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Technology Stocks : ADFLEX SOLUTIONS ( AFLX )

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To: Jerome who wrote (529)	1/28/1999 12:30:00 AM
From: Douglas V. Fant	Read Replies (2) of 718

Jerome, The report looks pretty good. In terms of estimates they beat the street estimate of $-12. to -0.14/share and the "whisper number of $-0.15/share handily. To me this is not a big surprise because there have been a number of indirect hints from this sectors' customers and suppliers that demand is strong in end markets for flex/flip/CSP products. Adaptec's CEO noted strong demand especially in in the dd market for their software that allows peripherals to communicate. Strong sales at Dell of PC's and ongoing Y2K concerns for old PC's should also help that trend. Their ball grid array provider FCT went to a 24-hour day/7 days/week production schedule. The Forward Concepts Co. in Phoenix, AZ estimates demand for DSP chipsets will rise from $3.3bb/year in 1999 to $13.4bb/year in 2002. Many DSP chipsets go into cellphones and cell phones also use flip chips and flex circuitry...So flex/flip may "poggyback" that trend.. Finally note that Harry Hollack President of the Flip Chip Technologies Joint Venture (Delco Electronics and Kulicke & Sofa) at a conference this time last year in Phoenix (FCT's homebase) estimated that flip chip demand would grow at an annual rate of 38% annually through the year 2003. AFLX in its report noted quarter over quarter revenue demand of 9.6%. That works out if AFLX sustained that pace to about a 40% annual increase in revenues- close to the Hollack projection. (And fits FCT's new all-out BGA production schedule)... Now that's partly comparing apples to orange since AFLX is more than flip chips only and it's harder to judge demand for flex circuitry and CSP. Also on the good side revenues came in about 10% higher than analysts expected (39.6mm versus 36mm anticipated). The restructuring is finished, restructuring charges appear to be completed and two plants have been closed in Mexico (This is good corproate management- clean up your balance sheet while earnings expectations are low!) . Inventories and operating expenses also both dropped last quarter. Profit margins expanded by 150% from last quarter to 11.5% (excluding the special charge). The Thailand plant expansion is moving toward completion and that should help reduce capital expenditures out there in a quarter or two. The drop in ongoing operating expenses one wonders if it links to the Thai Plant since the 100,000 square foot expansion will increase the assembly area capacity by 50%. That is ADFlex will be able to compete with its Asian-based competitors on a cost basis more easily. Note also that Mgt repriced all AFLX stock options to $8.50/share in June 1998. So Mgt will have an incentive to exceed that price/share. On the downside I need more information on their customers than provided in the report to give a better judgment on demand moving forward. Note though that AFLX stated that demand for new component designs was excellent and the above glimpses from industry sectors that use flip chips and flex circuits look positive.. Backlog of $20mm end of quarter- I'm not sure if that went up or down or was flat. Also the impact of phaseout of a number of high end SEG programs -that impact is unclear although AFLX's last SEC 10Q noted that dd makers only accounted for 36% of its revenue in 3q 1998. There may still be additional expenses building out the expansion in Thailand-that was unclear form the report,although the report made it very clear IMO that finishing this expansion was of a very high priority to AFLX. Profit margins expand more rapidly when capital expansions cease. Finally profit margins have improved significantly but still need to improve more. My guess is that as AFLX loads its Thai Plant expansion that such margin expansion will occur. Most component manufactures are predominantly fixed cost in structure. Thus profitablity depends partly upon throughput. That is costs vary little as throughput increases or decreases in the manufacturing facilities. Als increasing profit margins will also help improve AFLX's balance sheet. Well I need to find a number for a replay of the conference call. I bet that lots of these questions are addressed by analysts during that call....But if current trends continue I think it is reasonable to estimate that AFLX will break "into the black" next quarter... Sincerely, Doug F.

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