RealTime IT News

Solectron: Bucking the Trend?

It's been a busy, but fruitful, week for Solectron Corp. , a company that provides electronic components and supply-chain management services to networking manufacturers.

Thursday's announcement of a $2 billion, three-year deal with Lucent Technologies is just icing on the cake, proving more and more manufacturers are willing to outsource its component needs rather than make it themselves, according to Solectron officials.

The deal comes after months of negotiating between the two companies: since January, Solectron has been trying to buy up between $250-$290 million in equipment and other inventory.

Both sides reached a compromise agreement Thursday morning, with Solectron agreeing to buy up $125 million in equipment and lease space from Lucent's North Andover plant to build the components required for the $2 billion deal.

Now, the company is the primary advanced optical systems provider for Lucent's Lambda and WaveStar product families.

Saheed Zohouri, Solectron executive vice president and chief operating officer, said the Lucent deal is a good stepping stone for future networking equipment contracts down the road.

"This agreement is significant from several perspectives," he said. "It broadens our relationship with Lucent, an important Solectron customer. It takes advantage of our technical expertise in producing highly complex products. And it is a showcase example of a customer relying on Solectron to provide complete supply-chain solutions.

It would seem the company is poised for greatness, so why doesn't Wall Street think so?

In recent weeks, a bevy of Wall Street analysts either downgraded or announced plans to review Solectron's books for a possible downgrade because of its performance last quarter, which barely met its guidance and was below analyst expectations.

Many analysts said they had concerns over Solectron's ability to find customers in a tight market, resulting in the company's credit downgrade from double B plus to double B, what a Reuters report calls "junk status."

Matt Roszell, Solectron spokesperson, said those downgrades were made last week, before they knew about this week's success.

"You look at these wins and it shows that people are finally taking advantage of what our outsourcing can do," he said.

What it shows is the telecommunications might be on the mend, as equipment makers sign contracts to meet carrier needs down the road. If these manufacturers feel an upswing is in the wind, it makes sense to get ready for the demand.

On Tuesday, Solectron signed a deal with Lucent rival Juniper Networks , expanding its existing service and repair contract with the company, to provide circuit board and manufacturing services for Juniper's G10 cable modem termination system (CMTS).

A day earlier, Xbox makers Microsoft Corp. signed a three-year quality control and repair agreement with the outsourcing company, while troubled European set-top box maker Pace Micro Technology signed the company to a multi-billion dollar deal March 5.

Last quarter's meager showing is the result of Solectron's restructuring and acquisition-related costs in 2001, as it struggled to define itself as an outsourcing choice for equipment makers. In the second quarter (which ended March 1), the company posted a net loss of $126 million and a 45 percent slump in revenues.

The acquisition of Iphotonics, Inc. in October 2001 is finally seeing dividends, though, and is the likely reason Solectron was able to bring aboard both Lucent and Juniper. Iphotonics manufactures fiber handling, splicing, and optical subsystem manufacturing, as well as providing optical engineering and design services.