Semiconductor investors had to be disheartened by the second-quarter earnings report from FlextronicsInternational
Beginning in July and continuing into August, Flextronics experienced a broad-based weakness across all product lines, including its cell-phone segment, which lost two large European customers, Alcatel and Siemens. This led to sales for the quarter ended Sept. 30 dropping 6% from a year ago to $3.9 billion, which was about 5% below analyst estimates. Earnings also came in lower than expected. The company recorded a generally accepted accounting principles loss of $2.4 million. Ignoring restructuring charges and some other items, Flextronics earned $0.17 per share, short of analyst estimates by two pennies. Adding salt to the wound, it also lowered its earnings and sales guidance for the next two quarters.
Flextronics definitely has some of its own problems, but I worry that the broad-based softness in customer demand in its business may be hinting at a general industry slowdown as well.
You sure wouldn't think so by looking at current industry statistics. After an inventory build last year, business has improved markedly for semiconductor manufacturers. Certain segments of the market are doing great (like flash memory), and fellow foundry operator United Microelectronics
Unfortunately, statistics like capacity utilization and book-to-bill ratios aren't perfect for describing the health of the industry. The problem is that most semiconductor manufacturers sell to OEMs (original equipment manufacturers), which then sell their products to consumers and businesses. For example, Hewlett-Packard
Excess production caused bloated inventories last year, and I have to wonder if high production, combined with the effect of high energy prices on consumers, is going to bloat inventories again. If so, Flextronics would not recover anytime soon.
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Fool contributor Dan Bloom has no financial interest in any stock mentioned in this article.