Sanmina Corp Q1 FY2025 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Sanmina’s First Quarter Fiscal 2025 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, January 27, 2025. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communications. Ma'am, please go ahead.

Thank you, Constantine. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first quarter fiscal 2025 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 Yuri Sola, Chairman and Chief Executive Officer. And Jon Faust, Executive Vice President and Chief Financial Officer. Before I turn the call over to Yuri, 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 with 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 our 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 first quarter ended December 28, 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 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 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 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. 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 and 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. For the first quarter fiscal year 2025, we delivered solid revenue of $2.01 billion and non-GAAP EPS of $1.44 per share. Again, to Sanmina’s employees, thank you 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 results and future goals. And John and I will open 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 I review our results for the first quarter, I want to acknowledge the entire Sanmina team for their focused execution and thank them for delivering a solid start to the new fiscal year. Now please turn to Slide 5, where I'll speak to the financial highlights. We're very pleased with our first quarter results, which as you can see either met or exceeded all of our outlook commitments. Our revenue of $2.01 billion and our non-GAAP operating margin of 5.6% each came in toward the high end of our outlook. Also, our non-GAAP gross margin of 9.0% and our non-GAAP diluted earnings per share of $1.44 each exceeded our outlook. These results, combined with how we exited the last fiscal year, puts us on a good trajectory for the new fiscal year and sets us on the right path toward achieving our long-term financial goals of driving growth and expanding margins. Now please turn to Slide 6, where I'll speak to the P&L performance. As I just mentioned, we delivered revenue of $2.01 billion, which was up 7.0% compared to the same period a year ago. This was primarily driven by growth in the communications networks and cloud infrastructure end-markets, which Jure will speak to in more detail as a part of his prepared remarks. Non-GAAP gross profit was $180.1 million or 9.0% of revenue, up 20 basis points compared to the same period a year ago. This was driven by favorable mix as well as operational efficiencies. Non-GAAP operating expenses were $67.4 million, slightly above our outlook as we continue to make targeted investments to drive future growth. Non-GAAP operating profit was $112.7 million or 5.6% of revenue, up 10 basis points compared to the same period a year ago, driven by mix, focused execution and effective cost management. It's important to note that our non-GAAP 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 $2.3 million of net expense favorable to our guidance driven by our strong cash flow results. Non-GAAP diluted earnings per share came in at $1.44 based on approximately 56 million shares outstanding, up 10.8% compared to the same period a year ago or up 16.2% if you normalize for the tax rate change. As we mentioned on our prior call, we expect fiscal 2025 to be a growth year and our results for the first quarter represents a solid start toward achieving that objective. Now please turn to Slide 7, where I'll speak to the segment results. IMS revenue came in at $1.62 billion, up 7.8% compared to the same period a year ago, driven by growth in the majority of our end markets, but primarily in the communications networks and cloud infrastructure end markets. IMS non-GAAP gross margin was 7.9%, up about 30 basis points compared to the same period a year ago, due primarily to favorable mix and operational efficiencies. CPS revenue came in at $416 million, up 5.4% compared to the same period a year ago, driven by higher demand in most of our end markets. CPS non-GAAP gross margin was 12.5%, down about 40 basis points compared to the same period a year ago, driven by unfavorable mix. While we're pleased with the performance of the IMS and CPS businesses this quarter, there is still room to improve, both in terms of revenue growth and margin expansion. And as such, we will continue to focus on doing those going forward. Now please turn to Slide 8, where I'll speak to the balance sheet highlights. As with the P&L results, we maintained a very strong balance sheet in the first quarter. Cash and cash equivalents were $642 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 quarter with inventory, net of customer advances of $1.3 billion, which was down approximately 5% versus the same period a year ago. When you look at our inventory reduction from either an inventory turns or days of inventory perspective, it represents a notable improvement from a year ago. While we're pleased with these results, there is still more work to be done when you look at where we've been historically. So inventory will continue to be an area of focus for us going forward. Our non-GAAP pre-tax ROIC was 23.5% for the quarter, well above our weighted average cost of capital and an improvement from the 22.7% from the same period a year ago. As I've mentioned many times before, we have one of the strongest balance sheets in the industry with no net debt and a low gross leverage ratio of 0.49 times, which puts us in a great position to execute on our long-term financial goals to drive growth and expand margins. Now please turn to Slide 9, where I'll speak to the cash flow highlights. As a result of the team's disciplined working capital management, our first quarter cash flow from operations came in at a solid $64 million. Capital expenditures were $17 million for the quarter, below our outlook, largely due to timing. We continue to expect capital expenditures to be between 1% to 2% of revenue on a full-year basis, consistent with historical practice. Also, as I've mentioned before, we will continue to make strategic investments in the technology and capabilities needed to strengthen our position in the market and support our long-term financial goals. Free cash flow was $47 million. During the quarter, we repurchased 206,000 shares for approximately $16 million. As of December 28, 2024, we had $37 million remaining on our current share repurchase program. We're pleased with our strong cash flow performance as it gives us the flexibility to continue to invest in the business and return capital to our shareholders, all through a disciplined and balanced capital allocation approach. Now please turn to Slide 10, where I'll speak to our capital allocation priorities. When it comes to capital allocation, it's incredibly important to have a clear strategy and a well-defined set of priorities when making decisions. Each quarter, we evaluate our capital allocation options and look for opportunities to maximize shareholder value, all while taking a disciplined ROI-based approach. As I've mentioned before, our long-term financial goals are to drive growth and expand margins. And as such, two key capital allocation priorities are, number one, funding investments in organic growth; and number two, investing in strategic M&A and partnerships. It's also important to manage our leverage ratio, so we closely monitor our debt level and take the appropriate actions. And lastly, another key capital allocation option that can help us drive shareholder value is share repurchases. We believe that our stock is undervalued in the market and as such, share repurchases remain an attractive capital allocation option. To that end, earlier today, we announced that our Board of Directors authorized an additional $300 million of share repurchases, which is incremental to the amount remaining on our prior program. This authorization has no expiration date as we intend to continue to repurchase shares opportunistically and in the context of the capital allocation strategy I just outlined. Now please turn to Slide 11, where I'll provide our outlook for the second quarter, which is based on what we are seeing in the market, the forecast from our customers and takes into consideration our typical seasonality. Our second quarter outlook is as follows. We expect revenue between $1.9 billion and $2.0 billion, which at the midpoint of $1.95 billion puts us up 6.3% compared to the same period a year ago. Non-GAAP gross margin of 8.4% to 8.8% dependent on mix. Operating expenses of $60 million to $64 million. Non-GAAP operating margin of 5.3% to 5.7%. We expect other income and expense to be a net expense of approximately $5 million, a tax rate of 20% to 22%. This is in line with our prior tax rate outlook, which, as a reminder, is up from the prior year due to the final utilization of our U.S. federal net operating losses, the impact of the Pillar 2 global minimum tax, mix of jurisdictional earnings and other tax credits and incentives. We estimate an approximate $3.0 million to $3.5 million non-cash reduction to net income to reflect our India JV partner's equity interest. Non-GAAP EPS in the range of $1.30 to $1.40 based on approximately 56 million fully diluted shares outstanding. At the midpoint of $1.35 that would put us up 3.5% compared to the same period a year ago or up 9.5% if you normalize for the tax rate change. Capital expenditures to be around $30 million and finally, depreciation of approximately $30 million. In summary, based on the demand signals from our customers and our second quarter outlook, we continue to expect FY '25 to be a growth year. We believe we have the right set of customers and capabilities to be successful and are well-positioned to take advantage of the opportunities ahead. And with that, let me turn the call over to Jure.

Thank you, Jon. Ladies and gentlemen, let me add a few more comments about our results for the first quarter and the rest of the fiscal year 2025 and beyond. As you heard from Jon, our team delivered solid execution and excellent service to our customers. Revenue, gross margin, operating margin and non-GAAP earnings per share were either met or exceeded our outlook. So overall, a good quarter. I can also tell you that our customers' inventories continue to come down. We're also starting to see new programs ramp up, as we planned at the beginning of the year, and we see more positive trends from our customers. To talk more about it, please turn to Slide 14. Let's look at our outlook at the revenue by end markets for the first quarter. Industrial and energy, medical, defense, aerospace and automotive was 63% of our revenue came at $1.269 billion. It grew slightly 1% year-over-year. Communication networks and cloud infrastructure was 37% of our revenue, $737 million, a growth of 19% year-over-year. For the first quarter, total revenue of $2 billion plus is a solid start to a new year, a year-over-year growth of 7%. As you can see, Top 10 customers for the quarter was 50.1% of our revenue. Bookings were solid. Book-to-bill came at 1:1. Please turn to Slide 15. We continue to invest in key markets to drive the future growth. For industrial and energy, we have a strong customer base, and we see new projects in the pipeline to drive growth. In medical, as always, we have a solid customer base, well diversified within the market, and we see positive trends for our long-term growth. Defense and aerospace, we continue to see strong market opportunities and we expect the new programs to drive growth. Automotive and transportation, we continue to see solid demand. We see positive trends and opportunities for our long-term growth. High-density, high-performance networks, AI is driving these opportunities around this high-performance networks and optical business. For cloud infrastructure, we see exciting opportunities. We are expanding our capabilities to meet present and future demand. Sanmina provides industry-leading capabilities end-to-end solution from design to systems. For this segment, we provide high technology printed circuit boards, which we fabricate here in the United States and Singapore. We assemble this product and we also fabricate and manufacture the rack enclosure and open racks and liquid cooling systems. We provide design and servers for storage systems. We provide optical modules. At the end of the day, we put all these things together, and we're delivering fully integrated systems to our customers. Please turn to Slide 16. Let me add a few more comments about the fiscal year '25 outlook. For fiscal year '25, we're forecasting revenue growth in the high-single digits. We expect growth to come from new and existing programs. We are also adding new customers with higher margin opportunities. We are focused on margin expansion and earnings growth. Earnings per share should grow at a faster rate than revenue in fiscal year '25. Short-term, as Jon mentioned, our operating margin will be stable at that 5% to 6%. But as you see for the first quarter, we delivered an operating margin of 5.6% compared to the last quarter of 5.3%, a very nice improvement quarter-on-quarter. Long-term, for our business model, we expect to deliver operating margins of 6% plus. Again, for our fiscal year '25, we expect to continue to generate strong cash flow and we'll continue to maximize shareholders' value short-term and long-term. Please turn to Slide 17. In summary, we are focused on diversifying in the key markets to drive profitable growth. Our manufacturing footprint is well aligned with customer needs for the future. Sanmina will deliver consistent cash generation to fund the business with a disciplined approach. We remain focused on fundamentals and future financial performance. Sanmina continues to be a partner of choice with our customers, the market leaders. We continue to execute on our strategy, and we are positioning Sanmina to be a bigger company in the future. Again, we are confident we will grow revenue, expand margins, grow earnings per share and generate cash in fiscal year '25 and beyond. We're excited about Sanmina's future. So ladies and gentlemen, 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 all again.

Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from the line of Ruplu Bhattacharya from Bank of America. Your line is now open.

Hi. Thank you for taking my questions. Hi, Jure. I wanted to ask you about the guidance for fiscal '25. So you're guiding for high-single digit growth on revenues. One aspect of that is the cloud infrastructure business. Can you remind us how much of this growth, high-single digits, do you think comes from this cloud infrastructure segment? And you talked about adding new capabilities. So what is it that you're doing today? What is the capability that you're adding? And how many customers do you have? Do you have one customer in cloud infrastructure and how do you see that business growing?

First of all, that’s a great question. Sanmina is well diversified across several key markets: our largest market is industrial and energy, followed by communication networks, medical, defense and aerospace, and cloud infrastructure. As you can see, we have a diverse portfolio. We have established relationships with our industry-leading customer base that has been loyal to Sanmina for many years. Regarding cloud infrastructure, we provide an end-to-end solution and we continue to invest in this area, which we believe offers significant growth opportunities for us. We provide services ranging from design to complete systems, along with high technology boards manufactured in North America or Singapore for the North American and European markets. Currently, we are supplying rack enclosures from our California and Mexico operations, which includes liquid cooling solutions. We have a dedicated storage group that designs storage products and servers, and we have been engaged in this business for a long time, aiming to expand it further. Our focus is not just on integration but also on providing essential components that fit into the racks, followed by fully integrating, testing, and delivering the complete product to the customer's location. While we don't supply everything to every hyperscaler or data center, we're beginning to grow our presence in this market. We have been supporting the sector through our components for many years, and we see this as an opportunity for growth. We have been investing significantly, especially over the last year, and will continue to do so because we have promising customer opportunities that will help us expand. However, we are not reliant on this segment alone; we maintain a well-diversified approach and currently have no single customer account for more than 10% of our revenue. Additionally, we have some exciting new top customers.

And I think just to add to that, if I can, this is Jon. So just a couple of other things to note. If you look at the Q1 performance, specifically, the communication networks and cloud infrastructure end markets, they grew 19% year-over-year. Now the other category, industrial, energy, medical, defense and aerospace and automotive was more flat. But in my prepared remarks, I mentioned how the majority of our end markets grew. So there was one that's still under pressure, but all in all, we expect that growth. Back to your first question that come from all. And then on the capabilities point, I'll just add to Jure's comments, we are making targeted investments in R&D, certain programs to build out those capabilities. We've got some of our own IP, Viking Enterprise Solutions for example. So looking at programs like that, that can help us drive that future growth that I mentioned.

Got it. Can I ask on the Communications segment? I think you made a statement that the inventory at customers is going down. This segment has been going through an inventory correction for the last year plus. Do you think that, that inventory correction is over? And how do you see your communications segment revenues growing this year?

First of all, I would say that, as I mentioned in my prepared statement, the inventory continues to decrease. I still believe there’s a bit left, but let's say we’re in the eighth or ninth inning of this situation, depending on our customers. There’s definitely more excitement in the communication networking side of the business, especially in the high-end networks and high-end optical modules we are involved with. How do I see this business? We expect it to grow significantly this year, based on what we are currently observing and what our key customers are indicating.

Okay. Maybe I'll ask a question to Jon. You announced that the Board had authorized a new $300 million buyback. You also laid out your priorities for cash. Given that, I mean, do you see more opportunity to have M&A inorganic growth? And how should we think about the pace of the buybacks?

Yes. As I mentioned earlier, when we consider capital allocation, our primary focus is on driving growth. This is why our first priorities involve investing in organic growth and exploring strategic M&A and partnerships. We prefer this approach because we want to enhance growth. However, if immediate opportunities are not available, we can shift our focus to share repurchases. Our debt levels are manageable, with minimal long-term debt, and we service it at favorable rates. For instance, last year, we returned nearly all of our free cash flow to shareholders because it was an appealing option, as we believed our stock was undervalued. We still think that our stock is undervalued today, making share repurchases an ongoing attractive choice. As new opportunities arise from quarter to quarter, Jure and I will evaluate them and make decisions based on return on investment, determining the most effective ways to utilize our cash.

Thank you for all the details. Appreciate it.

Thanks, Ruplu.

Your next question comes from the line of Steven Fox from Fox Advisors. Please go ahead.

Hi. Good afternoon.

Hey, Steven. How are you?

Hi. I'm very good. Thank you. I guess, first off, you mentioned mix a bunch of times in terms of influencing, I think, generally positively the margins for the quarter and looking forward. Can you just be more specific on what the positive mix drivers were and maybe any negative mix drivers in the quarter that were partial offsets? And then I had a follow-up.

Sure. Let me address this from a segment perspective. On the IMS side, our gross margin profile performed well both year-over-year and sequentially. We have consistently discussed our expectations for IMS margins and CPS. IMS is trending towards the high end, largely due to the mix of programs we have. We've diversified our customer base and continue to target high-end programs, adding more each year. This past quarter, IMS had a strong mix of programs. Our culture at Sanmina emphasizes operational efficiencies, and our capital investments last year were aimed at driving these efficiencies. Back in 2023, we were adding incremental capacity, but last year our focus leaned more towards efficiency. Overall, it was a good outcome for IMS. On the CPS side, we were pleased with the gross margin performance as well, at around 12.5%, although it decreased from approximately 13% year-over-year. We experienced a couple of lower-performing programs, but we are still content with CPS's current standing. Over the last year, CPS hovered between 12% to 13% in gross margin, and we are satisfied with that performance as we begin Q1. As Jure and I have mentioned before, we believe there is potential for improvement in CPS's gross margin profile, which is why we're making ongoing investments with the expectation of achieving a few points better in the long term.

That's helpful. But I'm just curious, are there specific markets that were most responsible, or are you saying it was mainly because the mix of new programs is more attractive? I just want to make sure I understand the drivers. And then I had a follow-up.

Yeah. I would say on the IMS side, we were pretty balanced between the end markets. I wouldn't say, Steve, that there was one or another that drove it to be much different on the CPS side—that business is a little different, the components, products, and services, right? And so that's really just the mix between the divisions from time to time, but not much of a difference there in terms of end markets either.

Yeah. Steve, just to add to that—if you look at our markets, we came basically plus or minus 1% comparing to the last quarter...

Right. That's helpful. And then I guess, obviously, there's been a lot of talk today about the future of cloud computing architectures. And you just obviously had a great quarter there. Can you just maybe give us a little more insight into what your customers are overstated...

So let me qualify that I'm not a 100% expert. My job is to service our customers. There's a lot of positive trends out there with the key customers. And Steven, as you know, we provide wide services from our fabricating high-technology, high-speed printed circuit boards for designing custom storage products. We're also expanding into servers. Fabricating racks. We've been fabricating racks for hyperscalers for the last 10 years. We're now expanding into more liquid cooling. We're working with our customers by providing more value to those racks. We custom design some of these. So we're well diversified, but we are really also pushing more and more to provide fully integrated racks at a high level. So we still believe there are opportunities. And we're just starting to really expand that business. It's not a major impact of growth for us today over the last 12 months. And but we believe it's going to be more positive with '25. But as we look at the longer term, we think there's more opportunity just the way Sanmina is set up.

Great. That's super helpful, Jure. Thank you.

Yeah.

Your next question comes from Anja Soderstrom from Sidoti. Please go ahead.

Hello, Anja.

Hi. Thank you for taking my questions here. I'm just wondering for the revenue target for fiscal 2025. Is there a specific end market do you think is going to be a main driver for that or is it to be more broad-based?

I think for us, what we're seeing today is more broad-based. Industrial energy remains a strong market for us and is our largest segment percentage-wise. We have many great customers there and good new opportunities in the pipeline. The medical segment is stable with solid support, although it may experience slower short-term growth. However, I believe we have a customer base that can expand in the long term. We are focusing our efforts and investing heavily in defense and aerospace, where we see many strong market opportunities. We have added additional management in that segment and will continue to invest moving forward. In the next couple of years, we expect numerous opportunities there. Regarding automotive transportation, we maintain a strong customer base and anticipate significant growth. We continue to see stable demand and expect an overall good year. In cloud communication networks, specifically within high-performance networks and cloud infrastructure, we believe we are well positioned on the enterprise side and are starting to expand into hyperscale. There appears to be good opportunity here. I believe that 2025 will be a growth year for us, as mentioned in our prepared statements, and we feel that we are positioned to grow significantly larger than we are today. We are excited about the future and hope to finish 2025 strong, with even more prospects in 2026 and beyond.

Okay. And when you talk about the long-term operating margin target of 6% plus, what kind of time frame are you talking about there? What kind of revenue level do you need to achieve this?

We aim to reach that goal quickly. Our business model supports this, particularly as we expand our component businesses. We will keep investing in that area since it leads to better margins. We hope to see our revenue run rate increase by about 10%. Once we reach a run rate of over $9 billion, we anticipate achieving a margin of over 6% and building from there.

Yes. I think to add to that, Anja, this is Jon. If you go back in time, back in Q1 of '23, when we did about $2.35 billion of revenue, that we had posted an operating margin of 6%. But even this quarter here in Q1, our gross margin was about 9%, just shy of 9% now. Jure and I made a to make some targeted investments in our OpEx profile, right? So operating margin was at 5.6%, and we did that because Jure mentioned, we're trying to drive the company to become much bigger, right, those types of investments. So we're in that ballpark, like Jure said, but we're always focused on the long term. And when we see those good investments to make, we'll do those because we're really focused on the long-term success.

Okay. And have you seen any changes to the competitive landscape at all or...

Well, you never underestimate your competitors. I think there's more discipline in the industry. I think the industry itself understands we add a lot of value to our customers. This is not a simple business when it comes to the global supply chain and managing material and technology to be good in this business; you have to invest strategically. So our customers understand that. We're building a strong partnership, and I personally believe that industry has a better future than what we saw, let's say, in the last three years.

Okay. Thank you. That was all from me.

Thanks a lot. Thank you for your support, Anja.

There are no further questions at this time. So I'd like to turn the call over back to Jure for any further comments. Sir, please go ahead.

Well, ladies and gentlemen, first of all, thank you for your time. We appreciate your support. And if we didn't answer all your questions, please get back to us. Otherwise, looking forward to talking to you 90 days from now. Thanks a lot.

Thank you.

Bye-bye.

Ladies and gentlemen, this concludes today's conference call. Thank you very much for your participation. You may now disconnect.