Jabil Circuit touching bottom?

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. Looking at consumer electronics a bit more closely, Jabil's consumer sales represented roughly $900 million for the Company (35% of third quarter revenues) with 0.5% core operating margin (compared to 1.3% in February). Revenues from mobility were roughly $548 million (21%), down 12% from third quarter. Again, likely due largely to seasonality yet difficult to compare to the prior quarter due to new product ramps. Displays were roughly $79 million, or 3% of revenues, down 27% from last quarter and peripherals sales were roughly $293 million (or, 11% of sales) which were down 8%, sequentially. Helping to round things out, revenue from telecom was up 8.7% quarter-on-quarter at approximately $153 million which equates to about 6% of total revenues (down 1% sequentially). Industrial electronics was down 4.7% quarter-on-quarter, and networking which came in at $420 million and represented about 16% of Jabil sales, was also down 14.8% quarter-on-quarter. Combined results for industrial / instrumentation / medical of approximately $519 million (20% of total revenues) declined 5% quarter-on-quarter and was aided in part by smart grid / clean technology programs. While Company management said most segments are expected to remain unchanged quarter-on-quarter, the exception is the automotive segment, which they expect will be seasonally down 10% quarter-on-quarter. Jabil's automotive segment generated about $86 million in revenues which equates to about 3% of total revenues. While revenue is indeed expected to be flat in Q4, many on Wall Street believe the Company's focus on driving costs out of the business should lead to some earnings leverage. Talk is cheap It's more than just talk in industry that Jabil has cleaned up its operations. Some of the numbers are beginning to prove this. The Company also appears to be positioning itself for growth for when the economy recovers (which, it admits, it does not know when that time will come) and being able to access new emerging growth opportunities like smart grid and alternative power (solar and wind) -- which the Company is hopeful can contribute more meaningfully exiting 2009, moving into 2010. It's important to note that with all of Jabil's business segments down sequentially (again) this quarter, the diamond was Jabil's after market services offering which reported a solid increase of 11%, at roughly $179 million representing 7% of total revenues with improving operating margin (10% vs. 9% previous quarter). VentureOutsource.com, June 2009