Q1 2024 Sanmina Corp Earnings Call
Participants
Paige Melching; SVP, Investor Communications; Sanmina Corporation
Jure Sola; Chairman & CEO; Sanmina Corporation
Jon Faust; EVP & CFO; Sanmina Corporation
Christian Schwab; Analyst; Craig-Hallum Capital Group LLC
Anja Soderstrom; Analyst; Sidoti & Company, LLC
Ruplu Bhattacharya; Analyst; BofA Merrill Lynch
Presentation
Operator
Good afternoon, ladies and gentlemen, and welcome to the Sanmina's First Quarter Fiscal 2024 earnings conference call. (Operator Instructions) This call is being recorded on Monday, the 29th of January 2024. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communications. Please go ahead.
Paige Melching
Thank you, John. Good afternoon, ladies and gentlemen, and welcome to Sanmina's First Quarter Fiscal 2024 earnings call. A copy of our press release and slides for today's discussion are available on our website at sanmina.com in the Investor Relations section. Joining me on today's call is Jure Sola, Chairman and Chief Executive Officer, and Jon Faust, Executive Vice President and Chief Financial Officer.
Before I turn the call over to Jure, let me remind everyone that today's call is being webcasted and recorded and will be available on our website. You can follow along with our prepared remarks and the slides provided on our website.
Please turn to slide 3 of our presentation and take note of our Safe Harbor statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the Company. We caution you that such statements are just projections. Company's actual results could differ materially from those projected in these statements as a result of factors set forth in the Safe Harbor statement. The Company is under no obligation to and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in the earnings release, the earnings presentation on the conference call or the Investor Relations section of our website, whether as a result of new information, future events or otherwise, unless otherwise required by law.
Included in our press release and slides issued today, we have provided you with statements of operation for the first quarter ended December 30, 2023, on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our web. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, noncash stock-based compensation expense, amortization and other unusual or infrequent items. Any comments we make on this call as it relates to the income statement, measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit gross margin, operating income, operating margin, taxes, EBITDA, net income, and earnings per share. We are referring to our non-GAAP information.
I would now like to turn the call over to Jure.
Jure Sola
Thanks, Paige, and good afternoon, ladies and gentlemen, and welcome and thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina leadership team and our employees for doing a great job. So to you Sanmina team, thank you for your dedication and delivering excellent customer service, and let's keep it up.
Please turn to slide 4.
And now ladies and gentlemen, I would like to introduce to you Jon Faust, Sanmina CFO. Jon joined Sanmina on December 18, 2023. He brings over 20 years of finance, accounting controls and operational experience. Jon previously served as a Global Controller and Head of Finance Transformation and corporate services at HP Inc.
He was also CFO of Aruba at Hewlett Packard Enterprise company, and he held various leadership roles at Hewlett Packard Enterprises. Jon has proven track record driving transformational business strategies is a highly accomplished leader with extensive background and I can tell you, I'm very happy to have Jon on Sanmina leadership team.
Now let's go to our agenda for today's call. You'll have Jon to review details of our results for you. I will follow up with additional comments about Sanmina results and our future goals. Then Jon and I will open for question and answers. And now I'd like to turn this call over to Jon. Jon?
Jon Faust
Great. Thank you, Jure, and good afternoon, ladies and gentlemen. It's a pleasure to be here today and to be on my first earnings call for Sanmina I've been with the company for about six weeks now, and I've really enjoyed meeting the team and learning about the business.
Sanmina is a company that I've long respected during my many years at HP. because of its customer centric approach, focus on operational excellence and overall reputation of being a market leader in the EMS industry. While I've only been here for a short time. My experience to date has only strengthened that perspective. I'm excited to be here and to work with you and the rest of the leadership team to continue to deliver on Sanmina's strategy and to drive value for our shareholders.
With that, let's talk about the Q1 results. Please turn to slide 6. First, I want to commend the entire Sanmina team for executing well and delivering financial results in line with the company's outlook while continuing to navigate a difficult period in the market.
First quarter revenue was $1.87 billion in line with our outlook of $1.85 billion to $1.95 billion. As a reminder, the decline in revenue results from the ongoing market driven inventory disruption that we've been managing with our customers, which is unfolding in line with our expectations.
Non-GAAP gross margin was 8.8%, up 10 basis points sequentially and 30 basis points compared to the same period last year, which is at the high end of our outlook, largely driven by a favorable mix. Non-GAAP operating margin was 5.5%, down 20 basis points sequentially and 50 basis points compared to the same period last year at the midpoint of our outlook, as we continuing our as we continue to carefully manage costs and make targeted investments when needed.
Non-GAAP earnings per share came in at $1.30 based on 58 million shares outstanding on a fully diluted basis and at the high end of our outlook.
Please turn to slide 7, where I'll talk about the segment results. IMS revenue came in at $1.5 billion, down approximately 8% sequentially due to lower demand and ongoing customer inventory adjustments with non-GAAP gross margin down 40 basis points to 7.6% due to lower revenue and mix. CPS revenue came in at $394 million, down 10% sequentially due to similar dynamics as the IMS segment, non-GAAP gross margin was solid at 13% due to favorable mix and operational improvements we've been driving across the business.
Now please turn to slide 8 where I'll comment on the balance sheet. Sanmina has a very strong balance sheet, which is a key advantage of the company and a pillar of our value proposition to investors.
Cash and cash equivalents were $632 million. We ended the first quarter with inventory of $1.4 billion, which is down 6% sequentially and down 18% from a year ago as we have continued to focus on improving our inventory position we continue to have one of the strongest balance sheets in the industry with low leverage, which allows us to both navigate complex market environments and capitalize on the long-term opportunity in front of us.
Please turn to slide 9, where I'll talk about cash flow and capital allocation. We did a great job managing cash this quarter. And as I've been reviewing Sanmina's capital allocation priorities. I'm confident in our cash to use in the right areas. Each quarter. We evaluate our capital allocation requirements and look for opportunities to drive shareholder value, taking a disciplined ROI-based approach when making decisions.
As a reminder, those priorities are to number one, fund organic growth. Number two, execute on strategic transactions. Number three, reduce our debt and carefully manage our leverage ratio and number four the share repurchases, the actual mix of which depends on our needs and opportunities to touch on a few highlights.
Cash flow from operations for the quarter was $126 million. Capital expenditures were $34 million as we continued to make investments in the end markets that will support Sanmina's long-term profitable growth. Free cash flow was $92 million and during the quarter we repurchased 2.1 million shares for approximately $106 million. And as of December 30, we have approximately $174 million left on our Board-authorized plan. Going forward, we will look to do share repurchase repurchases opportunistically.
To conclude on the Q1 actual results. Overall, it was a strong quarter as we delivered on what we said we would despite the headwinds we face as customers continue to adjust inventory levels.
Please turn to slide 10. I'll now cover our outlook for the second quarter, which is based on everything we are seeing in the market and forecasts from our customers. Our outlook is as follows. Revenue between $1.825 billion to $1.925 billion, essentially flat with the prior quarter.
Now while we're not providing guidance beyond the second quarter, we are seeing signs that demand and revenue should start to improve in the second half of the year, which Jure will elaborate on shortly.
Non-GAAP gross margin of 8.3% to 8.8% consistent with prior quarters and dependent on mix. Operating expenses of $60 million to $62 million, in line with normal levels. Non-GAAP operating margin of 5.2% to 5.6%. Other income and expense, approximately $12 million was in line with normal levels, a tax rate of 17% to 18%. We also estimate an approximate $3 million to $3.5 million non-cash reduction to our net income to reflect our JV partner's equity interest. Non-GAAP EPS in the range of $1.20 to $1.30 based on approximately 57 million fully diluted shares outstanding.
Capital expenditures to be around $40 million to support new programs and future opportunities as we continue to invest where needed to support our long-term strategy, and finally, depreciation of approximately $30 million.
Overall, I'm very pleased with our performance this quarter and excited about the opportunity ahead. And now that I am on board. I look forward to meeting with many of you and hearing your perspectives. With that, let me turn it back to Jure.
Jure Sola
Thank you, Jon. Ladies and gentlemen, let me add a few more comments about our financial highlights for the first quarter, and I'll review our end markets and outlook for the second quarter and the rest of the fiscal year '24.
Please turn to Slide 12. For the first quarter. As you already heard, overall, we met outlook and we demonstrated our ability to manage costs and operationally secure in this macro economic environment for the overall market, we are seeing ongoing customer inventory adjustment coupled with softer demand across the industry. What is the main advantage of this environment?
All businesses aligned to adapt to market dynamics like this, where strong cost management and operational execution. We are well diversified in growth markets in the key markets that we focus on our customer requires Sanmina technical capabilities, global regional footprint and industry-leading IT systems managed by Sanmina, smart connected MES. The bottom line is this Sanmina provides a competitive advantage to our customers by delivering predictable and consistent performance globally.
Please turn to slide 13. Let me talk to you now about the revenue by end markets. As we said, we are operating in a very dynamic environment. Our team did a great job delivering first quarter financial results in line with our outlook. As you can see in a graph, industrial, medical, defense and automotive was 67% of our revenue came in at $1,257 million for quarter. Quarter to quarter revenue was down 6.4%. What we saw here is some inventory adjustments and softer demand softness in the medical sector for communication networks and cloud infrastructure. We delivered 33% of revenue or $618 million quarter over quarter was down 12.8%, mainly due to inventory adjustment at communications market and softer demand from end markets. We also saw some softness in cloud and cloud enterprise sector for the first quarter, the top 10 customers represented 45% of our revenue. Bookings for the first quarter were slightly better, then a fourth quarter of '23 demand for the second quarter is sequentially flat, but we expect to see sequential improvements in the second half of fiscal year '24.
Please turn to slide 14. Now let's talk about the markets that that's going to drive the future growth for us. Sanmina has been investing faster, growing at a higher margin end markets. These are key markets for us, cloud defense and aerospace, medical digital health, electrical vehicles, renewable energy, industrial and optical packaging for cloud, basically built around AI/ML. Now we see a lot more new opportunities driven by upgrade our cloud net force to meet air traffic needs for the future.
Defense and aerospace, we continue to see solid demand on medical digital health with a strong base of customers with positive trends for a longer term for electrical vehicles and electrical vehicle chargers. We see a fair amount of new projects and lots of great opportunities in front of us. For renewable energy new projects for us will drive the growth for industrial. We have a solid base of business and new projects in our pipeline and optical packaging for us. It's all about 800 gigs. We see a lot of trends in this side of the business. So I can tell you that the pipeline of the new opportunity is exciting for our future
Please turn to Slide 15. Now let me talk about Sanmina's priorities to drive long-term profitable growth. Number one, Sanmina culture is basically to build everything around customer requirements. We are very customer centric company. Because of that, we're able to build a strong long-term partnership with the market leaders. We have great diversified customer base in key markets. Our strategy, again is to build around the customer needs.
And I can tell you that we are even in this market, we are adding new strategic customers to our existing base. Number two is to continue to provide leading technology in heavy regulated markets. Our technology is a competitive advantage. We provide total solutions from NPI to full systems. We are well respected by our customers and industry for quality of execution. We also deliver time to market flexibility for our customers so they can get their new products to the market at a faster rate.
Number three, Sanmina is positioned for a long-term growth for fiscal year '24, where starting with a lower revenue base. We knew that beginning of the year with all the inventory correction that is going on, but we do have a strong pipeline of new opportunities. We do expect sequential improvements in the second half of fiscal year '24, and we'll continue to invest in the growth opportunities. We also continue to optimize capital structure to adapt to drive the growth in next two to three years.
So this way, I can tell you that the revenue goal is to get back to $9 billion run rate and then drive that growth to $10 billion to $12 billion. But we want to just grow number four for us is margin expansion and cash flow generation. We are focused on margin expansion and our business model will allow us to do that short term.
Our operating margin goal is 5% to 6%. And if you look at the last two years, we were able to deliver those numbers more than a high. And longer term, we believe that our long-term operating margin goal internally is over 6%, 6%-plus. We have high confidence we'll get there and we'll continue to generate cash to drive this growth.
And number five for us is how do we maximize shareholder value short term and long term, as Jon told you earlier, we did repurchase shares opportunistically. For the first quarter, we bought over $100 million and what's also positive in Sanmina business here is there were significant leverage still in our business model.
So now please turn to Slide 16 for the first quarter. As you already heard from us. We had a solid execution and excellent performance by our team revenue of $1.87 billion, in line with our outlook. We delivered a non-GAAP operating margin of 5.5%, and we delivered non-GAAP diluted EPS of $1.30. And this is at the high end of our outlook. For second quarter, revenue outlook going to be at the $1.825 billion to $1.925 billion and non-GAAP diluted EPS, we're guiding between $1.20 to $1.30, which is basically flat to our first quarter for the year.
As we already said, we are seeing ongoing customer inventory absorption absorption and softness in demand for the first half of this year, but we believe for the second half of the year, we expect to see sequential improvements.
Ladies and gentlemen, now we'd like to thank you for all of your time and support. Operator, we're now ready to open the lines for question and answers. Thank you all again.
Question and Answer Session
Operator
(Operator Instructions) Christian Schwab, Craig-Hallum Capital Group.
Christian Schwab
Can you just specifically on the growth markets, can you can you tell us which one or two that you guys are supposed to, but driving the sequential growth in the back half of the year?
Jure Sola
Well, as I mentioned earlier, if you look at our industrial medical defense and aerospace markets, we believe those are mark to market. They're pretty stable for us that there's some inventory adjustments going on now, but we expect to see nice improvements in a third, especially as we exit the fiscal year and then call in the first quarter of calendar year next year.
So those are the markets also when it comes to let's talk about communication networks for us. If you look at that market, we had a major channel inventory correction with some of the projects. There are we based on those, we see some improvements, you know, in the second half and some improvements will probably take longer than a couple of quarters to get there.
But on a cloud infrastructure side, we in a lot of our networking customers are into cloud AI, and we are involved in a lot of the new projects that are coming up that basically will be upgrading the cloud infrastructure. And we believe that some will we'll have a fair amount to participate in that segment in the second half of the year and beyond.
Christian Schwab
So on the communications equipment, part, do you anticipate seeing that exiting this quarter for the most part, it's, customers' inventory levels vary, but do you think after this quarter, the worst is kind of behind you or is there just going to be puts and takes at some point, as you suggested, a few more multiple quarters of digestion and others are possibly returning to ordering again? Is it just I guess that was a clear.
Jure Sola
Yes, I would expect to see improvements in the third quarter of our fiscal year, even cross those markets, but to see more better improvements probably till the fourth quarter and some of that. But I would say worst is behind us and I will see how we go through this quarter.
But I would I don't know if I'm smart enough to know when is the bottom, but I would expect I do expect based on what I see and what I'm hearing from our key customers that definitely third quarter, we should be able to improve our shipments. So I can say that, yes, I think the worst is behind us because some of this communication correction has been going on for the last 2.5 quarters.
Christian Schwab
Right? Yes. So then my last question, Jure, on the optically on your thoughts about sema in Australia, in particular at 800 gig. Are you guys seeing any strength? There are well positioned as the industry and possibly start with a 1.2 terabytes?
Jure Sola
Yeah we are working on some of those new programs. Yes, especially on the pluggable side of the business.
Christian Schwab
Okay. And then you would anticipate that that market would be solid in '24. Is it fair?
Jure Sola
I think it'll definitely there's some positive movement around, but I would say end of the '24, '25, we expect a fair amount of upside in this segment.
Operator
Anja Soderstrom, Sidoti.
Anja Soderstrom
Thank you for taking my questions. Congratulations on the solid quarter here despite the challenging environment. I'd also love to dive a little bit further into the end markets as well.
And the medical there were that we've heard from some other peers there that there has been some inventory corrections there. What are you seeing in terms of that and do you have new programs that are ramping that will sort of upset that if that prolongs longer than anticipated?
Jure Sola
The idea of you know, there is a inventory correction now for us, almost every customer out there, but it's a different level.
Okay. There are some that's not a major impact. And like in communication side, we had a more impact on the medical side during this quarter that we just finished. We had some softness in demand and some inventory correction, and we expect that to continue in the second quarter, and we feel that improvements in our third and fourth quarter of this year. So our base where around 20% of our revenue comes from medical.
So it's a very solid customer base for us. But with us, we also have a lot of programs that are basically changing into the [20 and 24 and 25 in some cases, even to 26]. So in next two years, we have got a lot of new programs that have upside, but also going through some upgrades.
Anja Soderstrom
Okay. And was there any And of this end market with some groups that you're talking about that were particularly strong.
Jure Sola
And then again, we are a defense and aerospace for us is still saw solid solid solid demand. We're still chasing certain parts, especially in some of the unique technology that renewable energy for us is the demand is strong is now, but a lot of these are new programs that are just ramping up. The new programs.
Industrial for us was solid. There was about [27%] of our revenue or so. So that's that's continued to be solid for us. And like, as I said earlier in prepared statement, the you know, on cloud, we're starting to see fair amount of demand from our customers. They are switching to support, AI and ML.
Anja Soderstrom
Okay, thank you. And in terms of inventory, it seems like you're doing a great job in managing that as well. Distinguish you can see continue to see improvement from here? Where are you targeting that?
Jure Sola
Yes, we definitely expect to see improvements. Now with my new CFO, I should have a lot of improvement. So now we do expect improvements. And we have programs internally that we're working very hard on. And with our customers, we will learn a lot through the COVID days and how to manage it. And so on.
So there's a lot of focus both on our customer side and of course, on our side to make sure that we are smarter and going forward, the way we manage inventory, especially if we have a hiccups in the industry like we have with COVID.
Anja Soderstrom
Okay, thank you. And we're talking and eventually achieving $10 billion to $12 billion revenue in a couple of years and 6%-plus operating margin, what kind of revenue level do you think you need for that operating margins?
Jure Sola
I think for us, it's a mix of the business, how much it goes from our technology group and how much does it come from all products. But as we -- as you can see, once we get, you know, closer to the $9 billion-plus I think you know, last year we exited the year almost were, $5.9 billion -- $5.8 billion. And so it wouldn't you know, as we get to the run rate around $9 billion-plus we expect to be in that high fives, low sixes.
But the key for us is the mix. We're investing a lot of these new technology products, some are components. We are investing in some of the defense industries. We are investing into lithography. You know, we get some European partners there that we have with lithography equipment, precision, machining and so on. So we've got a lot a lot of on our plate.
And I think as long as those things come together the way, because we already spent a lot of the money for growth. So we've got to grow. I mean, that's the whole focus. We are internally, but we've got to grow smart. We don't want to grow for growth's sake. We're going to make sure that we have a respectable margins.
All right. Operator, we have time for one more question.
Operator
(Operator Instructions) Ruplu Bhattacharya, Bank of America.
Ruplu Bhattacharya
Thanks for taking my questions. Appreciate it. I have a few questions. Let me start by welcoming Jon.
Thanks. So it's good to have you on board. Maybe can you just tell us what your maybe top two, three focus areas are over the next 12 months.
Yes. Thank you, Ruplu. It's nice to connect with you and looking forward to speaking more with you a couple of things, right. So number one, I would just say in the business right, that that is the top priority for me, as I mentioned in my prepared remarks, have been here for about six weeks and been spending a lot of time meeting with the leadership team.
In my first week here, I was able to make a trip down to the Guadalajara and that was very important is to be able to see our capabilities first hand at one of our major facilities, and I've done some in the Bay area too. And then really just getting into the details of the business. So just a couple of weeks back as we were preparing for for this earnings call, kind of in the normal course of business.
We went through all of our quarterly business reviews. So that was a great opportunity for me to dig in deep. So all the respective divisions learn about what's happening in the market, what's going on with our customers and helping to decide what our priorities need to be right to drive some of the things you're talking about with R&D as an example, where do we see opportunity to drive operational improvements, whether it be in inventory or otherwise kind of a national.
Another question and either you or you can chime in. So this quarter, the CPS segment saw about 220 basis points of sequential improvement on revenues that were sequentially down. I mean, part of this, you said is mix part of this is operational improvements. I'm trying to see if you can parse that out because if we look from 1Q to 2Q, as you have in years past, you had margins decline. So so how much of this is structurally sustainable at this 13% level? And how would you characterize this as a mix related versus operational, more structural improvements?
Jure Sola
Yes, Ruplu, let me -- this is Jure. Let me kind of give you an overview of what was going. What's going on last quarter. As we said, you know, definitely there were some inventory adjustments, the effect on fact that the revenue for us similar to the other businesses, we believe the components business, we're starting to see the light end of the tunnel. We're seeing because when you as the demand comes back is going to come in our component businesses first, okay?
So we're starting to see some of that right now so that we the key to that, our goal for our components, products and services route poised to get that minimum 15%. So yes, it sustainable and it's I think it's now for us. It's all about getting the revenue we might have short term plus or minus, you know, percentage there are up and down, but I think the longer term, just programs that we are working on and what we have in front of us and investments that we already made, Ruplu, into our factories.
And you have to have a timely come to the various will take you around and show you some of the investments that we made in the component side of the business is really to help us not just drive the revenue, but to go after the business that is more profitable. So Jon, you want to add something to add?
Jon Faust
Yes, what you learned in the last few weeks, as I said, just in the six weeks that I've been here, but CPS is a big priority for us.
I think I would add to what you're saying and really just focusing on expanding and adding more value for our customers. And if you look along the different lines of businesses there from precision machining, plastics, printed circuit boards in all of them, we saw some good operational improvements. But we think that there is more that we can do there to Jure's point to continue to grow that business, add value for our customers and expand margin.
Ruplu Bhattacharya
Okay. Thanks for the details there. Since you mentioned revenue a couple of times, I think, Jure, you've said that you expect sequential growth in the second half. If I look at consensus estimates, I mean, consensus is modeling double digit growth sequentially for both 3Q, 4Q. What do you think about that? I mean when you talk about sequential improvement, I mean, is that the kind of level of improvement you're expecting like double-digit sequential growth. Any color on that? Like what how strong a growth are you expecting?
Jure Sola
Yes. We're guiding Ruplu strictly to make sure that we are clear here. We're only guiding one quarter at a time at a time in this environment. But I can, you know, as we get into the third quarter, especially in the fourth quarter, you know, four quarters is going to be upside. The question is how much. Okay, and it can be it can be a double digits.
Okay. For the third quarter. I think it will be up, but it's really hard for me right now, too speculate that how much, you know, it all depends how inventory shake out, but our customer base and the new programs that are coming up or, you know, can drive the growth. We're just going to see it. So I don't want to overcommit, but I can commit that the longer term this company is positioned to be a lot bigger than what we just did.
Ruplu Bhattacharya
Okay. Thanks for that. And maybe I'll just trying to squeeze one more in. You also talked about strong free cash flow this quarter and inventory went down. I mean, how is there a target? Like how should we think about free cash flow, typically EMS companies. If the economy is weak, the countercyclical balance sheet, you should have strong free cash flow. Any thoughts on free cash flow, sustainability and thoughts for free cash flow for the full year?
Jure Sola
Yes. I mean, hope, you know, this business is just as good as I do. Yes, definitely we should be generating in a down market. We should be generating a fair amount of free cash flow as we did last quarter and we utilizing our cash properly, our stock is a high value. So we bought over $100 million of that we continue to invest.
Yes, we expect to be, you know, cash flow free for a year. I mean, if you look at historically, you know, we've been generating free cash flow around $200 million, $250 million, and we should be at that level.
Ruplu Bhattacharya
For fiscal '24?
Jure Sola
Just in the general term we'll just see how we how this inventory gets used up in the short term. So I think -- I think that's good. And I think that short term, it's all you know, that.
First of all, the good thing about inventory, Ruplu, you know, in our industry that we have our contracts where we only buy what is our customers tells us to buy and they are 100% responsible for this inventory. We charge for carrying charges and et cetera. But just getting these things off our books and turn it into the cash might take a little bit more than just three months.
Well, all right. Well, first of all, I like to say thank you to all our participants and if we didn't answer all your questions, as Jon said, you know, we're available, especially for Jon right now as he wants to get to know you. So please give us a call. Thanks a lot.
Jon Faust
Thank you, everyone.
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
