Sanmina - Q2 2023

Transcript

Operator (participant)

Welcome to 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 call over to Paige Melching, Senior Vice President of Investor Communications. You may begin.

Paige Melching (SVP of Investor Communications)

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 (Chairman and CEO)

Good afternoon.

Paige Melching (SVP of Investor Communications)

Kurt Adzema, Executive Vice President and Chief Financial Officer.

Kurt Adzema (EVP and CFO)

Good afternoon.

Paige Melching (SVP of Investor Communications)

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. 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 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 first, 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 (EVP and CFO)

Thanks, Paige. Before I discuss the Q2 results, I'd like to discuss the mention of the restatement of historical results in our press release. One of our divisions, which 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 or 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 FY23 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 FY20 and FY21 respectively. It also understated by $29.1 million in FY23. It overstated by $5.6 million in Q1 FY22. I'm sorry, I should have said $29.1 million in FY22. Apologize. GAAP EPS was overstated by approximately $0.09, $0.23, and $0.25 in FY20, 21, and 22 respectively, and understated by $0.06 in Q1 FY23. 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 $2.32 billion exceeded the high end of our outlook of $2.2 billion-$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-$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. 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 the prior year. Non-GAAP operating margins have continued to improve over time, with the first half non-GAAP operating margins of 5.9%.

Continuation of our current run rate for EPS for FY23 for the rest of the year would result in FY23 EPS over $6 compared to FY22. Please turn to slide eight. First half of FY23 IMS revenue was $3.9 billion. It was primarily due to the continued improvements in the supply chain. First half FY23 CPS revenue was $889 million. First half non-GAAP gross margin for CPS improved to 13.2% relative to FY22. 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 repurchasers, 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 nine please. 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-$2.3 billion.

We expect non-GAAP gross margin in the range of 8.2%-8.7% dependent on product mix. Non-GAAP operating expenses are expected to be in the range of $60 million-$62 million, and non-GAAP operating margin in the range of 5.5%-6%. We expect non-GAAP interest in 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 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 this guidance, our outlook for non-GAAP EPS is in the range of $1.50-$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. With that, I'll turn it over to Jure.

Jure Sola (Chairman and CEO)

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. 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. To you, Sanmina team, thank you, and let's keep it up. Let me add 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. We had 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 on execution of our strategy. 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 a second quarter. That was down slightly of 6% and strong growth year-over-year of 27%. Typically, for a second quarter seasonality, seasonally, this is a down quarter. We had a...

This quarter was stronger than typical as we delivered $2.32 billion. Quarter-over-quarter was flat, slightly down 2%, but year-over-year growth was very strong of 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 the 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-$2.3 billion. For industrial, medical, defense, and automotive markets, we expect to see nice growth year-over-year. In 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. 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 technologies to support the growth for Fiscal year 2024 and beyond. Overall, we are expanding our capacity into more profitable projects. 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 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, cloud infrastructure, we focus on the new products around networking and storage products. These businesses should produce higher margin and a long-term growth and stability. Let's talk about management through this challenging macroenvironment. We have positioned the company to be able to navigate any market dynamics. Sanmina is embedded resiliency in our focus 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 the right and lasting partnerships. We focus on continuing to diversify revenue growth with market leaders in mission-critical products. We continue improve productivity.

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.

Operator (participant)

If you would like to ask a question, please press star one on your telephone keypad now. You'll be placed into the queue in the order received. Please be prepared to ask your question when prompted. Once again, if you have a question, please press star one on your phone now. Our first question comes from Christian Schwab from Craig-Hallum. Your line is open.

Jure Sola (Chairman and CEO)

Hello, Christian.

Christian Schwab (Analyst)

Hey, this is Tyler on behalf of Christian. Thanks for letting us ask a couple questions. I guess first, on inventories came down nicely, you know, sequentially quarter-over-quarter, you know, about $1.5 billion. I guess I was wondering if you could help maybe level set us what you kinda think a normalized level is. You know, your business is larger than it was a couple years ago and, you know, maybe any decisions you made about, you know, what level you wanna manage those inventories going forward, given the constrained environment we just went through.

Jure Sola (Chairman and CEO)

Yeah. Before I turn you over to our CFO, you know, we believe that our inventories should be a lot better than where they are today. Because of the shortages that we experienced over the last two years, Our customers asked us to basically buy more inventory. Good thing is our customers are 100% committed to those inventories, and we expect it to continue to work them down in the next couple of quarters. With that, I turn it over to Kurt.

Kurt Adzema (EVP and CFO)

Yeah. 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. I think, you know, we've gotten our terms historically if you look back three years to, you know, almost six to seven times and have a, you know, ideally get it to eight. We've got a lot of opportunity to further improve that. It won't happen overnight, but as Yuri 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, that should help normalize things.

It does take, a while, multiple quarters, for things to normalize. I would say not normal until next fiscal year, most likely, but we will make progress.

Christian Schwab (Analyst)

That's great, Kurt. I appreciate that. Maybe, you know, following up on that then, regarding your cash balance also, you know, very strong, and as you work that inventory down, you know, should only grow as well as, you know, continue to drive a free cash flow. Expanded your share buyback, which looks great. I guess, you know, how much excess cash do you have, or rather, you know, what's a comfortable level of cash that you'd like to run your business with?

Kurt Adzema (EVP and CFO)

Well, again, I think we, you know, we talked about 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, you know, that being said, you know, we're gonna be cautious and only opportunistic as it comes to share repurchases. I think by adding to the authorization, it gives us flexibility over the coming months, but at the same time, you know, I think we're gonna do what's best for shareholders. Cash tends to vary a lot with inside of a quarter. You 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.

It's really hard to say what's the, quote-unquote, "right level of cash." Needless to say, we feel very comfortable with our balance sheet, and it's, you know, the most unlevered candidly, I believe, in the industry.

Christian Schwab (Analyst)

That sounds great. That's all for us. Jure, hope you feel better as well for next bit.

Jure Sola (Chairman and CEO)

Yeah, thanks.

Operator (participant)

Thank you. Our next question comes from Anja Soderstrom from Sidoti. Your line is open.

Jure Sola (Chairman and CEO)

Anja.

Anja Soderstrom (Senior Equity Research Analyst)

Hi, everyone, congratulations on the good quarter. Jure, I'm sorry, I'm running on my second week of a cold myself. In terms of the revenue guidance for the third quarter, it sort of indicates a slight decline, right? Sequentially.

Kurt Adzema (EVP and CFO)

You know, again, we finished at $2.32. The guidance is $2.20-$2.30.

Jure Sola (Chairman and CEO)

I would say it's flat, slightly down.

Anja Soderstrom (Senior Equity Research Analyst)

Yeah.

Jure Sola (Chairman and CEO)

Guidance.

Anja Soderstrom (Senior Equity Research Analyst)

Okay. 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 that things are getting pushed. Are you seeing the same or are you seeing something else?

Jure Sola (Chairman and CEO)

Well, well, as I said earlier, Anja, we are operating right now in this, you know, macroenvironment. There's a lot of changes going on. The good thing is, you know, it seem like demand is still there, but I think there are some, you know, moving parts that get pushed out here and there, definitely in some of the communication projects, that is true. We had a pretty good quarter in the second quarter. Actually, last two quarters in communication and cloud were very strong as you can see. I'm personally happy with in this environment, Anja, where we are. I think we are, you know, we can still deliver the good financial numbers even with these numbers. We'll see.

You know, we're still gonna push for a maximum as we try to do every quarter.

Anja Soderstrom (Senior Equity Research Analyst)

Okay, thank you. In terms of the cash cycle days, what is that on a normalized basis? What are you targeting to get that down to?

Kurt Adzema (EVP and CFO)

Well, you know, I think, again, it's if you look at how we've managed, you know, cash cycle days over time, we've typically kind of been in those 50 ranges, plus or minus. You know, I think is obviously as inventory comes down, that's helpful, but at the same time, you know, accounts payable come down as well. If you look at our history, we've actually over the last three years, despite all the challenges, have managed it pretty consistently in those 50s range. I'd expect it to be in there. You know, we're always looking to be more efficient.

Anja Soderstrom (Senior Equity Research Analyst)

Okay. To follow up on Kurt Adzema in terms of your anticipated further improved balance sheet, do you think, are you at all considering a dividend?

Kurt Adzema (EVP and CFO)

We've looked at that at times. We'll continue to evaluate that, but we have no intention at this time.

Anja Soderstrom (Senior Equity Research Analyst)

Okay, thank you. That was all for me.

Jure Sola (Chairman and CEO)

Thanks, Anja. Hope you feel better too.

Anja Soderstrom (Senior Equity Research Analyst)

Yeah, you too.

Operator (participant)

As a reminder, if you do have a question, please press star one on your telephone keypad now. Seeing no further questions, I'll turn the call back over to management.

Jure Sola (Chairman and CEO)

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. With that, I appreciate your support. Thanks a lot.

Kurt Adzema (EVP and CFO)

Thank you.

Operator (participant)

That concludes today's conference call. Thank you for joining, and have a pleasant day.