Q1 2021 Sanmina Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Sanmina Corporation's first quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one on your telephone. Please be advised that today's conference is being recorded.
If you should require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker for today, Ms. Paige Melching Senior Vice President of Investor Communications. Thank you Ma'am. Please go ahead.
Thank you Catherine good afternoon, ladies and gentlemen, and welcome to Sanmina is the first quarter fiscal 'twenty 'twenty, one earnings call a copy of our press release and slides for today's discussion are available on our website at Sanmina Dot com in the Investor Relations section.
Joining me on today's call is youri, Sola, Chairman and Chief Executive Officer.
Good afternoon.
And Kurt of FEMA, Executive Vice President and Chief Financial Officer, Good afternoon.
Before we jump into the results for the quarter, Let me remind everyone that today's call is being webcast and recorded and we will be will be available on our website.
You can follow along with our prepared remarks, and the slides provided on our website.
Please turn to slide three of our presentation or the press release Safe Harbor statement.
During this conference call, we may make projections or other forward looking statements regarding future events and future financial performance of the company.
We caution you that such statements are just projections the company's actual results could differ materially from those projected in.
And these statements as a result of a number of factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission the.
The company is under no obligation to and expressly disclaims any such obligation to update or alter any of the forward looking statements made on this earnings release the earnings presentation. The conference call or the Investor Relations section of our website, whether as a result of new information future events or otherwise unless otherwise required by law.
You'll note in our press release and slides issued today that we have provided you with statements of operations for the quarter ended January 2021 on a GAAP basis is one of certain non-GAAP financial information a reconciliation between the GAAP and non-GAAP financial information is also provided on the press release and slides posted on our website.
In general our non-GAAP information excludes the restructuring costs acquisition and integration costs noncash stock based compensation expense amortization expense and other unusual or infrequent items.
Any comments, we make on this call as it relate to the income statement measures will be directed at our non-GAAP financial result of accordingly, unless otherwise stated in this conference call. When we refer to gross profit gross margin operating income operating margin taxes net income and earnings per share we are referring to our non-GAAP information I would now like to turn.
The call over to Yuri Sola, Thanks, Paige good afternoon, ladies and gentlemen, and welcome.
And thank you all for being here with us today.
We are off to a good start for the fiscal year 'twenty 'twenty one despite the challenges around the COVID-19 and component shortages. We delivered a strong result for the first quarter fiscal year 2021.
All of the industry's operating in a challenging environments and the it looks like COVID-19 they'll be with us.
The split of wild.
I can tell you the I'm proud of all the leadership team and all of our employees for managing through it.
And supporting needs of our customers.
So the agenda today, we have is that Kurt our CFO will review the details of all the financial results with you.
And I will follow up with the additional comments about Sanmina is a results and future goals, then Kurt and I will be open for question and answers and now I'll turn this call over to Kurt Kurt.
Thanks, Gary.
Please turn to slide six.
In the first quarter, we posted strong financial performance, including cash generation, despite the challenges and uncertainty associated with Covid and the macroeconomic environment.
Q1 revenue of $1 76 billion.
<unk> at the mid point of our outlook of one seven to $1 8 billion.
Revenue grew sequentially after adjusting for the fact that Q1 had 13 weeks for Q4, FY 'twenty had 14 weeks.
Q1, non-GAAP gross margin was eight 3% the third consecutive quarter above 8%.
Q1, non-GAAP operating margin was 5% the second consecutive quarter of 5% or greater.
Okay.
Q1, non-GAAP other expenses were $2 9 million of $2 7 million lower relative to Q4.
This was primarily due to a lower interest expense as the company paid off the balance of its revolver in the last month of Q4 and.
And a $3.3 million gain compared to $2 5 million in Q4 related to deferred compensation assets is the result of the appreciation in the stock market.
As a reminder gains or losses related to deferred compensation assets have no net impact on earnings per share.
Finally, Q1, non-GAAP fully diluted earnings per share of $1 two exceeded our outlook of 75 to 85 cents. This was primarily as the result of management's focus is on driving efficiencies and better mix.
This was the second consecutive quarter that non-GAAP EPS exceeded of dollar per share.
Now please turn to slide seven.
This slide shows the quarterly trends of our financial results.
You can see the benefit of the operating efficiencies and better mix that the company has been able to drive despite the challenges associated with Covid.
Revenue grew sequentially for the third consecutive quarter. After adjusting for the fact that Q4 FY 'twenty had 14 weeks compared to 13 weeks in Q1, Q2, Q3 of FY 'twenty and Q1 of the FY 'twenty one.
As I mentioned earlier non-GAAP gross margin has has exceeded 8% for the last three consecutive quarters and non-GAAP operating margin has been five per cent or greater for the last two consecutive quarters.
And again non-GAAP fully diluted earnings per share has exceeded the dollar for the last two consecutive quarters.
Finally, Q1, FY 'twenty, one non-GAAP operating margin of 5% and earnings per share of $1 two increased from 4% and 79 cents in Q1, FY 'twenty, despite lower revenue of $85 million.
This year over year of comparison further demonstrates the impact of the operating efficiencies and better mix. The company has been able to drive despite the challenges of Covid.
Now please turn to slide eight.
IMS revenue was $1 5 billion and grew sequentially. After adjusting for the fact that Q1 had 13 weeks of Q4 'twenty had 14 weeks.
Non-GAAP gross margin for IMS improved from seven 2% to seven 3%.
This was the third consecutive quarter, the gross margins for IMS or 7% or higher.
Components products and services revenue was $319 million.
Non-GAAP gross margin for Cps was 12, 4%.
This was the third consecutive quarter C. P. S gross margin was 12% or higher.
Now please turn to slide nine.
Our balance sheet remains strong and the company is well positioned to operate in any economic environment.
Cash and cash equivalents increased to $516 million.
We continue to maintain a low debt to cap ratio of one <unk>.
Seven.
Between cash and the availability under the revolver, we have approximately $1 2 billion of liquidity.
Yeah.
In Q1, we generated $62 million of cash from operations and $51 million.
Of free cash flow.
Q1 net capital expenditures.
11 million compared to depreciation of 28 on it.
During Q1, we repurchased approximately 340000 shares for $9 4 million at an average price of $24 60.
Yeah.
Please turn to slide 10 now.
Here you can see inventory was down approximately $42 million and inventory turns improved to seven seven.
This improvement reflects the our efforts to further improve the operational efficiency of the company.
Cash cycle days were $55 two.
Non-GAAP pre tax return on invested capital was $28 four per cent.
Now please turn to slide 11, and we'll discuss the outlook.
We expect Q2 revenue will be in the range of $1 65 billion to $1 75 billion.
Overall customer demand is expected to be relatively stable at all of our market segments.
This revenue outlook reflects the Q2 is typically lower than Q1 due to seasonality.
And there is some uncertainty related to the potential supply chain constraints.
We expect non-GAAP gross margin will be in the range of seven 6% to eight 2%.
We expect non-GAAP operating expenses to be in the range of 59 million to 61 million and non-GAAP operating margin in the range of $4 one to $4 seven per cent.
Please note that the outlook for gross margin and operating margin is reflective of higher costs in Q2 compared to Q1 associated with no holiday shut down.
The annual resetting of the employer portion of payroll taxes.
And any annual salary adjustments.
We expect that non-GAAP other expenses to be approximately 7 million.
Our non-GAAP tax rate is expected to be around 19%.
We expect non-GAAP fully diluted share count to be approximately 67 5 million shares.
When you consider all of this guidance.
Our outlook for non-GAAP diluted earnings per share for the quarter is in the range of 76 to <unk> 86 cents.
We expect capital expenditures to be around $15 million.
And depreciation and amortization to be around 28.
I believe we have navigated well through the impact of Covid and the macroeconomic environment to date and I feel like we're very well positioned to benefit from the ultimate economic recovery.
And with that now I'll turn it back to you. Thank you Kurt ladies and gentlemen, let me tell you more about the business environment for the first quarter and the outlook for second quarter and the rest of the fiscal year 2021.
Just to add few more highlights for the first quarter as you heard from Kurt centimeters of delivered strong financial results for the first quarter.
Most important we deliver consistent and predictable results our performance in the quarter.
As a testament that our strategy is working.
Primary focus for management of was on the four key things that drives our success number one safety of our employees number two customer satisfaction.
Number three driving efficiencies and creating better mix and of course delivering on our free cash flow.
During the first quarter, we expanded our leadership of strategic customers by delivering mission critical products technologies and services.
And the key markets that we serve.
Again in the summary.
We're off to a good start for fiscal year 2021.
Please turn to slide 14.
Let me give you highlights of revenue for the first quarter by end markets. As you can see overall, we had a stable demand for the first quarter and if you compare it to a four quarter. This is a normal quarter of 13 weeks were in the fourth quarter, where the 14th of VIX. So from that point of view of where slightly.
Actually up over the last quarter Covid.
Indications to net force can cloud infrastructure delivered 41% of our revenue industrial medical defense automotive 59%.
Top 10 customers were 58, 1% of all revenue.
In the quarter with some component shortages shortages, but it was manageable.
Pipeline of new opportunities continue to be strong.
Please turn to slide 15.
Let's talk now about revenue outlook by market segments for the second quarter.
So I mean, I as well established the amount of REIT markets mission critical high complexity Lee heavy regulated markets.
So I mean, it is recognized as the leader in these markets by our customers for.
For the second quarter today, we're seeing good relatively stable demand.
Our forecast of approximately 60% of revenue will be from industrial medical defense and automotive markets and 40% in communication that force and cloud infrastructure markets. So let me break it down and more details for industrial we expect solid the softer demand.
For some project seeing on typical seasonality.
For medical we expect to continue to do well overall stable demand.
For the fence, we have very strong demand and we are winning long term projects.
Bookings are expanding.
Say growing.
Automotive starting to see nice improvement in demand.
Well the communication networks, which includes networking IP routing and advanced optical systems, we see stable demand, we see some typical seasonality, but the overall.
It's a fair of the men.
For the mobile <unk> net for short term, we see an improvement of long term, we've seen a good growth.
Four of cloud computing for us at the high end computing of storage, we're starting to see some positive improvements and some seasonality impact.
Yeah.
For second quarter, there's still some uncertainties around COVID-19.
And supply chain constraints, mainly with semiconductor components.
Please turn the slide 16.
Let me make few more comments about the business environment for the rest of the physical year of 'twenty 'twenty one.
We are focused on unlocking the total value by maximizing the operating leverage in each of our business groups.
So I mean, the strategy is to build businesses around customer needs.
Delivering the right value add and delivering competitive advantage to our customers.
And expanding into more profitable projects and I'll focus key markets.
As Curt mentioned, we delivered for the second consecutive quarter operating margin of around 5%.
We will continue to make progress and believe there's still room for improvement.
And goal is to continue to drive efficiencies and a better mix.
Today, I can say debt management feels more comfortable that we can deliver to our long term operating margin target of 5% to 6% in the future.
And most important is the Semina has a strong customer base to build on board I bet on future.
Based on present visibility customized forecast and pipeline of growth opportunities.
We feel positive about the rest of the calendar year 2021.
The goal for us is to deliver solid results for fiscal year 2021.
Let me give you a for more comments on management priorities.
We will continue to provide industry, leading end to end solution with the key technology components and products for key markets and all of a strategic customers.
Managers will continue to build strong customer partnerships. That's the key to our success, we are driving sustainable growth with financial discipline, whatever the thing is measured.
And and look how do we improve it the goal is to continue to deliver the operating margin growth and strong cash flow.
And two a lot of the total volume so I mean, that's capabilities and maximize the shame holders of logging of longer term.
Still a lot of leveraging some of those business model and we're excited about the future. Please turn to slide 17.
In summary, we delivered respectable results for the first quarter revenue of $1 76 billion exceeding the midpoint of our outlook.
Non-GAAP operating margin of 5% and non-GAAP diluted EPS of a dollar and two cents exceeding Oslo free cash flow.
Of $51 million non-GAAP pretax rois of 28, 4%.
For the second quarter, we see revenue outlook of 165 to 175, non-GAAP diluted EPS outlook of 76 to 86.
We are seeing a relatively stable demand.
We will continue to drive operational efficiencies and the mix.
Also during this quarter, we'll continue to monitor components supply environment and as Curt mentioned, we will have a we already fact of the syn <unk> into our quarterly outlook.
So ladies and gentlemen.
I would like to again at this time, thank you all and operator, we're ready for Q&A. Thank you again.
Ladies and gentlemen, just as a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad once again on the star and the number of lines.
Our first question comes from the line of absolute on a chair.
Sarah from Bank of America.
Thanks for taking my questions I have a couple of for UV and then a couple of for Kurt.
Hi.
Yuri you had expected stable demand for the first quarter.
More or less of it when I look at the communications networks on the cloud infrastructure segment. It was down a little bit. So can you help us parse through what happened like.
Maybe just talk a little bit about what you saw on optical versus networking and last quarter. You had said there were some push outs in cloud. So did those come in so just trying to understand what was a strong what was a little bit weaker in the quarter.
Yes, Roop, who again.
Thanks for for all of your support number one yes, the obstacle for US all of it or was it in good in networking was good we had some a few pushout.
You know based on some components that we couldnt get.
But overall I would say it was the stable slightly down if you compare it to the last quarter, but again remember last quarter, where in fourth quarter of last year, where the 14 weeks what in this quarter. We only had 13 weeks. So you kind of have to look at it that way.
When it comes to the cloud computing, Yeah, we're starting to see some.
Some improvements mainly based on some of the new programs that we won in last six months.
Got it and then just a follow up to that jewelry.
With respect to the five G and mobile projects that you have are they coming in as you had the expected or are they coming in faster or slower just your thoughts on the <unk> rollout yeah first of all of the five G. I will say a day coming in based on what of feeling was based on our customer inputs.
You know as I said earlier I think we're starting to see improvements on that it's a you know and we expect longer term if we look at the.
Forecast that we've seen from all customers on some of the other new projects that we are working on we expect to demand on debt to go up.
Got it and then Curt if I can ask you just just.
Just to get some more clarity around the operating margin performance both in <unk> and your guide for <unk>. I think you had guided <unk> operating margin to be four 3% at the midpoint and even despite all of.
And the extra week in the fourth quarter I mean, the revenues were down $120 million, but you still had 5% operating margin performance. So if you can talk about what were some of the factors that helped you maintain above 5% operating margin and then when we look at your guidance for <unk> I mean, it's at $1 7 billion of the midpoint.
On another 50 million lower but I think you're guiding like if I heard of just correct me four 4%. So why what is driving that 60 basis points lower operating margin for <unk>. So if you can just help us frame the operating margin performance in <unk> as well as the guide for <unk> sure.
So first we'll talk a little bit about Q1.
Again relative to Q4, I mean, the the gross margin.
About the same.
But the fact was we were able to control opex.
<unk> in the quarter, especially when you compare it.
The two Q4, which of Q4, which had 14 weeks, we did get some benefit this quarter for the holiday shut down which we typically have so I think you know given the lower revenues. It was really about controlling operating costs that allowed us to still come in at a 5% operate.
On margin.
It was a lot of discipline around that.
We look to Q2.
Think of US as you already mentioned first of all you know theres a lot of uncertainty not only around COVID-19, but also around component shortages.
We've got to be conservative as it relates to that it is the CS the lay down quarter, so revenue will be down and that will slightly impact.
The gross margin and if you look at our gross margin.
The range relative to where we were of last quarter. It is down a little bit at the midpoint.
And again, you know operating expenses are going to be slightly up as I mentioned.
And on down revenue and as I mentioned in the script.
It's really three things.
No holiday shut down, which you typically save some money there.
The annual of the resetting of the employer portion of the payroll tax and then finally, if theres any annual salary adjustments that kicked in at the beginning of of the calendar year, we tend to see it there. So those of the those of the gives and takes obviously you know we're always trying to improve on our.
Our performance and we'll continue to push it towards towards the upper end, but.
I think it's prudent to think about things conservatively, given the uncertainty around COVID-19 and the uncertainty around the component supply.
Supply chain.
Got it and then for my last question, if you you've talked about component shortages of key.
Can you just talk a little bit of.
Give us your thoughts on on working capital days I mean, how do you think inventory trends I think of your inventory was down quarter.
Quarter on quarter, but you talked about some component shortages. So do you think you expect to build inventory and any thoughts on free cash flow.
For the year that would be.
Got it thanks.
Sure. So I think inventory was down relative to Q4 and Q1 for two reasons. Obviously when revenue goes down on inventory goes down on again revenue went down mainly because of the 14 weeks in Q4 versus the 13 weeks, but I think we were also able to improve turns I'd say, we're very we're fine.
Focused on on the turns our turns this quarter were were 7.7, we're very happy with that I'll certainly on although of certainly we're never whenever satisfy as you think about inventory in particular in Q2.
Obviously, we're trying to improve turns at the same time. It is challenging when you have potential component shortages and theres always a risk.
Bringing in you know 99% of the inventory of missing the one key part and not being able to get the product on so you know I'd say I think our goal of certainly to keep inventory relatively flat given that dynamic we always try to improve but I think that dynamic makes it maybe a little bit harder.
And it would normally be but certainly in terms of generating fee free cash flow I think we've shown over the last many quarters now that we're generating consistent free cash flow in and you know certainly expect to continue to do that and in the future. So I think you know our balance sheet will only continue to get stronger.
Yeah.
If I can add to that.
Yes.
Fair amount of moving parts when comps too.
Just the supply chain.
Planning around debt, but theres still challenges.
Back to have a good quarter I mean, the today, we feel that about this quarter. The 90 days ago. So as Kurt said Theres a lot of tune up the to be done as we continue to do this and we expect to deliver the.
The result.
Okay. Thank you and thanks for all of the details appreciate it. Thank you.
Your next question comes from the line of Jim Suva with Citigroup investment.
Hello, Jim.
Good afternoon to you and your team.
Question, you gave some commentary around the component shortages, which are becoming pretty well known.
First of all.
Our sales constrained by any of it in.
This quarter or the outlook well as I said the.
There were some shortages that to me was manageable debt was.
The few orders that were pushed out I think if you look at this quarter just like in any other quarter, except in this quarter, we've seen more.
We are it's part of our outlook definitely we have certain projects that are going to be pushed out.
But we hoping that we're going to get what we need Jim.
But it's going to I mean, the whole industry. You know you of a lot of demand from automotive you at all of a lot of demand from.
The fight coming up the phones and so on and that's really creating the south shore, especially on a custom asics and things like that.
And then my last question is on the component shortages what are you spoke.
Is it kind of getting you mentioned, the norm was getting better and the visibility better.
90 days ago and this is the.
The component shortages.
Table or worse or better from 30, 60 90 days ago.
I would say, it's not getting better.
90 days ago of some of these things are we thought they were going to get pushed out I will say in the last the maybe 30 or 40 days, we starting to see more of that where the.
Right now we have to go out on some components that are six months out.
Gotcha. Thank you so much for the clarifications, it's greatly appreciated.
Thanks, Jim Thanks, Jim.
Operator, we have time for one more call.
Thank you Sir your net.
Question comes from the line of of Christian Schwab with Craig Hallum Capital.
Hello Christian.
Hey, you're good.
So I mean, the supply chain component shortages.
Is it your out of it.
Can you kind of.
Talk to your different.
This is ware.
The lead times for those type of products are stretched out the furthest you know I know a bunch of custom asics of networking certainly are in an even low end power MCU as it seems.
But.
As you look at your business you know.
Is there could you rank the top three that are going to be the most challenging.
The us for US I would say custom asics of some of the components profile G in automotive.
Those will be probably more challenging but you already mentioned I mean, it's ASIC MCA use M P use.
It takes like that but I think it's been driven.
But the industry and automotive five G and then some cost on the networking networking product, but again, we used to this.
We're working very closely with our key suppliers.
As of a great supply chain team.
Our customers are.
We are of top customers in the world.
So we're working together with that and we hope to be able to navigate it through this and be able to deliver the the numbers that we just told you.
Christian did I lose you.
I do believe he disconnected.
Okay.
Alright, well.
Maybe the Christian if you the on the hit US Please give us a call and we can catch up but ladies and gentlemen, I want to say thank you for for your time looking.
Looking forward to talking to you in 90 days from now and the.
One key thing to our business. It says, it's a fun business, we still having fun and we expect the work hard and deliver some respectable numbers in the in the next quarter. So with that thank you very much.
Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.
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Yeah.