Updated from 10:03 a.m. ESTSolectron's ( SLR) lower second-quarter margins were outweighing a small upside revenue surprise delivered after the close Thursday. Recently, shares of the contract manufacturer were off 35 cents, or 5.5%, to $5.75. Solectron's sales of $2.89 billion in the February quarter of fiscal 2004 rose 22.4% from last year's levels and came in above analyst expectations for $2.78 billion. The company reported a net loss from continuing operations of $90 million, on the basis of generally accepted accounting principles, compared with a loss of $104 million a year earlier. Excluding $74 million in restructuring and impairment charges, the company posted a pro forma net loss from continuing operations of 2 cents a share, in line with expectations. "We are very pleased with the strong growth in several of our end markets, including communications, networking and consumer," said CEO Mike Cannon, adding that the expansion of the company's 3G mobile handset program had contributed to the growth of its consumer market revenue. Gross margins, however, were off sequentially by 20 basis points to 4.5%, a factor attributed to an increase in lower-margin consumer sales. Despite the company's protestations that margins will turn back up, and that the company will return to profitability by the fourth quarter, traders punished the stock, and some analysts expressed skepticism about the company's turnaround. "Management appears to have stopped the bleeding, but we are concerned about the slow progress toward profitability," Wells Fargo analyst Jim Savage wrote Friday morning. "Although we forecast a profitable fourth quarter , we find it difficult, even after years of Solectron's restructuring, to forecast that it will reach its stated 4% operating margin goal in the near future." (Wells Fargo does not have a current investment banking relationship with Solectron.) The company guided for third-quarter sales of $2.9 billion to $3.2 billion. Pro forma EPS from continuing operations, excluding restructuring and impairment and other unusual items, should range from a 2-cent loss to a 1-cent profit. Analysts had penciled in expectations for break-even earnings on sales of $2.87 billion. Despite the disappointing report on gross margins, Alexander Blanton of Ingalls & Snyder said there was good news hidden in the report that traders may have missed. Gross margins from continuing operations -- margins excluding parts of the company that were subsequently sold off -- were 2.56% a year ago. This year they were 4.45%, an improvement of close to 200 basis points, "a huge improvement," Blanton said. Operating expenditures were also much improved, he noted, down from 5.91% of revenue a year ago to 3.78%. "When margins start to improve, they will improve very fast," he said. Ingalls & Snyder does not have a banking relationship with Solectron.