Molex Beats, Outlook Strengthens – Analyst Blog

Molex Inc’s (MOLX) earnings for the fiscal third quarter ended March 2010 beat the Zacks Consensus by 12 cents, or 48%. Strengthening end markets have enabled the company to beat estimates in the preceding two quarters as well, taking the average positive surprise in the current fiscal year to 21.3%.

 

Analysts on the whole are positive about the company’s prospects going forward, raising 2010 estimates by 10 cents and 2011 estimates by 13 cents over the past 90 days.

 

 

Revenue of $756.3 million was up 3.7% sequentially and 49.6% year over year, exceeding consensus expectations by 3.7%. The company generates the bulk of its revenue from the connector market, resulting in a strong revenue pick up with a recovery in markets using these products.

 

 

Telecommunications remained the largest market in the last quarter, with a revenue contribution of 24%. The 56.1% growth from the year-ago quarter was driven by the broad-based strength in the networking market, as well as parts of the cell phone market. Molex is particularly strong in the smartphone segment, which grew 15% in 2009 compared to the 2% overall growth in the cell phone market. Management stated that entry-level phones for emerging markets continued to grow strongly in the last quarter, while mid-range phones declined.

 

The second largest end market was Data (22% revenue share), which declined sequentially, but grew 43.1% from the year-ago quarter. Management believes Molex took some share here, helped by new products and a rejuvenated sales team. Additionally, customers mostly in Asia and also parts of Europe migrated to new platforms, further spurring demand. Longer-term drivers in this market continue to be the migration to SAAS 2.0 and 16GB fiber channel networks in the storage market, the growing popularity of notebooks, as well as other MIDs.

 

Consumer Electronics was the third largest market, with a 19% revenue share, representing a 6.2% sequential decline and a 35.4% year-over-year increase. The strength is primarily being driven by customers in Asia and the transition of digital still cameras to digital single lens reflex cameras. This transition is favorable for Molex, since it increases the connector content of the devices by roughly 3X according to management. Other areas of strength in the last quarter are flat panel TVs, 3D TVs and game consoles (where the company is strongly positioned as the top three players).

 

The automotive market recorded 17% of total revenue, increasing 10.1% sequentially and 81.7% year over year. The growth in the auto market should continue, given the number of new functionalities (rear-view cameras, navigation systems HD and satellite radios) being incorporated into cars. The increasing electronic content also increases demand for the company’s connector technology. Consequently, Molex saw very strong demand in North America and China (due to market expansion) and Europe (due to government stimulus programs).

 

Industrial generated 15% of revenue, a sequential increase of 19.6% and a year-over-year increase of 87.0%. The strength was not surprising, given the broad-based recovery in this market. The business typically reflects GDP growth rates, which have been improving.

 

The remaining 4% of revenue came from medical/military markets, up 107.3% sequentially and 99.5% year over year. The company recorded a number of wins with multiple customers here, driving the increase.

 

 

Orders were up 7.7% in the March 2010 quarter, the fourth straight quarter of sequential increase. They were also up 76.4% from year-ago levels, reflecting the strengthening of all served markets. Backlog accumulation continued in the last quarter, increasing strong double-digits on both sequential and year-over-year basis.

 

Approximately 24% of total orders were in the telecom market, 21% in data, 19% in consumer electronics, 16% in automotive, 16% in industrial and 4% in medical/military. All markets grew in the last quarter although medical and industrial were the strongest.

 

The strong sell-through drove a 111% year-over-year increase in orders through distribution. EMS customers increased orders by 109% and OEM by 56%.

 

The Americas, Europe and Asia/Pacific North saw double-digit year-over-year order growth, while Asia/Pacific South saw triple-digit growth from the year-ago quarter. All regions were up on a sequential basis.

 

 

The gross margin for the quarter was 31.2%, up 204 basis points (bps) sequentially and 1,269 bps year over year. The strong growth from the year-ago quarter was undoubtedly on the basis of higher volumes. In addition, both comparisons benefited from a better mix of business, as well as a lower cost structure that resulted from management’s restructuring initiatives.

 

Operating expenses of $156.4 million were higher than the previous quarter’s $150.1 million. The operating margin was 10.5%, up 194 bps from 8.6% recorded in the previous quarter. The sequential increase in operating margin was entirely on account of the stronger gross margin and was partially offset by slightly higher R&D and variable selling costs. Administrative spending remains under tight control.

 

 

The pro forma net income was $52.6 million or 7.0% of revenue compared to $41.4 million or 5.7% of revenue in the Dec 2009 quarter and loss of $14.3 million or 2.8% of revenue in the March quarter of 2009. Our pro forma estimates exclude restructuring charges, a loss related to unauthorized operations in Japan and the associated tax impact in the last quarter.

 

 

Including the special items, the GAAP income was $35.1 million ($0.20 per share) compared to an income of $19.3 million ($0.11 per share) in the previous quarter and loss of $58.6 million ($0.34 per share) in the year-ago quarter.

 

 

Inventories were up 12.8% to support the higher level of demand and inventory turns went down from 5.6X to 5.0X. Despite the very strong revenue growth, DSOs went down from 79 to 78, signifying improved collections. Collection patterns have been improving over the last few quarters.

 

The company ended with cash and short term investments balance of $443.4 million, down $52.6 million during the quarter. Cash generated from operations was $40.1 million. Capital expenses were $56.7 million, or 7.5% of revenue in the quarter. The company also spent $10.1 million on acquisitions, $46.9 million to pay down long term debt and $26.5 million on cash dividends.