Q2 2023 Sanmina Corporation Earnings Call
Speaker 2: Welcome to Sam Minas, second quarter, fiscal 2023, earnings conference call.
Speaker 2: At this time, all participants will be in a listen only mode.
Speaker 3: Later, we will conduct a question and answer session. I would now like to turn a call over to Page Melting, Senior Vice President of Investor Communications. You may begin. Thank you, Paul. Good afternoon, ladies and gentlemen. And welcome to San Mena's second quarter, fiscal 2023 earnings call. A copy of our press release and slides for today's discussion are available on our website at SanMena.com in the Investor Relations section. Joining me on today's call is Yuri Solas, Chairman and Chief Executive Officer. Good afternoon.
Speaker 3: and Kurt Edzema, Executive Vice President and Chief Financial Officer. Good afternoon. Our agenda for today's call is Kurt will review the details of our financial results and Yuri will follow up with additional comments on the results and our future goals. Then we will open the call up for questions.
Speaker 3: webcasted 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 the presentation and take note of our Safe Harbor statement. During this conference call, you may make projections or other forward-looking statements regarding future events or the future financial performance of the company.
Speaker 3: relation 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 issue today, we have provided you with statements of operations for the quarter-ended April 1, 2023.
Speaker 3: information is also provided in the press release and slides posted on our website.
Speaker 3: costs, non-cash stock-based compensation expense, amortization expense, and other unusual or infrequent items.
Speaker 3: Any comments we make on this call as they relate 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 margins, taxes, net income, and earnings per share.
Speaker 3: We are referring to our non-GAAP information. I'd now like to turn the call over to Kurt.
Speaker 4: Thanks, Paige.
Speaker 5: in our press release.
Speaker 5: One of our divisions which accounts for approximately 3% of total revenue and is part of our CPS business primarily enters into long-term fixed-price customer contracts on a project basis.
Speaker 5: GAP requires that the estimated amount of revenue and profit expected to be realized upon completion of a profitable contract is recognized over the life of the contract.
Speaker 5: However, if a contract is expected to be unprofitable upon completion, 100% of the loss must be recognized in the period in which it is initially estimated that a contract will result in a loss upon completion. For more information, visit www.fema.gov
Speaker 5: To the extent a contract has any actual or anticipated overruns, the company may seek the ability to seek recovery from its customers.
Speaker 5: During the preparation of our Q2 FY23 financial statements,
Speaker 5: The company determined that certain personnel in the division had failed to properly substantiate and update cost estimates for materials and other costs over the life of certain contracts. Primarily as a result of these findings, revenue was overstated by approximately $10.2 million Triple
Speaker 5: and the end 18.3 million and FY 20 and FY 21 respectively.
Speaker 5: It was also understated by 29.1 million in FY23 and overstated by 5.6 million in Q1 FY22.
Speaker 5: I'm sorry, I should have said $29.1 million in FY22. I apologize. I apologize.
Speaker 5: QGAP EPS was overstated by approximately 9 cents, 23 cents, and 25 cents, and FY20, 21, and 22 respectively, and understated by 6 cents and Q1 FY23.
Speaker 5: For more details on this, please see the 8K we filed today.
Speaker 5: For more details on this, please see the 8K we filed today. Now on to the second quarter.
Speaker 5: Please turn to slide five. Our team did an outstanding job delivering strong financial performance. Q2 revenue of $2.32 billion exceeded the high end of our outlook of $2.2 to $2.3 billion, despite Q2 typically being a seasonally down quarter.
Speaker 5: This was primarily due to continued improvements in the supply chain.
Speaker 5: Non-gaff gross margin was 8.4%.
Speaker 5: Non-GAP operating margin was 5.8 percent.
Speaker 5: non-GAAP fully diluted EPX was $1.59 at the upper end of our guidance range of $1.50 to $1.60.
Speaker 5: Finally, Q2 GAP fully diluted EPS with a $1.33.
Speaker 5: Please turn to slide six.
Speaker 5: If you compare our Q2 FY23 results with Q2 FY22, revenue grew 21% from $1.92 billion to $2.32 billion. Operating margin improved from 4.7% in Q2 FY22 to 5.8 in Q2 FY23.
Speaker 5: of fiscal 2023 revenue was $4.7 billion and is on track for a full year to grow in the mid-teens relative to the prior year. non-GAAP operating margins have continued to improve over time with the first half non-GAAP operating margins of 5.9%. Finally, continuation of our current run rate for ETS for FY23 for the rest of the year would result in FY23 ETS over $6 compared to FY22.
Speaker 5: Now please turn to slide 8. First half of FY23 IMS revenue was $3.9 billion.
Speaker 5: This is primarily due to continued improvements in the supply chain.
Speaker 5: First half, FY 23CPS for revenue was $889 million.
Speaker 5: First half non-GAF rose margin for CPS improved to 13.2% relative to FY22.
Speaker 5: Now please turn to slide 8.
Speaker 5: We continue to have a very healthy balance sheet that provides our company a competitive advantage.
Speaker 5: Cash in cash equivalents at the end of the quarter was $718 million.
Speaker 5: Finally, please turn to slide 10. Let's talk about the Q3 outlook. Coming off of a very strong Q2 and given the continued uncertainty related to supply chain as well as the macroeconomic and political environment, we expect Q3 revenues to be in the range of $2.2 to $2.3 billion. We expect non-GAAP gross margin in the range of 8.2 to 8.7% dependent on product mix. GAAP operating expenses are expected to be in the range of 60 to 60.
Speaker 5: percent and non-GAAP fully diluted share count of approximately 60 million shares.
Speaker 5: When you consider all this guidance or outlook for non-GAAP EPS is in the range of $1.50 to $1.60.
Speaker 5: We expect Q3 capital expenditures to be around $60 million driven by growth of new programs in the support of future growth.
Speaker 5: We expect Q3 depreciation of around $30 million.
Speaker 5: Overall, we are very pleased with our recent results. That being said, we continue to believe that there is an opportunity to further improve our business model over the long term.
Speaker 6: I would like to take this opportunity to recognize Seminole leadership and our employees for doing a great job as you heard from Kurt. So to you, Semino team, thank you. And let's keep it up. Let me add a few more comments about financial highlights for a second quarter. And I'll review the end markets and outlook for the third quarter and the rest of the fiscal year, 23. As you heard from Kurt, for a second quarter, Seminole leader struggles with a great operational execution.
Speaker 6: and our supply chain for semi-components got a lot better and that allowed us to shift more. Our Semina team has done an outstanding job. Despite ongoing macroeconomic uncertainty, these results are a reflection of our continued focus on execution of our strategy. Now let's talk about revenue for the second quarter by end markets. The second quarter demand for the products was stable across most of the markets.
Speaker 6: For industrial, medical, defense, and automotive, we delivered $1,362,000,000. The growth was quarter over quarter 2% and year over year growth of 18%. Communication networks and cloud infrastructure was $958,000,000, pretty strong for a second quarter that was down slightly of 6% and strong growth year over year of 27%.
Speaker 1: Thank you.
Speaker 6: Typically, for a second quarter seasonally, this is a down quarter.
Speaker 6: But this corner was stronger than typical as we delivered 2.32 billion hours.
Speaker 6: So quarter over quarter was flat, slightly down 2%, but year over year growth was very strong of 21%. Also, we continue to diversify our customer base. As you can see, our top 10 customers.
Speaker 6: for a second quarter was 49% of our revenue. Please turn to slide 14.
Speaker 6: Let me talk to you about the third quarter outlook and fiscal year 23. First of all, we expect to see nice growth quarter over quarter for the third quarter. As you heard from Kurt, our revenue forecast is about 2.2 to 2.3 billion.
Speaker 6: For industrial, medical defense and automotive markets, we expect to see nice growth year over a year.
Speaker 6: and communication, that was a cloud infrastructure. We also expect to see a nice growth year over year.
Speaker 6: As you can see, semi-dynamic does not serve consumer markets at all, or focuses on high-complencivated, heavy-regulated markets.
Now let me talk to you more about fiscal year 23.
We are trying to deliver year-over-year mid-teens revenue growth for fiscal year 23.
and we expect to deliver margin expansion and EPS growth. I can tell you that Semina has well diversified customer base and it's growing. We'll continue to invest in talent and leading technologies to support the growth for fiscal year 2014 and beyond. Overall, we are expanding our capacity into more profitable projects.
So let me give you some example. For medical defense automotive, first of all these markets were well established at the same time we have large opportunities as we looked in the future.
multi-renew programs and some programs that are in pipeline. For industrial, we also see some more growth through renewable energy.
grid management, public safety equipment, and a fair amount of our precision electromechanical system across many industrial projects.
For communication and cloud infrastructure, we focus on the new products around networking and storage products. These businesses should produce higher margin and a long term growth and stability.
Let's talk about management to this challenging microenvironment. We have positioned the company to be able to navigate any market dynamics. Sanbila is embedded resiliency in our focus market space and we have strong global management to do the job. Sanbila is well positioned for any economical environment.
in mission critical products.
We continue in pro productivity.
Yes, we are focused on quality of earnings.
Ecosystems for short term and long term.
for short term and long term.
Please turn to slide 15. In summary, for the second quarter, we deliver solid execution, more on top, and above them, light results.
Please turn to slide 15. In summary, for the second quarter, we deliver solid execution, both on top and above the blood results. Our priorities haven't changed.
Our strategy is working and it's delivering results.
We will continue to make investments for the future growth and I can tell you that we are excited about the future.
With that, ladies and gentlemen, now I would like to thank you all for your time and support. Operator, we are now ready to open lines for questions and answers. Thank you again.
If you would like to ask a question, please press star 1 on your telephone keypad now.
If you would like to ask a question, please press star 1 on your telephone keypad now. You will be placed into the queue and the order received.
Please be prepared to ask your question when prompted. Once again, if you have a question, please press star one on your phone now. And our first question comes from Christian Schwab from Craig Hallam.
Your line is open.
Hey guys, Tyler. Hey this is Tyler on behalf of Christian. Thanks for letting us ask a couple questions. I guess first on inventory came down nicely you know sequentially quarter over quarter you know about 1.5 billion I guess I was wondering if you could help maybe level set us what what you kind of think a normalized level is you know your business larger than was a couple years ago and
We believe that our inventory should be a lot better than where they are today. And we have, because of the shortages that we experienced over the last two years, they force us to really, our customers ask us to basically buy more inventory. Our customer is 100% committed to those inventories.
I think ultimately how we think of inventory is inventory term. And I think we've gotten our terms historically through of X-3 years, you know, almost six to seven times, but you know, I'd be able to get it to 8th. So we've got a lot of opportunity to further improve that.
It won't happen overnight, but as Yuri said, we should start to see some benefit as we progress through the fiscal year and into 2024. Again, we are starting to see and continue to see improvement in the supply chain. So that should help normalize things, but it does take a while, multiple quarters.
for things to normalize. So I would say not normal until next fiscal year, both likely, but we will make progress.
You know, should only grow as well as, you know, continue to drive a free cash flow. So, you expanded your share buyback, which looks great, I guess, you know, how much excess cash you have or rather, you know, what's a, what's a comfortable level of cash that you'd like to run your business with?
Well, again, I think we talked about we have the strongest balance sheet in the industry. We feel very good about our cash position and the lack of leverage there. I think that being said, we're going to be cautious and only opportunistic as it comes to share repurchases. So I think by adding to the authorization, it gives us flexibility over the coming months, at the same time.
and it's the most unlevered candidly, I believe, in the industry.
That sounds great. That's all for us. You're, I hope, you feel better as well. Yeah, thanks.
Thank you. And our next question comes from Anja Sotrstrom from Seddadi. Your line is a lot of work.
Hi everyone, congratulations on the good quarter and Joanne, sorry I'm feeling really I'm running on my second week of a cold myself.
Hi everyone, congratulations on the good quarter and Joanne, sorry I'm sitting with you, I'm running on my second week of a cold myself.
In terms of the revenue guidance for the third quarter, it sort of indicates a slight decline, right?
The question is, you know, again, we finished at 2.32. The guidance is 2.2 to 2.3.
At the, you know, again, we finished at 2.32. The guidance is 2.2 to 2.3. So.
I will say it is slightly down.
Okay, and in terms of the communication networks, you had a decline in that as well. What are you seeing in terms of that? I'm hearing from others that there are some delays and things are getting pushed. Are you seeing the same or are you seeing something else? Well, as I said earlier, we are operating right now in this micro-environment. There's a lot of changes going.
that is true. But we had a pretty good quarter in the second quarter, actually last two quarters in communication and cloud were very strong as you can see. So I'm personally happy with this environment, Anja, where we are. And I think we are, you know, we can still deliver the good financial numbers even with these numbers.
But we'll see, we're still going to push for a max, we try to do every quarter. Okay, thank you. And it does on the cash cycle days, what is.
If you look at how we manage cash cycle data over time, we've typically kind of been in that in those 50 ranges plus or minus. So I think obviously as inventory comes down, that's helpful, but at the same time accounts payable come down as well.
If you look at our history, we've actually, over the last three years, despite all the challenges, have managed it pretty consistently in those 50s range. So I'd expect it to be in there, but we're always looking to be more efficient.
Okay, to follow up on quick, Helen, in terms of your.
anticipated improved balance, further improved balance sheet. Do you think at all considering a dividend?
We've looked at that at times, and we'll continue to evaluate that, but we have no attention at this time.
Okay, thank you. That was all for me. Thanks, Anja. Hope you feel better too. Yeah, you too.
And as a reminder, if you do have a question, please press star 1 on your telephone keypad now.
And seeing no further questions, I'll turn the call back over to management.
Paul, thanks a lot. First of all, ladies and gentlemen, thank you very much. I'm sorry that I can't yell today. Hopefully, I'll get a lot better for the next quarter. So with that, I appreciate your support. Thanks a lot. Thank you.
That concludes today's conference call. Thank you for joining and have a pleasant day.
That concludes today's conference call. Thank you for joining and have a pleasant day.