Sanmina Corp (SANM) Q3 2024 Earnings Call Transcript

Good afternoon, ladies and gentlemen. And welcome to the Sanmina Corporation Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Monday, July 29, 2024. And I would now like to turn the conference over to Paige Melching. Please go ahead.

Thank you, Ina. Good afternoon, ladies and gentlemen. And welcome to Sanmina’s third quarter fiscal 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 to 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 operation for the third quarter ended June 29, 2024 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, non-cash 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 would also like to let investors know that Sanmina will be participating in the Jefferies’ Semiconductor, IT Hardware & Communications at the end of August and Citi’s 2024 Global TMT Conference at the beginning of September. I’d now like to turn the call over to Jure.

Good afternoon, ladies and gentlemen, and welcome, and thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina leadership team and our employees for doing a great job. So to you, Sanmina’s team, thank you for your dedication and for 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, our CFO, to review details of our results for you. I will follow up with additional comments about Sanmina results and our future goals. And Jon and I will open for questions and answers. And now I’d like to turn this call over to Jon. Jon?

Great. Thank you, Jure, and good afternoon, ladies and gentlemen, and thank you for joining us here today. Before we go through the financial results, I want to thank the entire Sanmina team for their hard work and dedication and for delivering results in line with our outlook. Now please turn to Slide 5 to discuss the P&L highlights. Third quarter revenue was $1.84 billion in line with our outlook of $1.8 billion to $1.9 billion and up 0.4% sequentially. We are beginning to see customer inventory absorption improve as the communications networks and cloud infrastructure end market grew 8.3% sequentially, partially offset by declines in the industrial and automotive end markets. Non-GAAP gross margin was 8.5%, just short of the midpoint of our outlook and down 40 basis points sequentially and 10 basis points compared to the same period last year, driven by unfavorable mix, which I will comment on in more detail on the next slide. Non-GAAP operating expenses were $60.2 million within the guided range. Non-GAAP operating margin was at the low end of our outlook at 5.3%, down 10 basis points sequentially and 40 basis points compared to the same period last year, driven by the lower gross margin that I referenced earlier. Our operating margin continues to be in line with the 5% to 6% short-term target range that we have previously communicated. Non-GAAP other income and expense was $7.7 million, favorable to our guidance of approximately $12 million. This was driven by our strong cash flow results as we generated higher interest income and incurred less interest expense. Non-GAAP earnings per share came in at $1.25 based on approximately 57 million shares outstanding on a fully diluted basis and in line with our outlook. Now please turn to Slide 6 to discuss the segment results. IMS revenue came in at $1.48 billion, up 1.1% sequentially, driven by growth in the communications networks and cloud infrastructure end market. IMS non-GAAP gross margin was down 10 basis points sequentially to 7.6%, due primarily to unfavorable mix. CPS revenue came in at $388 million, down 2.5% sequentially, driven mostly by short-term delays in two programs which have since been resolved and will ship in the fourth quarter. CPS non-GAAP gross margin was down 140 basis points sequentially to 11.5%, due primarily to the delay in the two programs that I just mentioned. We expect CPS non-GAAP gross margin to return to recent levels in the coming quarter. Now please turn to Slide 7 to discuss the balance sheet highlights. Sanmina has a very strong balance sheet, which is a competitive advantage for the company and we continue to manage it well. Cash and cash equivalents were $658 million. At the end of the quarter, we had no outstanding borrowings on our $800 million revolver, leaving us with substantial liquidity of approximately $1.5 billion. We ended the third quarter with inventory of $1.3 billion and turns at 4.9 times, which was a slight sequential improvement. As a reminder, we purchased inventory based on commitments from our customers, but we believe there is an opportunity to reduce our inventory levels even further, so that, as well as increasing our inventory turns, will remain priorities going forward. Our non-GAAP pre-tax ROIC was 21.1% for the quarter, well above our weighted average cost of capital. We continue to have one of the strongest balance sheets in the industry, with low leverage of 0.48 times, which allows us to both navigate complex market environments and capitalize on long-term opportunities. Now please turn to Slide 8, where I’ll talk about cash flow and capital allocation highlights. As I have mentioned before, cash flow is a key focus area at Sanmina, and I am pleased that we have delivered another strong quarter of cash flow performance. Cash flow from operations was $90 million for the quarter, which brings the year-to-date total to $288 million and is $130 million improvement on a year-over-year basis. Capital expenditures were $23 million for the quarter, adding up to $87 million for the year. As a reminder, last year we made significant capital investments across multiple geographies and strategic end markets to position the company for future growth and new opportunities. Free cash flow was $67 million for the quarter and now stands at $202 million on a year-to-date basis, which is up $196 million year-over-year. During the quarter, we repurchased 845,000 shares for approximately $55 million, which adds up to a total of 3 million shares for approximately $162 million for the year so far. As of June 29, we had approximately $118 million left on our Board-authorized plan and we continue to repurchase shares on an opportunity basis. Our strong cash flow performance gives us the flexibility to continue to invest in the business while also returning cash to shareholders over time as part of a disciplined approach to capital allocation. To conclude on the Q3 actual results, overall it was a solid quarter as we delivered on what we said we would. Now please turn to Slide 9, where I’ll cover our outlook for the fourth quarter, which is based on what we are seeing in the market and the forecasts from our customers, which are starting to trend upwards. Our outlook is as follows. Revenue between $1.9 billion to $2.0 billion, which is up 6% sequentially on a midpoint basis. Now, while we’re not providing guidance beyond the fourth quarter, we are seeing signs of stabilization and demand improvement as we look out into FY 2025. Non-GAAP gross margin of 8.3% to 8.8%, consistent with prior quarters and dependent on mix. Operating expenses of $60 million to $64 million, in line with normal levels. As our revenue starts to increase, we expect to achieve operating leverage as we have driven efficiencies in our cost structure and don’t expect to make material spending increases. Non-GAAP operating margin of 5.3% to 5.7%. We expect other income and expense to be approximately $10 million, which is in line with recent levels, driven by strong cash management. A tax rate of 17% to 18%. And to account for our India Joint Venture Partners’ interest, we estimate an approximate $3 million to $3.5 million non-cash reduction to our net income. Non-GAAP EPS in the range of $1.30 to $1.40, based on approximately 56 million fully diluted shares outstanding. Capital expenditures to be around $30 million as we continue to invest in future opportunities and further strengthen our capabilities. And finally, depreciation of approximately $30 million. In summary, based on the demand signals from our customers and our fourth quarter outlook, we now expect to return to growth. We have the right set of customers and capabilities to be successful, and I’m excited about the opportunities ahead. And with that, let me turn the call back over to Jure.

Thank you, Jon. Ladies and gentlemen, let me add a few more comments about our third quarter and I’ll also review our end markets and outlook for the fourth quarter, and I’ll make a few more comments about the next year, our fiscal year 2025. Please turn to Slide 11. For the third quarter, we delivered good results, as you heard from Jon, in line with our outlook. In our focus markets, we had nice growth in communication networks, cloud infrastructure markets, as we continue to see softness in automotive and industrial during the quarter. I can also tell you that we are working very closely with our customers as they are slowly burning through their inventory. We’re starting to see better forecasts from some of our customers. And in this environment, the Sanmina team continues to demonstrate resilience by delivering solid financial results. Overall, we are seeing stabilization in some end markets. To talk more about it, please turn to Slide 12. As you heard from Jon, revenue for the third quarter was $1.84 billion, within our guidance. Revenue was slightly up quarter-over-quarter. The industrial, medical, defense, and aerospace and automotive sector contributed 64% of our revenue, but that was down 3.6% quarter-over-quarter. For communication networks and cloud infrastructure, that was 36% of our revenue. Here, we had nice improvement in demand, which was up 8.3% quarter-over-quarter. For the third quarter, top 10 customers represented 49.7% of our revenue, and I can tell you that Sanmina is a well-diversified company. Regarding bookings, we had strong bookings in the last six months. Book-to-bill over the last two quarters was 1.1 to 1. Mainly newer products are driving better bookings. Please turn to Slide 13. Let me make a few more comments about our end markets. I can tell you that Sanmina has been investing in faster-growing and higher-margin end markets in the last year or year and a half, which includes cloud infrastructure, defense, and aerospace, medical, automotive, industrial energy, and high-density performance networks. In cloud infrastructure, for AI applications, I continue to see more opportunities driven by upgrades to cloud networks to meet AI traffic for the future. In defense aerospace, we continue to see solid demand. We’re adding more capacity in our high-technology printed circuit boards fabrication business and for defense systems build. Here, mainly new program wins should continue to drive growth. Our medical market is driven by digital health around medical devices. In medical, we have a strong base of customers with positive long-term trends driven by new opportunities in the pipeline. In automotive, we’re focused on electrical vehicles, car connectivity, advanced driver assistance systems, and electrical chargers. I can tell you that Sanmina is well-positioned with new projects to drive growth in this segment. In the industrial and energy market, we have a solid customer base with new projects in the pipeline. Good opportunities around energy generation and energy storage, power controls and management, and factory automation. And for semiconductor infrastructure, we’re focused on lithography products. AI architecture is driving opportunities for high-density, high-performance IP routing, computing, and storage. And we continue to expand our optical business around advanced packaging focused on 400-gig, 800-gig, and 1.6 terabyte developments. For these markets, we see positive trends for the future. Please turn to Slide 14. In summary, for the third quarter, our team executed well by delivering revenue of $1.84 billion in line with our outlook. Non-GAAP operating margin at 5.3% and non-GAAP diluted EPS of $1.25 in line with our outlook. And as Jon said, we delivered solid cash for the quarter. For the fourth quarter, visibility is getting better. For the revenue, as you heard earlier from Jon, we are guiding up to $1.9 billion to $2 billion in revenue and non-GAAP diluted EPS of $1.30 to $1.40. I am personally excited about long-term growth for Sanmina. Fiscal year 2024 has been a transition year for us. We are navigating this market dynamic pretty well and positioning Sanmina for a better future. We expect that fiscal year 2025 will be a growth year for our end markets. We are focused on optimizing our capital structure to drive growth in the next two to three years. That’s basically 2025 to 2027 and beyond. Short-term, operating margin should be stable in a range of 5% to 6%. Long-term, we are making improvements to drive operating margin up to 6% plus. Driven by the investments we made in our Integrated Manufacturing Solutions Group and Technology Components Group focused on AI and enterprise cloud infrastructure. In summary, our focus is to drive profitable growth in a heavily regulatory market where we have a competitive advantage. Again, I’m excited about the opportunities in front of us. Ladies and gentlemen, now I would like to thank you all for your time and support. Operator, we are now ready to open the lines for questions and answers. Thank you again.

Thank you. One moment, please, for your first question. Your first question comes from the line of Ruplu Bhattacharya from Bank of America. Please go ahead.

Hi. Thank you for taking my questions.

Hello, Ruplu.

Hi, Jure. I was wondering, Jure, can you give us more details on the communications end market? What are you seeing specifically within optical, within wireless and networking? What did you see in the third quarter and what are your expectations for the fourth quarter that you’re guiding?

As we mentioned in our prepared statement, communication networks and cloud infrastructure grew about 8% from the previous quarter. We anticipate this market will continue to progress positively. I believe this growth is largely due to our high-performance network, cloud-grade routing, IP routers, switches, and certain optical packaging systems. Some of these are new programs, and we are also beginning to see demand from existing customers who are reducing their inventory, although not to the extent they desire or that we would prefer. Nonetheless, it is moving in the right direction. Additionally, we faced challenges last quarter with material and testing equipment, which we noted in our second quarter. However, things have started to improve, and we expect this positive trend to persist into our fourth quarter.

So maybe let’s build on that point that you just mentioned. I think you talked about two programs that got pushed out in CPS. What caused that push out? How much was the dollar impact? And can you tell us which end markets those programs were in?

Jon, do you want to talk about it?

Yeah. So just to touch on, so like we had said in the prepared remarks, we expect both to ship in Q4. The issues have been resolved. This is really just working with our customers on...

I think he’s asking about the Components Product Group in this quarter.

The CPS program, correct? Yeah. Exactly. So those that pushed out, we expect them in Q4. From a dollar perspective, Ruplu, if it was not for that, we would have been at the overall Sanmina level, a little bit above the midpoint of our revenue guide and the same for EPS. But on both fronts, the issues have been resolved and we expect to see the numbers in our Q4 results.

And Jon, just to clarify, the sequential decline in CPS margins, was that all because of just those two programs or did you have any other impacts or any other issues impacting margins?

We have some positives and negatives as usual, but looking at the last couple of quarters, we were around 13%. In the most recent quarter, we were at 11.5%. The combined effect of those two programs accounted for a little over a percentage point of that impact. Overall, we would have seen just a slight decline in CPS, but the majority of the effect came from those two programs.

Could you provide more details on the IMDA segment, which has four different end markets? What are your expectations for each of those markets in the fourth quarter, and how do you anticipate revenues will trend for them?

As I mentioned in my prepared statement, we are experiencing some softness in the automotive and industrial sectors. For automotive, we expect this trend to continue. However, I am more optimistic about the industrial sector, as there are several promising programs related to energy. We will see how effectively we can ship those out, but I believe opportunities exist. In the medical sector, I would characterize the situation as flat to slightly down, primarily due to ongoing impacts from COVID, as we had previously seen strong demand. Nevertheless, I am pleased with our position in the medical business, particularly with our existing customers and the new programs emerging with both existing and new clients. This is promising. In the defense and aerospace sectors, we are in a favorable position, with strong demand. Additionally, we are expanding through significant investments in our circuit board fabrication for military and high-technology military boards, where demand remains robust, including in system assembly. I anticipate that the business will continue to progress positively. Overall, if I had to estimate, I would say we are likely to be flat or possibly slightly up.

Okay. All right. Thank you for all the details. Appreciate it.

Thanks, Ruplu.

Thank you. One moment, please, for your next question. And your next question comes from the line of Steven Fox from Fox Advisors. Please go ahead.

Hi. I have two questions as well.

Hello, Steve. How are you?

Hi. Good afternoon, Jure. Jon, could you start by discussing the inventories on your balance sheet? You already have impressive inventory turns, but it seems you believe there's room for improvement. Can you give us an idea of how much better you could get and what factors are driving that? I have a follow-up question as well.

Yeah. Sure, Steve. Thanks for joining the call today. So in terms of inventory, like I mentioned, we were at 4.9 turns overall and from a DOI perspective, that was about 75 days. If you go back into our history a couple of years back, we think we can get back into the mid-60s days. So, we definitely think that there’s opportunity there. And from a turns perspective, we’re driving towards more towards a number like 6, right? So we did make some progress. If you look at quarter-over-quarter sequentially inventory dollars on an absolute basis was pretty much flat, but made some progress, but more room to go on that front. So that’s what we’re driving from a cash conversion cycle perspective.

And just to be clear, is that based on your own improving internal capabilities, better efficiencies or is that like as demand recovers, mix recovers? How much of that is like under your control?

Yeah. It’s both, Steve, at the end of the day. So, certainly customers are still working through inventory absorption, like I was mentioning at the beginning of the call, and that’s a little bit different by end markets. We are seeing some improving and getting back to kind of normalized levels. But we think there’s some room on that front. Then for us, we’re always looking to drive efficiencies, right? And so I think there’s some on both sides.

That’s helpful. And then, Jure, can you talk a little bit more about the book-to-bill? So 1.1 for two quarters in a row, you mentioned newer products. Can you talk about one, what’s driving it, and like how much of the bookings is maybe longer term and how much maybe turns into revenues in the next two quarters? Thanks.

Yes, Steve. Bookings over the past couple of quarters have been strong, at 1.1 to 1, primarily driven by new programs. We assess bookings based on what is released for production, typically looking at the next two to three quarters, with a maximum of four quarters. We don’t include bookings for orders that aren’t released for production. For instance, in the military sector, if we receive a contract worth $100 million over five years, but only $20 million is released in the first year on a quarterly basis, we only count the bookings for what's released. Everything I mentioned pertains to bookings that are ready for production. Additionally, we’re starting to see our existing customers release the new programs they have been developing over the past year and a half, which is also contributing to our bookings. I understand we’re experiencing an inventory correction affecting some of our customers, but I can confirm that conditions are improving. I can't guarantee everything will be perfect in the next four or five quarters, but the signs are definitely moving in the right direction. Most of our customers are feeling more optimistic about the future as they work through their inventory in the coming quarters, showing a better outlook compared to six months ago. These are positive trends. We also have a solid pipeline of opportunities that will contribute to our growth in the upcoming years. As Jon pointed out in his statement, we have made significant investments, positioning us to increase our output beyond what we are currently shipping. We're focused on growth, and importantly, we have not lost any customers. In fact, we've secured new programs and potentially gained customers who had multiple suppliers. There are many positive developments, but we want to wait a little longer before declaring everything completely positive.

Understood. That’s helpful. Thank you.

Thanks, Steve.

Thank you. One moment, please, for your next question. And your next question comes to the line of Christian Schwab from Craig-Hallum Capital Group. Please go ahead.

Hey.

Hey, Christian.

Hey, Jure. On last quarter, you guys talked about inventory headwinds and things bottoming, and now we’re kind of still being impacted by pushouts, and it kind of sounds like we’re a little bit more guarded exactly what the customer inventory broadly across entire business impacting the business maybe for multiple more quarters. Last quarter, I think you guys talked about an opportunity to exit this fiscal year and return to strong growth. And in 2025, what should we be thinking about as far as a top-line growth range for next fiscal year, given the pushes and takes, strong bookings momentum, nice new design wins, but ebbs and flows of real visibility from the end customer regarding demand and inventory maybe remaining not crystal clear?

Sure, Christian, I'll address that. Firstly, looking back at the last quarter, our shipment forecasts remained quite consistent. When we discuss delays in our smaller projects within the Components Product Group, we're referring to revenue impacts of around $10 million to $15 million, which is a more profitable area for us. While this has some effect, it’s not substantial. I've noticed that inventory is decreasing at a slower pace than I initially anticipated at the start of this fiscal year. I expected stronger demand in the latter half, leading to a quicker inventory reduction. While inventory is still decreasing, it's happening more gradually. Today, we are optimistic about demand; for the fourth quarter, we're guiding for revenues between $1.9 billion and $2 billion, indicating we are moving in a positive direction. As both Jon and I have mentioned, the customer forecasts and visibility are trending positively. Looking ahead to 2025, I feel confident based on our key customers and markets that we will see growth. We're prepared to commit to expecting growth in 2025, but we won’t disclose the specific amount yet. We prefer to assess this quarter before fiscal year 2025 progresses, and I believe we'll have a clearer picture to share in the first quarter of 2025. I remain optimistic. We're excited about the new programs that are emerging. The recent communication increases mainly stemmed from new programs that should benefit us in this quarter and the next, as well as in the future. While I affirm our expectation for 2025 to be a growth year, I won’t provide a percentage until we have more certainty in around 90 days. Jon?

Yeah. Just to add to what Jure was saying, Christian, and the level set on some of the numbers. So if you think about our Q3 guide, so we came in just shy of the midpoint. We had guided the $1.8 billion to $1.9 billion, which would have been a midpoint of $1.85 billion. If not for those two programs that I mentioned before, like when I was answering Ruplu’s question, we would have been slightly above that and be about a 1% sequential improvement. If you think about the Q4 guide of $1.9 billion to $2 billion revenue, the midpoint of that would be about a 6% sequential increase. So we do expect to be getting on the correct trajectory from that perspective. And inventory-wise, when we started this fiscal year, we were at $1.7 billion. We’re now down to about $1.384 billion, and we’ve improved our turns as well. And like I was mentioning just a little bit ago, we think that there’s more opportunity to work through that inventory on the customer side and then certainly efficiencies that we’re going to be driving to get turns back up. So as we look ahead, we definitely see Q4 as that return to growth where we’re going to start to make that progress into the next fiscal year.

Great. Thanks for all the clarity. No other questions. Thank you.

Yeah. Thanks, Christian. Operator, it looks like we don’t have any further questions. I would like to thank everyone for joining us today and we look forward to speaking with you again in a few months to discuss our fourth quarter and our fiscal year 2025. Thank you very much.

Thank you.

Bye-bye.

This concludes today’s call. Thank you for participating. You may all disconnect.