Jabil Circuits (NYSE: JBL) surprised some Wall Street analysts with its 2010 fiscal Q1 results by posting revenue slightly below consensus but with admirable margin leverage (14.2% contribution margin while some expected at or below 10%).
Although there is no doubt Jabil’s first quarter was solid, the real prize to all will come when /if Jabil can meet it’s fiscal 2010 guidance for Q2 of $2.9 billion to $3.1 billion, perhaps signaling the Company really does have a handle on its business and end-markets are indeed improving.
The good news
According to investment bank Credit Suisse, the big positive on Jabil’s FQ1 was the 30bps upside to gross profit margin that fell through to the Jabil’s operating line, which is believed to be mostly a result of more vertically integrated (plastics) revenue in the mobility end market.
Jabil’s industrial was the only end market that beat Credit Suisse analyst Will Stein’s revenue expectations on new program ramps. Meanwhile, both working capital and cash flow metrics beat Stein’s expectations.
Furthermore, Jabil’s Q2 guidance for fiscal 2010 beat the investment bank’s model on anticipated strength in the networking and mobility end-markets, and continued operating leverage.
It’s important to note that on the quarterly call, Jabil executives reiterated their 10% to 15% contribution margin goal (until revenue approaches $3.3 billion to $3.5 billion per quarter).
The bad news
Component shortages triggered a $40 million to $50 million inventory build in Jabil factories coupled with $50 million to $75 million lost revenue thus emphasizing just how difficult it can be for a first-rate executive team to run a world-class EMS provider.
Jabil’s networking segment fell below Stein’s expectations. He believes partly from the component shortages and partly from competitive pressures at a European customer Stein believes to be wireless technology company, Option (www.option.com).
According to Stein, the New York-based analyst sees better value for investors elsewhere and mentions Flextronics (NASDAQ: FLEX) as his preferred choice given the current investment opportunities between the two top EMS providers.
West coast perspective
San Francisco-based Sean Hannan with Needham & Co. (read an interview with Sean Hannan) feels different about Jabil. He believes Jabil continues to show diligent execution within its business as the broader economy slowly improves from the recent downturn.
Aided by recent restructuring efforts and program wins (as well as a healthy industrial / instrumentation / medical group), he expects to see additional leverage in the Jabil’s business model for at least the next few quarters.
Among other favorable indicators, Hannan notes Jabil’s non-GAAP gross marging of 7.5% was up 70 basis points sequentially from 6.8% in August 2009 while non-GAAP operating margin of 3.4% was up 110 basis points quarter-on-quarter.
Like Credit Suisse’s Stein, Hannan recognizes Jabil’s revenue strength in the industrial, instrumentation and medical end-market – and the Company’s consumer division (mobility, digital home office). Hannan also notes Jabil’s enterprise market is solid and continuing to recover slowly.
Meanwhile, Hannan views Jabil’s component shortages “…mostly memory, had slight negative impact on top-line, but shortages [are] largely expected to persist into [the] spring / summer timeframe.”
On Jabil’s restructuring, Hannan notes it is proceeding smoothly, with benefits beginning to materialize and full savings run rate remaining achievable in the third quarter of fiscal year 2010 or perhaps sooner.
Segment overview
Hannan continues his Jabil analysis with his end market segment overview (see Table 1), where EMS revenues were approximately $1.67 billion (or, 54% vs. with 58% in F4Q) with core operating margin of 3.4% (vs. 3.0% in F3Q).
Consumer electronics sales represented roughly $1.2 billion (40% of revenues) and had a 2.7% core operating margin (vs. 0.3% in August).
Aftermarket services sales were roughly $190 million, down 3% from the prior quarter and represented 6% of total revenues. Core operating margin was 8.2% (vs. 7.2% in F4Q).
Hannan also notes Jabil had two 10% customers during the quarter, which he believes were Cisco Systems and Research in Motion. Top 10 customers represented roughly 58% in the first quarter of 2010 (vs. 57% in August).
Outlook
By segment, Hannan believes Jabil’s EMS business is expected to improve 5% while the Company’s consumer electronics segment is expected to decline approximately15% from the November quarter due to seasonality.
Additionally, for second quarter of fiscal 2010, Jabil’s aftermarket services are generally expected to be flat Hannan reports.
He also indicates Jabil’s SG&A is expected to be roughly $116 million, research and development is expected to be near the $8 million level, an interest expense of perhaps $21 million and the company’s tax rate is projected at 20%.
VentureOutsource.com, December 2009
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