Jabil Circuit (JBL, Financial), a manufacturer of electronic components for some of the leading tech companies like Apple (AAPL, Financial) and Cisco (CSCO, Financial), has shaken the confidence of its investors following its recent earnings release. The business not only missed the analysts’ earnings estimates, but also gave a weak guidance for the current quarter. Besides this, the company has also announced that it will sell its aftermarket services unit, which is responsible for providing warranty repair services for consumer electronics.
Following the earnings release, the company’s shares dropped by more than 20% on Dec. 18, which is the single biggest drop in nearly six years. The shares still haven’t recovered and are trading just 0.2 times Jabil’s trailing sales.
Earnings Overview
During the quarter, Jabil’s revenues were nearly flat from the corresponding quarter last year, showing a decline of less than 1% to $4.61 billion. The company’s net income rose 11.8% year-over-year to $118.07 million, or $0.57 per share. However, excluding the impact of one-off items, Jabil’s adjusted earnings, which the company refers to as core diluted earnings per share, fell to $0.51 per share from $0.61 per share in 2012, which is considerably below Wall Street’s expectations of $0.54 per share.
 During the quarter, Jabil generated nearly half of its revenues from its Diversified Manufacturing Services. The segment witnessed a growth of 5% from prior year to $2.3 billion. The growth in segment was largely due to the Nypro’s acquisition. On the other hand, all other segments of the company reported a drop in quarterly revenues. The Enterprise and Infrastructure segment’s revenues fell by 6% from last year while the High Velocity segment also witnessed a 5% drop in sales. The drop in the former was due to the weakness in the overall macro environment while the latter witnessed a decline in handset volume which offset the gains coming from printing and set-top boxes
Disappointing Guidance
While Jabil’s earnings were clearly not impressive, its future guidance was even more disappointing, which was the main reason behind the massive drop in shares. For the current quarter beginning Dec. 1, the company is expecting a 17% decline in revenues from last year to between $3.5 billion and $3.7 billion.
Similarly, the business expects the core earnings for the current quarter to come in the range of $0.05 per share to $0.15 per share for, which will be a far cry from $0.53 per share in second quarter 2013. The guidance is also way below Wall Street’s expectations of earnings of $0.52 per share from revenues of $4.35 billion.
Apple and Jabil
Jabil’s weak guidance has also raised question marks over Apple’s iPhone prospect, particularly those of 5C. As a result, Apple’s shares also dropped following the weak guidance from Jabil.
For the fiscal year ended on Aug. 31, Jabil earned 19% of its revenues from the iPhone, an improvement from 13% in the previous fiscal year. The company’s diversified manufacturing segment grew strongly as it started making the aluminum casing for the iPhones from 2013. Analysts believe that Jabil’s lower guidance, particularly the expected revenue drop in the diversified manufacturing, is because Apple is expecting a significant drop in iPhone production.
Reasons Behind the Drop
This decline will be led by Diversified Manufacturing and Velocity segments, both of which will witness a year-over-year decline of around 25% each. This will be due to the temporary shift in demand experienced by Diversified Manufacturing and the winding down of Jabil’s relationship with the struggling smartphone maker BlackBerry (BBRY, Financial).
To cope with this shift in demand, Jabil is planning to reallocate its resources for the next two to three quarters towards different revenue streams from its existing customers. Although Jabil has not pointed out the name of the customer, rumors abound that this could be Apple.
Meanwhile, Jabil expects to incur charges of between $35 million and $85 million related to the wind-down of its relationship with BlackBerry. The business will record the restructuring charges of $25 million to $35 million in the second (current) quarter. The company will continue to serve BlackBerry through the first three months of 2014.
BlackBerry has been fighting for its survival as its Hail Mary smartphone failed to impress consumers. In its previous quarter, the company’s revenues plummeted 56% as the business reported a massive loss of $4.4 billion, or $8.37 per share.
AMS Sale
Moreover, Jabil has also decided to sell its aftermarket services (AMS) business for $725 million to iQor Holding Inc. The deal is expected to close in the third quarter of 2014 and its impact on Jabil will be evident in the current quarterly results when the unit will be reclassified as “discontinued operations.” Jabil has been mulling the sale of this unit for quite some time, as it felt that the unit was not aligned with its long-term strategy as it wants to increase its focus on diversified manufacturing services.
Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf have any positions in the stock(s) mentioned in this article.
