Updated from 10:30 a.m. EDT

Flextronics ( FLEX), which surprised Wall Street with a stronger-than-expected fourth-quarter earnings report after the bell Tuesday, got a surprise of its own Wednesday: Investors are pummeling the stock.

In recent trading, the contract manufacturer was off $1.89, or 10%, to $16.57.

The beating began after hours on Tuesday even though the Singapore-based company beat its own top- and bottom-line guidance for the fourth quarter, as net sales increased by 23% over last year.

But the real damage took place when Nortel ( NT) announced Wednesday that it had fired its CEO amid a worsening accounting scandal. Flextronics has been negotiating a $2 billion outsourcing deal with Nortel, which could be threatened by the shake-up.

Net sales for the March quarter were a record $3.8 billion, and pro forma net income was $72.8 million, or 13 cents per diluted share. Analysts polled by Thomson First Call were expecting an 11-cent profit on sales of $3.54 billion.

The numbers were better than the company signaled in early March, when it reaffirmed previous guidance of a 9-cent to 11-cent profit and sales ranging from $3.4 billion to $3.6 billion for the fourth quarter.

On Tuesday, Flextronics told analysts to raise their earnings and revenue projections for fiscal 2005, and it said talks to win a multibillion-dollar outsourcing job from Nortel are still on track.

Tuesday's report had a few negatives that helped explain Wall Street's sour response even before the Nortel news broke.

Weighed down by restructuring charges of $48 million, net income declined to $16 million, or 3 cents a share, according to generally accepted accounting standards. A year ago, the firm reported GAAP net income of $19.5 million, or 4 cents per share.

But the latest restructuring charge will be the last major one for some time, promised CEO Michael Marks. "We can't keep doing this and be seen as a major player ," he said during a call with analysts. Flextronics and other EMS companies have written down hundreds of millions of dollars in excess capacity in the last few years.

Deutsche Bank analyst Chris Whitmore noted that the balance sheet had some weakness; the cash conversion cycle (time it takes to convert expenditures into realized cash) lengthened by nine days sequentially and the company's net debt increased by $450 million. Still, the oft-skeptical Whitmore kept his buy rating on the stock and raised earnings estimates. (Deutsche Bank has a banking relationship with Flextronics.)

Credit Suisse First Boston downgraded Flextronics to neutral from outperform on Wednesday, saying it will be difficult for the company to deliver further upside to expectations. CSFB has an investment banking relationship with Flextroncis.

The company said it is raising its outlook for the June quarter by 2 cents per share to 14 cents and said sales will be about $150 million greater than previously expected, or about $3.88 billion. Analysts were expecting EPS of 12 cents on sales of $3.7 billion.

Guidance for the current fiscal year (2005) is up too; the company added $450 million in revenue and 5 cents a share to existing analysts' estimates. That brings the financial target for the year to 70 cents a share on sales of $16.69 billion.

Analyst Alexander Blanton of Ingalls & Snyder noted that consensus for fiscal 2005 was just 55 cents a year ago. "You can see how much things have improved," he said. Moreover, should a long-awaited deal with Nortel close in the June quarter, as the company expects, Flextronics could add another 5 cents a share to the annual bottom line, Blanton added, before the Nortel news became public.

Flextronics, which does not build cell-phones for troubled vendor Nokia ( NOK), has benefited from strong performances by telco customers, including Sony Ericsson, which last week reported that sales of handsets in its first quarter were up 63% year over year.

Flextronics' revenue from sales of handsets were down 9% sequentially, significantly lower than the usual seasonal double-digit drop. Sales of other types of telecom-related equipment were up 10% sequentially and 39% year over year.

Pro forma gross margins were up from 5.4% a year ago to 6.3%.

Also last week, rival electronics manufacturer Celestica ( CLS) posted an adjusted first-quarter profit and strong second-quarter guidance, beating analysts' forecasts. The upside surprise is more evidence that the sector is continuing its recovery from the technology downturn.