Anyone who knows the EMS sector knows Plexus is a well-run EMS provider with a history of solid margin performance compared to the average EMS company. Recently, Plexus management said it expects sales to exceed $3 billion in fiscal year 2013, growing at a 20% CAGR over the next 5 years.
Plexus’ near-term view is to grow over 20% in fiscal year 2010, reaching greater than $2 billion in revenue. All of this taking place even as most EMS providers in industry continue to look for ways to communicate their value propositions to OEMs.
In its most recent earnings call, Plexus management noted the first-half of 2010 gross margins will likely revert back to the March / June 2009 level owing this possibility to a shift in the Company’s product mix; new capacity additions, and salary increases. One should also note Plexus is currently ramping its Freestyle program with Coca-Cola. Cola-Cola was Plexus’ previously unnamed mechatronics customer. Freestyle is believed to be the most advanced soda fountain ever and able to mix 100 drinks on the fly with a touchscreen-based ordering system.
Plexus’ strategy is to be the best EMS company in the world serving the mid- to low-volume, higher mix segment of the EMS market where opportunities for complex mechatronics, design, assembly and fulfillment reside.
Despite the current downturn, this strategy has resulted in EMS industry-best growth, margins, and returns with the Company doing all it can to keep to its “20-10-5” model: 20% ROIC, 10% gross profit margin and 5% operating margin.
Fiscal Q309 earnings overview
Plexus reported F3Q results of $379 million and EPS of $0.23.
Management provided FQ4 revenue guidance of $380 million to $405m (up 3.6% quarter-on-quarter at mid point).
Non-GAAP EPS include $0.04 in stock-based compensation and a $0.01 unfavorable impact from higher taxes (10% vs. original 4/30 guidance for 7%).
Gross margin of 9.1% was down sequentially from 9.2% (meeting the company’s 9% to 9.5% range), but slightly lower than some industry estimates of 9.3%.
Non-GAAP SG&A expense of $22.5 million (5.9%) was up from $22.3 million in F2Q. Consequently, non-GAAP operating margin was 2.7%, down from 2.9% in F2Q due largely to the lower revenue levels.
ROIC for F3Q09 was 12.4%, down from 13.8% in March.
Plexus had 15 new manufacturing wins (largely in wireline and industrial / communications), with revenue opportunities expected to near $188 million annually (vs. $220 million in F2Q), and pipeline remained at $1.9B.
Global as-tooled manufacturing capacity up slightly sequential to 72% (from 70%) and where many Wall Street analysts expect this to remain near the low 70% range in the near-term.
Revenue breakdown by segment
Wireline / networking end-market segment revenues of $184 million improved 5% from $176 million in March and performed in line with management expectations.
Medical electronics end-market segment revenues of $80 million declined 14% from the prior quarter, below some analyst expectations as 7 of the top 10 sector accounts missed their forecasts.
Wireless electronics end-market segment sales were $33 million (vs. $35 million in March) and were slightly better than some analysts expected.
The industrial / commercial electronics end-market segment generated $46 million in sales, down 4% from F2Q and slightly better than management expected. Defense, security, aerospace electronics end-market segment revenues of $36 million were down 3% sequentially. End-market revenue detail is defined on a quarterly basis in Figure 1 which was prepared by Needham and Co.
Figure 1: Plexus revenue breakdown by end-market
Plexus’ top 10 customers comprised 57% of total revenue (vs. 58% in F2Q) with Juniper (flat sequentially at 23%) as the only 10%+ customer in the quarter.
Outlook by end market
Wireline / networking is expected to be sequentially up in the low single digit range as 6 of the top 10 customers expect improved demand.
Industrial / commercial is expected to increase near the 20% range in September due to recent wins and growth expectations from 7 of the top 10 customers.
Medical is expected to be down sequentially in the mid single-digit range.
Wireless is forecasted to improve 20% sequentially from F3Q due to recent wins.
Aerospace / defense is expected to exhibit growth in the high teens-20% range from new program ramps.
Business development insight
Overall pipeline (reassessed on a monthly basis) remains at roughly $1.9 billion (somewhat flat compared to March and up from just under $1.8 billion one year ago).
Revenue opportunities from the 15 manufacturing wins noted above are expected to near $188 million annually, down from $220 million in wins in F2Q
New engineering programs totaled $14 million, up slightly from $13 million in the prior quarter, with approximately 50% of the programs in medical electronics.
Future outlook
Gross margin expectations for June are below the company’s historical 10% level but are expected to improve to the 9.5% to 9.8% range based on business mix.
F4Q operating expenses are anticipated near $22 million to $22.5 million due to recent and ongoing efforts to reduce SG&A costs.
The midpoint of guidance implies an 18% year-on-year top-line decline, but Plexus management has said it continues to see stabilization and believes it is gaining market share.
Capital expenditure expectations were lowered for F09 to $55 million to $60 million (vs. prior $60 to $65 million), with plans to support the growth of new business in addition to capital required for the company’s new Hangzhou facility in China.
Free cash flow for F09 is expected to be roughly $65 million to $70 million (up from prior expectations on Wall Street for $60 million to $65 million).
Taxes for F09 are expected to be roughly 8% on a blended basis.
VentureOutsource.com, August 2009
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