Top 10 customers 62% of total revenue. Higher Asia utilization rate prompts footprint expansion plans in region. Business development nets 16 wins. Market trends and revenue breakdown reveal Plexus strategy insight. Anticipated increases in operating expenses spell growth.
Wall Street believes EMS provider Plexus (www.plexus.com) is demonstrating traction in its return to double-digit growth through new program wins (i.e., follow-on programs with Coca-Cola’s “crew serve”) and further aided by a generally recovering business environment. Operating with a leaner model compared to recent years prior, some analysts expect notable earnings improvement over the next 12 to 18 months.
The following is Plexus F1Q financial results information and market analysis provided by Needham & Co with some interpretation by VentureOutsource.com.
Some risks exist
Apart from general economic conditions, many investors believe company specific risks for Plexus include, but are not limited to:
- Customer concentration (i.e., Juniper Networks is approximately 17% of revenues)
- High volatility of military programs order flow
- Successful ramps associated with its nascent Coca-Cola relationship
- Effectively leveraging the company’s significant investment in operating expenses (relative to EMS industry peers)
- Maintaining sufficient differentiation, or EMS industry value proposition, relative to top-tier EMS players seeking to expand engineering services
Results Overview
Plexus reported F1Q results of $430 million in revenue and non-GAAP EPS of $0.44, vs. original guidance for $405 to 430 million and $0.31 to 0.36 EPS.
Non-GAAP EPS of $0.39 includes $0.04 in stock-based compensation and a $0.01 favorable impact from lower taxes (1% vs. guidance for ~5%), but it excludes $3.2 million (or, $0.05) from a legal settlement.
Adjusted gross margin of 9.6% (ex. legal settlement) was flat sequentially from 9.6% (meeting the company’s 9.5% to 9.8% margin range)
Non-GAAP SG&A expense of $24.3 million (5.7%) was up from $23.1 million in F4Q. Consequently, non-GAAP operating margin was 4.0%, up from 3.8% in September 2009.
Global as-tooled manufacturing capacity improved to 76% from 73% in the prior quarter.
ROIC for F1Q10 was 18.1%, up notably from 13.2% in September and now back above the company’s weighted-average-cost-of-capital (WACC) which is believed to be ~14% to 15%.
Revenue breakdown by market segment
Wireline / networking revenues of $202 million improved 20% from $168 million in F1Q (through relative strength on the enterprise side) and were above expectations for some analyst as 8 of 10 customers were also above forecasts. (See Table 1)
Medical revenues of $79 million improved 16% from the prior quarter.
Wireless segment sales were $49 million (down 4% from $51 million in September).
The industrial / commercial market segment generated $64 million in sales for Plexus, flat with F4Q but better than management expectations.
Defense / security / aerospace revenues of $36 million were down 14% sequentially (in-line with expectations from many on Wall Street).
Top 10 customers comprised 62% of total revenue (vs. 56% in F4Q) with Juniper (at 17% and flat sequentially) as the only 10%+ customer in the quarter.
Table 1: Plexus market revenue by end segment
16 new manufacturing wins
Overall pipeline (apparently, this is reassessed monthly) improved slightly to about $2 billion (flattish with September and down slightly from ~$2.1 billion one year ago).
Plexus cited 16 new manufacturing wins, with the majority at existing customers. Revenue opportunities from the wins are expected to near $108 million annually, down from $122 million in wins in F4Q (see Table 2). However, it is important to note that the anticipated revenue opportunities do not include a new, sizeable(?), Coca-Cola “crew-serve” program (for application behind a service counter) which is expected to ramp to full production in F11 along with Coca-Cola Freestyle (previously announced).
New engineering programs totaled $10 million, down from $20 million in the prior quarter, with medical programs representing roughly 50%. Needham & Co. notes that new engineering program activity has improved since the close of the quarter.
Table 2: Plexus new business program wins
Plexus business outlook
Plexus management provided F2Q10 guidance during its FQ1 conference call with expected revenues of $470 million to 495 million and EPS of $0.44 to $0.52 (including $0.07 of options), vs. prior consensus of $424 million and $0.31.
Management also indicted gross margin expectations for March are subject to revenue mix but are expected to perform closer to the company’s traditional 10% level.
F2Q operating expenses are anticipated near $26 million to $26.5 million due to higher levels of business activity in addition to accruals for variable compensation within SG&A. This midpoint of guidance by management could imply a 12% quarter-on-quarter top-line improvement (or, 24% year-on-year), and Plexus also commented that it expects each of its segments and regions to be up sequentially in March.
Specifically, the Company’s wireline end-market business is expected to increase in the low, single-digit range.
Wireless is anticipated to improve 30%+.
Medical is expected to increase near the 20% level.
Industrial is expected to improve in high-teens to the 20% range.
The defense / security / aeronautics segment is expected to increase in the mid-teens range.
Capital expenditure expectations for F10 were raised to $65 million to $75 million (from prior $60 million to $70 million) in order to address equipment investments and continued efforts to build the company’s new headquarters (accounting for approximately $15 million alone).
Separately, Plexus is investigating the potential for footprint expansion in Asia (potentially in the next 12 to 14 months), which has been receiving a healthy level of new programs and is managing higher utilization rates than the rest of the company.
Taxes for F10 are expected to be roughly 1% on a blended basis, down from the Company’s previous forecast for 5% (due mainly to larger mix in Malaysia and China).
Balance sheet financial indicators
Cash equivalents and short term investments were $234 million, down from $258 million in September.
Free cash flow in F1Q was negative primarily due to working capital investments.
Looking at EMS sector-specific financial indicators (see link, page 2) days sales outstanding (DSO) at Plexus improved sequentially from 45 to 50 days. Inventory was higher at 88 days (vs. 83 in F4Q), days payable increased (from 60) to 69 days, translating into a cash conversion cycle of 69 days (vs. 68 in F4Q).
Capital spending of $12.3 million was down from $15.2 million in F4Q.
Tangible book per share was $13.65, and net cash per share was $2.15.
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