Sanmina Corporation (NASDAQ:SANM) Q3 2023 Earnings Call Transcript

Sanmina Corporation (NASDAQ:SANM) Q3 2023 Earnings Call Transcript August 1, 2023

Operator: Good day, and welcome to the Sanmina Third Quarter Fiscal 2023 Earnings. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Ms. Paige Melching, Senior Vice President of Investor Communications. Please go ahead, ma’am.

Paige Melching: Thank you, Chuck. Good afternoon, ladies and gentlemen, and welcome to Sanmina’s Third 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 today on this 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 : 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 the safe harbor statement in the presentation. 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 this 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 quarter ended July 1, 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 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 they relate 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 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 leadership team and our employees for getting the job well done. So, to you, Sanmina’s team, thank you for delivering solid results for the third quarter, and let’s keep it up. For agenda, we have today that Kurt, our CFO, to review detailed results for you. I will follow up with additional comments about Sanmina’s results and future goals. Then Kurt and I will open for questions and answers. And now I’d like to turn this call over to Kurt. Kurt?

Kurt Adzema : Thanks, Jure. Please turn to Slide 5. Our team did a good job delivering solid financial performance for the quarter. Q3 revenue was $2.21 billion, in-line with our outlook of $2.2 billion to $2.3 billion. In general, revenue remained stable across most of our customer base. However, we did see some declines relative to the prior quarter primarily as a result of a few communication customers adjusting inventory levels as the supply chain continues to improve. Non-GAAP gross margin improved to 8.6% from 8.4% in the prior quarter. Non-GAAP operating margin was 5.7%. Non-GAAP fully diluted earnings per share was $1.55 in-line with our guidance of $1.50 to $1.60. Finally, Q3 GAAP fully diluted EPS was $1.28. Please turn to Slide 6.

Revenue grew approximately 9% from $2 billion in Q3 FY ’22 to $2.2 billion in Q3 FY ’23. Operating margin improved from 5.3% in Q3 FY ’22 to 5.7% in Q3 FY ’23. Finally, EPS grew approximately 23% from $1.26 in Q3 FY ’22 to $1.55 in Q3 FY ’23. Please turn to Slide 7. This slide shows a comparison of our GAAP and non-GAAP quarterly financial results. If you could now turn to Slide 8. We are off to a strong start for the first 9 months of fiscal ’23. For the first 9 months, revenue grew 21% to $6.9 billion compared to the prior year. Non-GAAP operating margins have continued to improve over time with year-to-date non-GAAP operating margins of 5.8%. Finally, FY ’23 year-to-date, non-GAAP EPS grew 46% to $4.84 compared to $3.31 in the prior year.

You now please turn to Slide 9. Q3 FY ’23 IMS revenue was $1.8 billion compared to $1.9 billion in Q2 FY ’23. As I said before, this decline in revenue was primarily the result of a few communication customers adjusting inventory levels as the supply chain continues to improve. Q3 IMS gross margins improved to 8.3% in Q3 compared to 7.5% in the prior quarter. This improvement was primarily related to a partial release of inventory reserves taken during the first fiscal quarter related to a start-up company. We expect IMS gross margins to return to a more normalized level in Q4 FY ’23. Q3 CPS revenue was $419 million compared to $431 million in Q2 FY ’23. Q3 FY ’23 non-GAAP gross margin for CPS was 8.8%. This was primarily due to cost overruns at one of our CPS divisions.

We are actively working with our customers in that division to recover these costs and expect CPS gross margin will be in a more normalized range in Q4 FY ’23. You now please turn to Slide 10. We have a strong balance sheet that provides our company a competitive advantage. Cash and cash equivalents were $657 million. There were no borrowings outstanding under our $800 million revolver at the end of Q3. Cash flow from operations was $57 million in Q3, and capital expenditures were approximately $52 million in Q3. During Q3, we repurchased approximately 970,000 shares for a total of approximately $51 million. At the end of Q3, we had $312 million of remaining authorization for additional share repurchases. You now please turn to Slide 11. We continue to remain focused on efficient cash management.

Cash cycle days were approximately 58 days in Q3. Non-GAAP pretax ROIC was approximately 30% for Q3. Now please turn to Slide 12. Let’s talk about the outlook for Q4. We expect revenues to be in the range of $2.1 billion to $2.2 billion as we expect to see a few communication customers adjust inventory levels as the supply chain continues to improve. We expect non-GAAP gross margin in the range of 8.3% to 8.8% depending on product mix. Non-GAAP operating expenses are expected in the range of $59 million to $61 million and non-GAAP operating margin in the range of 5.5% to 6%. We expect non-GAAP interest and other expenses of $12 million to $13 million, primarily driven by the increase in interest rates. In addition, we estimate an approximate $3 million noncash reduction to net income to reflect our JV partner’s equity interest to the net income of our Indian JV.

We expect non-GAAP tax rate for the quarter of approximately 17% to 17.5% and non-GAAP fully diluted share count of approximately 59 million. When you consider all of this guidance, our outlook for non-GAAP diluted earnings per share is in the range of $1.47 to $1.57. We expect Q4 CapEx to be approximately $50 million, driven by growth of new programs and to support future growth. Q4 depreciation is expected to be about $30 million. While we are pleased with our recent results, we continue to believe there is opportunity to further improve our business model over the long term. And with that, I’ll turn it back to Jure.

Jure Sola : Thank you, Kurt. Ladies and gentlemen, let me give you some key highlights for the third quarter. As you heard from Kurt, for our third quarter, Sanmina delivered solid results in line with our outlook. We had a solid operational execution as we provide competitive advantage to our customers. Supply chain for semi components is getting a lot better. Lead times are improving. And I can say it’s coming back to some normality. Despite ongoing macroeconomic challenges, these results are a reflection of our continued focus on the execution of our strategy. Our Sanmina team continues to do a great job by focusing on customer needs, margin expansion and EPS growth. Please turn to Slide 14. Let me talk to you now about revenue by end markets.

For the third quarter, revenue was stable of $2.2 billion, year-over-year growth of 9%. Industrial, Medical, Defense and Automotive for the quarter was fairly flat of $1.344 billion, but for the year, it was nicely up, up 10%. Also, the market trends and mix are improving. We continue to diversify in industrial, medical, defense and automotive markets, driven by new program wins and new customers. As you can see, mix improved to 61% of our revenue. For Communication Networks, as Kurt said, we did see some inventory adjustments relative to prior quarter with fuel communication customers. The revenue for the quarter was $863 million and year-over-year growth of 7.7%. Cloud infrastructure continues to be stable and growing. For the third quarter, top 10 customers were 47% of our revenue.

And I can also tell you that book-to-bill was approximately 1:1. Please turn to Slide 15. Let me talk to you about fourth quarter and fiscal year ’23 end markets outlook. For industrial, medical, defense, aerospace and automotive markets for the fourth quarter, we’re seeing strength in automotive and defense. And for Industrial and Medical, we see a stable demand during the quarter. For Communications Systems, we see lower revenue due to inventory adjustments. Cloud infrastructure outlook is stable and growing. Please turn to Slide 16. In this macro environment, we expect for a fourth quarter revenue outlook to be in the range of $2.1 billion to $2.2 billion. We expect revenue growth for fiscal year ’23 to be approximately 14%. For the fourth quarter non-GAAP EPS outlook, we expect to be in the range of $1.47 to $1.57.

Our focus on margin expansion should deliver non-GAAP EPS growth of approximately 35%. As you can see, these are strong year-to-date performance and we expect to deliver strong performance for fiscal year 2023. Now let me talk to you about Sanmina’s future for fiscal year ’24 and beyond. We will continue to focus on profitable growth despite challenging macroeconomic environment. Sanmina is in a great position for the future, strong balance sheet to build on, well-diversified customer base in the high complexity and heavy regulated markets, pipeline of new opportunities is exceeding — exciting for the future. Our focus today is on quality of our diversified customer base, building on right partnerships with customers that have high complexity products.

Quality of earnings. The key focus is consistency, margin expansion and growth of earnings, cash flow to support the growth and focusing on maximizing shareholders’ value both short term and long term. We’re making investments for the future, and we are expanding our capabilities to support new wins for fiscal year ’24 and beyond. Overall, we’re expanding to more profitable projects by providing industry-leading technologies in engineering solutions and R&D support, investing in advanced components, products and integrated manufacturing services. We’re expanding in these key focus markets such as medical, defense, automotive, focusing around electrical vehicle, industrial alternative energy and cloud infrastructure. Sanmina will continue to invest in talent and technologies to drive margin expansion and profitable growth for fiscal year ’24 and beyond.

I can also tell you that Sanmina is well positioned to manage through this dynamic market. Please turn to Slide 17. In summary, third quarter was a good quarter. Our strategy continues to deliver results, customer base and pipeline opportunities remain solid. So for the fiscal year ’23, as I mentioned, we expect to deliver solid revenue and non-GAAP EPS growth, and we are investing to support long-term growth opportunities. As a management, we are focused on quality, delivery and consistently meeting the needs of our customers. Ladies and gentlemen, now I would like to thank you all for your time and support. Operator, we are now ready to open the lines for question and answers. Thank you again.

Q&A Session

Operator: [Operator Instructions]. And the first question will come from Anja Soderstrom with Sidoti.

Anja Soderstrom : I’m sorry, I missed the first part. I don’t know if you addressed or talked about the Indian joint venture? And what are you starting to see there? And also, I’m curious, you said you expect that to be a $3 million charge in the fourth quarter and that’s sort of down from the second and third quarter, so why is that coming down in the fourth quarter?

Jure Sola : All right. Let me give you highlights of the strategy for India venture and then I’ll turn it over to Kurt to address the other question. First of all, our JV venture in India is very exciting. This is about a year ago, we signed a deal with Reliance. This division is doing really well. We continue to — actually, it’s ahead of our strategy. We’re looking at a lot of options right now. How do we grow that. We think there’s a lot of upside potential in the next couple of years. We have strong management in India that we’ve grown over the last 10 years. And with a few additions to that team, I think this team has a lot of upside. Reliance has been a great partner, and together, we have the same goals, and we believe we are on the same pace. So personally, and I can speak for the rest of the team, we’re very excited what’s in India for us. Kurt?

Kurt Adzema : Yes. So again, just to clarify, it’s not really a charge, right? So basically, we back out Reliance’s 50.1% share of the net income, and last quarter, that was about $5 million. This quarter, again, it’s hard to forecast. We forecasted $3 million. It’s really a combination of two things. One of it has to do with obviously the profitability of the business, the other variable that’s a little bit harder to predict is the exchange rate and how that affects things. So, I would say, we’re forecasting a little bit lower this quarter. Candidly, we had forecast a little bit lower last quarter but did better than expected. So, I would say it’s just a little bit hard to predict, especially given some of the foreign currency issues.

Anja Soderstrom : Okay. And then also in terms of the communication network, you said you saw some inventory adjustments there. What kind of visibility do you have there that gives you confidence that it’s going to come back?

Jure Sola: Well, first of all, as we mentioned in our prepared statement, we believe based on some inventory adjustment that we saw some down short term. I think we’re confident about because of the type of products we are involved, we were involved with on the new programs. And based on what we see next 12 months. The customers are still very optimistic. And plus, we have a strong pipeline of other businesses that we believe will make it up even if that area doesn’t pick up as fast.

Anja Soderstrom : Okay. And did you quantify much revenue you left behind in the quarter due to the supply chain challenges?

Jure Sola : No. Actually, supply chain has been very good. As I said in my prepared statement, Anja, is coming back to some kind of normality. I can say that — and yes, there’s still some certain components out there that have a longer lead time, but it’s manageable. And I don’t believe we left any major revenue that we couldn’t ship because of the other parts.

Operator: The next question will come from Christian Schwab with Craig-Hallum Capital Group.

Christian Schwab : So, just a few follow-ups. As far as the customer adjustments on the inventory adjustments in comps, which could be multi-quarter in nature. Does that push out the fact that we can get our inventory days outstanding back into the 40-day level? Does that make that kind of a four-to-six-quarter adventure? Or do you think that should normalize faster now that supply chain has normalized?

Jure Sola : Well, first of all, let me give you my view on that. We look at — most of our customers still give us a, Christian, about 12 months outlook. So based on that outlook, we definitely believe knowing where the lead times on our inventory turns should get better, and we expect to see improvements in every quarter. Next, I think you should — next 3 quarters, I think the goal there is to get as normal as humanly possible. There’s a lot of work internally that we’re working on. So, I’m pretty optimistic that when it comes to the inventory that will work it down. I think back to the demand, we’ll take — our policy is take 1 quarter at a time. But as I said, as we looked at the ’24, we don’t see anything that is falling off the cliff.

Christian Schwab : So, I know you guys will look at one quarter at a time, but your customers, as you talked about, do give you a 12-month outlook. Directionally are you looking at that? Can you give us a range of top line growth for next year?

Jure Sola : Well, Christian, we had a — we had also 12 months outlook a year ago, and we didn’t do that. So, we’ll stick with the one quarter at a time, but we expect to grow in ’24, and we’ll probably talk a lot more about when we finish our fiscal year ’23. But at this time, we do expect to grow.

Christian Schwab : Great. And then my last question as it relates to the India joint venture. When do you expect that to be a material positive contributor to the net income line? I know you guys in the past have said — I believe you’ve said that that business in India could [ramp] [ph] north of $1 billion as far as top line revenue. So just wondering how we should be thinking about that?

Jure Sola : Let me — we’re positive right now, right, Kurt?

Kurt Adzema : Yes. I mean that JV makes good profit, good revenue, good margins, I think, to the extent on how quickly we could grow that business, I think, as Jure said, we’re seeing good indications and a lot of interest from customers, but you don’t ramp customers overnight, right? So I think we’ll start to see it over the next year or two. But that business is doing very well right now. It’s definitely profitable. And so we’re very pleased with where we stand.

Jure Sola : Yes. Just to add to that, Christian, it’s — I think we’re in excellent position to grow that business and this to be a multibillion-dollar business for us sooner than later. Let’s put it that way.

Operator: [Operator Instructions]

Jure Sola : Well, ladies and gentlemen, that’s all for today. I appreciate all your support. If we didn’t answer all your questions, please get back to us and looking forward to talking to you in the next 90 days. Thanks a lot.

Kurt Adzema : Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.