Q1 2023 Sanmina Corp Earnings Call

Hello, and welcome to the Sanmina Corporation's first quarter 2023 earnings conference call, all participants will be in listen only mode.

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I would now like to turn the conference over Tuesday, Senior Vice President of Investor Communications Paige Melching. Please go ahead.

Thank you Jay good afternoon, ladies and gentlemen, and welcome to send me that's first quarter fiscal 2023 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 Jerry Sola, Chairman and Chief Executive Officer.

Afternoon, and Kurt Athena Executive Vice President and Chief Financial Officer. Good afternoon, before we begin our prepared remarks, let me remind everyone that today's call is being webcast and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. Please turn to slide three of our.

Patients or the press release Safe Harbor statement.

During this conference call, we may make projections or other forward looking statements regarding future events or the future financial performance of the company.

Caution you that such statements are just projections the company's actual results could differ materially from these projections in 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 company is under no obligation and expressly disclaims any such obligation to update or alter any of the forward looking statements made in 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.

Included in our press release and slides issued today, we have provided you with statements of operations for the quarter ended December 31, 2022 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 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 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.

Pretty eerie sola.

Thanks, Paige good afternoon, ladies and gentlemen, welcome and thank you all for being here with us today.

First I would like to take this opportunity to recognize some in the leadership team and our employees for doing an exceptional job.

So to us I mean this team. Thank you for delivering strong and consistent results for the first quarter of fiscal year 2023.

Let's keep it up.

For the agenda, we have Kurt our CFO to review details of our results for you.

Follow up with additional comments about our results and future goals.

Kurt and I will open for question and answers and now I would like to turn this call over to Kirk.

Thanks, Jerry Please turn to slide four.

As you already mentioned our team did an outstanding job delivering strong revenue and profit growth for the quarter.

Q1 revenue of 2.136 billion grew nicely by approximately seven 2% from the prior quarter and exceeded the high end of our outlook of $2 one to $2 2 billion.

This was primarily due to strong customer demand as well as continued improvements in the supply chain.

non-GAAP gross margin was flat at eight 3%.

non-GAAP operating margin was five 8% compared to five 6% in the prior quarter. This was primarily due to operating expense leverage.

non-GAAP fully diluted earnings per share grew approximately 9% to $1 64 compared to $1 50 in the prior quarter and exceeded the upper end of our outlook of $1 41 to $1 51 by <unk>.

Finally, Q1, GAAP fully diluted EPS was $1 40 years.

Please turn to slide six.

This slide shows the quarterly trends in our financial results you can see here that non-GAAP operating margins have continued to improve over time.

Furthermore earnings per share grew over 50% from $1 eight in Q1, FY 'twenty two to $1 64 in Q1 FY2023.

Please turn to slide seven.

Q1, IMS revenue increased to 194 billion, an increase of seven 7% over the prior quarter.

Primarily due to strong customer demand and continued improvement in the supply chain.

non-GAAP gross margin for IMS was six 9% compared to $7 two in the prior quarter.

This decline was primarily due to a reserve taken during the quarter related to a startup customer.

We expect IMS gross margins to return to a more normalized level in fiscal Q2.

Components products and services revenue grew to 464 million an increase of three 8% over the prior quarter.

non-GAAP gross margin for Cps improved to 13, 3% compared to 11.9 in the prior quarter.

Primarily due to better product mix.

Now please turn to slide eight.

We have a very healthy balance sheet, which provides our company a competitive advantage.

Cash and cash equivalents were seven $735 million.

Increase in cash was primarily due to 216 million as a result of the previously announced joint venture in India, which closed on October 3rd 2022.

At the end of the quarter, there were no borrowings outstanding under our $800 million revolver.

Cash flow from operations was 37 million in Q1.

Cash flow is typically lower during our first fiscal quarter given the calendar year at.

Capital expenditures were approximately $37 million.

Q1.

Free cash flow was approximately 1 million in Q1.

Now I'll turn to slide nine.

We continue to focus on the management of working capital.

Cash cycle days remained relatively flat at 50 days in Q1.

non-GAAP pre tax ROIC was 35, 5% for Q1.

Okay.

Please turn to slide 10, let's.

Let's talk about the outlook for Q2.

Overall customer demand remains strong, but there continues to be uncertainty related to the supply chain as well as the macroeconomic and political environments.

We expect Q2 revenue to be in the range of two point to the $2 3 billion.

Typically there is some seasonal impact in our fiscal Q2.

We expect non-GAAP gross margins in the range of eight point to 8.7, depending on product mix.

non-GAAP operating expenses in the range of 59 to 61, primarily due to the annual resetting of the employer portion of payroll tax and any annual salary adjustments.

And non-GAAP operating margin in the range of five 5% to 6% we.

We expect non-GAAP interest and other.

15 million, primarily driven by the increase in interest rates.

In addition, we estimate an approximate 3 million non cash reduction to our net income to reflect our JV partner's equity interest in the net income Indian JV.

We expect non-GAAP taxes of approximately 15%.

The fully diluted non-GAAP share count of 60 million shares.

When you take all of this guidance into account our outlook for non-GAAP diluted earnings per share is in the range of $1 50 to $1 60.

We expect Q2 capital expenditures of around 50 million driven by the growth of new programs as well as to support future growth.

Q2, depreciation is expected to be around 30 million.

While we're pleased with our recent results. We continue to believe that there is opportunity to further improve our business model over the long term and with that I'm going to turn it back to you.

Thank you Kurt ladies and gentlemen, let me add a few more comments about our financial highlights for the first quarter.

And a lot of you our end markets and outlook for the second quarter and the rest of the fiscal year 'twenty to 'twenty three.

As you heard from card for the first quarter Sanmina delivered a strong and consistent results.

The key highlights for the.

The growth was broad based driven by strong demand from our end markets.

And performance of our supply chain organization was excellent by working closely with our customers and suppliers.

We can also tell you that the lead times for semi components is getting better.

We saw nice improvements in the first quarter.

Despite ongoing macroeconomic uncertainty.

These results are a reflection of our continued focus on execution of our strategy.

Our Sanmina team has done an outstanding job as we continue to differentiate our industry leading capabilities and all of this is continuing to try to translate into growth and margin expansion for sanmina.

Please turn to slide 12.

Yeah.

Okay.

Let's look at the revenue for our first quarter by end markets.

I can tell you that the demand for our products was strong across all markets for industrial medical defense and automotive segments, we delivered revenue of $1 billion 345 million.

Which was quarter over quarter growth of four 5% and year over year 27, 5%.

For communication networks, and cloud infrastructure, we deliver 1.016 billion.

Which was quarter over quarter growth of 11% and year over year 44, 6%.

Total for the first quarter, we delivered 2 billion 361.361 billion. It was nice organic growth quarter over quarter growth of seven 2% and year over year growth of 34, 4%.

For the first quarter top 10 customers were 56% of our revenue.

Overall, we are seeing strong demand and solid backlog for the future.

In summary, we're off to a good start for fiscal year 2023, Please turn to slide 13.

Okay.

Now, let me review, our second quarter end market outlook.

The key markets for Sanmina.

Australia Medical defense, and aerospace automotive communication that force and cloud infrastructure.

As you can see Sanmina does not serve consumer markets at all but our focus is on high complexity heavily regulated markets.

For us this is a seasonally down quarter.

The healthy backlog, we have strong outlook for the second quarter of $2 2 billion to $2 3 billion.

We expect to see some supply constraints to continue through our second quarter and beyond.

But good news is that things are getting a lot better.

Yeah.

As I look at the rest of the fiscal year 2023 I'm excited about <unk> future.

For physical 'twenty, three we expect to deliver nice improvements over fiscal year 'twenty two.

At this time, we've seen a strong outlook from all key customers.

Revenue growth will be driven from existing and new programs.

We're well diversified in our growth markets.

<unk> pipeline of new opportunities will continue to drive growth for the future.

Margin expansion to be driven by revenue growth in IMS segment.

And by continuous improvements in manufacturing efficiencies.

Margin expansion at Cps segment will be driven by technology components defense products optical packaging and other services.

And lean Opex leverage as we continue to drive efficient structure.

Yeah.

Now, let me talk to you about managing through these challenging macro environment.

From sent me and this management point of view, we have positioned the company to be able to navigate any market dynamics that could come up in the future.

Sanmina has embedded the resiliency in our focus market space and strong global management to do the job.

Again, sanmina is well positioned for any economical environment.

Our priorities have not changed.

Strategy is working and it's delivering results.

Our focus today is on quality of our customer base building right partnerships.

We are focused on continuing to diversify revenue and good old with market leaders in mission critical product.

We are focused on quality of earnings.

Liberty consistency and growth of our earnings we've focused on.

Quarterly and yearly cash flow.

And we are focused on maximizing shareholders' value short term and long term.

I can also tell you there's a still a lot of leverage as that mean its business model.

Let's turn to slide 14.

So in summary, as you heard from both Kirk and I.

We delivered a strong quarter.

With solid execution.

Revenue of $2 36 billion growth of seven 2% quarter over quarter and growth of 34, 4% year over year.

non-GAAP operating margin, we improved by 20 basis point to 5.8%.

And we delivered a non-GAAP diluted EPS of $1 64 growth of nine 5% quarter over quarter, and 52, 7% year over year.

For second quarter.

We are forecasting again strong revenue outlook up 2.2 to $2 3 billion. Typically this is seasonally down quarter for us, but the demand is strong and backlog is strong. So non-GAAP diluted EPS were forecasting $1.50 $2 60, as Kurt said we.

Believe there's still upside as we continue.

Look at the opportunities in front of US we believe we can improve our business model over the long term.

So ladies and gentlemen, now I would like to thank you all for your time and support operator, we're now ready to open the lines for question and answer Thank you.

Operator.

Thank you.

We'll now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys.

Jonathan The question queue. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Okay.

Today's first question comes from Jim Suva with Citigroup. Please go ahead Jim.

Hello, Hello, Good evening. Thank you so much for the details.

Some of your peers have talked about some inventory digestion or inventory buffer that needs to be worked down are you seeing that in any of your markets and if so which ones and how long or I'm, just kind of curious on that topic and I probably have a follow up yes.

Yeah, Jim definitely during this period as you know when a customer gives us a forecast, we're basically bringing inventory based on their needs. But then there was a lot of shortages and sometimes we have to wait for those shortages are a little bit longer and then end of the day inventory ran up we built we believe we are.

The peak are we we as we look at the next couple of quarters. We expect to you know work that inventory down and generate more cash. So that's kind of where are we at with cross all the markets. Jim It's not just wonder another it's hold up really more customer driven than just the market itself.

Okay, so across our.

Several and then you have seen a lot of success in recent years with your cloud Hyperscale or server storage initiatives can you update us on that and give us some view on additional colors on that effort.

Well the deaths segment for us. So if you look at the last quarter communication networks can and cloud computing did pretty well grew about 11 plus percent. So.

You know, we always were well positioned in that market.

Again, we got a lot of new programs there.

You know overall, we're very positive.

We take one quarter at a time, where a lot more confidence about a 23, let's say today than we were six months ago, but we will take one quarter at a time and we expect to to grow these markets.

Thank you so much for the details and congratulations to you and your team at Sanmina.

Jim.

The next question comes from Anja Soderstrom with Sidoti. Please go ahead.

Hi, and thank you for taking my question, so you're talking about.

Hi, and congratulations on the good quarter.

You're talking about a nice improvement for fiscal 2023.

But you don't really quantify it if I think about the growth for the next couple of quarters and the second quarter seems to be stronger even though you normally have a seasonal weakness there so she.

Should we expect that our sequential revenue increase throughout the year.

Well, let me put it this way we had a great start to a year.

So I think first quarter speaks for itself.

I believe with our guidance for the second quarter of very solid.

So we will take one quarter at a time on yet is even as we operate in this macro environment.

We're very positive about the year based on our customer forecasts, but at the same time you know we read papers.

You know inflation is up going up and still up in my opinion.

You know, how I think sanmina is well positioned to weather no matter what happens.

And we're very positive what's in front of us, especially with the new programs that are coming up as a as Curt mentioned, you know we spend a little bit more money on unexplained Sharon and the reason we're doing that is all driven by the new programs are in our high technology product mission critical custom.

So we are we believe in a better future.

Okay. Thank you and can you just talk a little bit about the end markets that you participate in and you're talking about new programs can you just.

Tell us a little bit about those programs and what excites you about them.

Well as you know.

As we talked in our last quarter, we continue to.

Driving these mission critical programs such as industrial <unk>.

Medical.

And industrial would be well established there I think all are currently the energy market is going to be expanding there substantially.

Got an automotive is the same thing on the E V vehicles, we're well positioned there.

When Jim asked the question regarding the communication network cloud.

It and cloud infrastructure, we're also well positioned there.

Of course medical and in and defend so lot of the new programs are really cross all our markets.

Okay. Thank you and have you seen any changes to the competitive landscape at all recently.

Competition is always there are but I'm more worried about ourselves than competition I always believe it's what we do we are focused.

You know to really build a strong partnership with our customer we will be focused on our mission critical prior that's heavy regulated markets that require a lot of technology and that's that's what that's why are we spending energy in.

Okay. Thank you that was all for me.

I know that thank you very much.

Operator.

That's that's all for today.

I appreciate it everybody is our input and if theres any more questions. Please let us know.

Thanks, a lot.

And if you have a question. Please press Star then one.

Okay.

Okay.

Yeah.

But.

Thanks Luke.

Go ahead.

Please go away go ahead, yeah. Thanks for it we'd like to thank everybody for joining this call again, if there's any more questions. Please let us know we're available for the next 90 days.

Thank you thank you Mike.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

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