Q4 2019 Earnings Call
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If you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker for today. This page Melching, Vice President of Investor Relations. Thank you Ma'am. Please go ahead.
Thank you Catherine.
Afternoon, ladies and gentlemen, and welcome to 10 minutes fourth quarter in fiscal year 2019 earnings call a copy of our press release and slides for today's discussion are available on our web site at San Marino Dot Com any investor Relations section.
Let me remind everyone that today's call is being webcast today recorded and will be available on our website you can follow along with our prepared remarks in the slides provided on our website.
During this conference call, we may make projections or other forward looking statements regarding future events for the future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operations may differ significantly as a result of various factors, including adverse changes to the key markets we target.
Significant uncertainties that can cause or future sales and net income to be variable reliance on a small number of customers for a substantial portion of our sales.
Risks arising from our international operation.
The amount of restructuring charges related to the company wide of Rightsizing plan actually recorded in the first quarter.
And other factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission.
You'll note in our press release and flights issue today than we have provided you with statements of operations for the quarter and fiscal year ended September 28, 2019 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 cost acquisition and integration costs noncash stock based compensation expense amortization expense and certain other infrequent or unusual items to the extent material.
Any comments, we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial result.
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're referring to our non-GAAP information I would now like to turn the call Liberty Erie Sola Executive Chairman Uri backstage, yeah, good afternoon, ladies and gentlemen wall.
Welcome and thank you all four be here, but also on this call.
Most on this call today, we have a hockman liebl, our chief Executive Officer.
Huh.
Also occurred the Zima Ouch, <unk>, new Chief Financial Officer.
Good afternoon.
And David Anderson, our former Chief Financial Officer, Good afternoon, everyone.
Before we talk about offered onshore resolved so I would like to provide you with some background on two new members of so I mean as executive team.
Hard to believe will join Sanmina in July of 2019, as a chief operating officer.
He was promoted to Chief Executive Officer on October 1st.
Oh no argument for over 10 years I believe is the right person for the job and has a strong knowledge our markets and our industry.
The board of directors and I'm quite excited for ARQ <unk>, two will lead the Sunday night, as our Chief Executive Officer.
[laughter] curtains, almost a joint Semina only few weeks ago on October 14.
As our Chief Financial Officer.
Kurt will see David on there so for non sees plans to retire.
Kurt brings over 20 years of strong financial experience.
He will be a great fit into our team.
And he understands I mean as markets well.
Kurt will work closely with David on there so to ensure smooth transition.
David Anderson as I mentioned.
She is a retirement in January of this year.
On this call I will like to a really take this opportunity there to say thank you.
For <unk> being a great team player for many years and most importantly, if an entre leader for a lot of 17.
Thank you you're going to Miss you.
I would like to also say that I'm very proud off so I mean as management team.
And with the addition of current Zima and hurt and the argument Leavell Sanmina has a strong leadership team in place to lead all company for a better future.
And now I'd like to turn this call over to curb Kurt.
Thank you Jerry I'm very excited to have joined San Marino Sanmina is keen focus on profitable growth in question, it's well with my business philosophy on what it takes to creep and maintain a successful company.
I'm looking forward to working with Uri and her but in the coming years.
I'm also fortunate to have Dave Anderson remain as it advisor over the coming months to affect an orderly transition.
Since I joined the company just two weeks ago vast David to provide the results for fourth quarter in fiscal 2019.
Now I'll turn the call over to David.
Thanks, Curt and welcome to San Marino.
As you said, we're excited to have apartment incurred as part of the same Mena team.
They're depth of knowledge of our customer base markets and overall industry. We're confident that they will lead sanmina to the next level of operational and financial performance.
Please turn to slide three.
[laughter] overall, our fourth quarter revenue and non-GAAP diluted earnings per share were in line with our outlook.
While revenue was at the low end up or look at $1.9 billion non-GAAP diluted earnings per share at 84 cents exceeded the top end of our outlook by one cents.
Revenue was down 6.6% sequentially or $134.8 million, anup, 0.8% or $15.9 million from the fourth quarter of last year.
Fiscal 2019 revenue ended at $8.23 billion up 15.8% from fiscal 2018 and in line with the full year revenue outlook, we provided on our prior earnings calls.
Revenue was up on a four year basis across all of our end markets I will discuss or end market performance in more detail in a few minutes.
Please turn to slide four.
From a GAAP perspective in the fourth quarter, we reported net income of $19.8 million, which resulted in diluted earnings per share of 27 cents.
This was down 32 cents sequentially and up 26 cents from Q4 last year.
The sequential drop in GAAP diluted earnings per share was largely driven by the contribution margin impact on gross profit, resulting from the sequential drop in revenue as well as the increase in the GAAP tax provision that resulted from a tax restructuring transaction that required us to remeasure certain deferred tax liabilities.
The increase in GAAP diluted earnings per share over Q4 fiscal 2018 was largely driven by certain items that were included in Q4 2018 financial result.
30.6 million dollar noncash goodwill impairment charge at $12.5 million out of period adjustment related to long term government contracts and one of our Cps divisions, and a $10.8 million increase in restructuring costs.
This was partially offset by a 6.1 million dollar reduction in stock compensation expense.
For the year, we had GAAP net income of $141.5 million, an increase of $237 million from fiscal 2018.
GAAP diluted earnings per share for fiscal 2019 was $1.97 cents compared to a negative $1.37 cents in fiscal 2018.
Fiscal 2018, GAAP loss per share included a non cash tax charge of $2.33 per share as a result of the U.S. tax cuts and jobs Act enacted in December 2017.
The non cash goodwill impairment charge of 44 cents per share and 42 cents per share restructuring cost primarily associated with the restructuring actions that we announced in January of 2018.
My remaining comments will focus on the non-GAAP financial results for the fourth quarter and fiscal 2019.
At $144.4 million gross profit was down $5.4 million or 3.6% sequentially and up $20.6 million were 16.7% from the same period a year ago.
Gross margin came in at 7.6%, which was 20 basis points higher than we reported in Q3, and a 100 basis points higher than year ago.
For the full year gross profit was up $130.2 million and gross margins were up 70 basis points.
We continued to focus on improving our program mix and operational execution in fiscal 2019 in order to expand our gross margins and drive higher levels of profitability profitable growth.
I will discuss our margins in more detail when I review our segment results.
Operating expenses were down $3.9 million for the quarter ending at $64.7 million.
Our operating expenses came in below the low end of our outlook, which was primarily driven by continued cost containment across our operating expense departments, including the refocusing of our investment in our sales and R&D effort as well as lower than anticipated incentive costs.
3.4%, our operating expenses as a percentage of sales were flat with a third quarter, even though revenue was down $134.8 million sequentially.
For fiscal 2019 operating expenses were up $9.1 million compared to fiscal 2018.
This increase was largely driven by higher incentive costs, resulting from the significant improvement in our financial results in 2019, including the increase in revenue and operating margins.
Well absolute operating expense dollars were up as a percentage of sales operating expenses were down 40 basis points as a result of our ability to contain our operating expenses as we grew our revenue 15.8%.
At $79.6 million operating income decreased by $1.5 million from the prior quarter. It was down 1.8% and was up $20.9 million or 35.5% from Q4 of last year.
For the full year operating income ended at $333.9 million and grew 56.9% over the prior year.
Operating margin was 4.2% up 20 basis points sequentially and at the high end of our outlook and up 110 basis points compared to Q4 of last year.
Fiscal 2019 full year operating margin was 4.1%, which was up 110 basis points over fiscal 2018, we ended fiscal 2019 in line with our goal of driving operating margins to the 4% plus range.
Other income and expense at $8.7 million was down $900000, when compared with last quarter and up $1.8 million from the fourth quarter of last year.
We continued to see a reduction in our funding costs during the quarter from lower short term working capital needs throughout the quarter, there were driven by our efforts to reduce our inventory levels.
On a full year basis other income and expense grew in 2019, largely driven by increased funding costs to support higher short term working capital needs that were largely driven by higher inventory levels.
The tax rate for the full year was 16.6% to pre tax income with the rate for the quarter coming in at 14.6% a pretax income due to the full year true up.
This was better than we expected and was largely driven by a more favorable distribution of our profits during the quarter.
We earned $60.6 million net income with our non-GAAP diluted earnings per share coming in at 84 cents, which exceeded the top end of our it looked by one cents for the fourth quarter.
non-GAAP diluted earnings per share was up two cents or 2% from Q3 and up 24 cents or 40.9% from Q4 last year.
This was based on 72.3 million shares outstanding on a fully diluted basis for Q4.
For fiscal 2019, non-GAAP diluted earnings per share at $3.40 was up $1.27 cents from fiscal 2018.
An increase of 59.8 percentage points.
This significant year over year improvement in our financial result was driven by growth in revenue as was the continued improvements in the mix of our business that drove strong profitable growth.
This was coupled with a continued focus by the whole thing Mena team on driving better operational execution and cost efficiencies, while continuing to contain our operating expenses.
Please turn to slide five.
I will now give you some color around our end market segments for for the fourth quarter.
Communications networks was $629.7 million or 33.3% of Q4's total revenue.
This was down 14.5% sequentially and down 8.8% year over year.
Communications declined during the quarter more than we anticipated in our Q4 outlook. This higher decline largely resulted from late quarter push outs by our customers driven by excess inventory in the channel a slower than originally expected fiveg ramp and overall global economic uncertainties.
Industrial medical automotive defense was $1.1 billion or 58.8% of revenue for the quarter.
This was flat on a sequential basis, which was in line with our outlook and was up 11.4% compared to the same period a year ago.
Cloud solutions consists of cloud computing storage systems point of sale and casino gaming.
This segment was $149.9 million or 7.9% of revenue for the fourth quarter.
It was down 15% sequentially, which was inline with our it look and down 19.7% compared to Q4 fiscal 2018.
Our top 10 customers were 55.7% of revenue for the quarter.
Please turn to slide six.
For the full year communications was $2.9 billion or 35.3% of revenue. This grew nicely up 8.3% over fiscal 2018.
The supply constraints, we experienced in fiscal 2018 started to stabilize early in fiscal 2019, which allowed us to satisfy our customers pent up demand. We also started to move fiveg deployments from prototype Npis builds to low volume production. Although this ramp is progressing slowly.
In fiscal 2019, the industrial medical automotive defense end market segment had revenue of $4.6 billion or 55.5% of revenue.
This was up a healthy 24.2% compared to fiscal 2018.
We grew across all the sub segments on a year over year basis, with medical defense and automotive driving the bulk of the growth.
New program wins across all these sub segments and our ability to procure components helped drive the growth in this segment.
This segment is made up of markets that are mission critical and highly regulated which fits well within means core higher technology capabilities.
We believe there is there continues to be significant opportunities for profitable growth in this segment going forward.
Cloud solutions was $755 million or 9.2% of revenue for the full year.
Cloud solutions was up 1.6% over fiscal 2018, which was basically in line with our outlook for the full year.
Please turn to slide seven.
The integrated manufacturing solutions segment includes printed Circuit Board Assembly and test final system Assembly and test as well as direct order fulfillment.
As you can see from the graph on the left the Imus segment revenue was down $119.2 million from last quarter ending at $1.6 billion.
Imus gross profit dollars were basically flat with Q3 on a declining revenue driving an increase in gross margins by 40 basis points from the third quarter two 6.8%.
The Imus gross margin improvement on a decline in revenue was largely driven by operational improvements, including the resolution of certain cost recovery and excess inventory claims with our customers.
On a full year basis, Imus gross margins were up 40 basis points over fiscal 2018% to 6.4% with gross profit dollars increasing by 26.1%.
I am as profitability improved in fiscal 2019, largely driven by the contribution flow through on the increased revenue as well as the improvements in operational execution productivity.
Claims management and materials and overhead cost control that the Imus sales operation supply chain and finance teams drove throughout the year.
On the right is our second segment components products and services.
Components include printed circuit board fabrication.
Backplane assemblies.
Well assemblies enclosures precision machining and plastic injection molding.
Products include computing and storage products defense, and aerospace products memory, and SSD modules as well as optical and RF modules.
Services include design, and engineering, as well as logistics and repair services.
In aggregate the revenue for this segment was down sequentially by $19.8 million to $342.3 million with Grossman gross margin down 100 basis points from Q3 to 10.2%.
Cps segment gross margins declined sequentially, mainly driven by reduction the gross margins within our components sub segment.
On a full year basis, Cps gross margins were up 190 basis points over fiscal 2010, 2018% to 10% with gross profit dollars increasing by 32.6%.
Cps profitability improved in fiscal 2019, largely driven by the contribution flow through on the increased revenue as well as improvements in the business mix within the Cps segment and operational improvements that the various cps teams have driven throughout 2019, including some continued benefits flowing through this segment from the.
Restructuring actions, we announced in January of 2018.
Please turn to slide eight.
Here, we are showing you the quarterly trend in our key non-GAAP PNM metrics.
Revenue was down 6.6% from last quarter and up 0.8% over Q4 of last year to $1.89 billion.
Gross profit decreased 3.6% from last quarter to $144.4 million and gross margin at 7.6% was up 20 basis points from last quarter, and 10 basis points higher than the midpoint of our outlook.
Our operating profit decreased 1.8% from last quarter to $79.6 million and this led to operating margins of 4.2%, which was at the high end of our outlook.
Operating margins in Q4, we're at the high end of our outlook driven largely by operational improvements, including certain cost recoveries in our Imus segment combined with continued cost containment of our operating expenses.
As you can see we continued our goal of driving operating margins to be in the 4% plus range with fourth quarters operating margins of 4.2% up 110 basis points over the fourth quarter fiscal 2018, and returning to the level last reached in the third quarter of 2017.
non-GAAP diluted earnings per share one cents above the high end of our outlook at 84 cents and up two cents sequentially.
Please turn to slide nine.
We are providing you the year over year trends in our non-GAAP PNM metrics revenue was up 15.8% from last year to $8.23 billion gross profit increased 27.7% from F. way team to $600.4 million gross margin at 7.3% was up 70 basis points for.
The last year.
Our operating profit increased 56.9% from fiscal 2000 $18 million to $334 million, a new high over the past six years. This led to operating margin of 4.1% another new high.
non-GAAP diluted earnings per share is up from fiscal 2018 by 59.8% to $3.40 a highest level reached over the past six years.
Please turn to slide 10.
Our balance sheet remains strong.
Our cash and cash equivalents were $455 million at the end of the year.
Cash was up $40.5 million from the previous quarter accounts receivable was down $106.6 million contract assets were up $9 million and inventory was down $14.6 million, we'll talk more about contract assets and inventory in a moment.
From a liability standpoint, we had a 13.2 million dollar decrease in accounts payable during the quarter.
Our short term debt was $38.4 million down $116.3 million from the prior quarter.
Short term debt includes the current portion of our long term debt.
Our long term debt decreased by $4.5 million to $347 million with our gross leverage ratio ending the fourth quarter and fiscal 2019 at approximately 0.9 based on our total debt.
Please turn to slide 11.
Since fiscal year 2014, we have repurchased 26.4 million shares at an average per share price of approximately 24.6 dollars and an aggregate purchase price of $649.2 million, leaving $100.8 million a board authorized share repurchases ability.
People under the prior board authorized share repurchase program.
Today, we announced our board has authorized an additional $200 million of share repurchases, increasing the amount available for future share repurchases to $300.8 million.
Since the inception of the share repurchase plan, we've provided a strong return of capital to our shareholders.
As we continue to generate strong free cash flow from our business. We will continue to return our capital to our shareholders on an opportunistic basis in line with our capital allocation priorities, which I will discuss in more detail in a few minutes.
Please turn to slide 12.
Here, we are showing you the quarterly trend in our balance sheet metrics.
Cash increased $40.5 million the $454.7 million. This was largely driven by our positive free cash flow generation during the fourth quarter.
Cash flow from operations for the quarter was a positive $190.2 million.
Net capital expenditures for the quarter were $29.2 million, which was below our expectations.
Net capital expenditures for the full fiscal year of $127.1 million ran slightly below our expected range of 130 $240 million that we mentioned during Q3 s earnings call.
We ended the quarter with positive free cash flow of $161 million.
Our cash generation for the fourth quarter was positively impacted by strong cash collections well the combination of contract assets in inventory remained relatively flat.
I will provide more details on our inventory in a moment.
For the full year, we generated cash flow from operations of $383 million and free cash flow of $255.8 million.
Our cash generation was strong as a result of our strong cash collections and our ongoing focus on reducing our inventory levels.
In the upper right quadrant, we are showing you the trend in inventory turns and dollars with the fiscal 2019 quarters shown on the old versus new bases for comparative purposes.
As of the first quarter fiscal 2019 send Mena adopted the new revenue recognition standard referred to as Estes six so six on a modified wrote retrospective basis.
As I previously indicated we did not expect the adoption of assay six so six to materially impact our revenue or earnings per share, which was a gain the case for our fourth quarter of 2019.
However, assay six so six does have an impact on our balance sheet.
With the recording of revenue on an overtime basis for the majority of our non product revenue stream. We're required to reflect work in progress in finished goods inventory along with the profit element as contract assets, which is essentially unbilled receivables.
As a result at the end of Q4, we had $396.3 million of contract assets and $900.6 million of inventories on the balance sheet.
For comparative purposes from an inventory turns perspective, we have provided the inventory turns calculation for fiscal 2019 under the old methodology and the new methodology.
Our inventory dollars under the old methodology were down $9 million sequentially to $1.27 billion and our turns were down sequentially point to have a turn to 5.4 turns.
Our fourth quarter inventory levels were negatively impacted by the inventory correction and slower fiveg ramp in the communication segment.
For fiscal 2019, our sales operations and supply chain teams drove a number of initiatives that drove our inventory levels down $102 million from the fourth quarter of fiscal 2018 to 1.7 to.
$1.27 billion at the end of the fourth quarter fiscal 2019 on an apples to apples comparison using the old methodology.
We remain focused on reducing our inventory levels and improving our returns.
Inventory continues to be a challenge mostly recent most recently driven by the inventory correction in the channel and the slower fiveg ramp in the communication segment.
While we saw continued improvement in lead times during Q4, some capacitors supply is still tight and suppliers continue to reduce capacity on legacy technology commodities, which we expect to potentially further tightened in the first half of calendar 2020.
Lead times, well recently declining are still extended on certain commodities when compared to a more normal market.
We continue to work with our customers to better understand the demand outlook. So that we can plan for the requirements with our suppliers and minimize any potential negative impact on our inventory levels and cash flow.
Our supply chain organization and operations teams continue to do a good job partnering with our customers and suppliers to secure constrained parts.
We expect continued to make improvements in our operational efficiencies and materials execution in the areas. We can control during Q1.
In the lower left quadrant, we are showing cash cycle days, which combines our cycle time for inventory contract assets accounts receivable and accounts payable.
Overall cash cycle time was down slightly on a sequential basis to 52.1 days, which was largely driven by better supply supplier payment terms mix and stronger cash collections during the fourth quarter.
On a full year basis, our cash cycle days were up from 47.2 days in Q4 of last year to 52.1 days in Q4 this year.
This was largely driven by a reduction in our accounts payable days outstanding.
Finally, pre tax ROI see was 23.6% up 1.4 percentage points from the prior quarter.
Compared to the fourth quarter of last year pre tax ROI see improved six percentage points and remains above our target of 20%.
Please turn to slide 13.
I will now provide you with a few remarks on our capital structure and capital allocation priorities.
As we mentioned on our last earnings call, we refinanced our long term debt in the third quarter by putting in place at $375 million secured delayed draw term loan with the maturity date of November the Thirtyth two 2023.
Through interest rate swaps, we effectively converted $350 million of this loan from a variable interest rate to an effective fixed interest rate of approximately 4.3% through December onest of 2023.
We also improved the flexibility of our capital structure by increasing the revolving commitments under our credit facility by $200 million to a total of $700 million and we maintain the flexibility to increase our commitments by another $200 million under the accordion feature which is subject to lender approval.
At the end of fiscal 2019, we had $692 million of liquidity available under our credit facility and as I previously mentioned, our gross leverage ratio dropped to 0.9 at the end of fiscal 2019 based on total debt.
In fiscal 2019, we generated $383 million of cash flow from operations and $256 million of free cash flow. Our business model has generated average annual cash flow from operations of $271 million and free cash flow of $160 million over the past five years.
Our capital allocation priorities have been consistent over the years and we expect them to remain the same going forward.
Our first priority is to invest in the business through Capex in R&D spending.
Our second priority is to invest in tuck in acquisitions, where the valuation and technological capabilities make sense.
Our third priority is the opportunistic repurchasing of shares supported by the board authorization, we just announced.
And our last priority is debt reduction, which we will consider when it makes sense to do so.
We have a high financial hurdle rate of at least 20% pre tax ROI see that we used to assess any investments we are considering acting on.
Overall, our balance sheet and capital structure remain in great shape, and our capital allocation priorities remain the same.
Please turn to slide 14.
I will now share with you our outlook for the first quarter of fiscal 2020.
Our view is that revenue will be in the range of 1.7 to five to $1.8 billion to $5 billion.
This reduction in the revenue outlook range compared to Q4's actual is driven by softness in the customer demand that we're seeing in the first half of fiscal 2020 that is based on our customers current forecast.
This declining custard your customer demand is largely driven by excess customer inventory in their channels slower than anticipated fiveg deployment and macro level global economic uncertainties.
To align our cost structure to this first half softness and customer demand that we're currently seen we have initiated a companywide rightsizing plan.
This rightsizing plan will continue to improve our operational efficiencies and further optimize our cost structure.
We expect to incur between $10 million to $20 million in restructuring charges, consisting primarily of cash severance costs.
We expect to execute this rightsizing plan over the first half of fiscal 2020.
This rightsizing coupled with our continued focus on the quality of our revenue with support will support our ongoing operating margin non-GAAP earnings per share and cash generation objectives.
GAAP diluted earnings per share will be between 52 to 62 cents.
This includes estimated stock based compensation expense of 13 cents per share.
On a non-GAAP basis, we expect the gross margin will be in the range of 7.3% to 7.9%.
Operating expense will be 62% to $64 million. This leads to an operating margin in the range of 3.84, 0.2%.
We expect that other income and expense will be in the range of $9.5 million to $10.5 million, our tax rate should be around 17% and we expect our fully diluted share count to be around 73 million shares plus or minus half a million shares.
When you consider all of this guidance, we believe that we will end up with non-GAAP earnings per share in the range of 65 to 75 cents.
For your cash flow modeling, we expect the capital expenditures will be around $30 million, while depreciation and amortization will also be around $30 million.
We expect to once again generate positive cash flow from operations in Q1.
Overall, we delivered solid operating margins earnings.
And free cash flow in the fourth quarter.
While revenue was at the low end of our outlook operating margins were at the high end of our look at 4.2% and once again met our goal of being in the 4% plus range.
non-GAAP diluted earnings per share of 84 cents exceeded our outlook and we generated $161 million of free cash flow during the quarter.
We're pleased with our results for fiscal 2019 revenue was up 15.8% operating profit was up 56.9% operating margins improved 110 basis points to 4.1% inline with our 4% plus short term goal and the highest operating margin reached over there.
The past six years.
non-GAAP diluted earnings per share were up 59.8% to $3.40 a gain the highest level reached over the past six years.
The whole samina team contributed to driving these solid operational and financial results during fiscal 2019, and I want to thank each of you for your contributions as they are well deserved.
As we move into fiscal 2020, we remain committed to delivering on our ongoing operating margin non-GAAP earnings per share and cash generation objectives.
In closing I want to welcome Kurt and Zima to send Mena as our new Chief Financial Officer, and congratulate Hartmut level.
On his recent appointment as our new Chief Executive Officer, I'm committed to helping hartmut incurred transition smoothly into their new roles over the next few months.
I wish to thank all the San mean employees for older support over the 17 plus years that had been at Semina, including the past two years as Sanmina is chief financial Officer.
We have experienced a lot together since I joined Samina right. After the same minus JPY merger back in 2002.
I greatly appreciate all the dedication sacrificed an extra effort that youve put into supporting me send Muniz executive management, the board, our customers and suppliers and our other stakeholders and most importantly, our shareholders.
I want us into special Thanks to say munis finance team, both past and present you earn extremely professional and dedicated team you should be proud of the contributions that you make on a daily basis in both creating and protecting shareholder value for our company.
Truly enjoyed working with and leading such a highly dedicated and professional team over the years.
I also want to personally thank our executive management team and urea and the board both past and present for all their supportive my career Semina your support and mentoring over the years help me becomes and Muse Chief Financial Officer I greatly appreciate your in the boards confidence me that led to my appointment as a means CFO two years ago.
Uri has a depth of experience and knowledge of San Mina and he emmis industry that is unsurpassed.
And I sincerely thank him for all the time you spend mentoring me during my tenure Hudson.
Last but not least I want to thank page and Bob you low for supporting me with my transition into the CFO role two years ago.
And by helping me get connected with our investors and analysts.
I have truly enjoy interacting with our investors and analysts over the past couple of years during our earnings calls Investor day and at various investor conferences.
I hope that you will give the same support the Hartman and Curt you have given to me as they transition into their new rules at San Nina.
Sanmina is a strong company that is well positioned to continue to deliver superior service.
Innovation and support to our customers as well as enhanced value to our shareholders.
I'm confident that Hartmut encouraged strong with Hartmut incurred strong leadership supported by the whole San Mena team Semina will reach the next level of operational and financial performance and will meet or exceed its mid term financial objective I will now turn the call back to Uri for further comment on our outlook.
Thanks, David Thanks, Charles complements of course, you're going to be missed but you're not going away.
Yes.
I know you're going to be around to help us get to the next level Ceight. Your comments and have a late is in general that let me add few more comments about the business environment for the fourth quarter and fiscal years 2019, and I'll talk about the outlook for fiscal year 2000 Fleming.
As David mentioned with delivered a good financial results for the fourth quarter exiting four quarter at the operating margin, 4.2% shows us that event the lower revenue with the improvements that we make inefficiencies that we're driving.
We can improve margins.
With that we deliver the.
non-GAAP EPS of 84 cents.
For fiscal year 2019, I will read is a solid year.
We really focused on.
A few things number one was our customer satisfaction number two margin improvements as I promise you a year ago that we'll get back to that operating margin of four plus percent.
Number three we are focused on cash flow.
Cash flow from operation was strong of 383, 383, Amelia and free cash flow of $256 million. They should continue.
Number four would it covered very well from supply environment constraints that we experienced during the year and delivered a non-GAAP EPS growth of 60% to $3.40 per share.
Please turn to slide 16.
Let me summarize our end markets and give you my my outlook.
So I mean I have markets were strong in fiscal year 2019.
80% of revenue growth was driven by high complexity heavy regulated markets driven by industrial medical defense and automotive segments.
For fiscal year, 2000, I think with delivered a great growth in these markets.
At 24.2%.
Industrial medical and defense and automotive markets continue to expand the last year was 50% of all revenue.
Industrial medical defense automotive markets should continue to be solid in fiscal year 2020.
For the first quarter, we're forecasting some softness in demand.
We expect first quarter to be flat.
But for defense markets, we are seeing us that own damn to continue.
Long term, we expect to continue to see growth in these markets.
Communication networks was 35% of all revenue.
You grew 8.3% last year.
Communication at four for Semina is very important Mark and then we do have a very strong customer base in place.
That involve into key.
16 programs.
Also have a good pipeline of new opportunities and we're working on adding new projects and new customers into segments.
For the first quarter were seeing softer demand in communications segments, and we are focusing a slower demand.
We are forecasting slower demand during the first quarter.
Also short term, we see some extra inventory in channels that needs to be worked out.
Long term, we see communication networks improving.
Semina is well positioned with that right customers and project, including deployment of Fiveg infrastructure.
For cloud solution said, there was about 9% all revenue last year. They also grew 1.6%.
And this segments. We also eliminate a lot of the lower technology products, such as a set top box business that we are strictly focused on a high end cloud solution.
Product itself.
For the first quarter, we're forecasting slower the demand in this segments, but we're working with some good opportunities in this segment, we do expect to expand customer base. This year.
And we think long term this will be a good segment for Semina.
In summary, what end markets.
And short term, we see some inventory that needs to be flushed out.
But longer term I believe sanmina is focused on the ride market at right customary opportunities.
Global economies very hard to predict but I believe based on our customary inputs fiscal year 2020 will be a good year.
Most important for US is that Sanmina is a strong companies that I would say stronger than a year from year ago.
We have a strong management in place.
Solid structure in place to drive profitable growth a strong balance sheet as David mentioned, and we're well positioned for any economic environments.
We will continue to drive operational discipline margin improvements and cash generation in fiscal year 2020.
We know this will yield this will yield continued improvements in operating model and drive shareholder value.
I can tell you semina strategy is working.
Sanmina is well aligned with the key end markets as we have focused on high complexity heavily regulated markets.
And for these markets Semina has competitive advantage semina provides industry, leading end to end solutions for our customers.
So I mean as also continued to investing talent.
Right technologies and services for the future.
Simply put.
We remain focused on the quality of the growth Thats our model.
So Matt.
Customer base is still positive about the future.
As I mean, less and Semina has a lot of leverage and its business model.
Now, ladies and gentlemen, I would like to thank you all for your support.
Now I'll turn this call over to augment our.
Thank you very very glad to be here and I look forward to working with excellent management team to continue building a great company.
It's been a couple of months since I joined summing up so I thought you might be interested in my initial observations.
First and foremost we enjoyed an exceptional reputation among our customers.
Many of our key accounts have been with us for more than 10 units and we continue to win next generation programs with them.
Second we owned the right technical capabilities operational and financial discipline that are so important to be successful then I'll end markets that is really a great assets to half.
Third our global teams Wilcox doing all customers trust everyday to execute flawlessly and to when the next pull them.
Well the many years of management team as profitably growing this business and successful the diversified.
In us revenue stream.
So after these first couple of months all just gives me great confidence that we are well positioned and I believe the best the assuming.
Still ahead of us.
With that let me now turn to my priorities for this upcoming year.
The fall into three main categories.
First the company enjoyed solid margin expansion in 2019.
I believe we've taken the rights steps to continue the strength in pursuit of our long term goal, which as you know remains a focus mplus operating margin at the same time, we'll continue to book continues to be a relentless and foot on cash flow generation.
Second we will continue to focus on key customers in high complexity mission critical end markets.
We are driving initiatives to further improve efficiencies and beach, even higher level of customer satisfaction.
Through a variety of program such as market, leading onboarding processes for new programs and customer wins.
And third the Rightsizing, we outlined today further reinforces our strategy, while a target markets.
Lean dedicated teams and no right locations can execute even faster fall regional and global customers and together with continued focus on the quality of all revenue will support our cash generation objectives.
I have communicated these parties clearly through it all company and the management team is excited about this strategy.
With that I would like to draw your attention to page 18 summarize what we covered in today's call.
We're pleased with those out for the fourth quarter revenue had 1.9 billion was lower than expected. However, operating margin increased 20 basis points sequentially.
We enjoyed full year revenue growth of 16% why the operating margin of 4.1% was in line with a 4% monotone protective.
non-GAAP EPS increased by a strong 60% and we generated $385 million in cash flow from operations.
In terms of outlook for Q1.
Expect demand to be soft in the first half of the fiscal year well the reasons outlined earlier.
That said I'm confident that our efforts in operation accidents as highlighted before to support our margin targets in Q1 2020 beyond all while our sales team as mobilized returns I mean that if you took rule.
I anticipate to share more details on the message on the measures we have taken in our next call.
Let me express my appreciation to David since I joined Semina. He has been a great help to get me up to speed. Thank you, David and yes, we will definitely Miss you.
And of course, a big Thank you goes to all of the employees for solid 2019.
Well as our vendor partners customers in investors around the globe for their support and confidence in Semina.
Glad we published team and look forward looking with all of you to building a great company.
Catherine but that we can open the call for Q and a session.
Thank you, Sir ladies and gentlemen, just as a reminder, if you'd like to ask a question at this time. Please press star and then the number one on your telephone keypad.
I'm going to star and the number one and we'll pause for just a moment to compile thereafter.
Your first question comes from the line if it got a child with bank of America.
Hi, Thank you for taking my questions and I will also started by congratulate thing Dan.
Well done and.
We're certainly going to Miss you as well so.
Please keep in touch.
Group, where maybe.
And maybe a question for you, we and our month, you've talked about maintaining margins and possibly growing margins going forward.
The general overview are you happy with the portfolio as it is and how do you see that mix.
Evolving over time are you going to drive a better mix or are you think there more operational efficiencies that you need to concentrate on to get the margins. The just your thoughts on how to improve margins going forward.
Yes rule, we already started that I would say in.
2000 fiscal years 2019 to really focus on driving efficiencies. We still believe we'll have more room to drive efficiencies and we're going to continue to do that back to the market said, we were able to get all industrial medical defense and automotive in is it pretty well I'd into customer bases there to continue to grow so we expect.
We improved the quality of of revenue and that quality of the revenue combination been improving operating margin should drive.
Better margins, even with the lower revenue, we expect to drive better margins.
Short term.
Communication networks to us.
Even dad, it's about timing, we are well positioned with a key programs. There we have some good opportunities in a pipeline both with existing has some new new opportunities so to us it's about the timing. The fiveg deployment is a is going to be it's got to hop and you just when.
So I think overall, we don't control the market, but we control what we do internally we are.
Very aggressively driving the expansion of our customers in a new markets. The Mark is there will not around maybe a few years ago and without capabilities, we able to attract.
And those that relationship is some key customers. So combination of all of these things and without new CEO right now.
Definitely believe we should be able to can you say higher than any other comments you want I think I think the position that we have without customers in okay with existing programs are strong. We have we have the right initiative in terms of cost containment and Rightsizing the company in place so.
Optimistic that we have positioned well it was but if other markets will try it up or down and the in the next few quarters you.
Okay. That's helpful and you you mentioned the communications segment I think you've said the first half is going to be week, maybe any color you can provide on what you sign optical versus networking and wireless and do you think that this is we need to quarter problem and using the inventory you get some better situation gets better in the second half.
Yes, I mean that we don't see everything.
Customer shares so much and even some of the stuff to share we can't talk about it but we definitely feels like it's going to be wanted to quarter scenario here.
You know.
But we are really taking one quarter at time, and then Thats why we have taken this rightsizing, making sure that dollar cost reduction meets our present demand.
Well well position.
Networking and wireless part of the business, we believe that Fiveg deployment will happen it just a timing.
On the optical side again, we're well position.
There are some softness on that side of the business.
But we.
We are talking to the customer had a few weeks ago.
A nice meeting and the dinner with Lenovo.
Customers and basically.
They see the overall year over year will be a growth year for that it just about timing. So I'm optimistic that this is.
Just a temporary.
Combination of stop demand and inventory because I definitely see little bit extra inventory in the pipeline that needs to be flushed out.
Okay and the last one from me I mean, you've talked about.
First have but maybe a stronger second half any thoughts for the overall year do you think I mean, given the first quarter is down the revenue guidance is about down 19% year on year at the midpoint do you think that fiscal 20 can be a year, where you grow revenues or do you think that at this point its two unclear to tighten that yes, I think for us.
Let's wait for that right now I mean, we're going to drive our business if if the but opportunities. There are structure is there that we can deliver lot more but in the meantime will then I just focused in what we haven't fully focused on quality. It's a time really to tune things some of the tune things.
And also we have a fair amount of new programs that we need to bring to the market. So overall.
Optimistic you know about next 12 18 months, but it's a short term, it's really hard to say, we're going to do X y and Z because it's hard to see it today, but I know that we will drive what we control and we'll continue to make big improvements. There. That's my promise to you. Okay. Thank you for all the details. Thank you.
Your next question comes from the line of Jim Suva with Citi.
Jim let Jim again, I'll want had say congratulations for Vista job running to be.
Big shoes to fill up multiple people behind going what's going on.
Yes, good forward to that well that's occurred but.
Jim curve, but the big shoes. So he is going to is starting to what will come around here office as they will do well.
Sanjay.
Yes.
Excess inventory in that channel.
Referring to current.
Specifically, but I Genie communications market, a little bit broader base that wont. Thanks.
Okay.
Yes.
Jim My comment is more broad based.
Yes ill thought fiveg is still in it but I would call in the development.
I would say the other parts of the business I think thats, what we have some inventory.
And your thoughts that we.
Component shortages exasperated, the mean, maybe double order or hopefully get product to the supply chain count.
Hi.
Issue Wellbore.
Slowdown in demand.
I think.
You know, Jim you being around long time and the.
That one is always hard too.
Figure it out 100%, but anytime when you have shortages.
There's a little bit panicking goes on where.
Customers do double order and by more than they need and I, that's kind of what I see today, I think we need to flush that out first.
And I'm, hoping that Dan demand will continue to be okay.
To that okay.
My last question.
During Q.
So again, that's pretty pull off.
Which is great.
But will also it sounds like.
I am pause is going to be a little bit longer.
Well, there's a couple of quarters you could probably.
Keep your employee not happy to announce lunch.
Well I mean, these restructurings are hard to get people lives on path.
On the carry it sounds like it.
Well a couple of course small.
Yes, well Jim.
Let me, let me make it clear there is a two questions there and I want to break those up.
The new I don't know how long were going to see some of the us slower demand is that a one quarter or two quarters, I'm really not smart enough to forecast that today and I don't think my annual management is ready to forecast on that either.
Well then comes to the people, Jim we're very sensitive to that.
So that's always been.
Management and our employees.
But in our nature of our business you constantly have to tune things up.
As we experienced growth last year around the world.
Customer has moved the product out around and sometimes you have to time comps that you need to to tune things up and I was said that's kind of what we're doing it right not tuning things up to make sure. If will have a lot of reasons they still be it really it ready for upside and when things come back to the demand that we're looking forward that we can deliver.
To better margins, but in the meantime.
The key here is that.
Given at the lower level that we continue deliver the respectable numbers.
Thank you so much and we'll look in portable Vulcan.
Thanks, So much. Thank you Jim Thanks for your support.
Kathleen operator, we have time for one more question at this point.
Yes, Sir your last question comes from line of Christian Schwab with Craig Hallum Grant.
Hey, guys congratulations to the new management team and congratulations on retirement.
And Gary Congratulations on coming back for another conference call. So.
If I could just little bit.
Further elaboration on Jim's earlier question on the excess inventory.
If you look at your top 10 customers.
It does everybody have excess inventory.
I don't think.
Yes.
Craig you know that I cannot Christian I can't really.
Comment on that.
But I will say this is a broad base and what happens when you have a shortage is basically for almost.
Yes, and a half two years.
If you look at historically Unfortunately, there's always the.
People.
By more than they need and I said tenet thats, what we see today I hope we are right and that's but in the meantime, just continue to do what we what's in our control and we will continue make better semina.
Right right, so kind of a textbook you know semiconductor correction might be happening right now that MLCC is you're no longer and allocation MC use mpos lead times gone from 26 weeks to eight weeks, maybe 10 weeks in some parts. So what you're either you or say there.
Maybe we're just seeing inventory draw down by customers to generate cash.
Not the type of demand restructuring destruction that maybe your year over year guidance would.
Which suggests is that fair, yes, we're not really at this moment I will say, we don't really not ready to guide year over year.
I mean, we're optimistic from our capabilities point of view and what we're working on.
You know from that point of view, but I think in a short term I definitely believe there's some correction and inventory for those reasons because of shortages.
Right, Okay, and then my last question.
Again following up on the Rightsizing, Hey, can you elaborate on who exactly as being Rightsized is that should we be assuming quarterly operating expenses change or is a bunch of that in Cogs.
No.
Christian is going to be.
Combination the Rightsizing is not.
We havent.
Finalized it totally but but in terms of the bulk of it as I mentioned is going to be a severance costs would be across both Cogs and opex.
Okay. Okay.
Great I didn't have any other questions. Thank you.
Sure.
Well with that thank you everybody for joining todays call and we look forward to providing an update on the business.
Our next earnings call again, thank you so much lease will support and speak to next time. Thanks, everyone.
Ladies and gentlemen. This concludes today's conference call. You may now disconnect. Thank you for your participation.