Celestica Fills BlackBerry Gap With Aerospace: Corporate Canada
Celestica Inc. (CLS) is betting on industries from health care to aerospace to fill the sales void left by BlackBerry, which a year ago made up 19 percent of the electronics-parts supplier’s revenue.
The Toronto-based components maker expects revenue to grow by “modest double digits” in its so-called diversified category after winding up assembly work for BlackBerry in late 2012, Celestica Chief Executive Officer Craig Muhlhauser said.
Muhlhauser, 64, said he realized he had to do something about his company’s dependence on BlackBerry toward the end of 2011, when the smartphone maker, then known as Research In Motion Ltd. (BB), was struggling against Apple Inc. (AAPL) and Samsung Electronics Co.
“The momentum was not in RIM’s favor, and they seemed to be lost from a product strategy standpoint,” Muhlhauser said in an interview yesterday in Toronto. As BlackBerry sales tumbled, “it became a big overhang on the company -- it just overtook us,” said Muhlhauser.
Celestica announced in June it would stop building BlackBerrys. The diversified category, which also includes defense, industrial and semiconductor customers, accounted for 24 percent of revenue in the first-quarter earnings released yesterday, up from 19 percent a year ago.
The strategic shift has just begun, and Celestica’s challenge will be to rebuild sales, said Shawn Harrison, an analyst at Longbow Research in Independence, Ohio. The potential customers Celestica is eyeing in the diversified business offer opportunities because they haven’t traditionally turned over their manufacturing for an outsider to handle, he said.
“These markets are less outsourced. The challenge is many of the program wins are much smaller,” Harrison said. “If you won a large telecoms program in the past it could be a half- billion dollars. These could be $100 million, but many are $5, $10, $15, $25 million,” Harrison said by phone. On the other hand, those smaller contracts also can be more profitable, he said.
BlackBerry has been losing market share for three years as its aging lineup of smartphones with a slower Web browser and smaller range of applications led consumers to opt for rival devices like the iPhone. BlackBerry is now betting on a new operating system and refreshed phone lineup to woo back customers.
Celestica’s sales fell 19 percent to C$1.37 billion ($1.33 billion) in the first quarter from a year earlier, the company said yesterday. Revenue this year is expected to slide 9.7 percent, according to the average estimate of 13 analysts surveyed by Bloomberg.
The company posted profit of 16 cents a share excluding stock compensation and other charges, beating the average analyst estimate of 15 cents in a Bloomberg survey. The stock rose 1.7 percent to C$8.44 at 9:59 a.m. in Toronto. They remain little changed in the past year as the Standard & Poor’s Information Technology Sector Index (STINFT) climbed 14 percent.
Revenue growth across the diversified category was helped by the acquisition of semiconductor component makers D&H Manufacturing Co in 2012 and Brooks Automation Inc. (BRKS) in 2011. Analysts said they expect more purchases as Celestica looks to build expertise in these industries.
“They have half a billion dollars on their balance sheet, they have no debt, they’re generating roughly C$150 million in cash per year,” Gus Papageorgiou, an analyst at Scotia Capital Inc., said. “Making acquisitions in the right segment” makes sense, he said.
Muhlhauser, who has previously worked for Ford Motor Co. and became CEO in 2007, won’t say if more acquisitions will come this year. “We’re constantly looking for M&A opportunities, but our priority is to reinvest in the business,” he said. “We are not in any rush.”
The CEO has done a good job of turning the company around at a difficult time for the global economy, even if the work remains unfinished, said Papageorgiou, who rates Celestica the equivalent of a hold.
“When Craig took over the company, it was a bit of a broken company. The margins had fallen apart; the operations were horrible,” said Papageorgiou. The CEO fixed operations and made some decent acquisitions, he said.
In one of its most important growth markets, aerospace and defense, Celestica makes everything from cockpit avionics to in- flight entertainment systems, Muhlhauser said. Commercial sales make up 90 percent of that market, with 10 percent from the military, he said.
Companies like Raytheon Co. and Honeywell Inc. still keep a lot of business in-house for design, testing, engineering and final assembly, said Lavanya Rammohan, a Fairfax, Virginia-based electronics analyst with Frost & Sullivan Inc. That presents a challenge for Celestica as it seeks new clients, she said.
“Even though they’re making inroads, it will take a lot of time to get there,” she said. “But it will happen, as all the traditional markets are slowing.”
Forty percent of Celestica’s sales comes from supplying servers and related computer-network equipment to technology companies like Cisco Systems Inc. (CSCO), now its largest customer and the only one that accounts for more than 10 percent of revenue. The business may be a drag on Celestica, Harrison said.
“The growth rate of IT spending and networking spending is in many cases slowing,” said Harrison. “That’s their greatest challenge and that’s why, other than the benefit from buyback activity, the stock has been stuck in a rut.”
The server business is “hyper-competitive,” and the best way to improve margins in that area is to “do the entire supply chain” for their customers, Muhlhauser said.
Four analysts say Celestica is a buy, eight call it a hold, and three recommend selling the stock, according to analyst ratings compiled by Bloomberg.
Celestica said yesterday it anticipates total restructuring charges related to shuttering its BlackBerry assembly business to be C$55 million to C$65 million this year.
BlackBerry doesn’t comment on relationships with its suppliers, Crystal Roberts, a company spokeswoman, said yesterday by e-mail.
Muhlhauser, however, said he’s looking forward to a future without BlackBerry, even if his erstwhile biggest customer has returned to profitability.
“It was almost like we were out of control, and the first question and every question in every interview was RIM, RIM, RIM,” he said. “We’re in control of our destiny now.”
To contact the reporter on this story: Hugo Miller in Toronto at email@example.com
To contact the editor responsible for this story: Nick Turner at firstname.lastname@example.org