Q4 2022 TTM Technologies Inc Earnings Call
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Good afternoon, ladies and gentlemen, thank you for standing by welcome to TTM technologies fourth quarter and fiscal 2022 financial results Conference call. During today's presentation, all parties will be in a listen only mode.
Following the presentation. The conference will be open for questions to ask a question you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one one again.
As a reminder, this conference is being recorded today February eight 2023, I would now like to hand, the call over just a mirror.
Ttm's Vice President of corporate development and Investor Relations to review Ttm's disclosure statement. Please go ahead Sir.
Thank you Sherry before we get started I would like to remind everyone that today's call contains forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, including statements related to Ttm's future business outlook.
Results could differ materially from these forward looking statements due to one or more risks and uncertainties, including the factors explained at our most recent annual report on Form 10-K, and our other filings with the Securities and Exchange Commission. These forward looking statements are based on management's expectations and assumptions as of the date of this presentation TTM does not.
<unk> undertakes any obligation to publicly update revise any of these statements whether as a result of new information future events or other circumstances, except as required by law. Please refer to the disclosures regarding the risks that may affect TTM, which may be found in reports on Form 10-K 10-Q 8-K.
Registration statement on form S. Four and the company's other SEC filings. We will also discuss on this call certain non-GAAP financial measures such as adjusted EBITDA such measures should be not be considered as a substitute for measures prepared and presented in accordance with GAAP. We direct you to the reconciliation of non-GAAP to GAAP measures included in the company's press.
Please with the spa with the efficacy and is available on Ttm's website at Www Dot T. T. M. Dot com. We've also posted on our website a slide deck that we'll refer to during our call I will now turn the call over to Tom Edman Ttm's Chief Executive Officer. Please go ahead, Tom Thank you Samir.
Good afternoon, and thank you for joining us for our fourth quarter and fiscal year 2022 conference call.
I'll begin with a review of our business highlights from the quarter and a discussion of our fourth quarter results.
Led by a summary of our business strategy.
Joe our CFO will follow with an overview of our Q4 2022 financial performance and our Q1 2023 guidance. We will then open the call to your questions.
The quarter's highlights are also shown on slide three of the Investor presentation posted on Ttm's website.
In the fourth quarter of 2022, TTM delivered solid results in a difficult business environment.
While revenues softened non-GAAP EPS was above the midpoint of guidance, despite a challenging supply chain and the labor environment and the continued impact that COVID-19 is having on our business.
Demand in our aerospace and defense market remained strong with record bookings and backlog offset by weaker demand and bookings in our commercial end markets.
We also saw improvement in our profit margins year on year in Q4.
I'm proud of our employees for delivering solid results this quarter in a tough environment.
As we look into Q1 production inefficiencies in our Asia Pacific facilities, due to Chinese new year inventory adjustments and weaker demand from some of our commercial end markets are causing revenue and margin declines, but we will continue to see strong demand in our A&D market, which now.
Represents 40% of our revenues.
For the full year of 2022, excluding the acquisition of Telephonics TTM grew revenue five 4% with improved year on year profitability. Despite the challenges I previously mentioned.
Full year cash flow from operations was $272 $9 million, enabling us to purchase telephonics and strengthened our balance sheet, while returning capital to shareholders in.
In addition, we repaid $50 million of our term loan B on January three 2023.
I am proud of what our employees have accomplished in the face of these challenges. Despite one of the most difficult manufacturing environments that we have ever experienced.
I would now like to provide a strategic update.
<unk> Amazon a journey to transform our business to be less cyclical and more differentiated.
Over the past several years TTM has consistently emphasized that a key part of our strategy is to add value to the product solutions that we deliver to our customers, particularly in the aerospace and defense market.
In 2018, we acquired Anaren, which broadened ttm's product portfolio into highly engineered RF components and sub assemblies as well as adding critical RF engineering capability and resources in.
In 2022, we acquired Telephonics, which builds on Anaren in Ttm's customer driven culture, and disciplined approach to engineering and manufacturing.
The addition of Telephonics expanse, Ttm's aerospace and defense product offering vertically into higher level engineered system solutions and horizontally into the into the surveillance and communications markets, while strengthening our position and radar systems.
Your agreement with Raytheon technologies for this by six family of radars.
This is an agreement to provide radio frequency assemblies electronic hardware and printed circuit boards for the spy six family of Aisa radars.
The the agreement that has the potential to reach $500 million over five years.
The spy sixth radar will be on 40 ships of seven different classes by 2030.
TTM designs and manufacturers the beam forming network along with P. C DS and specialized assemblies for these radars.
This type of multiyear commitment for supply allows TTM to increase value to our end customer.
Another important element of our differentiation strategy is the current construction of a new state of the art highly automated P. C D manufacturing facility in Penang Malaysia.
The decision to build this new factories, a direct response to our customers increasing concerns about supply chain resiliency and regional diversity diversification and in particular, the need for advanced multilayer P C be sourcing options and locations outside of China.
The new facility in Malaysia will assist customers in our commercial markets, such as networking data center computing and medical industrial and instrumentation.
We made great progress on the Malaysian facility this past quarter as we completed the pilings required for the building laid the majority of the foundation completed the power substation and the roof. We also have received multiple deposits from customers with whom we have signed long term agreements, which provide a business days for.
Over 70% of the planned capacity in this new building.
Finally, I'd like to discuss today's announcement regarding the consolidation of our manufacturing footprint.
After the market closed today, we issued a press release announcing that we plan to close three small manufacturing facilities in order to improve total plant utilization operational performance customer focus and profitability.
P C D manufacturing operations in Anaheim, and Santa Clara, California, and Hong Kong will be closed and consolidated into Ttm's remaining facilities.
The plant closures are expected to improve both facility and talent utilization across our footprint, resulting in improved profitability T.
C. G M is offering customers of the affected PCB plants continued support at our remaining manufacturing sites we.
We plan to close the Hong Kong facility by the end of our second quarter and the two North America facilities by the end of the year in order to allow for necessary customer approvals at other facilities.
We expect the actions we are announcing today will allow us to better serve our customers with more focused operations as well as a more efficient cost structure.
We will be working with our employees to transfer them into other facilities and where that is not possible to treat all of these employees with the respect that they are due for their dedication to T. T F.
Todd will later discuss the financial impact.
Now I'd like to review, our end markets, which are referenced on page four and five of the earnings presentation on our website.
The aerospace and defense and market represented 40 per cent of total fourth quarter sales compared to 30% of Q4 of 2021 sales and 38% of sales in Q3 2022 M's.
The majority of the year on year growth was due to the inclusion of telephonics.
Excluding that impact our queue for A&D revenues grew 3.4% year on year organically we.
We continue to experience a positive defense climate with our AMD program backlog at $1.36 billion, including Telephonics excluding.
Excluding telephonics program backlog was $1 billion compared to $768 million a year ago.
This solid backlog was driven by a second quarter of record bookings of $464 million, including telephonics.
The solid demand in the defense market as a result of a positive tailwind in defense budgets are strong strategic programme alignment and key bookings for ongoing franchise programs.
During the quarter, we saw a significant bookings for key programs, including the spy six radar and M. H 60, our program.
We expect sales in Q1 from this end market to represent about 43% of our total sales.
For the full year aerospace and defense revenues grew 1.2% excluding telephonics.
Our revenue growth was limited by labor supply chain and production challenges.
And the U S. We are encouraged by the continued strong support for national security, including overwhelming bipartisan support for a 10% spending increase in the fiscal year 2023 defense budget that was passed in December .
In 2023, we expect and market growth to be above market projections of 3% to 5% driven by the defense side of our business.
We also recently announced that pending confirmation by the defense counter intelligence and security agency or D. C. S. A.
<unk> Board of Directors has adopted a special board resolution or SPR, replacing the special security agreement or SSA that the company had entered into with the D. C. Esa in 2010.
The replacement of the SSA with the S. B R. As a result of the significantly reduced foreign ownership of T. T M.
The company plans to maintain much of the robust infrastructure developed during the adoption of and compliance with the SSA to continue to serve our customers and to maintain our focus on the national security of the United States, and our aerospace and defense sector as one of the top 40 U S based.
Defense companies.
The medical industrial instrumentation and market contributed 17% of our total sales in the fourth quarter compared to 19% in the year ago quarter and 19% in the third quarter of 2022 now.
A number of our customers have been reducing inventory as well as quick turn business.
In addition, the instrumentation segment is weighted toward automated test equipment for the semiconductor capital equipment market, which is seeing weaker demand.
For the first quarter, we expect M ini to be 18% of revenues.
For the full year M. Ini grew 16.7% following 11.5% growth in 2021, and 12.4% growth in 2020, well above industry forecasts three years in a row as we took advantage of mega trends in faster growing some segment.
So this and market.
In 2023, we expect growth to be below the 2% to 4% industry forecast as these segments feed moderated demand following the extraordinary strength of the past three years.
Automotive sales represented 16% of total sales during the fourth quarter of 2022 compared to 19% in the year ago quarter and 15% during the third quarter of 2022.
We saw a stable trends sequentially for automotive P. C. DS despite the combined impact of supply chain and demand disruptions caused caused by Covid, the Ukraine, Russia conflict and semiconductors shortages that had been impacting automotive OEM production.
We expect our automotive business to contribute 17% of total sales in Q1.
Slight decline from Q4, resulting from a reduced number of working days in Q1 due to Chinese new year.
For the full year automotive increased 4.2% in.
2022 advanced technology was 31 per cent of our automotive and market compared to 24% in 2021 due to strong growth in our HDI and radar product areas.
In 2022, we one new designs with a lifetime value of $530 million.
With a record $279 million and wins in the fourth quarter.
This compares to $532 million in 2021.
Designs that we are winning this year will contribute to revenues in future years.
We expect this market in 2023 to be below longer term forecast of 6% to 8% after the strong post COVID-19 recovery.
Sales in the data center computing end market represented 14% of total sales in the fourth quarter compared to 15% in Q4 of 2021 and 14% in the third quarter of 2022.
We expect revenues and this and market to represent approximately 12% first quarter sales due to a slowdown in the data center market, coupled with ongoing weakness in the semiconductor market.
For the full year data center computing grew 16.7% as we saw continued solid growth across our data center customers following 25% growth in 2021, and 9.1% growth in 2020.
In 2023, we expect to be below the forecasted and market growth of 9% to 12% driven primarily by inventory digestion and the data center market.
In regards to our network and communications and market, we have renamed it networking given the focus on networking customers.
Networking accounted for 13% of revenue during the fourth quarter of 2022. This.
This compares to 16% in the fourth quarter of 2021, and 14% of revenue in the third quarter of 2022.
Q1, we expect this and market to be 10% of revenue as customers manage their inventory levels and some customers see weak demand.
For the full year networking declined $4, 4% with declines in telecom customers, partially offset by growth and networking customers. We expect this this market to be below the longer term forecast of 3% to 6% growth in 2000 twenty-three due to the anticipated soft start to the year.
Next I'll cover some details from the fourth quarter.
This information is also available on page five of our earnings presentation.
During the quarter or advanced technology in the engineered products business, which includes H D. I, Richard Flex R F sub systems and components and engineered systems. Okay.
<unk> accounted for approximately 39% of our revenue.
This compares to approximately 31% in the year ago quarter and 41% in Q3.
We are continuing to pursue new business opportunities and increase customer design engagement activities that will leverage our advanced technology, and engineered products capabilities and new programs and new markets.
P C b capacity utilization in Asia Pacific was 75% in Q4 compared to 88% in the year ago quarter and 78% in Q3.
Our overall PCB capacity utilization in North America was 40% in Q4 compared to 50% in the year ago quarter and 45% in Q3 <unk>.
The lower rate in Asia Pacific was caused by a decline in production volumes, while the lower year over year right in North America was due to additional plating capacity added earlier in the year and direct labor shortages in certain regions.
Our top five customers contributed 37% of total sales in the fourth quarter of 2022 compared to 33% in the third quarter of 2022.
Had one customer over 10% in the quarter.
At the end of Q4, 90 day backlog, not including Telephonics, which is subject to cancellations.
Was $546.7 million compared to $615 million at the end of the fourth quarter last year.
Including Telephonics, our backlog at year end was $603.1 million.
Our book to Bill ratio, including Telephonics was 1.05 for the three months ended January 2nd.
Reflecting a stronger aerospace and defense book to Bill offset by a weaker commercial book to Bill.
R. A N D bookings also ship over a longer period of time compared to our commercial bookings.
As we looked into Q1, we are seeing our commercial markets soften.
As a result, we are taking extraordinary actions, including consolidating our facilities as I already explained shutting down for the full Chinese new year holiday season, freezing new hires except with special approvals, reducing discretionary spending and putting travel restrictions in place.
We also continue to focus on managing supply chain bottlenecks, particularly in R. A N D business, which has limited our ability to deliver on several key E. N D programs and will constrain revenue in the first half of the year.
I am confident that with the effort of our employees, we will be able to overcome these challenges as as we work our way through 2023.
In the meantime, I wish to thank our employees for continuing to contribute to T. T M and our critical mission of inspiring innovation for our customers.
Now Todd will review, our financial performance for the fourth quarter Todd.
Thanks, Tom and good afternoon, everyone.
I will be reviewing our financial results for the fourth quarter that were included in the press release distributed today.
As well as on slide seven of our earnings presentation that is posted on our website.
For the fourth quarter, net sales or $617 $2 million compared to $598.1 million in the fourth quarter of 2021.
The year over year increase in revenue was due to the inclusion of telephonics as well as organic growth in our aerospace and defense and market.
Partially offset by declines in our commercial markets.
For the full year revenues grew 5.4% excluding telephonics here.
Driven by our medical industrial and instrumentation data center computing, automotive and Andy and markets.
For all of 2022 revenue was $2.5 billion. This compares to $2.2 billion in 2021.
GAAP operating income for the fourth quarter of 2022 was $97.6 million and includes a gain of $51.8 million in December 2022 from the sale of the property occupied by our former Shanghai E. M S entity.
This compares to $33.1 million in the fourth quarter of 2021.
On a gap bases net income in the fourth quarter of 2022 was $6 million or six cents per diluted share.
Fourth quarter of 2022 results include a tax reserve a $51.7 million to establish a valuation allowance for certain U S deferred tax items.
And $14.7 million associated with the gain on the sale of the property noted earlier.
This compares to GAAP net income of $8.4 million or eight cents per diluted share in the fourth quarter of last year.
The remainder of my comments will focus on our non-GAAP financial performance.
A non-GAAP performance excludes M&A related costs restructuring costs.
Certain non-cash expense items, such as amortization of intangibles in stock compensation.
Gains on the sale of property and other unusual or infrequent items, such as the tax valuation reserve I mentioned earlier.
We present non-GAAP financial information to enable investors to see the company through the eyes of management and to facilitate comparisons with expectations of prior periods.
Gross margin in the fourth quarter was 19.8%.
And compares to 16.7% in the fourth quarter of 2021.
The year on year increase was due to the addition of telephonics better product mix Avery.
Favorable foreign exchange and lower material costs, partially offset by higher year on your labor costs, particularly in North America as we raise wages this year to be more competitive.
And lower revenue in our commercial markets.
Selling and marketing expense was $18.8 million in the fourth quarter or 3% of net sales.
Compared to $15.6 million or 2.6% of net sales a year ago.
Fourth quarter, G&A expense was $37.4 million or 6.1% of net sales compared to $30.4 million or 5.1% of net sales in the same quarter a year ago.
The inclusion of telephonics added $2.5 million and $4.1 million to sales and marketing and G&A respectively.
And the fourth quarter, R&D expense was $6.4 million or 1% of revenues compared to $4.8 million or 0.8% in the year ago quarter.
$1.5 million with the increase was due to the inclusion of telephonics.
Are operating margins in Q4 was 9.7%.
A solid resolve given the macro challenges we've been facing.
This compares to 8.2% in the same quarter last year.
For the full year 2022, operating margin was 9.4% compared to 8.4% in 2021.
Interest expense was $12 million in the fourth quarter compared to $11.2 million in the same quarter last year. So.
During the quarter there was a negative 3.2 million dollar foreign exchange impact below the operating light.
Government incentives in interest income decreases to $1.9 million or a two cent negative impact to our EPS.
This compares to a loss of $1.1 million or one set impact on E. P. S and Q4 last year.
Alright effective tax rate was 6.5% in the fourth quarter, resulting in tax expensive $2.9 million.
This compares to a rate of 1.6% or tax expensive zero point $6 million in the prior year.
For the full year are effective tax rate was 13.1%.
Fourth quarter net income was $42.7 million or 41 cents per diluted share.
This compares the fourth quarter of 2021, net income of $36.2 million or 34 cents per diluted share for.
For the full year net income was $181.2 million or one dollar and 74 cents per diluted share.
Compared to $138 million or one dollar and 28 cents per diluted share in 2021.
Adjusted EBITDA for the fourth quarter was $81.6 million or 13.2% of revenue.
Compared with fourth quarter, 2021, adjusted EBITDA of $70.4 million or 11.8% of revenue.
For the full year, adjusted EBITDA was $343.1 million or 13.8% of revenue.
Appreciation for the quarter was $24 million <unk>.
Capital spending for the quarter was $20.8 million.
Cash flow from operations was very strong at $77.6 million or 12.6% of revenue exceeding our target of 10%.
Free cash flow is also very good at $56.8 million or 9.2% of revenue.
For the full year cash flow from operations was $272.9 million or 10.9% of revenue.
Free cash flow for the full year was $176 million or 7.1% of revenue.
Cash and cash equivalents at the end of the fourth quarter of 2022 or $402.7 million.
In our net debt divided by last 12 months EBITDA was 1.5 times at the bottom of our targeted range of 1.5 to two times.
Following the end of the fiscal year, we replaced $50 million of our terminal B.
Before I discuss first quarter guidance I'd like to discuss the financial impact of today's facilities consolidation announcements.
The company expects to record between 22, and $28 million, a separation asset impairment and disposal costs related to this restructuring primarily between now and the end of 2023.
Approximately 80% of these costs are expected to be in the in the form of cash expenditures and the rest in the form of non-cash charges.
Today's actions are expected to yield an annual operating profit increase of approximately $22 million to $27 million. After the facilities are closed and the transferred business is fully assimilated within our remaining footprint.
No I'd like to turn a guidance for the first quarter.
Tom mentioned earlier, we expect a sequential decline in revenues due to weaker booking trends that are commercial and markets, resulting from inventory adjustments weak and market demand and the Chinese new year holiday.
We expect the sequential decline in margins due to lower revenues the.
The inefficiencies associated with the Chinese new year holiday I.
Iron material costs and unfavorable mix.
Given these factors we project total revenue for the first quarter of 2023 to be in the range of $550 million to $590 million.
And non-GAAP earnings to be in the range of 16 to 22 cents per diluted share.
E. P. S forecast is based on a diluted share count of approximately $104 6 million shares which includes dilutive security such as options that are issues.
We expected SG&A expense will be about 9.5% of revenue in the first quarter.
R D will be about 1.2% of revenue.
We expect interest expense to total approximately $11.9 million.
Finally, we estimate are effective tax rate to be between 13 and 17%.
To assist you in developing your financial models, we offer the following additional information.
During the first quarter, we expect to record amortization of intangibles of about $11.7 million <unk>.
<unk> expensive about $5.9 million.
Non-cash interest expense of approximately zero point $7 million and we estimate depreciation expense will be approximately $24.5 million.
Additionally, as you're building your financial models for 2023, I'd like to call your attention to three items.
First interest rates have risen and may rise further in 2022 or average borrowing rate on our term loan which is a variable rate that was 1.7 per cent plus a margin of 250 basis points.
Today, we are already incurring a rate of 4.6% plus our margin.
Second and 2022, we realized favorable foreign exchange below the operating line of $12.7 million.
We cannot predict how the Chinese U S exchange ratio will move in 2023.
Consequently, we do not forecast beside him.
And third we are investing in a new plan Penang Malaysia, we.
We expect to start production in the second half of the year and begin ramping towards full volume production.
During the 2023 startup phase, we expect to incur a negative impact to our margins of between 30 and 50 basis points.
We estimate that approximately 75 per cent of that impact will be weighted towards the second half of 2023.
Finally, I'd like to announce that will be participating in the Cowan Aerospace defense and Industrials conference on February 16th.
J P Morgan high yield and leveraged finance conference on March 7th and.
<unk> J P. Morgan industrialist conference on March 16th.
That concludes our prepared remarks, and now we'd like to open the lines for questions <unk>.
Thanks, Yeah as a reminder to ask a question. Please press star one one on your telephone and wait for your name to be announced.
Question. Please pass star one one again.
We ask that you please limit yourself to one question and one follow up question. You May then retiring today can you. Please stand by while we compiled Q&A roster.
And today's first question will come from the line at James.
Now your line is out there.
Alright. Thank you you have a good afternoon, so maybe putting aside the aerospace and defense.
You have a pretty good line of sight, which which was a commercial markets as you look at the gay do you believe you know.
Perhaps the most uncertainty attached to them I mean, you're clearly shame weakness.
Several of them.
Yeah, I think you know to to areas gym in terms of of you know areas of of weakness I think we can.
And we saw during during the course of the quarter.
Pronounced weakness in data center.
And so that was you know that affects our our computing.
And you know data center computing end market, which two thirds of that is really data center and a third of the semiconductor both both now really really showing signs of weakness in the case of data center, a lot of discussion around inventory control and and digestion.
But I, but I think you know a market that that certainly in the first half I think will will continue to be weak networking is is a second.
Similar similar in nature, right I think the networking.
By and large inventory control discussion around softening demand environment.
And spending environment.
And and a lot of discussion around the first half of the year.
Telecom really everyone holding their breath for for India investment, which is coming but it's coming slowly.
And and you know frankly, that's a pretty small part of that networking and market for it. So so those are the two markets I'd you know from from a challenging standpoint I'd I'd say are are <unk> are out there was a softening demand.
And just to finish the discussion yeah M I I medical.
Austrian instrumentation, it's really the instrumentation side that that is showing of the pronounced weakness medical and industrial relatively better, though you know a lot of discussion around inventory control, but I think that's shorter term in nature automotive continue.
Hearing that to really hold up pretty well, we are taking the the Chinese new year time, often our facilities there and so our revenues would be down in Q1, but if you do that quick calculation and you add back that that week and a half to two weeks of bread.
<unk> that we lose you'd be right back on top of a two for some numbers on automotive so holding up pretty well.
Got it and follow up question I have is you may have it's.
It's a reference to this.
Opening remarks, but to the does he announcement today with respect to the manufacturing footprint does that in any way change the investment plans or timing for Malaysia.
No no absolutely not and we yeah that that really for US and you know we look at a clip them regularly the small smaller facilities in Hong Kong and the two facilities in California really been struggling in terms of profitability in in there.
Plant charter and that that's been a struggle and and as we look into our forecasts. They also don't look look much better for the longterm so difficult actions to take the necessary and and we will continue the investment in Malaysia.
Our customer base is counting on this is a critical investment for T. T M to make in terms of supply chain resiliency automated hi, Lola account efficient production volume production capability. So you know we're we're moving proceeding there is scheduled in.
Holding to to schedule at this point.
Okay. Thank you.
Can I do.
Thank you one moment for our next question.
What comes on the line as my crossword with the rally.
<unk>.
Thank you I I heard somebody remarks that you basically have 70% of your capacity generally sold with customers for the Malaysia plant. This opening is that.
The case, where you're hoping to run.
Facility at <unk>, what and 80 per cent plus utilization or or what <unk> is that going to be the same maybe type of metrics that you had for your Chinese cities or is it going to be slightly different.
So the goal the goal will be to run it north of that I mean, it you know ideally you'd love to be in in between that 80, and 90% utilization rate, but you're absolutely right. Mike It's very similar interfering with our China facilities in terms of volume capabilities and the need to to leverage.
Your manufacturing foot footprint and keep that utilization at a high level and these will be volume requirements for these customers.
And you know <unk>, obviously, we won't we won't hit that about 80 per cent right away. We've got a we've got a good ramp that'll carry you know begin the the the end of this year and then carry us through next year to get there, but again, yeah. It's a very strong backdrop for us to have those customer.
<unk> lined up and and are willing to to to.
With their deposits to help us with as we invest in this critical capability.
Okay. Thank you and then my my second question switches to a sense so.
What.
Is the potential upside for a more ships speed included onto that program, perhaps as a result of the forthcoming budget and budget request will see you in a few weeks and secondly for potential for militarily military sales to.
To Alice.
So I can't always hard to speak for our customer I would say that that you know there certainly is is upside there.
The and and you're right. There's you know there there is possibility of foreign military sales as well.
The you know we we we have to stick to to their announcement I think I think even that is a very strong base for us.
And we continue to see of course, a number of other radar systems and programs moved to use.
That are that are really you know, allowing us to grow strongly in that market. So.
So not relying solely on that program, but it is a you know it's it's a program that has potential upside for sure at our focus will be on on servicing the customer making sure that that we ramp here successfully through the course of this year.
R for aerospace and defense market.
And critical to that is that we solve supply chain bottlenecks in that in that market and that's that's the big area of focus for us as we as we ramped it's great to be to have a program backlog as strong as we have at the beginning of the year allows our operations to really focus on getting the.
Job done.
Great. Thank you.
Thank you.
Thank you know as a reminder, if you have a question. Please press.
9111 moment for my next question.
That will come from the line Sharon with Stifel. Your line is out there.
Yeah. Thanks.
Good afternoon, everyone. Just a question on the outlook for the automotive sector. It sounds like you're looking below the market growth there and I know, you're starting out down I guess mid teens year over year in Q1, most of of the suppliers sound more optimistic some are seeing.
A little bit of inventory, but most expect some production groceries here and content growth do you expect to auto to grow for the year, even though you're gonna be down significantly in the first half.
So so the answer matters, yeah. The impact if you start to look sequentially and that's probably the best way to.
To look at it if you'll see the Chinese new year impact.
And and and so you can you know and that's really what this is that last year, we ran full out.
Chinese new year. We ran you know we were we went and the interesting thing last year that was a bit different than other years is that with COVID-19 out there. The government was encouraging employees to just stay in place. So we had our full compliment of labor as well so we ran as hard.
As we could and in Q1 and that's the difference you're saying, it's that Chinese new year difference now.
Amanda environment overall, a little bit off from where we were and you know Q1 last year, but but not substantially so the market is holding up well, we think it will it looks to hold up well through the first half so yeah. So as we go.
Again, a difficult to predict the back half of the year and that's mainly because there still are a critical shortages out there in part, but what we see in the first half is is a good strong demand Margaret demand environment, and yes, we would expect to be able to grow and.
In automotive this year.
Okay. Thanks for that and I know someone I'm just.
Just asked about the commercial markets being weak in in terms of the the cloud.
And the computing inventory correction, you're seeing in the same thing and the related semiconductor markets are you getting seeing signs at all of our men bottoming in the next quarter or two or will it will it get worse before it stabilizes.
Yeah, I think I think we're looking I felt I think the key there is a quarter or two cause I. I think this is really you know what are the indications rehab and R for the first half.
Now, we'll we'll see how how demand you know what let's shifts there in terms of demand as we go into the second half of the year, but most of the commentary we've had some customers around is related to the first half and and digestion.
Digestion as they put it that is necessary in the first half and it's and it's due due to a substantial inventory buildup and bring those inventories down before they can start to see again true levels of demand impacting.
The supply chain.
Okay. Thank you and then tied I had a couple of modeling question is I I don't remember you are you may have talked about the opex guidance for the quarter did you give that number out.
So what do I, what we would do.
Trying to give you in terms of insight into Q1, we're expecting SG&A expense to be about 9.5% of revenue.
And then R&D to be an additional 1.2% of revenue in Q1.
Okay. So 10.7 total okay. Okay.
And so that so that that in pleasure. Your gross margin is actually still up year over year is that primarily due to the mix with with the acquisition or or I know you're difficult obviously, it's tough.
You know some issues I know in Q1 of last year I was just trying to figure out given the big revenue decline how margins can actually be up.
Well, okay. So that's.
That's a good good discussion I think when we're looking at you won and comparing that to Q1 last year, okay year over year.
Revenue was only down slightly but there's a big mix shift.
Right, we added telephonic so when we look at year over year Q1, Q1, a year ago at the midpoint of guidance, our revenues are down about $11 million, but.
Aerospace and defense is up almost $75 million, if you take all the guy.
So that implies the commercial markets are are down substantially.
And down about 20 per cent yep.
Right.
But when you look at the margin impact. Okay. So you have some mixed shifting we add telephonics, we lose commercial P. C b business they have different economic profiles.
The the P. C V business at that kind of volume is pretty lucrative and telephonics is.
We brought that on <unk>, we're working with synergy to improve their profit profile, but has not yet quite dollar for dollar you know exchange terms of profitability.
We're also gonna see year over year, some pricing challenges, but we've got some favorable F X up in our cost structure.
Exchange rates are the Chinese currency is a little weaker in this quarter. We're we're we're seeing compared to a year ago. So that gives us a little bit of tailwind so kind of workshop better mix, a little FX health and that's offsetting some of the challenges that you'll see in our annual.
Kind of pricing and less premium revenue this year compared to last year and it all kind of breaks either right margin stay relatively consistent.
To be up slightly, but even though there's a big mix, there's a lot going on underneath the covers.
Got it okay very helpful. Thank you.
Thank you and speakers I'm showing no further questions in the queue at this time.
I'll call back over to Mr taught at Tom Edmund for any closing remarks.
Thank you yeah, I'd, just like to close by summarizing some of the points that I made earlier first we delivered non-GAAP EPS above the midpoint of guidance and saw good year over year improvement on margins.
Secondly announced the consolidation of our manufacturing footprint to streamline our operations to better serve our customers and lower our cost structure and the third regenerated strong cashflow, resulting in a net leverage of 1.5 times at the low end of our target range of 1.5 to two times.
And fourth really despite weakness in our in our commercial markets. We are seeing very strong demand in our aerospace and defense market.
Closing I'd like to thank our employees, our customers and our investors for your continued support as we navigate the challenges to our business. We'll continue our star longterm strategic focus on diversification differentiation and discipline with that I'd like to thank you again goodbye everyone.
Thank you all for participating this concludes today's programs you may now disconnect.
Yeah.
The conference will begin to T. Two reasons that way you'll have <unk> you can dial 911.
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Mm.
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