Solectron Meets Lowered Third-Quarter Earnings Estimates

Earnings were hurt by component shortages, which the company said will continue into 2001.
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Solectron

(SLR)

, the world's largest contract manufacturer of electronics and something of an early warning system for much of the computer and mobile-device business, announced third-quarter earnings Monday that matched analysts' lowered estimates of 21 cents per share. Earnings were hurt by component shortages, which the company said will continue into 2001.

Revenue for the quarter was a record $3.6 billion, slightly ahead of the company's forecast of $3.4 billion to $3.5 billion. Revenue grew 24% from $2.9 billion in the second quarter and 58.1% year to year.

"News on the quarter was good," said

Robertson Stephens

analyst Keith Dunne. "We like the stock. We're buying it." Robertson Stephens underwrote Solectron's secondary offering in July 1999.

"Regarding the fourth quarter, we're going to take our numbers up," said Dunne. "We were at 24 cents; they said they could do 26 cents."

The results come after the company warned April 28 that earnings would be less than previously anticipated because of component shortages. Analysts polled by

Thomson/First Call

had expected EPS of 22 cents, but after the warning they revised their estimates to 21 cents per share. Excluding one-time charges related to Solectron's acquisition of

Americom Wireless Services

and restructuring within the company, earnings per share were 21 cents.

"Record revenues of $3.6 billion could have been even higher if we had been able to meet customer demand. The supply base continues to constrain revenue upside," said Vice President and Controller Phil Kagel.

"We expect to experience a supply/demand imbalance through calendar year 2000 and into 2001," added Julio Leung, vice president of finance.

Including the $7 million in nonrecurring charges, EPS was 20 cents. Net income for the quarter was $122.9 million, a 36.6% increase from the third quarter in fiscal 1999, and a 5% increase over the previous quarter. The quarter-to-quarter disparity between revenue growth and net income growth was reflected in a decrease in gross margin from 9.7% in the second quarter to 8.4% in the third quarter. The company attributed the decrease to disrupted production lines caused by supply shortages. The resulting idle time at manufacturing facilities was costly, the company said.

In May, Solectron announced that it would buy Australia's

Bluegum Group

, that country's largest electronics contract manufacturer, in a pooling-of-interests acquisition.

At the end of the second quarter, Silicon Valley-based Solectron had estimated that fourth-quarter revenue could be as high as $5 billion. During Monday's conference call, the company reduced its estimate to $4.5 billion to $4.7 billion to reflect the supply-chain problem and the phased-in acquisition of

Nortel Networks'

(NT)

manufacturing facilities. Overall, the company expects revenue of $13.7 billion to $13.9 billion for fiscal 2000.

Nortel's sale of its manufacturing facilities is part of a growing trend among original equipment manufacturers (OEMs). Just weeks ago,

Motorola

(MOT)

announced a $30 billion, five-year outsourcing deal with Solectron competitor

Flextronics

(FLEX) - Get Report

. Motorola has been particularly hard hit by the current component shortage due to poor inventory control, a problem that outsourcing manufacturing should help overcome.

Despite continuing component shortages, Solectron predicts $20 billion in revenue for fiscal 2001.