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Molex Beats on Q1 Earnings, Rev Up Y/Y

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Molex Inc’s earnings for the first quarter of fiscal 2014 were 49 cents, which surpassed the Zacks Consensus Estimate by 12 cents. Earnings were driven by higher-than-expected revenue, higher gross margins, and foreign exchange gains.

Revenues

Molex reported revenues of $936.4 million, which was up 6.1% sequentially and 2.1% year over year, above the guidance range of $890 million–$930 million (up 1%–5% sequentially).

Both the Americas and Europe were down from the June quarter. Weaker-than-expected sales of mobile devices impacted sales in the Americas, while Europe is showing signs of stabilization.

Asia/Pacific was up sequentially as both mobile and consumer end markets ramped production to support the upcoming holiday season.

Revenues by End Market

The automotive market generated 20% of quarterly sales, making it the largest contributor. Segment revenues were up 1.0% sequentially and 21.0% year over year. The strength was driven by the Americas due to growing electronic content, increasing design wins and increasing automobile production. Europe was notably weak, partially offsetting the strength in the American region. The markets in Korea and Japan also remained weak.

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. Additionally, Molex’s exposure to China (where a large amount of auto manufacturing has shifted) is a secular demand driver in this market.

The Infotech market (16% revenue share) decreased 2.0% sequentially and 1.0% from the year-ago level. The weakness was due to the soft PC market which also affected the big technology companies such as Intel (INTC), Hewlett Packard (HPQ - Analyst Report) and Microsoft Corp (MSFT - Analyst Report). The growth in cloud computing, increasing demand for storage and the aging computer infrastructure remains long-term drivers for this segment.

The mobile device market, accounting for 17% of revenues, increased 17.0% sequentially while decreasing 12.0% from last year. Management has taken all mobile device-related revenues (tablets, mobile phones, smartphones and others from other segments to form this segment). This segment was another strong sector in the last quarter. Management stated that the mobile phones were the strongest sector, followed by tablets, laptops and notebooks.

Telecommunications,accounting for 15% of revenues, grew 19.0% sequentially and 6.0% from last year. This segment accounted for most of the strength in the last quarter. The improvement was driven by increased carrier spending particularly in North America and China. Molex’s optical routing and digital cross-connect products position it well for 4G LTE build-outs in China. So far, the company has spent on this infrastructure in North America, Japan and Korea. The company’s high-speed copper products, traditional fiber optic, and active optical fiber products witnessed good growth in the quarter.

Secular drivers of the telecom 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.

Consumer Electronicsgrew 7.0% sequentially but dropped 11.0% year over year to 14% of revenues. The sequential increase was driven by strong demand for white goods and navigation systems. Also, the gaming market was strong sequentially. Continued weakness in TVs and digital cameras (that are being impacted by increased demand for camera phones) were responsible for the year-over-year softness.

Molex should do well in the long term, as its customers introduce new products targeting the BRIC countries (Brazil, Russia, India and China), as well as Vietnam and Thailand, where the potential for growth is strong. Higher disposable income and increased consumerism in developing countries are secular demand drivers in this market.

Industrial accounted for 13% of revenues, up 1.0% sequentially and 7.0% from last year. The strength in the last quarter was quite broad-based across instrumentation, factory automation and transportation segments. The company saw increased activity and design wins at oil and gas refineries and some recovery in the semiconductor test equipment market and machine builder market, particularly in Europe.

The remaining 5% of Molex’s revenues came from medical/military markets, which were down 1.0% sequentially but up 38.0% year over year. The sequential decrease was due to cuts in government spending and uncertainty around the funding of government programs which is impacting the military market.

Orders

Total orders were up 6.7% sequentially but down 0.5% from the September quarter. As a result, backlog improved 4.2% sequentially and 5.9% from last year. The book to bill was around 1.0.

Approximately 20% of Molex’s total orders came from the automotive segment, 17% from the data/ infotech market, 16% from the mobile devices segment, 15% from the telecom market, 14% from the consumer segment and 13% from the industrial market. The remaining 5% came from the medical/military market.

Margins

Molex reported a gross margin of 32.3%, up 300 basis points (bps) year over year. Molex attributed the improvement to higher revenues, favorable product mix, lower material costs and increased equipment utilization rates.

Operating expenses of $179.0 million were up 8.3% from the previous quarter’s $165.7 million, with the operating margin expanding 190 bps year over year to 13.1%.

Net Income

Molex’s net income was $84.1 million compared to $71.3 million in the September quarter of 2012.

The quarter’s GAAP net income was $84.1 million or earnings per share of 46 cents, up from $71.3 million or 40 cents in the comparable quarter last year. Excluding the costs associated with the pending merger with Koch Industries, non-GAAP net income was $89.5 million or 49 cents per share compared with $57.1 million or 32 cents a share in the last quarter.

Balance Sheet

Molex ended with cash and short-term investments balance of $676.2 million versus $721.9 million in the prior quarter. Trade receivables were $737.0 million, up from $703.4 million in the prior quarter. DSOs went down from 69 days to around 68 days.

Cash generated from operations was $98.9 million, down from $167.4 million in the September quarter of 2012. Capital expenses were $47.0 million versus $69.4 million in the September quarter of 2012.

Conclusion

Molex is a leading player in the fast-growing connector market, with several secular growth drivers. The company appears to be seeing improvement in its core markets, which led both top-line and bottom-line results to exceed our expectations. Additionally, macro conditions in Europe are improving, and the positive effect may be expected to continue in the coming quarters.

The company reported higher orders and backlog also improved, indicating macro visibility and improved demand for Molex’s products in the future. Also, management remains quite optimistic about its revenue end markets, with automotive, mobile and telecom markets expected to do well in the near term.

We believe Molex should be able to take advantage of the product launches by customers and the improving macro environment.

Molex’s shares carry a Zacks Rank #2 (Buy).

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