Compaq, Flextronics sign $400M pact
Sep. 24, 1999 (Electronic Buyers News - CMP via COMTEX) -- Flextronics International Ltd. inked its
largest-ever electronics manufacturing contract last week when it became Compaq Computer Corp.'s sole
outsourcing partner for Intel-based printed-circuit-board assemblies.
And the San Jose contract electronics manufacturer's chief executive told Wall Street to look for similar
pacts in the months ahead.
In its latest deal, Flextronics is expanding its board-building relationship with Compaq to include higher-end
products. Earlier this year, Compaq began outsourcing some of its commercial desktop-PC board assembly
to Flextronics, adding roughly $150 million to the CEM's annual revenue.
As the sole supplier of Intel-based PCB assemblies for Compaq's servers, however, Flextronics has locked
in on much more.
"This represents the largest award Flextronics has received to date, with revenues likely to be in excess of
$400 million annually," Michael Marks, Flextronics' chairman and chief executive told analysts and investors
in a conference call last week.
"The actual revenue figures are not yet certain, but they should be in that range," Marks added.
Much of the work Compaq is outsourcing to Flextronics is currently done at Compaq's operations in
Singapore. Earlier this month, Compaq announced plans to cut those operations substantially, eliminating
1,600 jobs.
And the time frame for Flextronics' assumption of the PC-server board-build operations coincides with
Compaq's schedule for phasing out that plant.
Starting in December, Flextronics will begin assembling Compaq's PC-server boards in small quantities,
ramp up production in the March quarter, and should be in full production by next June, according to Marks.
Marks would not say in which of Flextronics' operations the Compaq products will be made, but he did say
that they will be manufactured at more than one facility, enabling the company to offer its supply-chain
management capabilities as part of its service.
"This award represents the PCB [assemblies] for essentially the entire line of Compaq's Intel-based PC
servers, which is a critical component of the company's business going forward," Marks said. "It is ...
strategic because it involves Flextronics providing boards in a number of facilities to support Compaq's
requirements for lower costs and shorter supply lines," Marks said.
Ultimately, analysts expect Flextronics to assume all of the board assembly for Compaq's PC-server line.
"We believe that as a result of this outsourcing agreement, 100% of Compaq's PC servers will include
motherboards assembled by Flextronics," Thomas Hopkins, an analyst at Bear Stearns & Co. Inc., New
York, said in a report. He noted that Compaq shipped 237,000 PC servers in the second quarter alone.
And while its latest outsourcing agreement was the largest in the company's history, there are more deals
of this magnitude on the horizon, according to Marks.
He said that Flextronics is currently negotiating "quite a number of projects like the Compaq one," and told
analysts to expect more programs like it in the near future.
"We are preparing our company to be able to handle them financially,"
he said.
Earlier this month, Flextronics filed a shelf-registration statement with the Securities and Exchange Commission in preparation for an
offering of up to 14.4 million new shares of stock in the company.
"With the shelf registration in place, Flextronics has the flexibility to quickly issue more shares, thereby avoiding potential delays with
the SEC," Hopkins said. "We believe that the registration is a strong signal that there are still sizable transactions that loom in
Flextronics' future."
Marks also described Flextronics' overall business as the strongest the company has ever seen, and said Wall Street could expect
sales and profits for the current quarter- which ends in November-and possibly the next quarter to be about 5% more than analysts
had previously projected.
Analysts polled by First Call Corp. had expected Flextronics to post earnings of 37 cents per share during the current quarter and 40
cents per share in the quarter ending in February 2000.
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