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Flex (FLEX) Q4 Earnings in Line, Revenues Lag Estimates

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Shares of Flex Ltd. (FLEX - Free Report) were up more than 3.5% yesterday, following the company's encouraging fiscal 2019 results, wherein earnings and revenues improved year over year.

Coming to fourth-quarter fiscal 2019 performance, Flex reported adjusted earnings of 27 cents per share, which came in line with the Zacks Consensus Estimate. The figure declined 3.6% from the year-ago quarter.

Revenues declined 2.9% from the year-ago quarter to $6.226 billion, lagging the Zacks Consensus Estimate of $6.481 billion.

Sluggish demand from China, soft demand from networking customers, and weakness in semiconductor capital equipment and energy verticals, impacted financial performance.
 



This has taken a toll on the company’s stock performance. Shares of Flex have fallen 17.7% in the past year, compared with the industry’s rally of 3.6%.

Quarter in Detail

Communications & Enterprise Compute (CEC) revenues grew approximately 6% from the year-ago quarter to almost $1.981 billion.

Expansion in cloud data center design capabilities and 4G/5G network buildout aided growth. However, sluggish demand from networking customers impacted results negatively.

Consumer Technologies Group (CTG) revenues declined 7% from the year-ago quarter to $1.535 billion.

Sluggishness in this segment was primarily owing to weakness in core consumer products, and expenses pertaining to restructuring activities.

Revenues from the Industrial & Emerging Industries (IEI) segment were $1.511 billion, which declined 8% on a year-over-year basis, on account of weakness in semiconductor capital equipment and energy.

High Reliability Solutions (HRS) revenues were $1.199 billion, dropping 4% 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 12% from the year-ago quarter owing to sluggish demand from China, Health Solutions domain was up 10%. However, strength in medical bookings could not negate weakness in automotive business.
 

Flex Ltd. Price, Consensus and EPS Surprise

Operating Details

Non-GAAP gross margin contracted 10 bps on a year-over-year basis to 6.6% 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 gross margin expansion.

Non-GAAP selling, general & administrative (SG&A) expenses were $203.8 million, down 10.9% year over year. Moreover, as a percentage of net sales, SG&A expenses declined 30 bps to 3.3%.

Consequently, non-GAAP operating margin expanded 20 bps on a year-over-year basis to 3.3%. Stringent cost measures and improving CTG and IEI segments favored margin expansion.

Segment wise, CEC generated $43 million in adjusted operating profit, translating in adjusted operating margin of 2.2%, down 20 bps year over year.

CTG raked in $25 million in adjusted operating profit, displaying adjusted operating margin of 1.6%, up 10 bps year over year.

IEI reported $73 million in adjusted operating profit, reflecting adjusted operating margin of 4.8%, up 70 bps year over year.

HRS reported $92 million in adjusted operating profit, exhibiting adjusted operating margin of 7.7%, down 10 bps year over year.

Balance Sheet & Cash Flow

As of Mar 31, 2019, cash & cash equivalents were $1.697 billion up from $1.503 billion at the end of the previous quarter. Total debt (long-term plus short term) was $3.054 billion up from $2.95 billion at the end of the previous quarter.

Flex generated $245.6 million as net cash from operations during the reported quarter compared with $283.3 million in the previous quarter. Free cash flow came in at $119.6 million compared with $128.3 million reported in the third quarter.

During the fourth quarter, the company repurchased approximately 6.6 million shares for $65 million. With share buybacks, the company intends to return 50% or more of its annual free cash flow to shareholders.

Fiscal 2019 at a Glance

Fiscal 2019 revenues of $26.31 billion grew 3.4% over fiscal 2018. CEC, CTG, HRS, and IEI contributed 31.7%, 26.4%, 18.4% and 23.5%, to total revenues, respectively.

Flex Ltd. Revenue (Quarterly)

Flex Ltd. Revenue (Quarterly) | Flex Ltd. Quote

Non-GAAP earnings per share of $1.14 grew 4.6% year over year.

Guidance

For first-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 remain flat to up in “high mid-single digits”. HRS revenues are anticipated to remain flat to up in “low-single digits”. However, CTG revenues are projected to decline 15-25%.

Adjusted operating income is projected in the range of $195 million to $225 million.

Moreover, adjusted earnings are expected between 25 cents and 29 cents per share. The Zacks Consensus Estimate is currently pegged at 27 cents.

For fiscal 2020, the company didn’t provide guidance in detail, but management anticipates adjusted earnings to come in near the mid-point (or $1.25 per share) of $1.20-$1.30 range. The corresponding Zacks Consensus Estimate is currently pegged at $1.26.

Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the broader technology sector are Cadence Design Systems, Inc. (CDNS - Free Report) , Avid Technology, Inc. and Synopsys, Inc. (SNPS - Free Report) , each 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 Cadence Design, Avid Technology and Synopsys is pegged at 12%, 10% and 10%, respectively.

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