Q3 2019 Earnings Call
Good afternoon, and welcome to the benchmark Electronics incorporated third quarter 2019 earnings Conference call.
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I would now like to turn the conference over to Lisa weeks, Vice President strategy and Investor Relations. Please go ahead.
Thank you operator, and thanks, everyone for joining us today for benchmarks third quarter 2019 earnings call with me. This afternoon I have Jeff, Thank CEO and president and reap lot garage, you see s. So.
Jeff will provide introductory comments and route will provide a detailed review of our third quarter 2019 resolved and outlet, we will complete our call whether Q and ice session.
After the market close today, we issued an earnings release, highlighting our financial performance for the third quarter adds 2019, and we have prepared a presentation that we will reference on this call. The press release. Some presentation are available online under the Investor Relations section of our website at Www Dot Dot com. This.
Paul is being webcast live in a replay will be available online following the call.
Please take a moment to review the forward looking statements advice on slide two in the presentation. During our call. We will discuss forward looking information as a reminder, any of today's remarks, but are not statements of historical facts are forward looking statements, which involve risks and uncertainties described in our press releases in FCC filings actual.
Results may differ materially from these statements and benchmark undertakes no obligation to update any forward looking statements.
Company has provided a reconciliation of our GAAP to non-GAAP measures in the earnings release as wells in the appendix of the presentation.
I will now turn the call over to our CEO , Jeff. Thanks.
Thanks, Lisa and welcome everyone joining us for this afternoons call.
During today's call I will first provide a brief overview of our third quarter were 2019 results and stepped through some meaningful new wins in the quarter.
Roop will then take you through the financial updates and I will close with the progress update on our key strategic initiatives.
Let's turn to slide four.
In the quarter ending September Thirtyth 2019, we delivered revenue of 555 million, which was at the high end of our guidance and we achieved 36 cents of non-GAAP EPS, which was at the midpoint of our guidance range.
Revenue was driven by year over year increases in the higher value, Andy and medical markets, along with higher than expected revenues from N.P.I. builds and the semi cap sector, which supported our sequential growth.
Our non-GAAP gross margins improved 60 basis points sequentially to 959.5% on our higher value market mix and non-GAAP operating margins increased 10 basis points sequentially the 3.2%.
We continue to deliver improved margins as we rotate our portfolio into higher value vertical markets and take on more complex products from our customers.
Roop will take you through the details on working capital and cash flow for the quarter and full year.
So please turn to slide five.
As we discussed on last quarter's call. We added the company's first chief revenue officer to integrate and lead our global go to market strategy. Rob Crawford is now fully up to speed has put up much of his organization together and is made progress in refining our go to market and sector strategy.
To further priorities in this area are to increase the funnel of the right opportunities aligned to our value proposition and to accelerate bookings with new and existing customers.
I'm very pleased with the early results from the team during the past quarter, our bookings in Threeq you grew sequentially and we had some exciting new program wins, which I will share in more detail.
In our medical sector, we were awarded a market leading platform of therapeutic surgical devices with a new global customer to benchmark.
Also we were awarded a new program within existing customer in the distributor market.
In aerospace and defense, we received a complex integration award for a satellite communication device and production orders for microelectronics assemblies that ultimately will be deployed in space from our Lark RF and high speed design Center.
In industrial we received an award from the Communications company for Smart Industrial I O T device supporting their initiatives in the transportation industry.
In semi cap, we were awarded new precision machining programs for some of the most advanced machine components with one of our existing industry, leading semi cap customers.
This award was the result of very close and collaborative early design engagement.
Lastly in computing in telco, we were awarded a new manufacturing services contract for state of the our digital display OEM and family of programs for commercial Critter modules for an existing OEM customer.
These are all excellent wins for our teams across a broad set of valued customers.
These representative customers from Threeq, you speak to the breadth and scale of the opportunities. We're closing will ultimately allow us to further grow our revenue.
No. If you please turn to slide six I will turn the call over to route to discuss our financial results for the quarter.
Thank you Jeff.
Good afternoon, everyone. We will start at slide seven for a discussion of our third quarter 2019 financial summary.
Revenues of 555 million was at the high end of our guidance of 525 million to 555 million our GAAP EPS for the quarter was 19 cents. Our GAAP results also included a total of 6.2 million of restructuring and other nonrecurring costs due to expenses associated with the previously announced site.
Those are activities and other restructuring activities of this total 5.8 million impacted operating margin with the remainder impacting other non operating expenses.
Our Q3, non-GAAP operating margin was 3.2% 10 basis point quarter over quarter, and 30 basis point year over year improvement due to our improved operational efficiency and slightly lower SG ne.
non-GAAP EPS of 36 cents was at the midpoint of our guidance range of 33 cents a 39 cents.
For the quarter, our ROI C was 8.2% flat sequentially and down 160 basis points year over year.
Turning to slide eight for our revenue by market sector for the three months ended September Thirtyth.
Industrial revenues were down slightly from our expectations and flat from Q2 revenues were down 10% year over year from softer demand from customers in the industrial transportation market in certain ramp delays from previously booked new programs.
Andy revenues were up 8% quarter over quarter, and 10% year over year from new program ramps and overall strength for existing products for ground based and airborne vehicles.
Medical revenues were 12% higher quarter over quarter, and 33% year over year, where we saw increased demand across our cardiovascular programs, including a last time buy build for an existing product that is going end of life.
Let me cap revenues increased 9% sequentially and were down 11% year over year continued semicap softness.
Sequential increases related to new programs that are starting to ramp.
Note that we are not yet seeing widespread signals that abroad recovery has begun our customers still expect the broad recovery to occur in the second half of 2020.
Overall higher value markets represented 77% of our third quarter revenue and were up 7% sequentially and 5% year over year.
Turning now to our traditional markets computing was down 55% sequentially and 59% year over year due to the exit from our legacy computing contract.
Telecommunications was down 2% sequentially and 22% year over year year over year decline is from softer demand from satellite programs.
Our traditional markets, which represented 23% of third quarter revenues were down 45% from last year and down 37% sequentially.
Our top 10 customers represented 38% of sales for the third quarter.
Please turn to slide 10 for a discussion of non-GAAP key business trends.
Gross margin for the third quarter was 9.5% 60 basis point sequential improvement and year over year improvement 100 basis points.
Year over year gross margin improvement is attributable to operational improvements throughout our global network. The exit from our legacy computing contract and the better mix from higher value market revenue.
Our non-GAAP SDMA was 34.9 billion, which is inline with our Q3 guidance and down from Q2 2019 due to a reduction in variable compensation expense.
non-GAAP operating margin was 3.2% up 10 basis points sequentially, and 30 basis points year over year.
We had 5.8 million in restructuring and other cost for Q3 that impacted our non-GAAP operating margin, including expenses associated with our announced site closures and other restructuring activities.
Regarding our previously announced site closures, we are on track to be completed by mid 2020 as planned.
As mentioned previously restructuring charges associated with these closures are expected to be between 6 million, an 8 million of which 3 million was recorded in Q3.
Once the site closures are completed we expect annualized savings of approximately $5 million beginning the second half 2020.
We expect to incur additional restructuring transition charges in Q4, approximately three and a half million to four and a half million related to restructuring activities discussed above and other employee related expenses.
Please turn to slide 11, where I will provide a few updates on cash flow and working capital highlights.
We use 11 million in cash from operations for the quarter and use free cash flow of 22 million.
The full year 2019, we still expect to generate cash from operations between 75 million an 85 million.
We also expect Capex to range for the year between 45 million to 50 million.
Our cash balance was 348 million at September Thirtyth with 168 million available in the U.S.
Our accounts receivable balance was 348 million decreased to 15 million from June Thirtyth.
Doubles were down 76 million quarter over quarter due to the activity related to the legacy computing contract.
Contract assets were 161 million at September 30, an increase of 5 million from June Thirtyth.
Inventory at September 30 was 316 million, which is flat quarter over quarter over quarter.
Please turn to slide 12 to review our cash conversion cycle performance.
Our cash conversion cycle was 79 days for Q3.
Future cash conversion cycle will range between 75 days and 82 days as a result of the completion of the legacy computing contract.
Please turn to slide 13 for our capital allocation update.
In March 2018, we announced a recurring 15 cents per share quarterly cash dividends.
Point 7 million in dividends were paid in Q3 2019.
Total share repurchases during Q3 were 18 million or 682000 shares.
Through September Thirtyth, we have repurchased approximately 118 million or for 4.6 million shares an average price of $25 and 70 success.
As of the end of September 2019, we had approximately 83 million.
Mailable under the current share repurchase program.
Turning to slide 14 for a review of our fourth quarter 2019 guidance.
We expect revenue to range from 520 million to 570 million our non-GAAP diluted earnings per share is expected to be in the range from 34 cents to 42 cents or a midpoint of 38 cents.
For sequential modeling information for the fourth quarter, Please turn to slide 15.
Overall, we expect industrial revenues to be flat in Q4, we're rebuilding the funnel with newly align targets from our industrial sector later, even with these headwinds we believe previous bookings coupled with new funnel opportunities should return this sector the future growth.
Andy is expected to be flat from sustained demand in Q4, we expected return to growth in Q1, and further overall growth in 2020 from new programs and a sustained strong us defense budget.
We expect medical revenues to moderate slightly and be down mid single digit after larger than expected builds in the third quarter.
Looking ahead, we expect continued growth for medical in 2020.
Semi cap is expected to be up greater than 10% primarily from continued new program ramps across our up semi cap, so customers rather than broader demand increases for new programs.
Turning now to the traditional markets.
We expect computing revenues to be down greater than 20% due to completion of our legacy computing contract in demand softness in other storage products.
We expect telco to be flat from softer demand in commercial satellite network testing gear.
Implied in our guidance is is a 3.2% to 3.6% non-GAAP operating margin range for modeling purposes guidance provided does exclude the impact of amortization of intangible assets and estimated restructuring and other costs.
Interest expense is expected to be 1.8 million and the effective tax rate is expected to be 21%.
Yes animated weighted average shares for Q4, 2019 or approximately 37.2 million.
I will now turn the call back to Jeff.
Okay.
Thanks for.
Let's go to slide 17.
During the past quarter, we've made further progress on the strategic initiatives, we outlined in July .
As I referenced earlier in the call optimizing our go to market efforts are a priority.
In addition, emerging our sector leaders marketing and new business development teams as part of our organizational alignment last quarter. We have also integrated the account manager role into the CR Rose organization.
Hello managers are focused on servicing our current customers, representing the breadth and depth of benchmark capabilities to reduce complexity in the selling process.
One of our key customer wins for this quarter was a testament to the effectiveness of our new coordinated selling approach.
Aligning our go to market structure, optimizing our targeted sector portfolios and improving the support of our existing customers are critical for accelerating revenue for benchmark.
The second initiative is driving operational efficiencies and process consistency across our sites.
Through continuous feedback loop with our customers. We are focused on aligning our global footprint to where our customers want us to be now and into the future.
This strategy considers our customers geographic requirements for our capabilities and the ability for them to work seamlessly across our network.
As part of our planning process, we are evaluating our global engineering and manufacturing services network, considering many factors such as utilization scale geographic placement cost and certain costs certainly customer feedback.
As we announced last quarter, we decided to close our San Jose, California in wireless Mexico operations with a target closure date of mid 2020.
We are working closely with our affected customers and employees to manage these transitions.
Across our network, we remain focused on consistent process deployment and cycle time reduction programs to drive productivity improvements in order to increase asset utilization.
Our teams are making progress on these initiatives.
The third initiative is creating a centralized DNA organization to accelerate our ability to efficiently deliver and scale our corporate services.
Last quarter, we kicked off a process to functionally realign our finance HR legal and I teams by the end of this year and this activity is well underway.
This updated structure will enable us to deliver cost effective shared services to the benefit of our internal teams as well as our customers.
And finally affords initiative is focused on accelerating engineering services and solutions to help our customers help solve our customers' most complex challenges.
As we've discussed over the past quarters, we've invested in our Lark RF and high speed design Center in Phoenix, Arizona to provide differentiation in substrates and micro electronics.
During the third quarter several of our micro E qualification builds were completed and many new substrate prototypes were started.
Now as we turn into Q4, we are beginning to ramp our production micro E orders and deliver our new substrate qualification units to a host of new customers.
We're excited to reach these pivotal milestones towards developing these differentiated capabilities.
We believe these are the right priorities for where we are as an organization and our executive leadership team has aligned and engaged in driving these initiatives throughout the organization.
And with that I will turn the call over to the operator to conduct acuity.
We will now begin the question and answer session.
To ask a question you made press Star then one on your Touchtone phone.
If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble a roster.
The first question is from Jim Ricchiuti with Needham and company. Please go ahead.
Hi, Thank you good afternoon.
First on the medical business.
During if you could.
Size. This this last time builds by that you had.
How meaningful was it to the growth because clearly the growth in this part of the business came in stronger than you were forecasting.
Yes, Jim this is roop good to talk to you. So so that last time Bill was relatively small in the aggregate for for the overall growth within the quarter.
You can think about it as less then ill kind of 10% 15% of that number.
Okay.
Looking at that that vertical.
Hey came in stronger you're guiding I guess two to the business being.
Down in Q4 is that is that it was it the timing of some.
Customer shipments what was it that drove that yes, Jim and there's a little bit of that I mean as you as you know I mean at 33% is pretty significant growth right. So while there is a pull back a little bit in fourth quarter, we expected to be a growth market for us as we look into next year as well so it's a little mix related.
Good, but you know you're coming off a pretty pretty big.
You know growth step up here and so that's not like totally unexpected to see a little bit of modulation. There as we continue to focus and win in that segment.
Sure and semi cap.
Encouraging that's starting to see some improvement, but yet the same time sounds like what you're hearing Jeff from your customers is.
So it sounds like more still looking out more toward the second half of next year.
Yeah, we said that in and we that's pretty consistent with what we've been hearing you know I mean, it we we'd love to see earlier signs of life at this point.
We're really you know, we're really preparing ourselves and thinking about the second half of next year and.
No we know that theres been a little bit has strengthened in.
Logic, but we also are looking for a memory recovery here as well.
Okay to drive Alans question. Thank you one final question I'll jump back into queue I know you don't.
Talk specifically about bookings, but you indicated that the bookings were up sequentially can you give us any flavor for where you're seeing the strength and bookings.
Yeah, I mean, we tried to I did I did.
Like we said, while we don't want to continue to publish a specific number one of give directional you know how are things doing there thats why we shared quite a bit of detail by sector of some of the wins that that that we accomplished in the quarter.
You know clearly we we've had good strength, the medical and a and B, which which are two key focus areas for us to key growth sectors and and when in some of the satellite business that we've been winning and and some of the really sophisticated systems that are going to being part of those systems that are.
We'll go to space is huge and the medical sector, we talked about.
Therapeutic surgical device win.
And and we.
Also we have been a supplier of the Formulators solutions for customers and had another win there so.
It's good broad based.
Strength ever every part contributed we we talked about industrial you know what the new leadership, there that was going to take time to build that pipeline back and we even had when in the wins in the compute in telco space, but I'd say in the and medical were the drivers.
Terrific. Thanks, a lot.
Sure.
Again, if you have a question.
Star then one.
The next question comes from on your soda Strum with Sidoti. Please go ahead.
Hi, everyone can you hear me.
Hi on senior year.
Great.
Congratulations on good quarter and thank you for taking my question well.
I guess you were talking about the your initiatives that you're working on and bucket them at four buckets, which one is more like.
Our agenda and more about currently and how far along are you would that.
Well when would you expect to quote.
Yes, it they're all you know all my children are important here.
But.
But I would say from go to market. You know certainly was top of mind for me that's why abroad, Rob Crawford on the run our you know our go to market efforts.
We're a bit further along there in the sense that he is onboard now and and we've kind of centralized sales and marketing and business development efforts under him.
Getting your hands around the pipeline and continuing to drive growth there as well as you know the conversion of.
Wins to revenue lot of things to focus on there, but if I was to say.
Which one is there is there a lot of focused on the other one that.
Probably knew little bit of noon new updates on this quarter is around really our engineering services and solutions you know are.
For quite some time, the company's invested from before I joined a bit in.
In this lark RF technology.
And been able to start to build microelectronics solutions and that facility and and starting.
To to deliver substrate samples and qualification samples to host to customers.
It really is a big opportunity for us and great glad to see that those investments are coming online and the opportunity from that but.
There are few things the highlight in that and Thats section of strategic initiatives.
Okay. Thank you and gross margin improved.
But by revenue mix systemic and elsewhere.
Yes, we're on.
No I mean.
It's primarily revenue mix obviously.
We finished up the compute contract in the third quarter as well so that contributed a little bit, but it's primarily that revenue mix.
Okay. Thank you.
And what is your sort of goal I think you still need before we take great that that be goal for followed that traditional versus non traditional Mick.
Yes, I think we had previously had you know with excluding the legacy computing contract, we're targeting 72% to 78% higher value market mix. We're obviously at the higher end of that range already as we looked at 2020, and we're going through our planning cycle now.
We'll likely see that target be somewhere around 76% to 80%, maybe even 82% we'll have to finish the planning cycle.
Okay great.
You.
That in of itself is going to be.
Margin driver for us.
Yes.
So.
Yeah.
Still Adam.
Yes.
Upside potential there right [laughter].
Well I mean, I think yeah, you there's opportunity for us as we said semi cap in the second half of 2020 is gone and what we see visibility towards so all of these will be contributors.
Continued topline.
Mix, having the right mix and driving that margin expansion.
Okay well. Thank you that was helping me. Thank you.
Okay.
The next question is a follow up from Jim Ricchiuti of Needham and company. Please go ahead.
So it looks like you're fairly.
Said it sounds like with the changes you've made.
And the go to market strategy are you seeing.
Dissipate the early success, there being with with newer customers or.
How do we think about that strategy as it relates to your existing customers.
Yeah, I think they're both important to US you know we had traditionally the company had been focus with the business development organization on on new opportunities and that certainly brings new folks to us, but I would strongly felt like we could also do more for the customers were doing business with so.
I referenced that it might be it a little buried in the in the commentary that.
We kind of are aligning our account management with that see our organization and the whole thought there as you know we have business development leaders that will that we'll look for new opportunities, but the account managers will really really be working.
To make sure that our current customers are really pleasing that were farming, new opportunities and and so it's definitely a more sophisticated model than where we've been traditionally.
Because it because I think we can do more for.
We've got some marquee customers unit, we look across the and Andy space.
We've got the who's who clearly, but I know, we can do more for a number those customers and and we can grow quite a bit just from within our installed base, but that being said new customers are always important and welcome and.
And we'll we'll make sure we maintain a balance but that's how we're thinking about it.
And Jeff any any kind of flavors and give us just with respect to.
The margin profile of some of the business.
Winning.
Well I mean, the fact that aerospace and defense and medical kind of OLED in that and you saw it in the kind of in the results.
That that allows us to to be a bit above our.
At or above our corporate margin, which is an opportunity is as route talked about as we get the mix up there.
These are really sophisticated systems and.
And the complexity involved allows us to have quite a bit of value add and and that allows us to garner more of that so as we as we look you know being in the mid nines from a gross margin.
We liked that we've we've seen without the large computing contract that we've got to double digits and so you know as we look out over time.
We'd like to continue to nudge that that range higher and maybe Jeff if I could just add comment to that to Jim's question I think as we think about aerospace and defense and medical.
Sectors, we've got target margins for each of our sectors and those margins tend to be higher than our corporate average and so as we look out into the future part of that margin expansion, obviously is getting not just revenue growth but.
The right mix of revenue growth across these sectors.
Well I guess, there's some precedent for that because last quarter excluding the.
Large computing contract.
Generating gross margins above 10%.
Yeah, we were at we were at temper, 10.1%, excluding that contract insensitive to mix and fluctuate how customers volumes are and stuff, but but even this quarter being in the mid nines is pretty solid and Jim or just remember it's a it's a portfolio business right. We've got a lot of different customers and within those customers a lot of there.
Products with varying margins and so it's always that.
Finding that balance with that mix.
And last question for me is just as it relates to.
Yes.
Still some ongoing concern about the macro environment I'm just curious given what do you guys here from your customer base.
And well I mean I think.
There are sold noise out in the marketplace.
With that said, our aerospace and defense and medical markets you can see yeah their strength within them Semicap, we've talked about we expect it to ultimately come back in the second half of 20 to 20 is our expectation I think the industrial spaces, where theres, a little bit maybe more potential effect, but.
To date, we've seen a little bit of softness, but it's as much I think.
Customer by customer considerations.
And the compute sector for US obviously is coming down and then it's not that primary growth sector for us.
But we've had some fluctuation there as a result of the legacy compute contract it feels like Theres, a little bit of trepidation out in the market you know I mean, I think to everybody reads.
Reis the press and.
In gets concern maybe a little bit about what's going on in the world economy.
I do think we're in some pretty resilient sectors and that.
You think about the the aging population and the need for some of these fantastic new medical devices that are being built and.
And you think about.
The cycle as semi cap and how that drives and how that buildup is often times before you see no large volumes in consumer devices even.
And then and aerospace and defense you know there has been a lot of lot of investment and a.
Support for that with the current certainly in the US administration. So so it's kinda like group set I think industrials, one where we're maybe more.
Im going to its going to follow the market fluctuation, but I think we've got pretty good resilience with the breadth of our business across all sectors that we.
Participating.
Okay. Thanks, a lot.
Thanks, Jim Thank you.
This concludes our question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
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