SAN FRANCISCO: Electronics manufacturers, already reeling from low margins and fierce competition, now must contend with the SARS outbreak, which analysts said could dent business in Asia this quarter. Contract manufacturers that recently reported quarterly results tried to ease concerns about Severe Acute Respiratory Syndrome, but nervous analysts expect June-quarter results to show the illness has further disrupted already slow business.
The flu-like illness appeared in China in November and has spread worldwide, infecting some 5,500 and killing more than 350. "SARS is a major theme," said Michelle Gutierrez, an analyst with SoundView Technology Group. "If SARS is not contained or controlled in the next month or so, it's hard to see how it won't affect their supply chains. ... There are customers asking about contingency plans."
Analysts already had reason to expect a slow June quarter for contract manufacturers, who build products for such tech companies as IBM Corp., HP., Cisco Systems Inc., Nokia and Microsoft Corp.
Demand for printed circuit boards and telecommunications gear remains anemic, and demand for consumer electronics is seasonally slow. Contract manufacturers are also under price pressures and have excess capacity despite deep restructurings, said Deutsche Bank Securities analyst Chris Whitmore.
RISING ANXIETY OVER SARS
SARS has suddenly added more uncertainty to contract manufacturers' prospects, especially since so many rushed into China to take advantage of its low costs. Fitch Ratings has warned that fallout from the spread of SARS could shave 1 percentage point, or roughly $30 billion, from Asia's growth this year.
"There's clearly a level of apprehension, and it's growing," said Raymond James and Associates analyst Shawn Severson. "One more thing this market doesn't need is another question mark." Flextronics International Ltd Chief Executive Michael Marks told analysts last week that SARS had not had a "discernible impact" on the Singapore-based company's business, and that none of its employees had the disease.
Flextronics said it had taken steps to protect employees, including travel restrictions and directing employees returning from trips through Asia to go into "self-imposed isolation" for at least 10 days before returning to work.
Analysts, however, said they saw SARS-related business disruptions built into cautious June-quarter revenue outlooks. "The fear factor is certainly causing disruptions in travel and program ramps," said Whitmore. Flextronics has forecast June-quarter revenues in a range of $3.0 billion to $3.3 billion, compared with March-quarter sales of $3.06 billion.
Plexus Corp. is expecting third-quarter sales of $190 million to $200 million, compared with March-quarter sales of $190.8 million. Benchmark Electronics Inc. also cautioned last week that its second-quarter sales would miss Wall Street's estimate. The Angleton, Texas-based company expects sales of $430 million to $450 million, versus first-quarter revenue of $448 million. Analysts had on average expected June-quarter sales of $456 million, according to tracking service Thomson First Call.
By contrast, Sanmina-SCI Corp. projected third-quarter revenues would rise amid more stable business. The San Jose, California company expects current third-quarter revenues of $2.55 billion to $2.70 billion, compared with second-quarter sales of $2.44 billion.
Earlier this month, Toronto-based Celestica Inc. forecast second-quarter revenues of $1.55 billion to $1.75 billion, compared with first-quarter sales of $1.59 billion. Analysts had on average expected second-quarter sales of $1.65 billion.