Jabil Circuit touching bottom?

By Mark Zetter

EMS provider Jabil Circuit recently held its quarterly conference call with Wall Street. Despite some soft spots, mainly the economy, Jabil's stock took a nice jump the day after. Below are some findings and analysis from the call and from speaking with others in industry.

The Company reported slightly better-than-expected third quarter fiscal 2009 results, but guided for revenue to be flat quarter-on-quarter which seemed lower than some analysts expected for sequential revenue growth of 10%.

Jabil anticipates it can achieve contribution margins of 10% to 15% when revenue growth returns.

Management forecasted robust (but not quantified) growth in the consumer, mobility, telecommunications, and instrumentation end markets. Regarding contribution margins, one analyst says 10% to 15% could be possible, perhaps if the revenue comes in handset plastics and after-market services.

Jabil reported fiscal third quarter revenue of $2.6 billion which was -9.4% compared to third quarter last year. EMS revenues were approximately $1.5 billion at 58% of total revenues with core operating margin of 1%.

Gross margin came in at 5.7% and was up 10 basis points quarter-on-quarter compared to 5.6% in February. Gross margin improvement was aided by focus on reducing costs.

Operating margin declined to 1.1% from 1.8% last quarter (down from 3.0% in the first quarter).

The Company seems to be doing a good job of managing its working capital, reducing inventory by $148 million quarter-on-quarter and generating $78 million in operating cash.

The Company paid down $136 million of its debt and the cash balance was flat quarter-on-quarter at $769 million.

Jabil is believed to be a creditor for over $7 million to Visteon which filed for bankruptcy. Details on a possible write-down tied to the Company's business with Visteon is expected in its 10Q filing.

While end markets appear they could be bottoming, and Jabil mentioned this to be the possibility, this is the second quarter that Jabil has called out the stabilization of end markets.

One investment firm writes, "Jabil's business appears to have officially stabilized across the board, and we have substantial confidence that the bottom has been established." Officially? I think that's a pretty bold claim.

Time will tell where we really are (right now) in this downturn.

Of noteworthy mention, VentureOutsource.com conducted a supply chain survey (April 2009) which revealed at the time that decision-makers at EMS providers were more optimistic about business sentiment across the electronics sector than their OEM counterparts. This seems to always be the case.

As mentioned above, Jabil stated fourth quarter revenue guidance remains flat quarter-on quarter yet mentioned all end-markets are remaining fairly consistent with the Company's third quarter levels.

Meanwhile, management indicated it expects growth to resume in the November quarter due to anticipated consumer and enterprise spending along with new programs the Company hopes to be ramping.

Jabil CEO Tim Main did mention that IT investment by enterprises and consumer electronics spending have both been hit by under investment over the past year (down 40% to 45%). Given this degree of decline, it could be reasonable to think these segments could be among the first likely to recover when end markets Jabil serves do begin to recover.

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