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Acoustic component provider Knowles (NYSE:KN) reported results in line with analysts' expectations in Q2 CY2024, with revenue up 18.3% year on year to $204.7 million. The company expects next quarter's revenue to be around $215 million, in line with analysts' estimates. It made a GAAP loss of $2.90 per share, down from its profit of $0.15 per share in the same quarter last year.
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Knowles (KN) Q2 CY2024 Highlights:
- Revenue: $204.7 million vs analyst estimates of $204.3 million (small beat)
- EPS: -$2.90 vs analyst estimates of $0.12 (-$3.02 miss)
- Revenue Guidance for Q3 CY2024 is $215 million at the midpoint, roughly in line with what analysts were expecting
- Gross Margin (GAAP): 37.5%, down from 38.8% in the same quarter last year
- Free Cash Flow of $21.7 million, up 56.1% from the previous quarter
- Market Capitalization: $1.61 billion
Holding a swath of patents, Knowles (NYSSE:KN) offers acoustics components for various industries.
Electronic ComponentsLike many equipment and component manufacturers, electronic components companies are buoyed by secular trends such as connectivity and industrial automation. More specific pockets of strong demand include data centers and telecommunications, which can benefit companies whose optical and transceiver offerings fit those markets. But like the broader industrials sector, these companies are also at the whim of economic cycles. Consumer spending, for example, can greatly impact these companies’ volumes.
Sales GrowthExamining a company's long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Knowles's sales were flat. This shows demand was soft and is a tough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Knowles's recent history shows its demand has stayed suppressed as its revenue has declined by 3.9% annually over the last two years. Knowles isn't alone in its struggles as the Electronic Components industry experienced a cyclical downturn, with many similar businesses seeing lower sales at this time.
This quarter, Knowles's year-on-year revenue growth clocked in at 18.3%, and its $204.7 million of revenue was line with Wall Street's estimates. The company is guiding for revenue to rise 22.8% year on year to $215 million next quarter, improving from the 1.7% year-on-year decrease it recorded in the same quarter last year. Looking ahead, Wall Street expects sales to grow 4.2% over the next 12 months, a deceleration from this quarter.
Operating Margin Knowles was profitable over the last five years but held back by its large expense base. It demonstrated lousy profitability for an industrials business, producing an average operating margin of 3.5%. This result is surprising given its high gross margin as a starting point.
Analyzing the trend in its profitability, Knowles's annual operating margin decreased by 41.2 percentage points over the last five years. The company's performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn't pass those costs onto its customers.
In Q2, Knowles generated an operating profit margin of negative 115%, down 121.4 percentage points year on year. This was driven by a one-time goodwill impairment of $249.4 million.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.
Sadly for Knowles, its EPS declined by 35.8% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to choppy demand.
Diving into the nuances of Knowles's earnings can give us a better understanding of its performance. As we mentioned earlier, Knowles's operating margin declined by 41.2 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Knowles, its two-year annual EPS declines of 35.7% are similar to its five-year trend. These results were bad no matter how you slice the data.
In Q2, Knowles reported EPS at negative $2.90, down from $0.15 in the same quarter last year. This print missed analysts' estimates. Over the next 12 months, Wall Street is optimistic. Analysts are projecting Knowles's EPS of negative $2.17 in the last year to flip to positive $0.81.
Key Takeaways from Knowles's Q2 Results We struggled to find many strong positives in these results as its EPS missed analysts' estimates. Overall, this quarter could have been better. The stock remained flat at $18.27 immediately following the results.
