F or someone who doesn’t follow Celestica closely, the news that company will wind down production of RIM’s BlackBerry smartphones may come as a shock. But if you look back, this was well telegraphed, and even discussed in length on the last quarterly earnings call.
Because Celestica has been aware of the possibility of losing what now makes up 20 per cent of its revenues for some time, the firm has had time to plan. For this reason, management has strategized a clear direction for the future: delving deeper into the diversified market.
The diversified unit, which currently accounts for 19 per cent of revenues, comprises aerospace and defence, medical, industrial, green technology and semiconductor equipment. Celestica’s other business lines are communications, consumer and computing, which encompasses servers and storage.
In a perfect world, the company will soon see 30 per cent or more of its revenues come from diversified. Here’s why this is necessary: last quarter, total revenues were $1.7-billion, and compared to the first quarter of 2011, they took a hit in every market other than diversified. Storage dropped 19 per cent, communications fell 15 per cent and consumer decreased 14 per cent.
Diversified businesses also offer margins in the 5 to 7 per cent range, much higher than the 1.5-2 per cent in the consumer unit. Should Celestica get 30 per cent of its reveneus from diversified, the overall operation margin would jump by 50 basis points, edging the company closer to its goal of an overall margin above 4.5 per cent.
Celestica’s already made some big steps to drum up more diversified revenues, such as acquiring Brooks Automation's contract manufacturing operations. However, to make real change, it’s going to need to stimulate more organic growth.
Last quarter, the diversified unit’s revenues were 58 per cent higher than the year prior, but organic growth was up only 28 per cent, far from the 40 to 50 per cent target range that management had previously targeted.