) earnings for the second quarter of fiscal 2013 beat the Zacks
Consensus Estimate by a penny. Revenues also beat by a sliver.
Shares dropped 2.9% during the day but did not move in
after-market trading because of the disappointing guidance.
Molex reported revenue of $967.7 million, which was up 5.5%
sequentially and 12.8% year over year, exceeding management
expectations of $930-970 million (up 1-6% sequentially).
Overall, infotech and telecom were clearly the high points,
although automotive also improved. Molex's gains in infotech
speak for its position at key customers and products. Most other
companies serving the market, such as
Advanced Micro Devices
) have suffered.
Management stated that Europe was again very weak, declining
13% sequentially and 16% year over year.
Revenue by End Market
Data or Infotech
market (28% revenue share) remained the largest contributor to
revenue, growing 9.5% and 31.6% from the previous and year-ago
quarters, respectively. Molex continued to see strength in
tablets that was supported by flattish server and growing storage
Management stated that although server revenue declined in the
last quarter, units sales were on the rise. Molex had some wins
in the server segment, which helped it gain market share and
generate relatively steady revenue.
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 tablets and other
MIDs. The transition from copper to fiber-optic platforms will
also drive results, as Molex remains well-positioned with
solutions for this market.
stayed in the second place, increasing 18.7% sequentially and
17.2% year over year to 27% of total revenue. Management did not
say how the infrastructure side of the business did in the last
quarter, but its optical routing and digital cross connect
products position it well for 4G LTE build-outs.
Spending on this infrastructure has so far been mainly in
North America, Japan and Korea; spending in the BRIC countries
should not be too far off. The mobile phone business was strong
as may be expected of a typical holiday season and Molex stated
that new products also played a part.
The long-term drivers for mobile phones are the growing
adoption of smartphones and the continued cramming of features
into increasingly smaller devices. Secular drivers of the
infrastructure business include increased Internet usage,
increased volumes of mobile devices of various kinds, more video
being watched and transmitted, as well as the adoption of cloud
market brought in 16% of total revenue, flat sequentially and up
12.8% from the year-ago quarter. Molex is seeing normal seasonal
trends in this business, as well as increased design activity and
project wins. The growing adoption of standard devices in Asia is
a positive in terms of profitability. Safety and infotainment
remained the strongest areas in the last quarter.
The increasing electronic content for safety systems,
powertrain, infotainment and telematics in automobiles is a
long-term positive because it expands the market for Molex's
connector technology. This and Molex's exposure to China (where a
large amount of auto manufacturing has shifted) are secular
drivers of demand in this market.
dropped 7.7% sequentially and 12.2% year over year to 14% of
revenue. Continued weakness in TVs and digital cameras (that are
being impacted by higher camera phone sales) were responsible for
the softness. Management stated that Japan accounted for most of
Molex should do well longer-term, as its customers introduce
new products targeting the BRIC countries, as well as Vietnam and
Thailand, where growth is expected to be stronger than in other
parts of the world. Higher disposable income and increased
consumerism in developing countries are secular drivers of demand
in this market.
generated 11% of revenue, down 10.7% sequentially and 4.5% from
last year. Management stated that customers including
distributors were exercising extreme caution, particularly in
Europe. The good news was that parts of North America and overall
Asia did well. Around 65% of the company's industrial revenue
comes through distributors. The business typically reflects
global GDP growth rates.
The remaining 4% of Molex's revenue came from
markets, which were up 40.7% sequentially and 50.5% year over
year. Molex is building this business both internally and through
Total orders were down 2.5% sequentially and up 12.9% in the
Dec quarter. As a result, backlog also softened, declining 10.4%
sequentially while increasing 16.3% from last year. The book to
bill dropped well below unity. The sequential decline was more or
less in line with normal seasonality.
Approximately 27% of Molex's total orders were from the data/
infotech market, 26% from telecom market, 17% from auto, 164 from
consumer, 11% from industrial and 5% from medical/military. While
the consumer, industrial and infotech markets declined in the
last quarter, the decline in industrial was the greatest. Telecom
and auto and medical/military were up 5.6%, 3.5% and 21.8%,
Molex reported a gross margin of 29.9%, up 61 basis points
(bps) sequentially and down 78 bps year over year. The sequential
improvement in the gross margin was on account of higher volumes.
Molex's costs are going up, particularly with respect to certain
new applications and assemblies for the mobile segment. This is
the main reason for the decline from last year.
Operating expenses of $181.0 million were up 11.0% from the
previous quarter's $163.1 million, with the operating margin
shrinking 31 bps sequentially and 47 bps year over year to
Molex's pro forma net income was $72.0 million or 7.4% of
revenue compared to $73.9 million or 8.1% of revenue in the Sep
2012 quarter and $66.7 million or 7.8% of revenue in the Dec
quarter of 2011. Our pro forma estimate for the last quarter
excludes losses related to unauthorized operations in Japan.
Including the special item, Molex reported a GAAP net income
of $70.4 million ($0.39 per share) compared to an income of $76.4
million ($0.43 per share) in the previous quarter and income of
$64.0 million ($0.36 per share) in the year-ago quarter.
Inventories were up 0.4%, with inventory turns increasing from
4.6X to 4.8X. DSOs went from 77 to around 70.
Molex ended with a cash and short term investments balance of
$716.8 million, up $14.7 million during the quarter. Cash
generated from operations was $87.2 million, down from $167.4
million in the first quarter. Capital expenses were $78.6
million, or 8.1% of revenue, up from 7.6% of revenue in the
previous quarter. Molex also paid $77.9 million for cash
dividends in the last quarter.
Molex expects revenue of $900-930 million in the next quarter,
down 4-7% sequentially. The pro forma EPS (excluding a cent for
unauthorized activities in Japan) is expected to be 33 to 37
cents a share, assuming a tax rate of 30-32%. The Zacks Consensus
estimate for the third quarter of fiscal 2013 was 38 cents, below
the guided range.
Molex is a leading player in the fast-growing connector
market, with several secular growth drivers. However, the company
appears to be seeing more growth in lower-margin segments, which
is impacting its profitability. Additionally, macro conditions in
Europe are impacting results, and the negative effect may be
expected to continue in the next few quarters.
A few other factors need to be considered for the long term.
For instance, the nature of the business necessarily leads to
some commoditization, which in turn results in price erosion. New
product launches by customers and the evolving nature of the
served markets are offsetting positives that Molex should be able
to take advantage of given its market position.
Molex shares carry a Zacks Rank #3 (Hold).
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