Sanmina Corporation (NASDAQ:SANM) Q2 2024 Earnings Call Transcript

Sanmina Corporation (NASDAQ:SANM) Q2 2024 Earnings Call Transcript April 29, 2024

Sanmina Corporation beats earnings expectations. Reported EPS is $1.3, expectations were $1.26. SANM isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, ladies and gentlemen, and welcome to Sanmina’s Second Quarter Fiscal 2024 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Paige Melching. Please go ahead.

Paige Melching: Thank you, Jenny. Good afternoon, ladies and gentlemen, and welcome to Sanmina’s Second Quarter Fiscal Year 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.

Jure Sola: Good afternoon.

Paige Melching: And Jon Faust, Executive Vice President and Chief Financial Officer.

Jon Faust: Good afternoon.

Paige Melching: 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 in 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. The 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 and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in these earnings release the earnings presentation, 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 operations for the second quarter ended March 30, 2024, on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP financial information excludes restructuring costs, acquisition and integration costs, noncash stock-based compensation expense, amortization expense and other unusual earned frequent 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, net income and earnings per share, we’re referring to our non-GAAP information.

I would now like to turn the call over to Jure.

Jure Sola: Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome, and thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina’s leadership team our employees for doing a great job. So, to you, Sanmina’s team, thank you for your dedication and delivering excellent service to our customers, and let’s keep it up. Now let’s go to our agenda for today’s call. We have Jon to review details of our results for you. I will follow up with additional comments about Sanmina’s results and 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. Thank you for joining us here today. Before we go through the financial results, I want to acknowledge the entire Sanmina team for executing and delivering financial results in line with the company’s outlook and continuing to do an excellent job. Now let’s talk about the Q2 results. Please turn to Slide 5. I Second quarter revenue was $1.835 billion at the low end of our $1.825 billion to $1.925 billion guidance range, which is down approximately 2% sequentially. We believe the business has leveled out from a revenue perspective, and we expect to see improvements in the quarters ahead as customer inventory absorption headwinds dissipate, which Jure will comment on more in his prepared remarks.

Non-GAAP gross margin was 8.9%, which exceeded the high end of our outlook and was up 10 basis points sequentially and 50 basis points compared to the same period last year. We’re very pleased with this gross margin result, which is due to a combination of favorable mix, focused execution and strong operating discipline. Non-GAAP operating expenses were $63.6 million, slightly above our outlook of $60 million to $62 million, primarily driven by incremental expense related to our deferred compensation plan which was completely offset by an asset gain in the other income and expense line item. Non-GAAP operating margin was 5.4%, which was at the midpoint of our outlook and down slightly at 10 basis points sequentially and 40 basis points compared to the same period last year.

This operating margin result was also impacted by the incremental deferred compensation expense that I noted earlier, but is still solidly in the short-term range of 5%, 6% that we set earlier this year. Non-GAAP other income and expense was $6.5 million, favorable to our guidance of approximately $12 million driven by the asset gain that I mentioned previously as well as higher interest income due to our strong cash generation results and less interest expense due to lower usage of our revolver. Non-GAAP earnings per share came in at $1.30 based on approximately 57 million shares outstanding on a fully diluted basis and at the high end of our outlook. Now please turn to Slide 6 to talk about the segment results. IMS revenue came in at $1.46 billion, down approximately 3% sequentially.

However, IMS non-GAAP gross margin was up 10 basis points sequentially to 7.7% due to strong operational execution and our continued focus on driving manufacturing efficiencies. CPS revenue came in at $398 million, up slightly at about 1% sequentially, and non-GAAP CPS gross margin was down 10 basis points sequentially to 12.9% and due to unfavorable mix. While we’re pleased with these results, we continue to see opportunity for margin improvement in both the IMS and CPS segments going forward, further supporting our longer-term margin objectives. Now please turn to Slide 7 to talk about the balance sheet. Our balance sheet is a key advantage of the company and a pillar of our value proposition to investors, and the team did a great job managing it again this quarter.

Cash and cash equivalents were $651 million. At the end of the quarter, we had no borrowings on our revolver, leaving us with substantial liquidity of over $1.5 billion. We ended the second quarter with inventory of $1.38 billion, down slightly sequentially, and inventory turns were 4.8%, up slightly sequentially. We continue to focus on improving our inventory position and increasing turns. Our non-GAAP pretax ROIC was 22% for the quarter, well above our weighted average cost of capital. We continue to have one of the strongest balance sheets in the industry with a low leverage ratio of 0.57 times, which allows us to both navigate complex market environments and capitalize on the long-term opportunity in front of us simultaneously. Please turn to Slide 8, where I’ll talk about cash flow and capital allocation.

We did a great job managing cash this quarter, and I’m confident we are putting our cash to use in the right areas. To touch on a few highlights. Cash flow from operations was $72 million for the quarter and approximately $200 million for the first half. Capital expenditures were $30 million for the quarter as we continue to make investments in the end markets that will support Sanmina’s long-term profitable growth. Free cash flow was $43 million for the quarter and $135 million for the first half. During the quarter, we repurchased 28,000 shares for approximately $1.4 million. And for the first half, we’ve repurchased 2.2 million shares for approximately $107 million. As of March 30, we have approximately $172 million left on our Board-authorized plan and we intend to continue to repurchase shares on an opportunistic basis.

Our focus and execution on cash generation provides us with the flexibility to invest in the business. When making those investment decisions, we look for opportunities to drive shareholder value while taking a disciplined ROI-based approach, which is a practice we will continue to follow going forward. To conclude on the Q2 actual results. Overall, it was a strong quarter as we delivered on what we said we would, and we continue to set up the company for future success. Now please turn to Slide 9. I’ll now cover our outlook for the third quarter, which is based on what we are seeing in the market and forecasts from our customers. Our outlook is as follows: revenue between $1.8 billion to $1.9 billion, up slightly sequentially. Now in this type of market environment, we believe it’s prudent to continue with our practice of only guiding 1 quarter at a time.

But we are seeing signs that demand and revenue are starting to improve, which Jure will elaborate on shortly. Non-GAAP gross margin of 8.3% to 8.9%, up slightly sequentially and dependent on mix. Operating expenses of $60 million to $62 million, in line with normal levels. Non-GAAP operating margin of 5.3% to 5.7%, up slightly sequentially. We expect other income and expense to be approximately $12 million, in line with normal levels. Tax rate of 17% to 18%. We estimate an approximate $3 million to $3.5 million noncash reduction to our net income to reflect our India JV’s partner’s equity interest. Non-GAAP EPS in the range of $1.22 to $1.32 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 as we delivered on what we said we would. With that, let me turn the call over to Jure to talk more about the business.

Jure Sola: Thank you, Jon. Ladies and gentlemen, let me add a few more comments about our second quarter, and I’ll review our end markets and outlook for the third quarter and the rest of the fiscal year 2024. Please turn to Slide 11. As you heard from Jon, for the second quarter, we delivered good results. Overall, we met our outlook. We are seeing stabilization in some of our end markets and incremental improvements in demand. Recovery is slightly slower than expected at the beginning of the year, but we are working very closely with our customers as they are burning through their inventory. I can tell you that macroeconomic uncertainty remains. But Sanmina team continues to demonstrate resilience and deliver good financial results in this environment.

So, what is the main advantage in big market? I can tell you that we are well diversified in growth markets. Sanmina has a strong customer base of market leaders to help us to get through this environment. We are working very closely with our key customers with existing and new projects to drive growth as market improves. Our business is well aligned to adapt to present market dynamics. We have strong cost management in place. We have aligned our cost to present business demand. And as Jon mentioned, Sanmina Industry’s leading balance sheet gives us a lot of flexibility to maximize the shareholder value. So please turn to Slide 12. Now let me talk to you about revenue by end markets. Revenue for second quarter was $1.835 billion, roughly slightly down approximately 2% quarter-over-quarter within our guidance.

I can say the forecast were more predictable this quarter. Industrial, medical, defense, aerospace and automotive was 67% of our revenue, slightly down 2.5% quarter-over-quarter. For defense, aerospace and automotive, we saw good demand during this quarter. For communication networks, cloud infrastructure that was 33% of our revenue, slightly down 0.5% quarter-over-quarter. Also, I can tell you that we had a higher demand from new projects in communication networks and cloud segment, but we could not ship it because of material shortages and some testing capacity issues. These issues will be resolved in our third quarter. For second quarter, top 10 customers represented 48.5% of our revenue. We’re a well-diversified company. And we have no customers over 10% plus.

I can also tell you that the bookings for second quarter improved nicely. Book-to-bill was 1.1 plus to 1. Newer products are driving demand. Please turn to Slide 13. Sanmina has continued to invest in a faster-growing and higher-margin end markets. such as cloud infrastructure, defense and aerospace, medical, automotive, renewable energy, industrial and optical advanced packaging. So, let me make a few comments on each of them. For cloud infrastructure, AI and ML is driving new opportunities for us. We’ve been driving — it’s mainly been driven by upgrades in our cloud networks to meet AR traffic needs. Sanmina is well-positioned to benefit from growth in AI. We have benefited some right now and the rest of the ’24, but we’re expecting to see more benefits and bigger opportunities in calendar year 2025.

For defense and aerospace, we continue to see solid demand. new program wins are driving our long-term growth. For Medical, our focus is on digital health and medical devices, such as disposable consumables, drug delivery, surgical, diagnostic imaging and lab diagnostic systems. We have a strong base of customers, and we are well-positioned here. We see positive trends long term. For a motive, we mainly focus on electrical vehicle and electrical charges. Short-term demand is softer but our new opportunities will drive the growth. We see a better forecast for September and December quarter, and we expect to see improvements in demand longer term as we enter fiscal year — calendar year ’25 and beyond. For renewable energy, we continue to win new projects.

We’ve been focusing around generation and storage of power, power controls and management. Here same thing, new opportunities are driving the growth for us. For Industrial, we have solid customer base. We see stable demand. We’ve been focusing on factory automation, test and measurement and inspection equipment. For semiconductor part of the industrial, we focus on lithography. That business for us has been stable, but we should see more improvements in the second half of ’24. Overall, we have solid new projects in the pipeline that will drive the growth longer term. For Optical Advanced and Packaging, we expand this optical business for AI applications mainly around 800 gig modules, and we’re starting to do the R&D and new product introduction of 1.6 terabytes.

Again, good opportunities here. Growth in cloud and data center will drive the growth for this segment for longer term. Please turn to Slide 14. I just wanted to show you a few slides — I mean a few pictures on this slide to see where Samina participates in AI and ML today. As you can see, for AI and ML for infrastructure such as communication, cloud infrastructure across multiple product lines such as servers, IC hardware, software development semiconductor capital, optical components, such as optical modules, powder controls, power management, networking equipment and service and storage. Consumption of AI and ML is going across all our markets such as automotive, transportation, safety, security, health care, defense and aerospace. And then, of course, what we’re doing internally utilizing AI/ML by automating our factories and machine learnings and back office.

So, as you can see, we are heavily involved in AI, and I believe this will drive a better future for us. Please turn to Slide 15. In summary, for second quarter, we had solid execution, revenue of $1.83 billion, in line with our outlook. Non-GAAP operating margin, 5.4%, non-GAAP diluted EPS of $1.30, high end of our outlook. So overall, respectable quarter. For third quarter, our end market outlook, as Jon mentioned, is what we’re seeing from our customers today. The third quarter will have a guidance of $1.8 billion to $1.9 billion. Non-GAAP EPS will be at $1.22 to $1.32. On positive side, our visibility is getting better, and we’re starting to see more or I should say, some normalization of supply chain. For fourth quarter, we remain optimistic that we will see sequential improvements as we move into the second half of the year.

And we are starting to see stronger forecast for our September quarter as we are getting our forecasting. I can tell you that I’m personally excited about long-term growth for Sanmina. As I said before, fiscal year 2024 is a transition year for us. We are navigating these market dynamics pretty well. Short term, our operating margins are holding and they’re stable in the range of 5% to 6%. At the same time, longer term, we are positioning the company by making changes and improvements to drive operating margin to 6-plus percent. We expect that the fiscal year ’25 will be a growth year for our end markets, and our focus is to drive the growth in a heavy regulated market, we believe that’s where we have competitive advantage, and we’ve got positioned there.

So, in summary, for short term and long term, Sanmina is well positioned to manage through this dynamic market. Ladies and gentlemen, now I would like to thank you all for your time and your support. Operator, we’re now ready to open the lines for question and answers. I’d like to say thank you again. Operator?

Paige Melching : Jenny, are you there?

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Q&A Session

Operator: [Operator Instructions]. Your first question is from Ruplu Bhattacharya from Bank of America. Please ask your question.

Ruplu Bhattacharya : Thank you, for taking my questions. The Communications and Cloud segment was down 36% year-on-year. Can you help us parse that? How much was communications down and how much did cloud grow? And can you give us some more details within that segment? I mean how are you seeing inventory correction being in that segment? And how did optical versus networking versus wireless? How did the different end markets within communications, how did they pan out this quarter? And how do you see trending over the next couple of quarters?

Jure Sola : Ruplu, thanks for the question. First of all, there’s no surprise that communication market has been down now, in my opinion, for the last three quarters, mainly driven by inventory adjustments and some softer demand in certain segments. But you asked the question, when is going to end? I believe we come in to the bottom of it. As I said, we’re starting to see some normalization when it comes to supply chain and we’re starting to see some more predictable forecast. And most importantly, as I said, I think as we go forward, I think our visibility is better and so on and so on. I think back to — I think, on the cloud itself is doing better for us. That’s about — if you — today, if you look at 33% of the revenue, about half of that is cloud and half of it is communication networks.

A lot of the business that we do is around the networks and optical networks, Ruplu. But the whole communication demand has got affected, especially around 5G and so on and so on. So — but it’s — on the positive side, we’re starting to see the light end of the tunnel, and it’s not a train anymore.

Ruplu Bhattacharya: Got it. That’s helpful. Maybe as a follow-up, Jure, I can ask you. On Slide 13, you talk about Sanmina’s expertise in optical packaging and you’ve talked about 800-gig and 1.6 terabyte. Can you give us a little bit more detail on what type of stuff — what are the projects that you’re working on? And when do you think these technologies will become mainstream, like when are you shipping 800 now? Or is that in testing phase? So, any time line for these technologies to become more adopted?

Jure Sola: Yes. We’ve been in our optical business for a long time, especially optical networks. That business for us is pretty strong. Overall, we have a strong customer base. We started getting involved in optical modules, I would say, last five years, six years. We’ve been investing a fair amount in the last couple of years into optical advanced packaging. We’ve been doing a 400-gig type of product. We’re starting to do 800 gig and making some shipments across our optical product line on 1.6 terabyte that’s in development with a couple of partners of ours and [indiscernible] designs and NPI process.

Ruplu Bhattacharya: Okay. Okay. And maybe I’ll ask one question to Jon. So, inventory was down sequentially a little bit this quarter. Can you give us your thoughts on the overall cash conversion cycle and how you see free cash flow trending? And just remind us on your uses of cash, how should we think about how you prioritize uses of cash in this environment?

Jon Faust : Yes. Sure, Ruplu. Thanks for the question. So, in terms of the cash conversion cycle, we’re in the mid-70s right now. But if you look back at the history of Sanmina, we’re closer into the 50s. And so that’s certainly what we’re going to be striving towards, right? And if you break that down between DOI, DSO, DPO, I think we’ve got a little bit of room to improve across the board. Inventory itself is quite a bit elevated several days beyond what our historical levels have been, DPO is not quite as high. So, we’re definitely going to be focused on working capital initiatives to bring that back down into line, which should help us generate more cash. And in terms of our priorities for capital allocation, those haven’t changed, right?

And we’ve got four of them just to reiterate for you and everybody else on the call. So, number one is in organic growth, indeed, the business; two, strategic transactions or inorganic growth three, paying down our debt, which is at pretty low levels already and then number four, share repurchases, which, as I mentioned, will continue to do opportunistically.

Jure Sola: Just to add to that, cash flow was pretty strong for six months, about $200 million and we expect to continue to generate strong cash for the rest of the year.

Jon Faust : Yes, absolutely. Yes.

Ruplu Bhattacharya: And do you expect strong free cash flow to continue for the rest of calendar ’24?

Jon Faust : Yes. And as you know, Ruplu, we guide one quarter at a time, but we are guiding cash flow to be positive in Q3. And as Jure mentioned, very pleased with the performance that we saw here in the first half, in the first two quarters, and then we expect to generate cash going into Q3 as well.

Operator: Your next question is from Steven Fox from Fox Advisors. Please ask your question.

Steven Fox: Good afternoon. A couple of questions, if I could. First of all — in terms of just — you mentioned some test capacity issues and some supply chain constraints during the quarter. Can you expand on that and make sure — I just want to make sure what sort of markets we’re talking about and how you’re solving that problem? Then I have another…

Jure Sola: Yes, Steve, that came from Communication Cloud customer base. We want to put a good size of a project that should go on for the next three quarters, four quarters, five quarters. And this mainly driven around our customer design and also top customer design our test fixturing. And some of the modification as we got involved in production, we realized some modification needed to be made. We have some shortages to materials. At the same time, we’re changing. On the positive side, these things will be resolved sometime this quarter, and then we should start continue to make shipments hopefully sometimes end of this quarter and the next quarter and should be a pretty good program for us going forward.

Steven Fox: Got it. That’s helpful. And then as you mentioned, your gross margins were a little bit better than expected. And do you still see room for gross margin improvement from here. Can you just walk through what you see as the gross margin opportunity, say, over the next, I don’t know, two quarters to four quarters?