The Day Ahead: Component shortages a nagging pain for techs

Contract manufacturer giant Solectron is like a lot of tech companies these days -- it has a dull ache known as component shortages.

"It's not getting better fast enough," said Solectron CFO Susan Wang, on a conference call Monday night.

It certainly isn't. The company said it sees component shortages through 2000 and into the first half of 2001. In other words, the demand is there, but the parts aren't.

When Solectron speaks, investors should listen. As tech companies continue to outsource manufacturing, companies like Solectron are becoming a proxy for the tech sector. Solectron makes equipment for Lucent, Nortel, Cisco and Hewlett-Packard among others.

Solectron officials said supply is tight for all parts including memory, circuit boards and cellular phone gear.

And it's costing tech companies real money. ATI Technologies recently blamed component problems for a profit warning. Motorola has had problems as has Dell, Gateway and other tech blue-chips.

For perspective, Solectron estimates it has lost nearly $500m (£330m) in sales in the last three quarters. Solectron's margins took a hit this quarter because shortages disrupted manufacturing.

The good news is Solectron is still executing well. Of course, estimates have come down a bit, but not much. Solectron has used its clout with suppliers to get the parts and deliver the goods for customers. It hasn't been easy though.

Solectron met analysts' reduced estimates in its third quarter Monday, earning $123m, or 21 cents a share, on sales of $3.6bn. First Call consensus pegged the electronics manufacturing services company for a profit of 21 cents a share.

Officials projected fourth quarter sales of $4.5bn to $4.7bn with fiscal year sales between $13.7bn to $13.9bn. Plant acquisitions from Nortel, IBM and Australia's Bluegum Group will boost sales in the quarter. The company initially projected sales of $5bn for the fourth quarter.

The company projected fourth quarter earnings of 26 cents a share, excluding charges, and 84 cents a share for the fiscal year. Those results are in line with consensus estimates, and could provide upside.

Despite component shortages, Solectron said it can bring in revenue of $20bn in 2001. That outlook should enable analysts to boost their estimates.

Wang said the company is "reasonably confident" it can meet its projections, but the component risk is still there.

Get used to the component risk mantra. Jabil Circuit reports earnings Thursday and it'll be interesting to hear what execs have to say. Also watch results from SCI Systems, Flextronics, which recently inked an outsourcing pact with Motorola, and Celestica among others.

Online advertising soft

Aside from component shortages, tech investors will also be watching those dot-coms.

NBCi issued a profit warning and blamed a soft dot-com advertising market for some of its problems. If you missed the news, don't be surprised. NBCi buried the profit warning under nine paragraphs about its new focus.

The company will combine all of its consumer properties such as Snap.com and Xoom.com under one NBCi.com property to be launched in the fall. NBCi's Allbusiness.com will be independent, but be linked heavily to the consumer portal.

As for the financials, NBCi said the new focus and the closing of recent acquisitions will hit the bottom line. NBCi said it intends to "tighten its cost structure and effectively contain costs. NBCi anticipates becoming profitable after non-cash expenses in 2002.

The NBCi woes could bolster a popular argument these days regarding online advertising. Cash poor dot-coms and market volatility are putting the brakes on ad spending. Put simply, if you aren't Yahoo! or America Online, you should be sweating at the thought of the dot-com ad spending slowdown.

Clarification

In a recent column about Electronics for Imaging, we noted that the company bought technology that zaps white board scribbling to the Web. In fact, EFI developed the technology in-house. We regret the error.

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