Molex Inc.’s (MOLX) earnings for the first quarter of fiscal 2011 beat the Zacks Consensus by 2 cents, or 4.6%. Revenue for the quarter beat by 3.5%. Despite the positive surprise, investors were disappointed with the declining orders and backlog, which resulted in a weak guidance for the December quarter. As a result, Molex share prices dropped 4.04% in after-hours trading.
Revenue
Molex reported revenue of $897.7 million, which was up 5.9% sequentially and 33.2% year over year, exceeding management expectations of $850−$880 million, or up 0.3%−3.9% sequentially. Molex generates the bulk of its revenue from the connector market, so results continue to be positively impacted by the secular growth in markets using these products. Contrary to some other players, Molex’s consumer and data (info tech) businesses did not see material weakness, although order rates started softening.
Revenue by End Market
Telecommunications remained the largest market in the last quarter, with an estimated revenue contribution of 25%. Segment revenues were up 10.0% sequentially and 32.7% from the year-ago quarter. Management stated that the infrastructure side of the business (typically lumpy), was undergoing temporary softness, although the smartphone side of the business was very strong. Demand from the smartphone market was fueled by customers increasingly switching to smartphones, geographical expansion, the introduction of new products and positive seasonality. Molex expressed optimism about continued growth, driven by new technology and operating systems, specifically Google Inc’s (GOOG) Android and Microsoft Corp’s (MSFT) Win 7.
The second largest end market was Data (estimated 22% revenue share), which increased 6.5% sequentially and 33.9% from the year-ago quarter. Results were impacted by some inventory accumulation in the channel, which will be worked down through the end of the year. However, since enterprise spending on servers, storage and networking products is expected to continue, Molex expects growth rates to pick up thereafter. Longer-term drivers in this market continue to be the migration to SAAS 2.0 and 16GB fiber channel networks in the storage market, as well as the popularity of notebooks and other MIDs.
Consumer Electronics, the third largest market, generated 21% of total revenue, representing sequential and year-over-year increases of 11.5% and 27.4%, respectively. Both backlog and turns sales were relatively strong in the last quarter due to some pre-Christmas builds. Additionally, Molex is strongly positioned in Asia, particularly China, which contributed to the growth in the last quarter. Higher disposable income and increased consumerism in developing countries are secular drivers of demand in this market.
Industrialgenerated 15% of revenue, a sequential increase of 3.0% and a year-over-year increase of 49.4%. Consistent with some other technology companies with industrial exposure, Molex saw some slowdown in the industrial market. Molex generates a significant portion of industrial revenue through distributors and this section was particularly weak. Management appeared optimistic that the “focus account” strategy was working and stated they continued to see new opportunities. The business typically reflects global GDP growth rates.
The automotive market brought in 14% of total revenue, declining 3.8% sequentially, but growing 20.9% from the year-ago quarter. A couple of factors contributed to the performance in the last quarter. Positive among these was a more stable North America market. Europe was the primary negative, as the region exited the strong summer season and incentive-driven spending also came to an end. Management stated that Molex’s automotive business was now equally split between Americas, Europe and Asia. China and North America are likely to be the biggest growth drivers and going forward, with Europe and Japan remaining flat. The increasing electronic content in automobiles is a positive because it expands the market for the company’s connector technology and is a secular driver of demand in this market.
The remaining 4% of Molex’s revenue came from medical/military markets, which were down 1.7% sequentially and up 64.8% year over year.
Orders
We estimate that orders were down 4.7% in the September 2010 quarter, following very strong order growth in the June quarter. They were up 19.8% from year-ago levels, reflecting higher business levels than last year. However, orders from the automotive market remained sluggish relative to last year. There was a 6.2% reduction in backlog, the first reduction since March 2009. However, Molex’s book-to-bill remained encouraging, at 1.07.
Approximately 25% of total orders were in the telecom market, 22% in data, 21% in consumer electronics, 14% in industrial, 13% in automotive and 4% in medical/military. Orders from all end markets declined sequentially, but increased strong double-digits from a year ago. Industrial, automotive and medical/military saw the greatest declines.
The order split between OEM/distribution/EMS was 55-26-19 in the last quarter. Distribution saw the highest sequential decline at 12%, although OEM and EMS also declined slightly. All three channels were up from last year.
All regions except Europe grew orders double-digits. Europe grew 3.8%. All regions except Asia/Pacific North saw orders declining sequentially, although Europe saw the biggest decline of 17.4%.
Molex reported gross margin of 30.6%, up 79 basis points (bps) sequentially and up 224 bps year over year. Although higher volumes and lower freight expenses positively impacted the gross margin in the last quarter, this was partially offset by higher commodity costs (particularly gold and copper) and currency.
Operating expenses of $157.1 million were lower than the previous quarter’s $158.7 million. The operating margin was 13.1%, up 202 bps from 11.1% recorded in the previous quarter. R&D and SG&A expenses declined as a percentage of sales, contributing to the margin expansion.
Net Income
Molex’s pro forma net income was $80.6 million or 9.0% of revenue compared to $71.1 million or 8.4% of revenue in the June 2010 quarter and $46.3 million or 6.9% of revenue in the September quarter of 2009. Our pro forma estimate excludes restructuring charges and loss related to unauthorized operations in Japan in the last quarter.
Including special items, the GAAP net income for Molex was $75.1 million ($0.43 per share) compared to a income of $39.8 million ($0.23 per share) in the previous quarter and loss of $15.1 million ($0.09 per share) in the year-ago quarter.
Balance Sheet
Inventories were up 16.5%, with inventory turns dropping from 5.1X to 4.6X.. This was the third straight quarter that inventories grew double-digits. DSOs went up by a day to 80. Collection patterns have been improving over the last few quarters.
Molex ended with a cash and short term investments balance of $358.9 million, down $35.9 million during the quarter. Cash generated from operations was $62.6 million, slightly less than in the June quarter. Capital expenses were $71.2 million, or 7.9% of revenue, down from 9.4% of revenue in the previous quarter. The company also spent $26.6 million on cash dividends and paid down $24.8 million of long term debt.
Guidance
Molex expects revenue of $850−$890 million in the next quarter, up 0.3% to 3.9% sequentially. Pro forma EPS is expected to be 38 to 44 cents a share, assuming a tax rate of 30%. The Zacks Consensus estimate for the fiscal second quarter at the time of the earnings announcement was 46 cents, higher than the guided range.
Conclusion
Molex is a leading player in the fast-growing connector market, with several secular growth drivers. Although the company is seeing softness in the info tech and consumer markets, the softness is nowhere near that faced by most other technology companies. Molex’s relative strength may be traced to its exposure to several emerging markets in Asia, which have offset the weakness in Europe and North America.
Although we are generally positive about the shares in the longer-term, we think that investors will view the recent order trends and guidance negatively.
The company has a short-term Hold rating (Zacks #3 Rank), indicating that the stock will trade in line with the market over the next 1−3 months.
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