) earnings for the first quarter of fiscal 2013 were in line with
the Zacks Consensus Estimate of 40 cents. Revenues were just
short of expectations.
Molex reported revenue of $916.9 million, which was up 6.8%
sequentially and down 2.0% year over year, missing management
expectations of $900-940 million (up 5-10% sequentially). Revenue
was also short of the consensus expectation of around $920.0
million. The sequential increase was encouraging, while the
decline from last year was due to over-ordering in that
Overall, revenue from the industrial market continued to
weaken, while Infotech and telecom strengthened. Molex was
impacted by weakness in industrial and telecom infrastructure,
similar to what
) reported earlier. The tablet strength it saw was similar to
that mentioned by others like
) and Advanced
). Therefore, there were few surprises in the quarter.
Management stated that Molex saw pockets of strength in the
U.S. and Asia and significant weakness in Europe, which was down
13% sequentially and 16% year over year.
Revenue by End Market
Data or Infotech
market (27% revenue share) remained the largest contributor to
revenue, growing 10.9% and 1.7% from the previous and year-ago
quarters, respectively. Molex continued to see strength in
tablets that was supported by a flattish server and storage
Management stated that the broader market for both peripherals
and server and storage segments continued to weaken, although
Molex had some wins, 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 16.5% sequentially and
2.2% year over year to 24% of total revenue. Strength on the
mobile phone side, where Molex's new products were particularly
strong offset weakness on the infrastructure side of the
Management currently expects a repeat of the situation in the
next quarter, as its new products for mobile phones continue to
ramp and infrastructure remains weak. The infrastructure business
is currently expected to pick up thereafter.
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 17% of total revenue, up 0.9% sequentially and
11.0% 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
were 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.
grew 0.5% sequentially while declining 21.6% year over year to
16% of revenue. The sequential performance was the combined
result of a strong gaming business that offset weakness in other
areas, particularly TVs and digital cameras. Management currently
expects protracted weakness in TVs and digital cameras due to a
smaller build for the holiday season.
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 13% of revenue, down 0.8% sequentially and 2.0% from
last year. Management stated that customers including
distributors were exercising extreme caution, particularly in
Europe. Around 65% of the company's industrial revenue comes
through distributors. The business typically reflects global GDP
The remaining 3% of Molex's revenue came from
markets, which were up 6.8% sequentially and down 2.0% year over
year. Molex is building this business both internally and through
acquisitions, which management stated would remain a focus area
Total orders were up 4.8% sequentially and 3.7% in the
September quarter. However, backlog strengthened for the second
straight quarter, growing 6.2% sequentially and 15.8% from last
year. The book to bill dropped slightly to 1.03, positive for the
third straight quarter. Order growth was driven by new products
and is indicative of a strengthening business for Molex, which is
a big positive given the current macro uncertainty.
Approximately 27% of Molex's total orders were from the data/
infotech market, 26% from telecom market, 16% from auto, 16% from
consumer, 12% from industrial and 3% from medical/military. While
the consumer, industrial and automotive markets declined in the
last quarter, the decline in industrial was the greatest while
the declines in the other two were about even. Telecom and
Infotech were up 13.5% and 8.8%, respectively while
medical/military were up mid-single-digits.
Molex did not provide any insight into the breakup by
Molex reported a gross margin of 29.3%, down 73 basis points
(bps) sequentially and 200 bps year over year. The margin was
impacted by startup costs related to new products a negative mix
Operating expenses of $163.1 million were up 1.0% from the
previous quarter's $161.6 million, with the operating margin
expanding 30 bps sequentially, while shrinking 171 bps year over
year to 11.5%.
Molex's pro forma net income was $73.9 million or 8.1% of
revenue compared to $75.1 million or 8.7% of revenue in the June
2012 quarter and $83.4 million or 8.9% of revenue in the
September quarter of 2011. Our pro forma estimate for the last
quarter excludes losses related to unauthorized operations in
Including the special item, Molex reported a GAAP net income
of $71.3 million ($0.40 per share) compared to an income of $72.0
million ($0.40 per share) in the previous quarter and income of
$80.5 million ($0.46 per share) in the year-ago quarter.
Inventories were up 6.1%, with inventory turns increasing from
4.5X to 4.6X. DSOs went from 80 to around 77.
Molex ended with a cash and short term investments balance of
$702.1million, up $49.8 million during the quarter. Cash
generated from operations was $167.4 million, up from $143.3
million in the fourth quarter of fiscal 2012. Capital expenses
were $69.4 million, or 7.6% of revenue, down from 9.1% of revenue
in the previous quarter. The significantly higher capex in the
previous quarter is related to new products being introduced.
Molex also paid $38.8 million for cash dividends in the last
Molex expects revenue of $930-970 million in the next quarter,
up 1-6% sequentially. The pro forma EPS (excluding a cent for
unauthorized activities in Japan) is expected to be 36 to 40
cents a share, assuming a tax rate of 32%. The Zacks Consensus
estimate for the second quarter of fiscal 2013 was 39 cents,
within 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. The Zacks Rank for
Molex shares is therefore #4, indicating a Sell recommendation in
the short term (1-3 months).
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. Therefore,
our long-term (3-6 month) recommendation on the shares remains
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