Sanmina Corporation (NASDAQ:SANM) Q2 2023 Earnings Call Transcript May 11, 2023

Sanmina Corporation beats earnings expectations. Reported EPS is $1.59, expectations were $1.55.

Operator: Welcome to the Sanmina’s Second Quarter Fiscal 2023 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the conference over to the 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 three 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.

The company’s actual results could differ materially from those projections in these statements as a result of a number 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 1st, 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, non-cash 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 a mention of the restatement of historical results in our press release. One of our divisions accounts for approximately 3% of total revenue and is 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 extend contract has any actual or anticipated overruns, the company may seek the ability to seek recovery from its customer.

During the preparation of our Q2 FY 2023 financial statements, the company determined that certain personnel 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 FY 2020 FY 2021 respectively. Also understated by $29.1 million in FY 2023, it overstated by $5.6 million in Q1 FY 2022. I’m sorry, I should have said $29.1 million in FY 2022, apologize. Q — GAAP EPS was overstated by approximately $0.09, $0.23, and $0.25 in FY 2022, 2021, and 2022, respectively and understated by $0.06 in Q1 FY 2023. For more details on this, please see the 8-K we filed today.

Now, on to the second quarter. Please turn to slide five. Our team did an outstanding job delivering strong financial performance. Q2 revenue of $23.2 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 six. If you compare our Q2 FY 2023 results with Q2 FY 2022, revenue grew 21% from $1.92 billion to $2.32 billion. Operating margin improved from 4.7% in Q2 FY 2022 to 5.8% in Q2 FY 2023, and finally, EPS grew over 50% from $1.05 in Q2 FY 2022 to $1.59 in Q2 FY 2023.

Please turn to slide seven. 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 prior year. Non-GAAP operating margins have continued to improve over time with the first half non-GAAP operating margins of 5.9%. Finally, continuation of our current run rate for EPS for FY 2023 for the rest of the year would result FY 2023 EPS over $6 compared to FY 2022. Now please turn to slide eight. First half of FY 2023, IMS revenue was $3.9 billion. This is primarily due to the continued improvements in the supply chain. First half FY 2023 CPS revenue was $889 million.

First half non-GAAP gross margin for CPS improved to 13.2% to FY 2022. Now please turn to slide eight. 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. Turning to slide nine. We continue to remain focused on efficient cash management.

Cash cycle days were approximately 50 days in Q2 and non-GAAP pre-tax 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% dependent on product mix. Non-GAAP operating expenses are expected to be in the range of 60% to 62%, 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 non-cash reduction to net income to reflect our JV partners 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, dollars 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 is 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 2023. As you heard from Kurt, for the second quarter, Sanmina delivered strong results with a 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 and execution of our strategy. Now, let’s talk — turn 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 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 2023. 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 2023. We’re on track to deliver year-over-year mid-teens revenue growth for fiscal year 2023, 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 2024 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, what I call, 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 improve 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.

Q&A Session

Operator: [Operator Instructions] And our first question comes from Christian Schwab from Craig-Hallum. Your line is open.

Operator: Thank you. And our next question comes from Anja Soderstrom from Sidoti. Your line is live.

Operator: [Operator Instructions] And 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.