Flextronics Isn't Soft on Software

Contract manufacturer could become a design powerhouse with the acquisition of two software groups

September 2, 2004

2 Min Read
Flextronics Isn't Soft on Software

Flextronics Corp. (Nasdaq: FLEX) is flexing muscles in the software area, making moves that could boost the contract manufacturer's standing as OEMs outsource bigger chunks of system design.

Yesterday, the company announced the planned acquisition of Future Software Ltd. (FutureSoft), an India-based firm that provides protocol stacks and Layer 2/3 switch software (see Flextronics to Acquire FutureSoft ). Per Indian law, terms of the FutureSoft deal haven't been disclosed yet, as the companies are awaiting government approval.

FutureSoft isn't the only deal of its sort that Flextronics is working. The company is also acquiring a 55 percent stake in Hughes Software Systems Ltd. (HSS), an Indian subsidiary of The DirecTV Group Inc. That deal is expected to close in the next several weeks.

Flextronics appears to be the first large contract manufacturer to amass a software group, beating out competitors Celestica Inc. (NYSE, Toronto: CLS), Jabil Circuit Inc. (NYSE: JBL), and Solectron Corp. (NYSE: SLR). It's no small team, either; FutureSoft boasts 524 engineers, and HSS has 2,400 employees.

Some software power would certainly complement Flextronics' June contract to take over Nortel's manufacturing operations (see Nortel Sells Plants, Supplies Update). But there's a more ambitious possibility. Flextronics already assists customers in hardware design. The addition of software expertise would make it possible for the firm to take over the entire design.

Whether Flextronics is interested in full systems design is yet to be seen. Company officials did not return a call for comment. But given the massive cost cutting of the last few years, most industry insiders expect OEMs to contract out more of their operations; some sources say the trend has already extended to R&D and product design.

In any event, analysts are expecting to see Flextronics broaden its offerings. "We continue to believe Flextronics could eventually introduce ODM [original design manufacturer] products for the networking market," wrote Brian White, an analyst with Kaufman Bros. LP, in a report last week.

Outsourced software design will also help Flextronics boost margins. In a July earnings call, Flextronics CEO Michael Marks told analysts HSS would be "probably the highest margin business unit" in the company, with post-tax margins of 21 percent.

Should both acquisitions come through, Flextronics will have a broad software team. FutureSoft's expertise is on the datacom side; the company has IP and ATM expertise and can do all the software for a Layer 2/3 switch, for example. HSS is more closely related to telecom, providing software for areas such as SS7 signaling.

FutureSoft, by the way, is no flash-in-the-pan startup. The company was founded in 1985 and got into the protocol stacks business in 1994. Officials are expecting revenues of $23 million for the fiscal year ending in March; and, before the Flextronics deal, they had talked of expanding to 2,000 employees by 2007.

— Craig Matsumoto, Senior Editor, Light Reading

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