Many EMS providers still clawing to survive while global EMS provider Jabil Circuit (NYSE: JBL) leverages operations, makes progress with restructuring, doubles stock price in 90 days.
Wall Street is mixed on Jabil’s near-term direction and whether to upgrade or remain neutral on JBL shares but most agree improvements are underway with Jabil delivering revenue upside in most (all?) end-markets, achieving an impressive 19.7% operating contribution margin.
Meanwhile, Jabil management has said its operating contribution margin will decline to 3% to 5% when revenue touches $3.3 billion to $3.5 billion per quarter.
As one industry analyst commented, “With a stabilized business in the background, Jabil’s recent actions to optimize operations are only just beginning to take hold and demonstrate the leverage power within its model.”
Financial community commentary goes further to note that ‘out quarters’ are becoming increasingly well positioned for Jabil to demonstrate healthy growth (from current revenue and profitability levels) as the broader IT environment recovers and new program wins materialize. While this is yet to be seen, VentureOutsource.com feels the possibilities are there.
Jabil finance detail
Fiscal year Q4 results of $2.8 billion revenue (up 7% quarter / quarter) and EPS of $0.16 were well above consensus of $2.7 billion / $0.08 EPS. Additionally:
- Fiscal year Q1 guidance of $3 billion to $3.2 billion revenues (up 10.7% quarter / quarter) and $0.24 to $0.32 EPS beat consensus of $2.87 billion at $0.17 EPS.
- FQ4 revenue grew in all end-markets except computing.
- Gross and operating contribution margin were 23% and 19.7%, respectively so margin expanded by 120 basis points quarter / quarter.
- Jabil margin upside was driven by (1) revenue growth, (2) mix shift to more industrial end-markets, and (3) more vertical components (plastics) in the handset business.
- FQ1 revenue guidance suggests >10% quarter / quarter growth, driven by consumer (handsets).
- Jabil management repeated its 10% to 15% operating contribution margin claims (until revenue approaches $3.3 to $3.5 billion / quarter).
- Cash flow and working capital metrics all beat our expectations.
- Computing end-market was the only end-market to decline quarter / quarter (key customers are IBM, NTAP and EMC). See detail of Jabil’s end-market performance (Table 1)
Table 1: Jabil (JBL) revenue breakdown by end-market segment
Segment and additional commentary
Jabil EMS revenues were approximately $1.63 billion (consistent with F3Q at 58%) with core operating margin of 3.0% (vs. 1.0% in F3Q). Additionally:
- Automotive revenues of approximately $89 million (3%) improved 4% from the prior quarter while computing and storage revenues of roughly $267 million (10%), declined 5% from May.
- Industrial / instrumentation / medical results of roughly $594 million (21%) increased 14% quarter / quarter.
- Networking revenues of nearly $468 million were up 11% (representing 17% of sales).
- Telecom was approximately $174 million (6%) and improved 13% sequentially.
- Consumer electronics sales represented roughly $960 million (34% of revenues) and had a 0.3% core operating margin (vs. 0.5% in May).
- Mobility results equating roughly $568 million (20%) were up 4 % from F3Q (some believe the segment is expected to increase sharply in November 2009).
- Displays were roughly $86 million or 3% of revenues, up 9 % from F3Q.
- Peripherals sales of roughly $308 million (or, 11% of sales) were up 5% sequentially.
- Aftermarket services sales were roughly $196 million, up 9% from the prior quarter, representing 7% of total revenues. Core operating margin was 7.2% (vs. 10% in F3Q).
Sub-segment commentary
Perhaps surprising to many, Jabil indicated it is essentially exiting its automotive electronics business (a particularly disappointing space for Jabil and broader EMS), with an expected divestiture before the end of F1Q.
Displays also remain at generally low levels and will be combined with peripherals to create a new “digital home office” sub-segment for the Company.
Jabil had two 10% customers during the quarter, which are believed to be Cisco and Research in Motion. Top 10 customers represented about 57% in F4Q revenues (vs. 59% in May).
Jabil restructuring efforts
Readers may recall Jabil’s new restructuring announcement January of this year calling for $65 million in new charges through fiscal year 2010, with roughly $55 million in anticipated annual savings. Some analysts believe this level of savings could be accretive by up to $0.04 to $0.05+ per quarter once fully implemented (exiting fiscal year second quarter 2010).
During fiscal year 4Q 2009, JBL incurred $3.6 million (or, $53 million cumulatively) in GAAP charges and made roughly $10 million (or, $27 million cumulatively) in cash payments related to the restructuring program.
For F1Q, Jabil expects to incur $6 million in charges and make cash payments near $16 million. Some Wall Street analysts indicate its important to note the key to when benefits may actually materialize in Jabil’s business model typically follow periods of cash outlays.
Jabil outlook
Considering the current electronics supply chain economic environment which has improved, but remains sluggish with somewhat limited visibility for many EMS providers, (see VentureOutsource.com electronics supply chain summer survey results: ‘Bumping along the bottom’), Jabil did provide Wall Street some solid guidance numbers that called for seasonally stronger revenues and earnings per share improvement based on a combination of leverage and recent restructuring actions.
Longer-term, Jabil management indicated the Company expects to continue experiencing broader revenue growth (and operating leverage) under stable market conditions as new program wins (~60% of quarter / quarter growth in F4Q) continue to drive the business.
By segment, EMS is expected to improve 3% while consumer is expected to increase about 30% from the August quarter.
Additionally, SG&A is expected to be roughly $117 million, R&D is expected to near the $9 million level, interest of ~$19 million and the company’s tax rate is projected at 20%.
VentureOutsource.com, Needham & Co., September 2009
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