Q2 2023 Sanmina Corp Earnings Call
Participants
Jure Sola; Co-Founder, Executive Chairman & CEO; Sanmina Corporation
Kurt Adzema; Executive VP & CFO; Sanmina Corporation
Paige Melching; SVP of Investor Communications; Sanmina Corporation
Anja Marie Theresa Soderstrom; Senior Equity Research Analyst; Sidoti & Company, LLC
Tyler Leroy Burmeister; Associate Analyst; Craig-Hallum Capital Group LLC, Research Division
Presentation
Operator
Welcome to Sanmina's Second Quarter Fiscal 2023 Earnings Conference Call. (Operator Instructions)
I would now like to turn the call over to Paige Melching, Senior Vice President of Investor Communications. You may begin.
Paige Melching
Thank you, Paul. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Second Quarter Fiscal 2023 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.
Jure Sola
Good afternoon.
Paige Melching
And Kurt Adzema, Executive Vice President and Chief Financial Officer.
Kurt Adzema
Good afternoon.
Paige Melching
Our agenda for today's call is Kurt will review the details of our financial results, and Jure will follow up with additional comments on the results and our future goals. Then we will open the call up for questions.
Before I turn the call over to Kurt, 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 in the slides provided on our website.
Please turn to Slide 3 of the 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. The company's actual results could differ materially from those projections in these statements as a result of factors set forth in our safe harbor statement. The company is under no obligation and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in the earnings release, the earnings presentation, this 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 operations for the quarter ended April 1, 2023, and -- 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 website.
In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, noncash stock-based compensation expense, amortization expense 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, net income and earnings per share, we are referring to our non-GAAP information.
I'd now like to turn the call over to Kurt.
Kurt Adzema
Thanks, Paige. Before I discuss the Q2 results, I'd like to discuss [and mention] of the restatement of historical results in our press release. One of our divisions, which accounts for approximately 3% of total revenue and as part of our CPS business, primarily enters into long-term fixed price customer contracts on a project basis. GAAP requires that the estimated amount of revenue and profit expected to be realized upon completion of a profitable contract is recognized over the life of the contract. However, if a contract is expected to be unprofitable upon completion, 100% of the loss must be recognized in the period in which it is initially estimated that a contract will result in a loss upon completion.
To the extent a contract has any actual or anticipated overruns, the company may seek the ability to seek recovery from its customers. During the preparation of our Q2 FY '23 financial statements, the company determined that certain personnel in the division had failed to properly substantiate and update cost estimates for materials and other costs over the life of certain contracts. Primarily as a result of these findings, revenue was overstated by approximately $10.2 million and $18.3 million in FY '20 and FY '21, respectively. It's also understated by $29.1 million in FY '23 and overstated by $5.6 million in Q1 FY '22. I'm sorry, I should have said $29.1 million in FY '22. Apologies. Two, GAAP EPS was overstated by approximately $0.09, $0.23 and $0.25 in FY '20, '21 and '22, respectively, and understated by $0.06 in Q1 FY '23. For more details on this, please see the 8-K we filed today.
Now on to the second quarter. Please turn to Slide 5. Our team did an outstanding job delivering strong financial performance. Q2 revenue of $2.32 billion exceeded the high end of our outlook of $2.2 billion to $2.3 billion despite Q2 typically being a seasonally down quarter. This was primarily due to continued improvements in the supply chain. Non-GAAP gross margin was 8.4%. Non-GAAP operating margin was 5.8%. Non-GAAP fully diluted EPS was $1.59 at the upper end of our guidance range of $1.50 to $1.60. Finally, Q2 GAAP fully diluted EPS was $1.33.
Please turn to Slide 6. If you compare our Q2 FY '23 results with Q2 FY '22, revenue grew 21% from $1.92 billion to $2.32 billion. Operating margin improved from 4.7% in Q2 FY '22 to 5.8% in Q2 FY '23. And finally, EPS grew over 50% from $1.05 in Q2 FY '22 to $1.59 in Q2 FY '23.
Please turn to Slide 7. This shows the strong annual trends of our financial results, including revenue, operating margin and EPS. We're off to a strong start in the first half of fiscal 2023.
First half of fiscal 2023 revenue was $4.7 billion and is on track for full year to grow in the mid-teens relative to the prior year. Non-GAAP operating margins have continued to improve over time, with the first half non-GAAP operating margins up 5.9%. Finally, continuation of our current run rate for EPS for FY '23 for the rest of the year would result in FY '23 EPS over $6 compared to FY '22.
Now please turn to Slide 8. First half of FY '23 IMS revenue was $3.9 billion. This is primarily due to the continued improvements in the supply chain. First half FY '23 CPS revenue was $889 million. First half non-GAAP gross margin for CPS improved to 13.2% relative to FY '22.
Now please turn to Slide 8. We continue to have a very healthy balance sheet that provides our company a competitive advantage. Cash and cash equivalents at the end of the quarter was $718 million. There were no borrowings under our $800 million revolver at the end of Q2.
Cash flow from ops for the quarter was $65 million. Capital expenditures were approximately $63 million. At the end of Q2, we had approximately $164 million of authorization of share repurchases, and the Board recently approved an additional $200 million of authorization. The company will continue to be opportunistic as it relates to repurchasing shares.
Turn to Slide 9. We continue to remain focused on efficient cash management. Cash cycle days were approximately 50 days in Q2, and non-GAAP pretax ROIC was 33.9% for Q2.
Finally, please turn to Slide 10. Let's talk about the Q3 outlook. Coming off of a very strong Q2 and given the continued uncertainty related to supply chain as well as the macroeconomic and political environment, we expect Q3 revenues to be in the range of $2.2 billion to $2.3 billion. We expect non-GAAP gross margin in the range of 8.2% to 8.7% depending on product mix. Non-GAAP operating expenses are expected to be in the range of $60 million to $62 million and non-GAAP operating margin in the range of 5.5% to 6%. We expect non-GAAP interest and other expenses to be approximately $15 million driven by the continued increases in interest rates.
In addition, we estimate an approximate $3 million noncash reduction to net income to reflect our JV partner's equity interest in the net income of our Indian joint venture. We expect non-GAAP tax rate of approximately 17.5% and non-GAAP fully diluted share count of approximately 60 million shares. When you consider all of this guidance, our outlook for non-GAAP EPS is in the range of $1.50 to $1.60. We expect Q3 capital expenditures to be around $60 million driven by growth of new programs and the support of future growth. We expect Q3 depreciation of around $30 million.
Overall, we are very pleased with our recent results. That being said, we continue to believe that there's an opportunity to further improve our business model over the long term.
And with that, I'll turn it over to Jure.
Jure Sola
Thanks, Kurt. Ladies and gentlemen, first of all, I got this bad cold. And hopefully, you can understand me, but I think I can get through it. So again, thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina leadership and our employees for doing a great job, as you heard from Kurt. So to you, Sanmina team, thank you, and let's keep it up.
Let me add a few more comments about financial highlights for the second quarter, and I'll review the end markets and outlook for the third quarter and the rest of the fiscal year '23.
As you heard from Kurt, for the second quarter, Sanmina delivered strong results with great operational execution, and our supply chain for semi components got a lot better, and that allowed us to ship more. Our Sanmina team has done an outstanding job. Despite ongoing macroeconomic uncertainty, these results are a reflection of our continued focus on execution of our strategy.
Now let's talk -- turning to Slide 14 -- sorry, to Slide 13. Let's talk about revenue for the second quarter by end markets. For the second quarter, demand for the products was stable across most of the markets. For industrial, medical, defense and automotive, we delivered $1.362 billion. The growth was quarter-over-quarter 2% and year-over-year growth of 18%. Communication networks and cloud infrastructure was $958 million, pretty strong for the second quarter that was down slightly of 6% and a strong growth year-over-year of 27%.
Typically, for a second quarter seasonality -- seasonally, this is a down quarter, but we had -- this quarter was stronger than typical as we delivered $2.32 billion. So quarter-over-quarter was flat, slightly down 2%, but year-over-year growth was very strong, up 21%. Also, we continue to diversify our customer base. As you can see, our top 10 customers for the second quarter was 49% of our revenue.
Please turn to Slide 14. Let me talk to you about our third quarter outlook and fiscal year '23. First of all, we expect to see nice growth quarter-over-quarter for the third quarter. As you heard from Kurt, our revenue forecast is about $2.2 billion to $2.3 billion. For industrial, medical, defense and automotive markets, we expect to see nice growth year-over-year. And communication networks and cloud infrastructure, we also expect to see a nice growth year-over-year.
As you can see, Sanmina does not serve consumer markets at all. Our focus is on high complexity, heavy regulated markets.
Now let me talk to you more about fiscal year '23. We're on track to deliver year-over-year mid-teens revenue growth for fiscal year '23, and we expect to deliver margin expansion and EPS growth. I can tell you that Sanmina has well diversified customer base, and it's growing. We'll continue to invest in talent and leading technology to support the growth for fiscal year '24 and beyond.
Overall, we are expanding our capacity into more profitable projects. So let me give you some example. For medical, defense and automotive, first of all, these markets were well established. At the same time, we have large opportunities as we look in the future, both on the new programs and some programs that are in the pipeline. For industrial, we also see some more growth through revenue -- renewable energy, grid management, public safety equipment, a fair amount of (inaudible) precision, electromechanical system across many industrial projects. For communication and cloud infrastructure, we focus on the new products around networking and storage products. These businesses should produce higher margin and long-term growth and stability.
Let's talk about management through this challenging macro environment. We have positioned the company to be able to navigate any market dynamics. Sanmina's embedded resiliency in our focused market space, and we have strong global management to do the job. Sanmina is well positioned for any economical environment, but we are continuing to monitor market conditions.
Our focus today is on quality of our customer base, building right and lasting partnerships. We focus on continuing to diversify revenue growth with market leaders in mission-critical products. We continue [improved] productivity. Yes, we are focused on quality of earnings and consistency for short term and the long term.
Please turn to Slide 15. In summary, for the second quarter, we delivered solid execution, both on top and the bottom line results. Our priorities have not changed. Our strategy is working, and it's delivering results. We'll continue to make investments for the future growth, and I can tell you that we are excited about the future.
With that, ladies and gentlemen, now I would like to thank you all for your time and support. Operator, we're now ready to open lines for question and answers. Thank you again.
Question and Answer Session
Operator
(Operator Instructions) And our first question comes from Christian Schwab from Craig-Hallum.
Tyler Leroy Burmeister
This is Tyler on behalf of Christian. I guess, first, inventories came down nicely sequentially quarter-over-quarter, about $1.5 billion. I guess I was wondering if you could help maybe level set us what you kind of think a normalized level as your business is larger than it was a couple of years ago and maybe any decisions you made about what level you want to manage those inventories going forward given the constrained environment we just went through.
Jure Sola
Yes. Before I turn you over to our CFO, let me -- we believe that our inventory turns should be a lot better than where they are today. And we have -- because of the shortages that we experienced over the last 2 years, it forced us to really -- our customers ask us to basically buy more inventory. Good thing is our customer is 100% committed to those inventories, and we expect it to continue to work down in the next couple of quarters. With that, I'll turn it over to Kurt.
Kurt Adzema
Yes. I think if you look overall, our inventory levels over the last couple of years have obviously dramatically increased. I think ultimately, how we think of inventory is inventory turn. And I think we've gotten our turns historically (inaudible) 3 years to almost 6 to 7x and have -- ideally get it to 8. So we've got a lot opportunity to further improve that. It won't happen overnight. But as Jure said, we should start to see some benefit as we progress through the fiscal year and into 2024.
Again, we are starting to see and continue to see improvement in the supply chain. And so that should help normalize things, but it does take a while -- multiple quarters to -- for things to normalize. So I would say not normal until next fiscal year, most likely, but we will make progress.
Tyler Leroy Burmeister
That's great. I appreciate that. And then maybe following up on that then, regarding your cash balance, also very strong. And as you work that inventory down, should only grow as well as continue to drive free cash flow. So expanded your share buyback, which looks great. I guess how much excess cash do you have or rather what's a comfortable level of cash that you'd like to run your business with?
Kurt Adzema
Well, again, I think we -- as we talked, we have the strongest balance sheet in the industry. We feel very good about our cash position and the lack of leverage there. I think that being said, we're going to be cautious and only opportunistic as it comes to share repurchases. So I think by adding to the authorization, it gives us flexibility over the coming months. But at the same time, I think we're going to do what's best for shareholders.
Cash tends to vary a lot with inside of a quarter. We tend to spend a lot of cash at the beginning of the quarter and then collect a lot of cash at the end of the quarter. So it's really hard to say what's the "right" level of cash. But needless to say, we feel very comfortable with our balance sheet, and it's the most unlevered candidly, I believe, in the industry.
Operator
And our next question comes from Anja Soderstrom from Sidoti.
Anja Marie Theresa Soderstrom
Congratulations on the good quarter. And Jure, I'm sorry, I'm feeling [with you], running on my second week of cold myself. In terms of the revenue guidance for the third quarter, it sort of indicates a slight decline, right? (inaudible)
Kurt Adzema
Again, we finished at $2.32 billion. The guidance is $2.2 billion to $2.3 billion. So...
Jure Sola
I would say it's flat, slightly down, the guidance.
Anja Marie Theresa Soderstrom
Okay. And in terms of the communication networks, you had a decline in that as well. What are you seeing in terms of that? I'm hearing from others that there are some delays, and things are getting pushed. Are you seeing the same? Are you seeing something else?
Jure Sola
Well, as I said earlier, Anja, we are operating right now in this macro environment. There's a lot of changes going on. The good thing is it seem like demand is still there, but I think there are some moving parts that get pushed out here and there. Definitely in some of the communication projects, that is true. But we had a pretty good quarter in the second quarter. Actually, the last 2 quarters in communication and cloud were very strong, as you can see.
So I'm personally happy with -- in this environment, Anja, where we are. And I think we are -- we can still deliver the good financial numbers even in these numbers. But we'll see. We're still going to push for (inaudible) we try to do every quarter.
Anja Marie Theresa Soderstrom
Okay. And in terms of the cash cycle days, what is -- on a normalized basis, what are you targeting to get that down to?
Kurt Adzema
Well, I think, again, it's -- if you look at how we manage cash cycle days over time, we've typically kind of been in the -- in those 50 ranges, plus or minus. So I think it's -- obviously, as inventory comes down, and that's helpful, but at the same time, accounts payables come down as well.
So if you look at our history, we've actually, over the last 3 years, despite all the challenges, have managed it pretty consistently in those 50s range. So I'd expect it to be in there, but we're always looking to be more efficient.
Anja Marie Theresa Soderstrom
Okay. And a follow-up on Craig-Hallum's in terms of your anticipated improved balance -- further improved balance sheet. Do you think -- are you at all considering a dividend?
Kurt Adzema
We've looked at that at times. So we'll -- and we'll continue to evaluate that, but we have no intention at this time.
Operator
(Operator Instructions) Seeing no further questions, I'll turn the call back over to management.
Jure Sola
Paul, thanks a lot. First of all, ladies and gentlemen, thank you very much. I'm sorry that I can't yell today. Hopefully, I'll get a lot better for the next quarter. So with that, I appreciate your support. Thanks a lot.
Kurt Adzema
Thank you.
Operator
That concludes today's conference call. Thank you for joining, and have a pleasant day.
