SAN JOSE -- Flextronics last night reported fiscal first-quarter net sales from continuing operations rose 6% to $4.06 billion, while GAAP net income rose 44% to $85 million. Both numbers topped previous estimates.

Sequentially net sales from continuing operations increased 15%, and GAAP operating margin improved 180 basis points, for the period ended June 30.

"There has been a reacceleration of significant growth in our core EMS business, which includes design, vertically-integrated manufacturing services, components and logistics," said chief executive Mike McNamara.

Sales were up in all end-markets sequentially, with particular strength in handsets. Inventory turns fell 0.8 times sequentially and 2.8 times year-over-year, to 6.8 times. The company does not expect turns to improve in the second half.

Nonetheless, the company upped its guidance for revenue growth for fiscal 2007 to 25%.

Flextronics guided for September quarter revenue to grow 25 to 30% year-over-year to $4.7 billion to $4.9 billion. Earnings are expected to grow 10 to 25% year-over-year. For the fiscal year, revenue from continuing operations is expected to grow 25% to $19 billion and earnings are expected to rise 15%.

In a research note last night, Deutsche Bank Equity Research analyst Carter Shoop wrote, "Flextronics is aggressively investing in its vertical capabilities and going after topline growth at the expense of margins in fiscal 2007. This strategy increases Flextronics' operational risk and will intensify industry pricing pressure, but we believe, is a step in the right direction."

Shoop also sounded a warning for Flextronics' competitors. "By forgoing margins in the near- to medium-term, Flextronics will likely take meaningful market share from its U.S.-based competitors, while at the same time creating substantial barriers to entry down the road. We deem it essential for EMS vendors who manufacture high-volume programs to invest in value-added offerings like design, component manufacturing and logistics and believe that Flextronics has a several years head start on its U.S.-based peers."

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