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Multi-Fineline Off On Margin Warning; Bad Sign For Apple?

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Shares of the flexible circuit board maker Multi-Fineline Electronix - also known as M-Flex - are taking a shellacking Tuesday morning after the company warned that margins for its fiscal first quarter ended December will be below previous expectations - and that it could report a loss for Q2. The warning, while bad news for M-Flex holders, also carries disturbing implications for Apple iPhone sales.

M-Flex said revenues for the quarter will about $290 million, above consensus at $270.2 million, and up 21% from a year ago. But it also said that gross margin will be about 8.5%, below guidance, and down from 12.2% from the year ago quarter.

The company expects to report full results on February 7.

"We generated record revenues during the first quarter reflecting strong demand from both our existing and new customers," CEO Reza Mesgin said in a statement. "Sales to new customers more than doubled sequentially."

But the CEO also said that toward the of the quarter M-Flex scaled back production.

"While this prudent business decision enabled us to successfully manage our working capital, including a reduction in work in process and finished goods inventory and an increase in our cash balance to over $92 million, the idled labor costs and manufacturing capacity were expensed rather than capitalized as inventory," he explained. "This, coupled with unfavorable product mix, impacted our gross margin."

For FY Q2, Mesgin says the company sees a seasonal decline in revenue, with break-even to slightly negative net income.

"Although we continue to work on cost improvements, including reduced headcount levels, we also anticipate a sequential decline in gross margin based on the lower anticipated revenues and overhead absorption," he said.

Stifel Nicolaus analyst Aaron Rakers asserted in a research note that "investors will be most notably focused on the company’s comment that it had scaled back production toward the end of the quarter – adding further fuel to the concerns over supply chain order cuts from Apple." He notes that the company in its most recent quarter generated 86% of revenue from a single customer - believed to be Apple.

MFLX is down $4.05, or 19%, to $17.24.