Sanmina - Q3 2023
July 31, 2023
Transcript
Operator (participant)
Good day, welcome to the Sanmina Third Quarter Fiscal 2023 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key, followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star, then one on your touch tone phone, and to withdraw your question, please press Star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Miss Paige Melching, Senior Vice President of Investor Communications. Please go ahead, ma'am.
Paige Melching (SVP of Investor Communications)
Thank you, Chuck. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Q3 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 (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)
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 1st, 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, non-cash 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'd now like to turn the call over to Jure.
Jure Sola (Chairman and CEO)
Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome, 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. 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. Kurt and I will open for questions and answers. Now, I'd like to turn this call over to Kurt. Kurt?
Kurt Adzema (EVP and CFO)
Thanks, Jure. Please turn to slide five. 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-$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-$1.60. Finally, Q3 GAAP fully diluted EPS was $1.28. Please turn to slide six.
Revenue grew approximately 9% from $2 billion in Q3 FY 2022 to $2.2 billion in Q3 FY 2023. Operating margin improved from 5.3% in Q3 FY 2022 to 5.7% in Q3 FY 2023. Finally, EPS grew approximately 23% from $1.26 in Q3 FY 2022 to $1.55 in Q3 FY 2023. Please turn to slide seven. This slide shows a comparison of our GAAP and Non-GAAP quarterly financial results. If you can now turn to slide eight, we are off to a strong start for the first nine months of fiscal 2023. For the first nine 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 2023 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 2023, IMS revenue was $1.8 billion, compared to $1.9 billion in Q2, FY 2023. As I said before, this decline in revenue is 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 product company. We expect IMS gross margins to return to a more normalized level in Q4, FY 2023.
Q3 CPS revenue was $419 million, compared to $431 million in Q2, FY 2023. Q3, FY 2023, 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 2023. 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. Will 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-$2.2 billion, as we expect to continue 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%-8.8%, dependent on product mix.
Non-GAAP operating expenses are expected in the range of $59 million-$61 million, and Non-GAAP operating margin in the range of 5.5%-6%. We expect Non-GAAP interest and other expenses of $12 million-$13 million, primarily driven by the increase 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 JV. We expect Non-GAAP tax rate for the quarter of approximately 17%-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-$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. With that, I'll turn it back to Jure.
Jure Sola (Chairman and CEO)
Thank you, Kurt. Ladies and gentlemen, let me give you some key highlights for the Q3. 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 Q3, revenue was stable, up $2.2 billion, year-over-year growth of 9%.
Industrial, medical, defense, and automotive for the quarter was fairly flat, at $1.344 billion, but for the year was nicely up, up 10%. 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 few 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 Q3, top 10 customers were 47% of our revenue, and I can also tell you that book-to-bill was approximately 1 to 1. Please turn to slide 15.
Let me talk to you about Q4 and fiscal year 2023, end markets outlook. For industrial, medical, defense, aerospace, and automotive markets, for the Q4, we're seeing strength in automotive and defense. For industrial and medical, we see a stable demand during the quarter. For communication 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 the fourth quarter revenue outlook to be in the range of $2.1 billion-$2.2 billion. We expect revenue growth for fiscal year 2023 to be approximately 14%. For the fourth quarter Non-GAAP EPS outlook, we expect to be in the range of $1.47-$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. Let me talk to you about Sanmina's future for fiscal year 2024 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 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 2024 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 electric 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 2024 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, Q3 was a good quarter. Our strategy continues to deliver results. Customer base and pipeline opportunities remain solid.
For the fiscal year 2023, as I mentioned, we expect to deliver solid revenue and Non-GAAP EPS growth. 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're now ready to open the lines for question and answers. Thank you again.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. The first question will come from Anja Soderstrom with Sidoti. Please go ahead.
Jure Sola (Chairman and CEO)
Hello, Anja.
Anja Soderstrom (Senior Equity Research Analyst)
Hi, and thank you for taking my question. 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? Also, I'm curious, you said you expect that to be a $3 million charge in the Q4, and that's sort of down from the Q2 and Q3. Why is that coming down in the Q4?
Jure Sola (Chairman and CEO)
All right. Let me, let me give you highlights of the strategy for India Venture, then I'll turn it over to Kurt to address that other question. First of all, you know, our JV venture in India is very exciting. You know, this is about a year ago, we signed a deal with Reliance. This division is doing really well, continue to You know, 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 potentially in next, couple years. We, we have strong management that in India that we've grown over the last 10 years, and, with a few, few addition to that team, I think this, this team has a lot of, a lot of upside.
Reliance being a great partner, and together we have the same goals, and we believe we are on the same page. Personally, and I can speak for the rest of the team, we're very excited what's in India for us. Kurt?
Kurt Adzema (EVP and CFO)
Just again, just to clarify, it's not really a charge, right? 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, it's hard to forecast. We've, we've forecasted $3 million. It, 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, is the exchange rate and how that affects things. I would say, you know, we're forecasting a little bit lower this quarter. Candidly, we had forecast a little bit lower last quarter, but did better than expected. I would say it's just a little bit hard to predict, especially given some of the foreign currency issues.
Anja Soderstrom (Senior Equity Research Analyst)
Okay, thank you. Then also in terms of the communication network, you said you saw some in-inventory adjustments there. What kind of visibility do you have there that gives you a confidence that it's gonna come back?
Jure Sola (Chairman and CEO)
Well, first of all, as, as we mentioned in our prepared statement, we believe based on some inventory adjustment, we saw some down short term. I think we we're confident about because the type of products we are involved, we're well involved with, on the new programs, and based on what we see next 12 months, the customers are still very optimistic. Plus, we have a strong pipeline of, of other businesses, that we believe that, you know, will make it up, even if that area doesn't pick up as fast.
Anja Soderstrom (Senior Equity Research Analyst)
Okay, thank you. Did you, did you quantify how much revenue you left behind in the quarter due to the supply chain challenges?
Jure Sola (Chairman and CEO)
No, actually, supply chain has been very good. As I said in my prepared statement, Anja, it's, it's coming back to some kind of normality, I can say that. Yeah, 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, that we couldn't ship because of, of the, of the parts.
Anja Soderstrom (Senior Equity Research Analyst)
Okay, great. Thank you so much. That was all for me.
Jure Sola (Chairman and CEO)
Thanks, Anja.
Operator (participant)
The next question will come from Christian Schwab with Craig-Hallum Capital Group. Please go ahead.
Jure Sola (Chairman and CEO)
Hello, Christian.
Christian Schwab (Partner and Senior Research Analyst)
Hey, guys.
Jure Sola (Chairman and CEO)
Hi, great.
Christian Schwab (Partner and Senior Research Analyst)
Just a few follow-ups. The as far as the customer adjustments, you know, on inventory adjustments and comps, which, you know, could be multi-quarter in nature, does that, you know, push out the fact that we can get our inventory, you know, days outstanding, you know, back into the, back into the 40-day level? Does that make that kind of a 4-6 quarter adventure, or do you think that, you know, should normalize faster now that supply chain has normalized?
Jure Sola (Chairman and CEO)
First of all, let me give you my view on that. You know, we look at, most of our customers still gives us, Christians and Christian, about 12 months outlook. Based on that outlook, we definitely believe knowing where the lead times are, our inventory turns should get better, and we expect to see improvements in every quarter. You know, next, next three quarters, I think, you know, 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, you know, when it comes to the inventory, that we'll work it down.
I think back to the demand, you know, we'll take as -- our policies take one quarter at a time, but, you know, as I said, you know, as we looked at the 2024, we don't see anything that is falling off the, off the cliff.
Christian Schwab (Partner and Senior Research Analyst)
Yeah, I know you guys take -- we look at one quarter at a time, but your customers, as you talked about, do give you a 12-month outlook. You know, directionally looking at that, you know, could you give us a range of, you know, top-line growth for next year?
Jure Sola (Chairman and CEO)
Well, Christian, we had the same -- we had, also the 12-month outlook a year ago, and we didn't do that. We'll, we'll stick with the one quarter at a time, but, we expect to, to grow in 2024. We'll probably talk a lot more about it when we finish our fiscal year 2023, but at this time, we do expect to grow.
Christian Schwab (Partner and Senior Research Analyst)
Great. My last question as it relates to the India Joint Venture. You know, when, when do you expect that to be a material, you know, positive contributor to the net income line? I know you guys in the past have said, I, I believe you've said, that that business in India could ramp north of $1 billion as far as top-line revenue. Just wondering how we should be thinking about that.
Jure Sola (Chairman and CEO)
We're positive right now, right, Kurt?
Kurt Adzema (EVP and CFO)
Yeah. I mean, that JV makes good profit, you know, good revenue, good margins. I think, you know, as Jure said, we're seeing good indications and a lot of interest from customers, you don't ramp customers overnight, right?
Christian Schwab (Partner and Senior Research Analyst)
Yeah.
Kurt Adzema (EVP and CFO)
I think, I think we'll start to see it over the next year or two, but that business is, is doing very well right now. It's definitely profitable, you know, we're very pleased with where we stand.
Jure Sola (Chairman and CEO)
Yeah. Just to add to that, Christian, it's, it's, I think we're in excellent position to grow that business and, and, and this to be a multi-billion dollar business for us sooner than later. Let's put it that way.
Christian Schwab (Partner and Senior Research Analyst)
That sounds great. No other questions. Thanks, Jure.
Jure Sola (Chairman and CEO)
Thanks.