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Flex Ltd. (FLEX - Free Report) reported fiscal first-quarter 2018 non-GAAP earnings (including stock-based compensation) of 21 cents per share, missing the Zacks Consensus Estimate by a penny. Excluding stock-based compensation, earnings declined almost 11.6% year over year to 24 cents per share.

Revenues increased 2.2% from the year-ago quarter to $6.01 billion, better than the Zacks Consensus Estimate of almost $5.89 billion and were toward the top-end of management’s guided range of $5.7–$6.1 billion.

Notably, the company’s partnership with Nike in 2015 to improve its supply chain and the latter’s product solutions has increased Flex’s operating expenses and adversely impacted its bottom line.

We note that the company has also underperformed the industry it belongs to on a year-to-date basis. While the industry gained 13.5%, the stock returned 13.3% over the same time frame.



Quarter Details

Communications & Enterprise Compute (CEC) revenues declined $13 million from the year-ago quarter. This segment generated $49 million in adjusted operating profit and recorded 2.5% adjusted operating margin. Lower profitability was due to 10% lower revenue levels.

Consumer Technologies Group (CTG) revenues advanced 15% from the year-ago quarter to $1.5 billion. This division produced $18 million in adjusted operating profit, resulting in an adjusted operating margin of 1.2%, which missed the management’s targeted range of 2% to 4% for this business. The weak adjusted operating profit was directly the result of the elevated level of operating losses due to its strategic partnership with Nike.

Management noted that Flex’s partnership with Nike witnessed a lot of incremental investments for vertical integration of technologies, which increased operating expenses, thus elevating operating losses. However, management is hopeful that once the integration is completed and challenges of the partnership are addressed, profits will increase.

Industrial & Emerging Industries (IEI) segment reported $55 million in adjusted operating profit, a new quarterly high, and 4% adjusted operating margin. This was driven by various new customer programs in the industrial, home and lifestyle and energy businesses.

High Reliability Solutions (HRS) segment reported $90 million in adjusted operating profit, resulting in adjusted operating margin of 8%.

Selling, general & administrative (SG&A) expenses increased 4.7% to $250.8 million, reflecting higher design and engineering costs. Management stated expansion in innovation and design centers as the major reason for an increase in expenses.

In the quarter ended Jun 30, 2017, cash & cash equivalents were $1.58 billion, while total debt was $3.00 billion. Flex generated net cash from operations of $138.5 million and free cash flow of $19 million. The company bought back 4.5 million shares worth $74 million in the first quarter.

Guidance

For second-quarter fiscal 2018, total revenue is expected to be in the range of $5.9–$6.3 billion.

Adjusted operating income is anticipated in the range of $170–$200 million. Management expects adjusted earnings in the range of 24 cents – 28 cents per share.

Management expects a collective revenue increase in the second half of fiscal 2018.

Zacks Rank and Key Picks

Currently, Flex carries a Zacks Rank #4 (Sell).

Better-ranked stocks in the industry are Alibaba Group Holding Limited (BABA - Free Report) , and Applied Optoelectronics, Inc. (AAOI - Free Report) , both sporting a Zacks Rank #1 (Strong Buy), and Symantec Corporation (SYMC - Free Report) with Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rates for Alibaba Group, Applied Optoelectronics and Symantec are projected to be 30.4%, 18.7% and 10.3%, respectively.

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