Jabil Circuit Beats Zacks Q2 2010 Consensus Estimates

Includes: AUTH, JBL
by: Zacks Investment Research

Jabil Circuit, Inc. (JBL) recently reported its preliminary results for the second quarter 2010, beating the Zacks Consensus Estimate. Jabil’s second quarter is normally a sequentially down quarter due to the seasonal slowdown in consumer spending (full conference call transcript here).

Despite the unfavorable seasonality, Jabil posted a much higher profit for the quarter. Results benefited from significant year-over-year margin expansion on modest revenue growth. Management said that since fiscal 2004, the results for the second quarter of 2010 represented the lowest sequential decline in revenue and core operating margin.

In our view, this is very positive, as results continue to improve. The shares rose 3.32% (or 59 cents) and closed at $18.36 yesterday.

We expect Jabil to resume growth by the end of the fiscal 2010 on account of new business wins, increase in customer orders, improving economic environment and stability in IT spending.

Jabil recently signed an agreement with AuthenTec, Inc. (NASDAQ:AUTH) to deliver next-generation technology to the mobile phone market. Under the deal, Jabil has developed its first mobile product, the Smart Navi-Key, which includes AuthenTec’s smart sensor technology with Jabil’s an all-in-one keypad.

Revenue Details

Total revenue for the quarter was $3.0 billion, an increase of 4.1% from $2.89 billion reported in the year-ago quarter. On a sequential basis, revenues decreased by 3% reflecting the seasonal weakness in the Consumer division.

According to sectors, the EMS Division (representing 61% of total second quarter 2010 revenue) increased 10% sequentially. Included in the EMS division, Computing & Storage (11% of total revenue) increased 15%, and Industrial, Instrumentation & Medical (23% of total revenue) increased 14% sequentially as a result of growth across a broad number of customers. Networking (18% of total revenue) increased 18% sequentially, and Telecommunications (5% of total revenue) decreased 6% quarter-over-quarter.

The Consumer division (representing 32% of total second quarter 2010 revenue) decreased 21% sequentially, reflecting a seasonal decline. In the Consumer division, Mobility (17% of total revenue) decreased 30% from the previous quarter, while the Digital Home Office sector (15% of total revenue) decreased 7% sequentially. Aftermarket Services (6% of total revenue) decreased 2% sequentially.

During the quarter, the two largest customers accounted for more than 10% of revenue, and the top ten customers accounted for 58% of the revenue.

Operating Performance

Core EPS or non-GAAP EPS (excluding one-time items and discontinued operations) for the quarter was 29 cent, up 123.1% from 13 cents reported in the year-ago period. EPS beat the Zacks Consensus Estimate of 22 cents by 7 cents. Improvement in profitability came from increased focus on operations and realized savings from previous restructuring plans.

Also, gross margin increased to 7.4% from 5.4% in the comparable quarter last year due to increase in net revenue. Excluding one-time charges, core operating margin increased to 3.2% from 1.8% in the year-ago quarter. On a dollar basis, core operating income increased 86.7% to $95.6%. However, on a sequential basis core operating income decreased 9%, reflecting the seasonal nature of the Consumer division.

During the quarter, Jabil generated $31.0 million in cash from operations. Cash and cash equivalents were to $794.1 million and long-term debt (including the current portion) was $1.20 billion at the end of the quarter. Annualized inventory turns reached 7 in the quarter. While inventory days expanded in the quarter due to constrained materials environment, the overall level of working capital performance improved in the quarter.

Core return on invested capital (ROIC) was 18.2%. Core EBITDA in the quarter was approximately $159 million or 5.3% of revenue. Capital expenditures were approximately $78.0 million, while depreciation was approximately $63.0 million for the quarter. The company also paid 7 cents per share in dividend yield on March 1, 2010.


Jabil expects net revenue for its third quarter of 2010 to be in the range of $3.1 billion to $3.3 billion, an increase of 3% to 10% sequentially. The EMS division is expected to grow 8% sequentially, while the consumer division is expected to grow 5%. The AMS division is expected to have consistent revenues with those of the second quarter.

Core operating income is expected to be in the range of $100 million to $120 million, a growth of 4% to 25% sequentially. As a result, core operating income margin is expected to be in the range of 3.2% to 3.6%.

At the mid-point of the guidance, revenue represents a growth of approximately $600 million or 22% on a year-over-year basis, while core operating income represents a growth of $80 million or 81% on a year-over-year basis.

Core EPS for the third quarter is expected to be between 30 cents to 36 cents, a growth of 3% to 24% sequentially. EPS forecast is above the Zacks Consensus estimate of 26 cents.

SG&A expenses are estimated to remain at $120 million, while R&D expenses are expected to be approximately $8 million. The company plans to invest an incremental $70 million to fund new technology and new program wins within the Jabil Green Point mechanical operations, which totals $150 million of expenditure in the third quarter.