Q1 2020 Earnings Call
And ignite and welcome to the Sanmina corporations first quarter fiscal 2020 earnings conference call.
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After the speakers presentation, there will be a question and answer session.
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I'd now like turn the conference over to your Speaker for today. This page smelting. Thank you ma'am. Please go ahead.
Thank you Catherine good afternoon, ladies and gentlemen, and welcome to San Marino first quarter fiscal 2020 earnings call a copy of our press release and slides for today's discussion are available on our website, it's been muna dot com and the Investor Relations section.
Let me remind everyone that today's call is being webcast did in recorded and will be available on our website you can follow along with our prepared remarks and the slides provided.
During this conference call, we may make projections or other forward looking statements regarding future events worth of future financial performance of the company. We caution you that such statements are just projections. The company's actual results of operation may differ significantly as a result of various factors, including adverse changes to the key markets we target.
Significant uncertainties that can cause our 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 operations the amount of restructuring charges related to his company wide Rightsizing plan actually recorded in the second quarter and other fat.
There are 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 slides issued today that we have provided you with statements of operations for the quarter ended December 28, 2019 on a GAAP basis as well as certain non-GAAP financial information a.
The Asian between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website.
In general our non-GAAP information excludes restructuring costs acquisition and integration costs noncash stock based compensation expense amortization expense and 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 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're referring to our non-GAAP information I would now like to turn.
The call over to Hartmut legal Chief Executive Officer.
Thanks, Pedro and good afternoon, ladies and gentlemen.
Welcome and thank you for being here with us today.
In addition to page our new CFO . Good Zima is with me on todays call.
Good I assumed alcon roles at the beginning of Q1.
We getting up to speed quickly and the transition is working smoothly.
The first few months with the company I can tell you that some mena is a well going organization.
With an exceptional management team.
I think could would equal that's and both of US I'm excited to be part of the team.
With that I will turn the call to crudes to take us through the financial and operational results. After that I will provide some color on the end markets we serve.
And our management teams priorities Cook.
Thanks.
Please turn to slide three.
I'm pleased to report first quarter revenue up 1.84 billion exceeded the high end of the range. Our prior outlook of 1.7 to five to 1.8 to 5 billion.
Revenue was down 2.8% sequentially, primarily due to lower revenues in the communications sector. As the result of excess inventory in the channel as we had discussed and had expected on our prior earnings call.
Q1, non-GAAP gross margin was 7.5% relatively flat with the prior quarter. Despite lower revenue levels as we started to see the benefits of our previously announced restructuring program and associated actions to create a more lean and flexible manufacturing processes.
Yes.
The restructuring program is on schedule and is expected to be largely completed by the end of the second fiscal quarter.
Q1, non-GAAP operating expenses declined relative to the prior quarter as we continued to drive efficiencies at the corporate level.
Q1, non-GAAP other expenses were approximately four point threemillion.
This was down approximately 4.4 million relative to the prior quarter.
This was partially driven by a gain of approximately 2 million related to deferred compensation assets, which had no net impact on non-GAAP earnings per share.
As deferred compensation gains are equally offset with corresponding increases in manufacturing and operating expenses.
In addition, we benefited from lower borrowings under our revolver and lower amounts of accounts receivable factoring.
Finally, Q1 non-GAAP earnings per share were 79 cents. This exceeded the high end of the range for our prior outlook of 65 cents to 75 cents.
Q1, GAAP earnings per share were 53 cents.
For cash flow purposes, depreciation and amortization was approximately 29 million.
And capital expenditures were approximately 28 million in the first quarter.
Please turn to slide four.
Here you can see additional income statement details related to the first fiscal quarter and associated comparisons.
Now please turn to slide five.
I will now discuss our two segments.
As you can see from the graph on the left.
Hi, I must segment revenue was down approximately 57 million from the prior quarter.
This was as expected primarily due to lower revenues in the communications sector as the result of excess inventory in the channel because we had discussed on our prior earnings call.
The modest decline in non-GAAP gross margin sequentially, but the result of this lower revenue level.
On the right is our second segment components products and services.
Revenues were down slightly by 6 million.
To the prior quarter.
non-GAAP gross margins improved over the prior quarter due to operating efficiencies.
Now please turn to slide six.
Our balance sheet remains strong cash and cash equivalents or approximately 431 million at the end of the quarter.
Inventory was down approximately 57 million and inventory turns improved to 7.8 times.
We're very focused on reducing inventory levels to improved capital efficiency and generate cash flow.
Cash cycle days were 52.9.
non-GAAP pre tax return on invested capital was 22.2%.
Cash flow from operations was 21.2 million.
From a liability standpoint, we had an approximate.
156.7 million decrease and accounts payable during the quarter.
The continued to maintain a low leverage of 0.9 park.
During the quarter, we repurchased approximately 300000 shares for a total of approximately 9 million.
As we generate strong free cash flow, we will continue to be opportunistic and repurchasing shares.
I would now ask you to turn to slide seven.
Here you can see additional balance sheet details related to the first fiscal quarter and associated comparisons.
Now please turn to slide eight.
Our outlook for the second fiscal quarter does that revenue will be in the range of 1.7 to 1.8 billion.
This expected sequential decline in revenue is primarily driven by seasonality.
We are still positive about the long longer term revenue outlook beyond Q2, and Harman will discuss this more subsequent to my remarks.
On a non-GAAP basis, we expect that gross margin will be in the range of 7.3% to 7.8%.
We expect the benefits of our previously announced restructuring program will allow us to keep margin relatively flat compared to the last quarter. Despite the expected revenue decline in revenue.
The restructuring program is on schedule and we expected to be completed by the end of the second fiscal quarter.
non-GAAP operating expenses should be approximately 62 to 64 Milligan with non-GAAP operating margin in the range of 3.8% to 4.2%.
We expect that non-GAAP other expenses will be in the range of 7.5 to 8.5 million.
Our non-GAAP tax rate should be around 17% <unk> percent and we expect our non-GAAP fully diluted share count to be around 73.5 million shares.
When you consider all this guidance, we believe that we will end up with non-GAAP earnings per share outlook in the range of 65 cents to 75 cents.
Adjusted adjusting for an estimated stock based compensation of 12 cents per share GAAP diluted earnings per share is expected to be.
Between 53 cents and 63 cents.
For cash flow modeling, we expect capital expenditures to be around 28 million, while depreciation and amortization to be around 30 million.
We expect to generate free cash flow in the second fiscal quarter.
I'll now turn the call to Hartman for further comments on our market segments and the longer term outlook as well as San minnows priorities.
Thanks, Good so let me add a few more comments about the cone business environment, our longer term outlook for that please turn to slide number 10.
As you know Semina remains focused on high complexity heavily regulated markets.
So I mean as large as market segment includes industrial medical defense in automotive and was approximately 60% of total revenues in the first quarter.
The segment was pretty much flat sequentially.
We had good growth in industrial defense, and aerospace offset by softness in medical and automotive.
Working with our team I see that's amenas, who Rudy well positioned in these markets.
And these complex regulated markets, our expertise in engineering and design.
End to end manufacturing, a one instance, IP system and regulatory certifications really differentiate us.
These markets continue to expand small companies in these segments.
Look to partner with a company like Semina.
We expect the segment to grow as we progress through fiscal year 2020 .
Communications network is our second largest segment at about 32% of revenue in the first quarter.
This market was down 7.8% sequentially, primarily as a result of excess inventory in the channel.
This is a very important market for some mena will enjoy as strong longstanding customer relationships.
I'm also pleased with a good pipeline of new opportunities, which we obviously work on improving with new projects and customers every day.
As we said on our prior earnings call for the first half of fiscal year, we seeing softer demand in this segment.
Got to hear from our customers that telling us that longer term demand should be improving primarily driven by the burning off of excess inventory in the channel and this new programs ramp including Fiveg.
[noise] Sanmina is well positioned with OLED customers and programs and I'm excited about what is ahead of us.
Cloud solutions grew modestly up 1.2% into fiscal year, so in the fiscal quarter and was about 8% although total revenue.
In this segment, we have eliminated some lower technology products, such as setup box business. So that today, we are strictly focused on the high end cloud solution products.
I believe the trend towards cloud computing this beneficial to Semina and we have some good opportunities ahead of us.
If I want to summarize our end markets in the short term, we see some inventory that needs to be flushed out.
And expect all of our market segments to be down sequentially in the second quarter, which as you recall from prior years has also due to seasonality longer term I believe the Semina is focused on the white market, then wed customer opportunities.
Based on what I hear from our customers and assuming a continued strong global economy, I believe 2020 will be a good year for us.
With that let me now turn to my priorities follow management team for that please refer to slide number 11.
First and foremost is profitable revenue growth to focus on key customers in high complexity mission critical end markets.
I believe we are focused on the right and markets, where we see plenty of opportunities to partner with current and future customers. So they can benefit from our lean manufacturing services offering.
Second is market, leading onboarding processes for new programs.
Our customers really value this a.
Hey plays a big part an exceptional customer satisfaction and it helps us accelerate the time to revenue and boosting our return on invested capital.
Third is our continued to drive code lean and flexible manufacturing processes that would allow the company to see attractive margins, regardless of the business environment.
Related to that at the last earnings call, we announced a corporate restructuring program and have started to see the benefits in the first quarter and.
And of course, we intend to continue this program to further improve operational efficiencies.
Finally, a keen focus on cash generation.
For example, we made good progress last quarter in reducing inventory, but believe the additional opportunities to improve.
A strong balance sheet and consistent cash generation give semina the flexibility to invest in growth with our customers.
Optimized capital structure, and minimize share dilution through opportunistic share repurchases.
I can say that our management team is locked into these parties and we're all excited about direction we're heading.
With that let me summarize will be covered in today's call. Please refer to slide number 12.
For the first quarter, we achieved revenue of 1.84 billion and non-GAAP earnings per share of 79 cents, both exceeding the high end of the guidance range.
In terms of revenue outlook for Q2, we expected to be modestly lower ranging between 1.7 to 1.8 billion primarily due to seasonality.
We expect we expect non-GAAP EPS in the range of 65 to 75 cents.
In addition, we expect to generate meaningful positive free cash flow during the quarter.
In the long term, we believe that revenue growth will resume and margins will improve as excess inventory in the channel is burned off and we continue to ramp new programs.
We also covered the properties for our management team and the discipline focused on a few key initiatives that mattered to drive profitable growth with our customers in high complexity mission critical end market.
I would like to thank all of our employees for the great work and a good starts to 2020 .
We couldn't do this without our global supplier partners customers investor support and confidence in Semina.
Thank you for that.
Im glad to be part of this team and we look forward to working with all of you to build a great company.
And cost when was that we can now open the call for the Q in a session.
Thank you, Sir ladies and gentlemen, just as a reminder to ask a question at this time. Please press star and then the number one on your telephone keypad. Once again that is our number one and we will pause for just a moment.
Your first question comes from the line of Bhatia with Bank of America.
Hi, Thank you for taking my questions.
Maybe just start off with I was wondering if you can dell's are little bit deeper into what you saw in the communications end market thing last earnings call you talked about some delays with Fiveg and and also you had talked about two quarters worth of inventory that.
Problem that needed to be burnt off so is there anything different that you've seen in this quarter based on what you had expected and can you talk about what you saw in networking versus optical versus wireless.
Sure sure we'll plan no good good good question.
No. The overall situation a pretty much remains the same as what we outlined in the last call.
We were working through.
The Oh the market is working through.
The the inventory burn of it in the channel and.
So.
We continue to dialogue with our customers I.
I would say overall diem the outlook in the information that we have is pretty much remains the same.
And.
So so again as we outlined in our comments to the outlook is pretty much the same as so if we had.
As we had outlined a few a few months ago and I think is very much a timing issue. So we're still working on the right. The nobody programs with the right customers and since we took the timing but at this point.
Okay. Okay. That's helpful and Hartman. Thank you said longer term you see revenue growth if I look at what you posted for the first quarter and the guidance for the second quarter I mean revenue so far in the first half is down double digits year on year do you think in the second half with Fiveg programs coming on and other.
End markets recovering do you think revenue into second half of the year can grow year on year or should we still expect a decline year on year into second half.
No. Good good question on where we will be taken as select one day, one week at a time here.
And.
With the with the ability of the visibility that we have feel right now we would be focusing on on the on improving the company and.
Make issue that we are we are ready to do execute the revenue in the demand when it comes center.
At this point, we lead onto comment as in the past beyond to beyond the next quarter. So again, we're optimistic that we working obviously on the buy programs.
And.
And.
We'll take it one week at a time okay. Okay.
And maybe one question for occurred on the margins for the Cps segment I mean, the sequential the 70 basis points improvement can you delve a little bit into what led to that improvement and specifically within components products and services, which segment within that actually improved and and can you remind us and.
How should we think about margins going forward or what is the long term target and what is the expectation for margins in that segment and Ken can there be further improvement in margins in Cps.
Yes, I would say first of all we don't break out.
That business beyond.
The segment total says Weve outweighed here and the slides.
But I would say in general the reason why we saw the increase in this quarter was twofold I think first of all we're very focused on improving the efficiency of our operations and so I think that was very helpful. I also think we had some positives related to mix.
There are as well in terms of Argos long term I would echo what.
What Hartnett said earlier, which is we're taking this thing one quarter and over time or we are making sure that we are well positioned as the revenue comes back to continue to further improve margins.
And that's our goal so I think in general what we saw in the first quarter for on Cps was a positive note, but we've got to keep them momentum ongoing.
Okay, Okay, and my last question would be.
Have you seen any disruption from the the events in China with Corona virus.
Have you seen any supply chain disruptions.
As a result of that.
Yes. So that's obviously, it's a it's a very much in evolving situation with us in all of US receiving updates almost on a day today of our to our basis.
Our entire team as they.
Is there much focused on that.
We have curtailed non essential travel and our local operation has taken necessary steps.
No we have not nor do we anticipate at this point to any material disruption.
To our business.
I also want to remind do that.
In terms of our total business Ella.
China Operation is probably not as significant as maybe some of the other players in our industry, but we will continue to watch this may be carefully and.
Taking necessary steps, but so far the the impact on our supply base is is very much on no control, but we have to continue to monitor this very carefully okay. Thank you that's helpful and thanks.
Thats on the quarter. Thank you. Thank you.
Our next question comes from the line of Jim Suva with me.
Hi, This is Tim young calling on behalf of Jim Suva. Thanks for taking my question your cloud solution outperformed last quarter.
I think your guidance was strong quarter over quarter on them.
Came up came out with positive gross also.
So are you maybe just provide some color on what's driving this rise in the second.
Hello.
Yeah no.
It's a it's a it's.
It's an important sector for us segment for us at the same time, it's about actively small segment for us so.
The timing off of a few program CN there can easily change the.
Percentage kind of funnel.
Ranges that we've estimated just a just a few few months ago. So so continues to be you know on an important segment loss, it's a business that's very much.
A project driven business, which can makes the.
Revenue estimates for the next couple of months a little bit more difficult. So now we are happy how we position there and look forward to executing on some exciting opportunities ahead of us.
Got you saw the lumpiness of the businesses.
And then distressed it's more just for this quarter again next quarter.
Youre guiding.
Decline, so right divide that I seem to adapt that's a good way of putting it yes.
My next question is on margins I think in the past five quarters, you have achieved operating margin expansion.
Yes.
However, I think Youre you hide the margin guidance for March quarter.
The midpoint of guidance on.
The 10 basis point in lower purchase.
So I guess my question here is that how should we think about the margins.
Just for the full year, because I think the in the second were second half margins typically stronger than the first.
Should we think about the same thing or what's the variables.
Just going forward.
Yes, so we're very focused on on margins.
You know we're focused on controlling what we can control relative to last year, obviously revenue right now or is down and so we're working very hard through our restructuring program and creating other operational efficiencies Dick's still maintained that four plus percent operating margin range and again.
Our hope is to create this lean and flexible manufacturing structure in the first half a year and should revenues come back as we opened in the second half then we should get some leverage there, but as harvest said, we only guide one quarter at a time and will take Theres one quarter to our.
Super helpful. Thank you.
Okay, Catherine we probably have time for one more question there will be great.
Okay last question comes from the line of Christian Schwab with Craig Hallum.
Congratulations on a solid quarter I just want a couple of quick follow ups to the series of first question the inventory in the channel situation that we talked about being the multi quarter situation. It sounded like in your implied guidance all segments down due to seasonality is the lions share of all that excess inventory and communications.
Work through.
<unk>.
So so the question of the if the majority of the inventory ahead, because we are the majority of the excess inventory on the channel work through following Q1.
Yes. So so no we really don't have that detailed the visibility again, we have ongoing communication here with our customers who.
Many of them also lack the alone visibility so.
Yes. So it's it's again, it's a mix between between seasonality and the and the inventory that needs to be burned off and and I wish I had the kind of complete understanding which of those two factors as equate effect in a given in a given dale given the weak but is this these are the two main factors that are not.
That.
Makes sense, you know explained city the variation him.
Right and then and then it just as we think about the communications business in the inventory correction is that broad based or is that you know kind of historically your number you know historically or you are one or two top customers and inside of that.
End market you know, it's definitely formats is definitely a rather broad based this this release stated it.
Okay Perfect and then my last question, there's just a just a follow up.
It again I know you guys have only been their short period of time as a team.
But do you have any idea besides day to day or quarter to quarter, you know doing the business.
When you may have an idea of of coming back to analysts investors with.
Target.
Gross margin operating margin that you think the business can drive overtime, if it's higher than what we're currently operating there.
Yes so.
So so obviously a and all we are I'm very happy with what I've seen idea of how the company's being run and ASCO done I get a more and more our Hansen gauge I think we'll discover some opportunities and.
We are we obviously driving floor for margin expansion.
At this point, we don't have a particular like no one point a goal in mind to I think it's more of a continuous process and throughout 2020 thing, we'll find some opportunities to a to update. It also some of you guys. So kind of what we see and there were some of the opportunities on the future, but I look at this man as a.
Continuous process to make this a better company or improve the quality of the business. So that we can execute improve the margins improve the cash flow irregardless of I'm kind of the business environment, we are finding ourselves and.
Great. Thank you for that no other questions.
Great.
Thank you. Thank you again for joining today's call I think this wraps it up.
We look forward to providing an update on the business on our next earnings call and think again for dialing in and thank you for your support.
Thank you so much and have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.