TTM Technologies: Good Quarter, but Weak Guidance

Six things you need to know about TTM Technologies' fourth-quarter earnings.

Feb 6, 2014 at 3:00PM

The latest earnings from TTM Technologies (NASDAQ:TTMI), a maker of circuit boards and other electronic components, beat analyst expectations for sales and profits. But the company still traded down in the after-hours market, primarily because of a weaker than expected guidance for next quarter.

Admittedly, TTM improved in key operating metrics, but it still faces a number of strategic challenges. Below are six key takeaways from the fourth-quarter earnings report and corporate conference call.

1. Sales and earnings beat expectations
The company reported better than expected sales and earnings per share. Revenue fell 4%, largely due to plant divestitures, but that was less than analysts expected. If you adjusted for those absent plants, revenue was actually up 2%. Adjusted earnings per share came in at $0.27 -- handily beating analyst estimates of $0.22.

2. Margins improved nicely
Thanks to an improved product mix (i.e., selling more high-end products) and higher volumes, particularly in Asia, TTM improved its gross and operating margins. Considering that its margins had previously been shrinking for quite a while, investors should applaud this news.

3. Capacity utilization was mixed
To improve its margins, or at least maintain current levels, TTM needs to make sure it's using as much of its plants' capacity as possible. In a low-margin manufacturing business, it's hard to make much profit running at much less than capacity, which is how TTM has operated over the past year or two. That helps explain its lackluster results in recent years.

This time around, capacity utilization in Asia increased sequentially to 90% (very good), but declined in North America to 59% (very bad). Again, those plant divestitures helped Asian utilization improve.

4. Customer concentration increased
TTM's top five customers accounted for 47% of sales, up from 43% in the third quarter. Those customers were, in alphabetical order: Amazon.com (NASDAQ:AMZN)Apple (NASDAQ:AAPL)Cisco (NASDAQ:CSCO)Huawei, and Juniper (NYSE:JNPR). The single largest customer accounted for 29% of sales.

The company hasn't named this key client, but I believe it's Apple. Generally, customer concentration and lack of bargaining power has been a problem for TTM, so I'm disappointed to see customer concentration increasing. Apple CEO Tim Cook is a supply-chain maven and a hard bargainer, which presents a major challenge for TTM.

5. Price increases offset wage inflation
Like Odysseus and his hapless crew in The Odyssey, TTM is stuck between the Scylla of higher Chinese labor costs and the Charybdis of lower prices demanded by customers. It's hard to earn a profit while getting squeezed on both ends.

On this front, the company appears to have made some progress. Average selling price in Asia increased 15%, while the company is only forecasting 8% wage inflation in China. This increase in average selling price certainly helped drive the company's improved margins during the quarter.

6. Guidance was weaker than expected
TTM announced lower than expected guidance for the first quarter of 2014; the company expects both revenue and profitability to sink. Given that markets are forward-looking, this weak guidance likely explains why after-hours markets pushed TTM's share price down.

Foolish bottom line
New CEO Thomas Edman is quite optimistic about the company's prospects, and all things considered this was quite a good quarter. But that doesn't mean tough times are over for TTM. I don't think it has substantial pricing power, and its margins will always be at risk.

A small tick up in demand, average selling pricing power, or capacity utilization could have a large impact on profits -- and the stock price. Still, I'm personally loath to recommend purchasing new shares in this company. There are plenty of worthier opportunities.

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Brendan Mathews owns shares of Amazon.com, Apple, and Cisco Systems. The Motley Fool recommends Amazon.com, Apple, Cisco Systems, and TTM Technologies. The Motley Fool owns shares of Amazon.com and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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