics has undertaken a number of new initiatives to  gain a competitive edge, which includes divestiture of non-core assets and deployment of new technologies. New programs are expected to boost production volumes in fiscal 2014, although profitability is expected to remain weak due to continuing investments.

In this regard, we believe that strategic acquisitions and strong new bookings will also drive top-line growth over the long term. However, macroeconomic concerns and weak end-market demands are major headwinds in the near term.

Moreover, the portfolio realignment is also expected to hurt Flextronics’ top-line growth in the near term. Further, increasing competition from Jabil Circuit Inc. (JBL - Analyst Report) and Plexus Corp (PLXS - Analyst Report) remains a concern going forward.

Currently Flextronics has a Zacks Rank #3 (Hold).

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