Jun 19, 2012 07:54 AM EDT
Contract electronics maker Celestica Inc will stop making products for its biggest customer, Research In Motion Ltd, by the end of the year as the BlackBerry maker seeks to cut costs by shrinking its global supply base.
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Toronto-based Celestica has mainly built BlackBerry Bold and Curve models in Mexico for the North American market. RIM's sales in the United States have been hit particularly hard as it struggles to compete with Apple Inc's iPhone and devices using Google Inc's Android software.
RIM's decision to trim the number of companies that build its smartphones illustrates the falling fortunes of the once-dominant smartphone maker as it looks to cut $1 billion from its operating costs this year. Major layoffs are planned.
Celestica will likely take a near-term hit due to RIM's move but it is expected to bounce back as it diversifies into higher-value and higher-margin markets.
"On some level this is a positive for Celestica," said CIBC World Markets analyst Todd Coupland. "RIM has been losing market share and they've been facing the brunt of that, both in terms of their business and their valuation," he said.
RIM's three main remaining suppliers are Flextronics International Ltd, Jabil Circuit Inc, and Quanta Computer Inc, which makes RIM's poor-selling PlayBook tablet.
Coupland said that, excluding cash, Celestica trades at half the multiple of Jabil. He expects either Flextronics or Jabil, which both have operations in Mexico, to win the contract to build RIM products for North America.
RIM accounted for 19 percent of Celestica's first-quarter revenue, but that was down from a year earlier due to weak demand and program transitions at the smartphone company.
Waterloo, Ontario-based RIM declined to comment on Monday on specific supplier relationships but pointed to its fourth-quarter earnings call in late March, when it said it would make changes to its supply chain in a bid to lower costs.
Celestica had also seen the writing on the wall, telling investors in April that the volume of business and the locations at which it manufactures products for RIM would likely change.
Struggling RIM has hired bankers from J.P. Morgan and RBC Capital to help evaluate its strategic options.
Celestica, which also produces servers and other products for branded manufacturers such as IBM Corp and Cisco Systems Inc, said it expects restructuring charges of up to $35 million. It did not provide a timetable for taking the charges but said it will wind down the operations over the next three to six months.
The company said it continues to expect an adjusted second-quarter profit of 20 cents to 26 cents a share on revenue of $1.65 billion to $1.75 billion.
Shares of Celestica, which has a market value of C$1.47 billion, slipped 0.5 percent to $7.43 on Nasdaq on Monday morning. They are down 17 percent this year.
RIM's Nasdaq-listed shares fell 1.7 percent to $10.70. They are down 70 percent this year.
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