Molex Tops, Guidance Disappoints - Analyst Blog

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Molex Inc's ( MOLX ) earnings for the third quarter of fiscal 2012 beat the Zacks Consensus by 4 cents, or 10.5%. Weaker-than-expected revenue pulled down results, despite increasing cost efficiencies.

Revenue

Molex reported revenue of $837.1 million, which was down 2.4% sequentially and 4.3% year over year, just within management expectations of $830-860 million, or down 0-3% sequentially. However, it fell short of the consensus expectation of around $848.6 million. The telecom and consumer segments remained under-color, with infotech growing slightly and other markets at a stronger rate.

Revenue by End Market

Despite its relative weakness, the Data or Infotech market (25% revenue share) emerged as the largest contributor to revenue, growing 1.7% and 3.3% from the previous and year-ago quarters. Molex stated that tablets and servers were the major divers of the increase, with storage staying flat. The end of the inventory correction and introduction of Romley from Intel Corp ( INTC ) also helped Molex in the last quarter.

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, notebooks 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.

Telecommunications dropped to second place, due to the 17.4% sequential and 10.3% year-over-year decline in revenue. The mobile phone segment within telecom was seasonally softer as may be expected. The dynamics in this market are both positive and negative for Molex at this point.

As smartphone penetration increases, it should benefit from its position at leading manufacturers. At the same time, feature phones (midrange devices) will continue to decline, which will be a negative for Molex. The infrastructure side of the business remained soft due to delayed spending by key players, made worse by the supply chain in Asia that was impacted by the Chinese New Year. However, management mentioned positive trends.

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 computing.

The automotive market brought in 18% of total revenue, up 9.8% sequentially and 3.8% from the year-ago quarter. Molex benefited from seasonal strength in North America and Europe where production typically picks up due to fewer holidays. In Asia, too, there was a pickup in production following the Chinese New Year.

The increasing electronic content for safety systems, powertrain, infotainment and telematics is a positive in automobiles 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.

Consumer Electronics dropped 7.8% sequentially and 13.8% year over year to 17% of revenue. Although impacted by the Chinese New Year, the weak pre-Christmas build enabled inventory depletion, which therefore led to steady order growth right through the quarter.  

Comparison with the year-ago quarter was also tough, as Molex benefited from economic recovery and government stimuli from all over the world, particularly in Asia.

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.

Industrial generated 14% of revenue, up 5.1% sequentially and down 4.9% from last year. Around 65% of the company's segment revenue comes through distributors. The sequential increase came after two quarters of decline, which Molex attributed to more acceptable inventory levels in the channel, as well as growing confidence at both OEMs and distributors.

The U.S. and Europe appear to be on the road to recovery, and Asia is also strengthening (probably on account of rising wage rates that are driving increased factory automation). The business typically reflects global GDP growth rates.

The remaining 4% of Molex's revenue came from medical/military markets, which were up 30.1% sequentially and 0.8% year over year.

Orders

Total orders were up 7.1% sequentially and 0.8% in the December quarter. Backlog followed a similar pattern, increasing 10.1% sequentially, while declining 9.4% from last year. The book-to-bill jumped to 1.04, after staying below unity for three quarters.

Approximately 25% of Molex's total orders were from the data/infotech market, 23% from telecom market, 18% from auto, 17% from consumer, 14% from industrial and 3% from medical/military. All except telecom orders grew on a sequential basis, while all except infotech declined from the year-ago quarter.

The order split between OEM/distribution/EMS was 49%-27%-24% in the last quarter, compared to 52%-25%-23% in the December 2011 quarter. The OEM channel declined double-digits on a sequential basis and was up slightly year over year. Distribution and EMS grew from both the previous and year-ago quarters.

The Americas and Europe saw strong double-digit sequential increase (15.1% and 23.6%, respectively) in orders. However, while the Americas also grew double-digits on a year-over-year basis, Europe declined. Asia/Pacific North was the weakest region, declining 9.0% sequentially and 11.2% from last year. Asia/Pacific South fared better, growing4.4% sequentially and declining 3.3% year over year.

Margins

Molex reported a gross margin of 30.5%, down 18 basis points (bps) sequentially and up 68 bps year over year. Despite the lower volumes, Molex was able to leverage favorable product mix, which almost totally offset adverse volume, commodity cost and currency headwinds.

Operating expenses of $163.9 million were more or less flat with the previous quarter's $163.1 million. However, the operating margin shrunk 73 bps sequentially to 11.6%. Most of the reduction was attributable to higher operating costs as a percentage of sales, although marginally higher cost of sales also contributed.

Net Income

Molex's pro forma net income was $67.4 million or 8.1% of revenue compared to $66.7 million or 7.8% of revenue in the December 2011 quarter and 71.0 million or 8.1% of revenue in the March 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 $64.9 million ($0.36 per share) compared to an income of $64.0 million ($0.36 per share) in the previous quarter and income of $68.1 million ($0.39 per share) in the year-ago quarter.

Balance Sheet

Inventories were down 1.0%, with inventory turns flat at 4.3X. DSOs went from 75 to around 79.

Molex ended with a cash and short term investments balance of $622.5 million, up $3.9 million during the quarter. Cash generated from operations was $138.9 million, up from $141.0 million in the fiscal second quarter.

Capital expenses were $54.4 million, or 6.5% of revenue, up from 6.1% of revenue in the previous quarter. Molex also paid $26.2 million for repayment of short-term loans and $35.2 million for cash dividends in the last quarter.

Guidance

Molex expects revenue of $870-900 million in the next quarter (at the high end of the guided range), up 4-7% sequentially. The pro forma EPS is expected to be 36 to 40 cents a share, assuming a tax rate of 31%. The Zacks Consensus estimate for the fiscal fourth quarter at the time of the earnings announcement was 41 cents, better than the guided range.

Conclusion

Molex is a leading player in the fast-growing connector market, with several secular growth drivers. Although some softness lingers on in the telecom and consumer markets, the inventory correction is over and orders are trending up.

Considering Molex's strong position in the connector market, the company should see the impact on its results. We note that despite improving order trends, the guidance disappointed yet again. The Zacks Rank for the shares is therefore #3, indicating a Hold 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 is also Neutral.


 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: INTC , MOLX

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