Good afternoon, everyone, and welcome to Sanmina's Second Quarter Fiscal 2024 Earnings Conference Call. I will now hand it over to Paige Melching. Please proceed.

Thank you, Jenny. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Second Quarter Fiscal Year 2024 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 Jon Faust, 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 our presentation and take note of our 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. 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 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 second quarter ended March 30, 2024, on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP financial 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 over to Jure.

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 Sanmina's leadership team, our employees for doing a great job. So to you, Sanmina's team, thank you for your dedication and delivering excellent service to our customers, and let's keep it up. Now let's go to our agenda for today's call. We have Jon to review details of our results for you. I will follow up with additional comments about Sanmina's results and future goals. Then Jon and I will open for question and answers.

Great. Thank you, Jure, and good afternoon, ladies and gentlemen. Thank you for joining us here today. Before we go through the financial results, I want to acknowledge the entire Sanmina team for executing and delivering financial results in line with the company's outlook and continuing to do an excellent job. Now let's talk about the Q2 results. Please turn to Slide 5. Second quarter revenue was $1.835 billion at the low end of our $1.825 billion to $1.925 billion guidance range, which is down approximately 2% sequentially. We believe the business has leveled out from a revenue perspective, and we expect to see improvements in the quarters ahead as customer inventory absorption headwinds dissipate, which Jure will comment on more in his prepared remarks. Non-GAAP gross margin was 8.9%, which exceeded the high end of our outlook and was up 10 basis points sequentially and 50 basis points compared to the same period last year. We're very pleased with this gross margin result, which is due to a combination of favorable mix, focused execution and strong operating discipline. Non-GAAP operating expenses were $63.6 million, slightly above our outlook of $60 million to $62 million, primarily driven by incremental expense related to our deferred compensation plan, which was completely offset by an asset gain in the other income and expense line item. Non-GAAP operating margin was 5.4%, which was at the midpoint of our outlook and down slightly at 10 basis points sequentially and 40 basis points compared to the same period last year.

Thank you, Jon. Ladies and gentlemen, let me add a few more comments about our second quarter, and I'll review our end markets and outlook for the third quarter and the rest of the fiscal year 2024. Please turn to Slide 11. As you heard from Jon, for the second quarter, we delivered good results. Overall, we met our outlook. We are seeing stabilization in some of our end markets and incremental improvements in demand. Recovery is slightly slower than expected at the beginning of the year, but we are working very closely with our customers as they are burning through their inventory. I can tell you that macroeconomic uncertainty remains. But Sanmina's team continues to demonstrate resilience and deliver good financial results in this environment.

The Communications and Cloud segment was down 36% year-on-year. Can you help us parse that? How much was communications down and how much did cloud grow? And can you give us some more details within that segment? I mean how are you seeing inventory correction being in that segment? And how did optical versus networking versus wireless? How did the different end markets within communications, how did they pan out this quarter? And how do you see trending over the next couple of quarters?

Thank you for your question, Ruplu. It's no surprise that the communication market has been declining for the past three quarters, primarily due to inventory adjustments and weaker demand in specific segments. Regarding when this will end, I believe we are nearing the bottom. We are beginning to observe a normalization in the supply chain, and our forecasts are becoming more predictable. Importantly, our visibility moving forward has improved. The cloud segment is performing better for us, accounting for about 33% of our revenue, divided equally between cloud and communication networks. Much of our business revolves around networks and optical networks, Ruplu. However, overall demand in communication has been impacted, particularly in 5G. On a positive note, we are starting to see a light at the end of the tunnel, and it's no longer a train.

Yes. Sure, Ruplu. Thanks for the question. So in terms of the cash conversion cycle, we're in the mid 70s right now. But if you look back at the history of Sanmina, we're closer into the 50s. And so that's certainly what we're going to be striving towards, right? And if you break that down between DOI, DSO, DPO, I think we've got a little bit of room to improve across the board.

Yes. Yes, Steve, that came from Communication Cloud customer base. We want to put a good sizeable project that should go on for the next three, four, five quarters. And this mainly is driven around our customer design and also top customer design our test fixturing. And some of the modification as we got involved in production, we realized some modification needed to be made. We have some shortages of materials. At the same time, we're changing. On the positive side, these things will be resolved sometime this quarter, and then we should start continue to make shipments hopefully sometime at the end of this quarter and the next quarter and should be a pretty good program for us going forward.

Got it. That's helpful. And then as you mentioned, your gross margins were a little bit better than expected. And do you still see room for gross margin improvement from here? Can you just walk through what you see as the gross margin opportunity, say, over the next, I don't know, two to four quarters?

Well, Steve, I think we are working to improve the mix of our business driven by some of the technologies that we're offering to our customers and creating a lot more value, especially in the new market with some of the leading technology that is coming out. Sanmina's goal is not to sell just based on price but to sell the value that we provide to our customers. I believe that what we're providing, all the way from our high-technology premium circuit boards, if you look at the AI market here and ML, it requires some more advanced printed circuit boards. It requires mechanical elements, cooling, and so on that goes around the integration of server storage. So that's the area that we're moving to.

I think you said it very well here. I think the only thing I would add on top, Steve, to add to what Jure said, which is all about driving value for our customers within the businesses and driving better segment or mix results. But as we return to growth, we should get some natural operating leverage as well, right? So if you add that on top of everything that Jure was saying, that's why we still believe that there's margin upside in both segments and for the company overall.

I'm curious why you came in at the lower end of the revenue guidance for this quarter, and do you anticipate improvement in the next quarter? What gives you confidence in that? Is it because of the shipments that were delayed in communications, or are there other factors contributing to that growth as well?

Well, first of all, Anja, thanks for the question, yes, we had a little bit extra. We could have shipped, our revenue would have looked a little bit better than what we delivered. But the confidence is really what we are seeing from our customers, what they're telling us right now based on today's information. As we said, we will take one quarter at a time in this environment. I believe that what we've seen through the forecasts, visibility is getting better. I think inventory shortages are being burned down with a lot of our key customers. A lot of our customers are telling us the second half of the calendar year will get better and the forecasts are looking better. A lot of upside potential, especially if you look at the next 12 or 18 months.

Jure, I have a quick question that hasn't been asked. What percentage of total revenue do the AI machine learning products represent?

In the Communication Cloud, we saw around 33% growth last quarter, with approximately half of that stemming from cloud services. While we don't provide a breakdown, it's clear that this quarter has shown more growth compared to the last. We anticipate even greater growth next quarter compared to this past quarter. Overall, the trend is positive, largely driven by our customers' needs for new products to upgrade their data centers. Ladies and gentlemen, I want to again, thank you for your time and your support. If you have any more questions, please get back to us. Otherwise, I appreciate everything, and we'll see you or talk to you in 90 days from now. Bye-bye. Thank you.

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.