It’s not often that a CEO admits his company’s sales strategy needs a complete overhaul because it has “stalled” but that was the blunt message Dean Foate had for Plexus Corp. shareholders recently. Foate, president, chairman and CEO of the electronics manufacturing services (EMS) provider, then launched into a detailed outline of how he expects to revive the company and spark growth again at an enterprise that once was the world’s biggest EMS company.
“We have struggled to achieve our full financial model and have underperformed when it comes to our return on invested capital or economic spread or our weighted average cost of capital,” said Foate. “Our growth rates have stalled and I think it's important that we get ourselves recalibrated and get on a trajectory to $3 billion. The bull case for Plexus, from our perspective, is we’re taking market share in the markets that we focus on.”
If Foate, who has led Plexus since 2002, was expecting equity investors to buy his “bull” case for the company, the verdict was swift. Within the week, Plexus’ stock price hit a new one-year high of $36.83 following upgrades by analysts at RBC Capital and Citigroup Inc. The company’s stock price continued to rise and has since set a new 52-week high of $37.29.
The positive endorsement is going to be sorely tested in coming months. Plexus is far from reaching many of its internally-defined goals, the most important of which is to increase revenue to $3 billion from the current annual rate of $2.3 billion. It’s a goal the company has been chasing for a long time and not one analysts see it reaching in the next few years. The consensus estimate of analysts polled by Yahoo is for Plexus’ sales to reach $2.22 billion in the fiscal year ending September 2013, rising barely to $2.27 billion in fiscal 2014.
The highest forecast from the eight analysts who track the company is for revenue to increase to $2.3 billion in fiscal 2014. Getting to $3 billion is obviously going to be a long-term goal for the company especially since it is not a big player in the high-volume but low-margin consumer electronics market. Plexus itself doesn’t expect to reach $3 billion in revenue until fiscal 2017.
In its 34-year history, Plexus has set many records for the EMS market and was one of the earliest providers of contract manufacturing services to electronics OEMs. Today’s sales are puny compared with those of rivals like Sanmina Corp. ($6.1 billion), Celestica Inc. ($6.5 billion), Jabil Circuit Inc. ($18.3 billion), Flextronics International Ltd. ($23.6 billion) and Foxconn (Hon Hai), the big-daddy of the contract manufacturing world with 2011 sales topping $116 billion.
Plexus can certainly achieve its $3 billion sales and might have been better positioned to reach that level if it hadn’t lost a major account last year when Juniper Networks dropped the EMS provider. The stunning news dislocated Plexus and, combined with unexpected decline in some market sectors, contributed to the forecast revenue drop for fiscal 2013 from $2.3 billion in fiscal 2012. Otherwise, sales would have continued to creep up – as they did starting in fiscal 2010 – pushing revenue to the company’s goal within a few years.
“We’ve felt some revenue pull back in many of our customers’ market places as the acceleration in the economy did not happen [in 2013] and of course we saw significant revenue dislocation [from Jupiter] so that’s a big challenge for us,” Foate said.
Back to the Drawing Board
Plexus’ strategy for resuming growth is quite simple and would work quite easily, other external factors permitting. The company continues to focus on strong margin sectors of high complexity products in four core markets: networking/communications; industrial/commercial; healthcare/life sciences and; defense/security/aerospace. The four segments require high complexity manufacturing and were supposed to shield the company from the vagaries of the PC and consumer electronics market.
That hasn’t always been the case. In the last year cutbacks in defense spending as well as problems in the networking and communications equipment market resulted in the company’s fiscal year sales decline. The company was hit especially hard by continuing turmoil in the networking/communications market, which in fiscal 2012 contributed 39 percent of Plexus’ sales, down from 46 percent and 55 percent, in fiscal 2011 and 2010, respectively.
In response, Foate said Plexus will be focusing in future on more resilient albeit highly regulated market sectors like healthcare and medical equipment where customers require a high degree of manufacturing and technical expertise. The markets have a higher level of barriers for new players who have to meet all kinds of regulatory requirements in addition to providing consistent services.
“This is not just something we do as a side show or just a portfolio in our business and this plays really well with customers,” Foate said. “That allows us to put the right equipment sets in place, become very good at the regulatory capability and put the right supply chain strategies in place. It gives us competitive advantage.”
Will this intense focus on serving highly demanding customers help push Plexus to its revenue goal despite the loss of Jupiter and some other networking and communications equipment customers? Foate took on this knotty question and what he calls the “bears’ ” case in the presentation to analysts. Not only was the loss of the Jupiter account a major blow to the company it was also unexpected, giving Plexus little time to shield itself from the financial loss.
The failure to anticipate Jupiter’s move, similar actions by other major customers and events in the larger economy could be problematic for a company with such minimal cushion for financial hits. Even as Plexus continues to deepen relationships with low volume, high-complexity equipment OEMs, the larger margin in such markets are attracting bigger rivals who have the resources to scale the barriers to entry identified by Plexus.
In fact, most players in the EMS market, including companies like Foxconn that serve mega OEMs such as Apple, HP and Cisco want to similarly diversify operations to include less margin-sensitive businesses. In any other economic segment, Plexus and other medium-size companies in its market segment would become easy acquisition targets. Such transactions are few in the contract manufacturing world and so the likelihood is remote that Plexus could be purchased by a rival.
It’s not impossible, though. Even bigger companies in the EMS sector have been folded into the arms of bigger competitors -- Solectron Corp., for instance was acquired by Flextronics. If Plexus fails to reach its dream revenue goal through organic growth, management may find it reachable via a strategic sale to a competitor.