Sanmina Corp (SANM) Q4 2023 Earnings Call Transcript

Good day, and welcome to the Sanmina's Fourth Quarter and Fiscal Year 2023 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communications. Please go ahead.

Thank you, Sarah. Good afternoon, ladies and gentlemen, and welcome to Sanmina's fourth quarter and fiscal year 2023 earnings call. A copy of our press release and slides for today's discussion are available on our website at sanmina.com in the Investor Relations section. Joining me on today's call is Jure Sola, Chairman and Chief Executive Officer, and Kurt Adzema, Executive Vice President and Chief Financial Officer. Before I turn the call over to Jure, let me remind everyone that today's call is being 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 3 of the presentation and take note of our safe-harbor statement. During this conference call, we may make projections or other forward-looking statements regarding the future events or 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 these statements as a result of factors set forth in the safe-harbor statement. The company is under no obligation to and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in the earnings release, the earnings presentation, the conference call, or on 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 and fiscal year ended September 30, 2023, 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 are referring to our non-GAAP information. I'd now like to turn the call over to Jure.

Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome. Thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina's leadership team and our employees. So to you, Sanmina's team, thank you for managing through a challenging environment these last few years, managing through COVID, supply chain constraints, and the ongoing geopolitical environment. Despite all these challenges, you delivered strong results for fiscal year '23. Please turn to Slide 4. Ladies and gentlemen, let me give you some highlights for fiscal year '23. As you can see, revenue grew 13% year-over-year. Non-GAAP operating margin also improved 80 basis points to 5.8%. And non-GAAP diluted EPS came in at $6.26, which is up 34% year-over-year. These results are a reflection of our continued focus on our customers, the market leaders in the key markets. For the rest of the agenda, we have Kurt, our CFO, to review details of results for you. I will follow with additional comments about Sanmina's results and future goals. Then Kurt and I will open for questions and answers. And now I'll turn this call over to Kurt.

Thanks, Jure. Please turn to Slide 6. For the fiscal fourth quarter, our team did a solid job, delivering consistent gross and operating margins despite lower revenues, mainly due to ongoing customer inventory adjustments, primarily in the communication end market as the supply chain has significantly improved. Q4 revenue was $2.05 billion, slightly below our outlook of $2.1 billion to $2.2 billion. Q4 non-GAAP gross margin was 8.7% at the higher end of the outlook of $8.3 to $8.8 primarily due to favorable product mix. Q4 non-GAAP operating margin was 5.7%, in line with the outlook of 5.5% to 6%. Finally, non-GAAP fully diluted EPS was $1.42, slightly lower than our outlook of $1.47 to $1.57 due to lower-than-expected revenues. With that, please turn to Slide 7. Again, Q4 FY '23 revenue of $2.05 billion was lower than Q4 FY '22 revenue of $2.22 billion. This decline was mainly due to ongoing customer inventory adjustments, primarily in the communication end market as the supply chain has significantly improved. Q4 FY '23 gross margin was 8.7% compared to 7.9% in Q4 of FY '22, primarily due to a favorable product mix. Q4 FY '23 non-GAAP operating margin improved to 5.7% compared to 5.3% in Q4 FY '22. Finally, Q4 FY '23 EPS was $1.42 compared to $1.37 in Q4 FY '22 despite lower revenues. Q4 GAAP fully diluted EPS was $1.04. Now please turn to Slide 8. Q4 FY '23 IMS revenue was $1.64 billion compared to $1.82 billion in Q3 FY '23. This decline was mainly due to ongoing inventory adjustments at customers, primarily in the communications end market as the supply chain has significantly improved. Q4 gross IMS close margin was 8% in Q4 compared to 8.3% in the prior quarter. Q4 CPS revenue was $440 million compared to $419 million in Q3 FY '23. Q4 FY '23 non-GAAP gross margin for CPS improved to 10.8% from 8.8% in Q3. Now please turn to Slide 9. As Jure said, fiscal 2023 was a really strong year for the company, with excellent execution by the Sanmina team. FY '23 revenue grew 13% to $8.9 billion compared to the prior year as the supply constraints improved significantly relative to FY '22. Non-GAAP gross margin improved to 8.5% compared to 8.1% in FY '22, primarily due to a favorable product mix. Non-GAAP operating margins improved to 5.8% compared to 5% in FY '22 as we did a good job managing our operating expenses. Finally, FY '23 non-GAAP EPS grew 34% to $6.26 compared to $4.68 in FY '22. Again, GAAP fully diluted EPS for FY '23 was $5.18. Overall, FY '23 was a really strong year for the company with continued positive annual trends in revenue growth, margin expansion, and earnings growth. With that, please turn to Slide 10. We have a strong balance sheet that provides our company a competitive advantage to manage through a dynamic market environment. Cash and cash equivalents at the end of the quarter were $668 million. There were no borrowings under our $800 million revolver at the end of Q4. Cash cycle days were 65.9% and pretax ROIC was 26.4%. Please now turn to Slide 11. Cash flow from operations was $77 million in Q4 and $235 million for the full fiscal '23. Capital expenditures were $38 million in Q4 and $190 million for all of FY '23. Free cash flow was $39 million in Q4 FY '23 and for FY '23. During the quarter, we repurchased approximately 600,000 shares for a total of $33 million. For the full fiscal year, we've repurchased 1.58 million shares for about $84 million. At the end of the fiscal year, we had $279 million of remaining authorization for additional share repurchases. Next, let's talk about Sanmina's capital allocation priorities. Sanmina's top priority is to fund organic growth, and we are excited about the opportunities we are currently pursuing. During FY '23, we've spent more in recent years in capital expenditures to position Sanmina for expected growth in the second half of FY '24 and beyond. In addition, we'll continue to evaluate potential strategic transaction opportunities as well as reduce our current debt levels. Finally, we will continue to return cash to shareholders through opportunistic share repurchases. We believe that the strong balance sheet and cash flow generation position Sanmina well for future growth. Now please turn to Slide 12. Let's talk about the outlook for Q1 FY '24. We expect Q1 revenues to be in the range of $1.85 billion to $1.95 billion as we expect customers to continue to adjust inventory levels, primarily in the communications end market as the supply chain has improved significantly. We expect non-GAAP gross margins in the range of 8.3% to 8.8% dependent on product mix. Non-GAAP operating expenses in the range of $58 million to $60 million and non-GAAP operating margin in the range of 5.3% to 5.7%. We expect non-GAAP interest and other expenses of approximately $12 million. In addition, we estimate an approximate $3 million noncash reduction to our net income to reflect our JV partner's equity interest in the net income of our Indian JV. We expect non-GAAP tax rate of approximately 17% to 17.5% and non-GAAP fully diluted share count of approximately 58.5 million. When you consider all of this guidance, our outlook for non-GAAP diluted earnings per share is in the range of $1.20 to $1.30. We expect Q1 capital expenditures to be around $40 million, driven by the growth of new programs and to support expected growth in the second half of fiscal 2024 and beyond. We expect Q1 depreciation of around $30 million. And with that, I'll turn the call back to Jure for more details on the outlook by market as well as the upcoming full fiscal year 2024.

Thanks, Kurt. Ladies and gentlemen, let me add a few more comments about our results for fiscal year '23, fourth quarter and outlook for the first quarter of fiscal year '24 and the future goals. Please turn to Slide 14. I can tell you that I am pleased with our fiscal year '23 results. Actually, I'm pleased with what we accomplished in the last 3 years. Every one of these years we met or exceeded our goals, especially last 2 years, if you look at the revenue growth, last year, we grew 17.5%. This year, we grew 12.8%. On a non-GAAP operating income, again, nice growth over 3 years. Last year, we grew non-GAAP operating income by 30%. And if you look at the non-GAAP diluted earnings per share, we grew that every 3 years, every year. Last year, almost 29.4% and this year, 33.7%. Again, these are the goals for all our internal plans; we either met them or exceeded them. So with that, please turn to Slide 15. Now let's look at the revenue by end market for the fourth quarter of fiscal year '23. Revenue per quarter went down as you heard from Kurt, 7% sequentially, mainly due to ongoing inventory adjustments, and it was primarily in the communications end market. For the fourth quarter, top 10 customers accounted for 49% of revenues. We continue to diversify our market segments. For Industrial, Medical, Defense, Aerospace, and Automotive for fourth quarter, revenue came in at 65.4%. That came to flat quarter-over-quarter. For the year, revenue was 60.3% and growth for the year was 13.6%. So overall, this segment did pretty well. Communication networks and cloud infrastructure for the fourth quarter revenue was 34.6%, down 18% with more inventory adjustment than we thought beginning of the quarter, but for the year, the revenue was 39.7% and growth for a year-over-year was up 11.7%. I can tell you that we had solid operational execution as we deliver a competitive advantage for our customers. Let me add a few more comments about the outlook for our first quarter. For the first quarter of fiscal year '24, as you heard from Kurt, we are forecasting revenue to be down mainly driven by inventory adjustments from some of our end markets. So we expect to see some headwinds for the next couple of quarters, driven by inventory adjustments and some softness in the economy. The majority of the inventory adjustments and softness is coming from our communication markets. On a positive side, for the second half of the year, we expect to see nice improvements in the market demand. We remain confident in what we are hearing from our customers about the long-term opportunities. Personally, I'm excited about what's in front of us and about our future.

Our first question comes from Anja Soderstrom with Sidoti.

For the network equipment market, you said the inventory adjustments there are primarily within that segment, but where else are you seeing inventory adjustments?

Well, most of our inventory adjustments are really across the communications side of the business, 5G, some networking product, but that's mainly with a few customers. The rest of the markets, as you can see, in industrial, medical, defense, and automotive basically came in flat. We see some minor adjustment there, but nothing major like what we see in the communications side.

Okay. And in terms of auto, have the types of all affected you?

Not really. I mean we have a few projects there, but most of our stuff was with the industry leaders in electrical vehicle.

Okay. And in terms of the joint venture, you said you're seeing strong growth there better than you had expected. When will we see some significant revenue experience from there?

I would expect it to have strong growth. First of all, we had a great year with excellent operations. We do anticipate good growth in 2024, and I believe we are well positioned for significant growth at the end of 2024 and into 2025.

Okay. And in terms of the gross margin and the product mix with the short term in the communications equipment, how should we think about the gross margin in the coming quarters and then in the coming years?

First of all, I want to comment on the margins. We have achieved a respectable margin this year, and we believe there is room for improvement. In the short term, I expect the operating margin to be in the range of 5% to 6%, despite a decline in revenue. We will continue to refine our approach and position the company for significant growth, anticipating a market rebound. As we increase our shipments, we acknowledge that we performed better last year. There is definitely room for improvement. Looking ahead to 2024 and 2025, we see considerable potential, and we expect our margins to exceed 6%. We have a strong track record in this regard.

Okay. And as you spoke about fiscal 2024, it's going to be softer in the first half, and then you see growth again in the second half. What gives you confidence in the growth there? And for the full year, how should we think about the overall revenue performance?

Okay. Anja, as you know, in the last 3 years, as you covered us, we take one quarter at a time. I think in the short term, definitely, we see inventory being resolved in the next 6 months, hopefully sooner. But definitely, I think inventory will get resolved based on what we see today. So definitely, we're going to see some pickup in the second half because of that. Unless the economy falls off a cliff, based on my customer forecasts, I think there should be some upside across all our markets, especially in the second half. And based on some of these new programs that we're working on, so there's three things that we're looking at; we expect to grow. We definitely expect to grow long term. But we'll take one quarter at a time.

Okay. And one last one. You said you have some new program wins. Can you just talk about those? Are those with the existing customers or expanding your logo at this? Or how is this baseline...

We're expanding logos, but most of the big wins are with existing customers. However, we have a fair amount of new logos, Anja, that have a lot of potential, but probably that's more end of '24, '25 because it takes some time to ramp these programs up. So yes, we have upside potential in the defense and aerospace side of the business. I think alternative energy has a lot and cloud infrastructure and optical packaging in that area, I think there's a lot about that. Also, Anja, I just want to remind you from my prepared statement, I mentioned that we have a goal internally to grow this company a lot bigger than what we are today, and as I said, in the next 3 years, we expect to be in the range of $10 billion to $12 billion. So we are focused on growth, but we're going to make sure it's the most profitable growth.

Our next question comes from Christian Schwab with Craig-Hallum Capital Group.

Most of my questions have been answered. Maybe just a little bit further clarity on the inventory correction communications. Since the inventory correction was obviously bigger than you thought in September, is it going to continue into December and into March? When you talk about some customers, is that like 2 or 3, or is that more than 5?

Well, we do business in that segment with all the market leaders, Christian. As you know, we let our customers speak for themselves. But yes, I will say the majority of the customers in that segment have a little bit of extra inventory. And I think what happened there, Christian, is when there were shortages, there was more inventory driven by end customers and our customers. So you had this pipeline that got filled up at a higher rate than I don't know if anybody in the industry really realized how much inventory was in that pipeline. The good thing is that I'm seeing or at least what customers are telling us is that this thing is going to empty and hopefully, within the next 6 months, we will go from there. But good thing, Christian, we didn't lose any customers or any programs. Actually, we won some programs in that side of the business, business being transferred from us and a couple of other competitors to Mexico for us, but that transfer is going to be delayed for a few quarters. So overall, we're still in a good position with those key customers for the long term. It's a basically short-term scenario.

Great. And then just elaborate further. Obviously, you have historically 1 large customer. But when you talk about all the market share leaders in communications, remind us, are you selling to 10 significant people, 15 significant people?

If you look at the market leaders in there, Christian, you know them better than I do. There's approximately 10 companies. And out of those, there are the 5 big ones and 4 or 5 smaller ones.

Yes, okay. That's what I thought. Okay, and then just a follow-up on the fiscal year guidance. I know you don't give that. But kind of back of the envelope, it does appear in a recovery scenario in the second half in communications. We should be growing revenue year-over-year, right?

Well, it all depends on how the market develops. If demand is present, we have the capability and capacity to grow, so that’s not a concern. We have been positioning the company for growth over the last year and a half, which is why we've undertaken a significant expansion. As you know, we are not frivolous with our spending unless it's aimed at growth. Currently, we are completing an expansion in Thailand and investing in projects in Mexico that will support our growth and our customers' growth. We are optimistic that the second half will be better. It’s challenging to predict with the various global issues at play. I remind our team that we can only control our daily operations. Therefore, we will continue to focus on meeting our customers' needs while being proactive as demand returns.

There are no further questions at this time.

Ladies and gentlemen, again, thanks for your time, and I appreciate your patience with us. Again, we're excited about our future, and if we didn't answer any of your questions, please get back to us. With that, thank you, and we'll talk to you 3 months from now, I guess. Bye-bye.

Thank you.

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