Solectron conference call notes:
(These notes were taken rapid fire and may not be verbatim; the conference call was long, and the notes are subject to my interpretation and editing.)
Sales grew in all geographical regions; Asia 21%, Europe 28%, Americas 5%. In the Americas, Mexico and Brazil added about 1%, Milpitas was down slightly, and Texas contributed the rest of the growth. New projects contributed 14% of revenues this quarter. The top 20 customers are the same as in previous quarters; the largest two customers are HP at 16%, and Sun at 10%. Ericsson hasn't broke into the top 10 yet, because the deal wasn't closed until October/November, but next Q they should.
The breakdown by industry segment is: Network 29%, PC 20%, Workstations 15%, Periherals 12%, Test and measurement equipment 6%, Telecom (ex mobil phones) 6%, Mobil phones 2%, and Other 10%. They expect growth in the next several quarters in Networking, Workstations, Telecom, and Test. Comparing the segnments this quarter with the last quarter, all segments are stable, except for a decline in Workstations and growth in PC Systems. They continue to see good growth in Networking; slower than before, but they still see good ECM industry growth in networking, and particularly Solectron. In the workstation area, Sun is still strong, but HP's Ft. Collins plant was sold to Celestica, and much of HP's domestic workstation work was returned to this plant, and finally Silicon Graphics business "needs no further comment". In spite of all this, they expect workstation growth going forward from this point. OTOH they expect PC System growth to level off.
Several of the analysts were confused over the Networking number; some quoted a drop from 38% to 29%; Solectron clarified that the previous report had the Networking, Telecom and Mobil phone segments all lumped together as Networking and Telecom. Last quarter these were 38%, and this quarter they add to 37%. Networking dropped from 32% to 29%, Telecom grew from 5% to 6%, and Mobil phones grew from 1% to 2%.
They expect at least 30% growth over the next year, with the 2nd half stronger than the 1st half. They expect a sequential gain in revenues in the 2nd quarter from the 1st just completed. This is in spite of the 2nd quarter (Dec - Feb) occasionally showing some seasonal weaknesses due to seasonal slowness in PC business and December S/Ds by many of their customers. This year they expect growth in new business to more than offset these seasonal factor.
Margins declined in the current Q to 5.9% from 6.7% last quarter. The impact of the "systems shift" in the PC segment has caused about 2/10% of the margin decline, and the rest was due to start-up costs of their new plants and spending on their infrastructure (MIS system). They had operating losses at their new sites; Mexico $1.8M, Brazil and Massachusetts split $2.2M, for a total of $4M. Massachusetts may go profitable in the next quarter, and Mexico and Brazil will go profitable by the end of the year. The hit due to PC system shift will remain (but PC systems will not grow as fast as their overall revenues), and the costs of start-up and MIS will benefit the company in the future. They don't know how much of these benefits will show up in the 2nd Q, but overall they expect margins to improve. Future quarters should see even better margins.
So with revenue growth in revnues next Q, along with margin improving, the company expects to report sequential EPS growth. They are comfortable with analyst's average estimate of 42 cents a share.
The Mexico plant is a major expansion and only did $6M this quarter. They have 850 people at the plant, about 25% of the future workforce. They are shipping to five customers from Mexico and expect this to grow to eight by theend of the year. Eventually they expect $250M in annual revenues from Mexico, but they only shipped $6M n the quarter just ended, considering they just started up in October.
One analyst asked about Receivables and Inventory increases on the balance sheet. For Receivables, the DSO went up from 36 days to 37 days. Solectron indicated that a lot of their shipments were in November, but that a lot of shipments also went out in early December. Europe and North America are shipping new projects/products in December. As for Inventory levels, with the new projects shipping, and with inventory builds at new plants in Mexico and Brazil, this explains the inventory build.
One analyst asked about the "Asian flu" and the spokeswoman replied, "I'm Asian, and I have the flu." She went on to suggest that there may be some impact, but since they don't know the final destination for all the products they produce, there is very little visibility of the impact on Solectron. They haven't seen any indications of reduced demand from Asia resulting in reduced orders form customers. Their backlog is up to $953M from $875M last quarter (if I heard the numbers correctly). They have seen that their Malaysian operations have become more cost competitive, with the drop in labor costs, and she implied this may be a more significant impact of the Asian currency crisis.
The tone of the call is best captured in the response to the last question from Alex Blanton of Ingalls and Snyder (buy side analyst) about the average ECM stock drop of 37% since the 1st of October; the Solectron spokewoman replied:
"I don't think there is any rational reason for this." "Unwarranted concerns about a slowdown in business..." and "High level of churn when nothing has gone awry."
And that about sums it up.
Paul |
