Highlights From JBL's Q1 Conference Call: Revenues Increased 6% to $4.3 Billion

Last night, Jabil Circuit, Inc. (NYSE: JBL) reported Q1 EPS of $0.65, in-line with the analyst estimate of $0.65. Revenue for the quarter came in at $4.33 billion versus the consensus estimate of $4.41 billion. Shares are currently down 5.1%.

Highlights From JBL's Q1 Conference Call:

• (Forbes I. J. Alexander) Our net revenue for the first quarter was $4.3 billion, an increase of 6% year over year. GAAP operating income was $170.8 million or 3.9% of revenue, which compares to $156 million of GAAP operating income on revenues of $4.1 billion or 3.8% in the same period in the prior year.
  
• Core operating income excluding the amortization of intangibles and stock-based compensation increased 7% to $194.6 million and represents 4.5% of revenue. This compares to $181.9 million or 4.5% for the same period in the prior year.
  
• On a sequential basis, revenue increased 1% in the first quarter, while core operating income increased 4%. Core diluted earnings per share were $0.65, an increase of 7% over the prior year. GAAP diluted earnings per share for the first quarter were $0.54, an increase of 10% over the prior year.
  
• In the first quarter, our Diversified Manufacturing Services segment grew 30% on a year-over-year basis. Revenue was approximately $1.8 billion, representing 42% of total company revenue. Core operating income expanded in the quarter to 6.8% of revenue.
  
• The Enterprise & Infrastructure segment increased 4% on a year-over-year basis. Revenue was approximately $1.2 billion, representing 28% of total company revenue. And core operating income for the segment was 2% of revenue.
  
• Our Enterprise & Infrastructure performance was below expectations as we experienced revenue reductions late in the quarter as a result of inventory leveling with specific large customers associated with specific mix and inbound product transitions. We expect a return to revenue growth and improved core operating income performance for the balance of the fiscal year.
  
• While our High Velocity segment performed above our expectations for the quarter, segment revenues decreased by 14% on a year-over-year basis.
  
• Revenue was approximately $1.3 billion, representing 30% of total company revenue in the quarter. Core operating income for the segment was 3.8% of revenue.
  
• And on a sequential basis, we saw strength across the whole segment. And core operating income performance exceeded our expectations primarily as a result of fixed cost leverage in a seasonally high quarter.
  
• It's also now interesting to note that we have one 10% customer in each of our segments.
  
• We ended the quarter with cash balances of $862 million.
  
• Inventory was approximately $2.4 billion, representing a 7% increase, primarily associated with our Enterprise & Infrastructure business, where we experienced some weakness late in the quarter. Inventory turns remained at seven.
  
• Cash flow from operations was approximately $115 million in the quarter. EBITDA in the quarter was $275 million or 6.4%, an expansion of 30 basis points over the same period a year ago.
  
• Our capital expenditures during the quarter were approximately $95 million as we continued to invest in infrastructure to support our targeted markets and capabilities. In the second quarter of the fiscal year, we expect CapEx levels of approximately $80 million to $90 million, reflective of capacity and infrastructure to support higher levels of production in the second half of the fiscal year.
  
• During the quarter, we increased our quarterly cash dividend by 14%, bringing our yearly cash dividend to $0.32 per share. So while we did not repurchase any shares during the quarter, we still have $100 million available on our authorization for the fiscal year.
  
• We're pleased with the first quarter's results. Core operating margin performance was 4.5%, at the high end of our guidance with revenues at the lower end of our guidance, reflective of continued operational efficiency and diversification of our revenue stream.
  
• Returns on invested capital, calculated on a GAAP net income basis, expanded 2% on a year-over-year basis to 26%, providing leading capital returns in the EMS [Electronics Manufacturing Services] industry.
  
• We expect revenue in the second quarter on a year-over-year basis to increase approximately 4%, in a range of $4 billion to $4.2 billion. On a sequential basis, overall revenue and operating guidance are consistent with the level of seasonality we experienced in fiscal 2011. Core operating income is estimated to be in the range of $160 million to $185 million, and core operating margin in the range of 4% to 4.4%. (Consensus is $4.23 billion)
  
• Our core earnings per share will be in the range of $0.52 to $0.62 per diluted share, based upon diluted share count of 213 million shares. (Consensus is $0.60)
  
• Based upon the current estimates of production, tax rate on core operating income is expected to be 18% for the quarter and the year. Turning to our segments and year-on-year performance, the Diversified Manufacturing Services segment is expected to increase 25%. The Enterprise & Infrastructure segment is expected to be consistent on a year-over-year basis. Finally, our High Velocity segment is expected to decrease 14% on a year-over-year basis.
  
• (Timothy L. Main) Very solid results if a little more uneven than what we would typically like. Enterprise & Infrastructure was disappointing in total, but that underperformance was isolated and we feel confident about prospects for Enterprise & Infrastructure going forward. We have very good customer relationships in this segment with stable to expanding share of wallet in all major business relationships.
  
• Many of you might be interested in a specific High Velocity customer, which I want to forewarn you we will not be able to answer any questions abouts specific customer relationships. However, recognizing the state of uncertain generally and as a result of some of the more uneven results in fiscal Q2, we thought it would be helpful to help you to understand and characterize the balance of our fiscal year.
  
• Using our fiscal first quarter results and the midpoint of our fiscal second quarter guidance, revenue for the first half of fiscal 2012 should be approximately $8.4 billion. In the second half of the year, we expect the Diversified Manufacturing group to continue leading growth. We have the organic growth contribution from Aftermarket Services, which is typically at least 12% to 15% per year combined with the benefit of the Telmar acquisition.
  
• However, the quality of that revenue in High Velocity and the margins should continue to be above the high end of our long-term targeted margin range. In essence, this will result in fiscal 2012 of approximately $9 billion in the second half and a total year revenue of about $17.4 billion. We're not trying to handicap anything more or less into this picture, just providing you a viewpoint as to where we think we are today and how the balance of the year might unfold.
  
• Should the year unfold at about this level, I would regard it as a solid year with a good trend in business mix towards the Diversified Manufacturing Services business area. Margin and profit expansion can take place on much more moderate revenue growth, which I would regard as a very good thing.
  
• Diversified Manufacturing Services group growth is underpinned by a very substantial market opportunity for the company, approximately a $500 billion addressable market with very low levels of penetration.
  
• (Q&A) I think last quarter you talked about the business having to outgrow despite the weak macroeconomic environment. We've now seen year-over-year growth trends decelerate from 32% to 4%. I'm just wondering how you would explain that. Is your expectation that mid-single digit is now a more reasonable growth target for fiscal 2012? (A) 7% to 8% growth is significantly above macroeconomic growth, and in fact, I think would be a leading position in terms of S&P 500 companies, and I think that's based on what we see today. So our long-term growth objectives remain on track, 20% to 30% in Diversified Manufacturing Services and 5% to 10% in the other business areas. If we look back in fiscal 2012 over growth in fiscal 2011 and 2012, we'll certainly be, if not in the range, above the range of growth for those business areas. So I'm having a
  > hard time getting to your interpretation of where we are. And actually this growth in terms of top line growth might be a little bit below where analysts had us after the conference call in September. But given the portfolio mix towards Diversified Manufacturing Services, the income and EPS associated with this revenue stream is roughly equivalent. So I would regard this as a nice trade-out of lower margin revenue for a better earnings profile and more sustainability. So I think I'd take fiscal 2012, particularly in this environment.
  
• And then just as a quick follow-up, perhaps maybe Forbes, can you help us understand what we should expect in terms of operating margin expectations for both HVS and E&I? I think HVS certainly surprised us on the upside and E&I on the downside. Just for the February quarter, how should we be thinking about movements for those two segments? (A) Yes, so I'll certainly give you some color in general without giving specific guidance around each of these segments. But let's think that Enterprise & Infrastructure obviously underperformed in the first quarter. That's really not about revenue growth. And as we've said in the prepared remarks, essentially the guidance we're providing is growth through the balance of certainly the second fiscal quarter and the balance of the year. So we should see some pretty reasonable margin progression. I'll remind you that last quarter we discussed the closure of our site in northern Italy. That's underway. We would anticipate that when that occurs, there will be some benefit in the February quarter, which will obviously lead to margin accretion. And then we'd see the full benefit of those closures in the third and fourth quarter. But principally, we add back the revenue. We see the growth and we'll start to see the margins progress from 2.5%. And I would expect us to be very close to the low end of our operating targets as we get through the fourth fiscal quarter here. I'll remind everyone that the long-term target is in the range of 4% to 4.5%. In terms of the High Velocity arena, as you say, we're extremely pleased with the performance in the first fiscal quarter. And the way we think about that is that we did have some hyper-utilization of assets in the seasonally high first quarter. So I would expect some decline in those margins as we move forward through the balance of the year. Sequentially, we do see revenues coming down as a result of this November high season. So the way to think about that is probably certainly above the high end of our targeted range, 2.5%, to somewhere probably approaching 3% for the balance of the year.

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