Sanmina Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 31, 2023

There are 6 speakers on the call.

Operator

And welcome to the Sanmina Third Quarter Fiscal 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the I will now turn the conference over to Ms.

Operator

Paige Melching, Senior Vice President of Investor Communications. Please go ahead, ma'am.

Speaker 1

Thank you, Chuck. Good afternoon, ladies and gentlemen, and welcome to Sanmina's 3rd quarter fiscal 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 today on this call is Yuri Sola, Chairman and Chief Executive Officer.

Speaker 2

Good afternoon.

Speaker 1

And Kurt Ezeema, Executive Vice President and Chief Financial Officer.

Speaker 3

Good afternoon.

Speaker 1

Before I turn the call over to Yuri, 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 the Safe Harbor statement in the presentation. 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.

Speaker 1

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 Slides issued today, we have provided you with statements of operations for the quarter ended July 1, 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, non cash stock based compensation expense, amortization expense and other unusual or infrequent items.

Speaker 1

Any comments we make on this call as they relate to the income statement measures will be directed at our on 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 Yuri.

Speaker 2

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 Samina leadership team and our employees for getting the job well done. So to you, Samina's team, thank you for delivering solid results for the Q3 and let's keep it up.

Speaker 2

The agenda we have today is that Kurt, our CFO, to review detailed results for you. I will follow-up with additional comments about Sanmina's results and future goals. Then Kurt and I will open for for questions and answers. And now I'd like to turn this call over to Curt. Curt?

Speaker 3

Thanks, Yuri. Please turn to Slide 5. Our team did a good job delivering solid financial performance for the quarter. Q3 revenue was $2,210,000,000 in line with our outlook of $2,200,000,000 to $2,300,000,000 In general, revenue remains stable across most of our customer base. However, we did see some declines relative to the prior quarter, primarily as the result of a few Communication customers adjusting inventory levels as the supply chain continues to improve.

Speaker 3

Non GAAP gross margin improved to 8.6 percent from 8.4% in the prior quarter. Non GAAP operating margin was 5.7%. Non GAAP fully diluted earnings per share was $1.55 in line with our guidance of 1.5 Please turn to Slide 6. Revenue grew approximately 9% from $2,000,000,000 in Q3 FY20 $2,000,000,000 to $2,200,000,000 in Q3 FY2023. Operating margin improved from 5.3% in Q3 FY 2022 to 5.7% in Q3 FY 2023.

Speaker 3

Finally, EPS grew approximately 23% from $1.26 in Q3 FY 'twenty two to $1.55 in Q3 FY2023. Please turn to Slide 7. This slide shows a comparison of our GAAP and non GAAP quarterly financial results. If you can now turn to Slide 8. We are off to a strong start for the 1st 9 months of fiscal 2023.

Speaker 3

For the 1st 9 months, revenue grew 21% to $6,900,000,000 compared to the prior year. Non GAAP operating margins have continued to improve over time with year to date non GAAP operating margins of 5.8%. Finally, FY2023 year to date non GAAP EPS grew 46% $4.84 compared to $3.31 in the prior year. And now please turn to Slide 9. Q3 FY2023 IMS revenue was 1,800,000,000 compared to $1,900,000,000 in Q2 FY2023.

Speaker 3

As I said before, this decline in revenue was Primarily the result of a few communication customers adjusting inventory levels as the supply chain continues to improve. Q3 IMS gross margins improved to 8.3% in Q3 compared to 7.5% in the prior quarter. This improvement was primarily related to a partial release of inventory reserves taken during the first fiscal quarter related to its startup company. We expect IMS gross margins to return to a more normalized level in Q4 FY2023. Q3 EPS revenue was 419,000,000 compared to $431,000,000 in Q2 FY2023.

Speaker 3

Q3 FY2023 Non GAAP gross margin for CPS was 8.8%. This was primarily due to cost overruns at one of our CPS divisions. We are actively working with our customers in that division to recover these costs and expect CPS gross margin will be in a more normalized range in Q4 FY 2023. You now please turn to Slide 10. We have a strong balance sheet that provides our company a competitive advantage.

Speaker 3

Cash and cash equivalents were $657,000,000 There were no borrowings outstanding under our $800,000,000 revolver at the end of Q3. Cash flow from operations was $57,000,000 in Q3 Capital expenditures were approximately $52,000,000 in Q3. During Q3, we repurchased approximately 970,000 shares for a total of approximately $51,000,000 At the end of Q3, we had $312,000,000 of remaining authorization for additional share repurchases. And now please turn to Slide 11. We continue to remain focused on efficient cash management.

Speaker 3

Cash cycle days were approximately 58 days in Q3. Non GAAP pre tax ROIC was approximately 30% for Q3. Now please turn to Slide 12.

Operator

Let's talk about the

Speaker 3

outlook for Q4. We expect revenues to be in the range of $2,100,000,000 to $2,200,000,000 as we expect to continue to see a few communication customers adjust inventory levels as the supply chain continues to improve. We expect non GAAP gross margin in the range of 8.3% to 8.8% dependent on product mix. Non GAAP operating expenses are expected in the range of $59,000,000 to $61,000,000 and non GAAP operating margin in the range of 5.5% to 6%. We expect non GAAP interest and other expenses of $12,000,000 to $13,000,000 primarily driven by the increase in interest rates.

Speaker 3

In addition, we estimate an approximate 3,000,000 Non cash reduction to net income to reflect our JV partner's equity interest in the net income of our Indian JV. We expect non GAAP tax rate for the quarter of approximately 17% to 17.5% and non GAAP fully diluted share count of approximately 59,000,000. When you consider all of this guidance, our outlook for non GAAP diluted earnings per share is in the range of $1.47 to 1 0.57 We expect Q4 CapEx to be approximately $50,000,000 driven by growth of new programs and to support future growth. Q4 depreciation is expected to be about $30,000,000 While we are pleased with our recent results, We continue to believe there is opportunity to further improve our business model over the long term. And with that, I'll turn it back to Jurgen.

Speaker 2

Thank you, Kurt. Ladies and gentlemen, let me give you some key highlights for the Q3. As you heard from Kurt, For our Q3, Sanmina delivered solid results in line with our outlook. We had a solid operational execution as we provide competitive advantage to our customers. Supply chain for semi components is getting a lot better.

Speaker 2

Lead times are improving, and I can say it's coming back to some normality. Despite ongoing macroeconomic challenges, These results are reflection of our continued focus on the execution of our strategy. Our Cimina team continues to do a great job by focusing on customer needs, margin expansion and EPS growth. Please turn to Slide 14. Let me talk to you now about revenue by end markets.

Speaker 2

For the Q3, revenue was stable at $2,200,000,000 year over year growth of 9%. Industrial, medical, defense and automotive for the quarter was fairly flat of 1,344,000,000 but for the year was nicely up, up 10%. Also the market trends and mix are improving. We continue to diversify in industrial, medical, defense and out of boarding markets, driven by new program wins And new customers. As you can see, mix improved to 61% of our revenue.

Speaker 2

For Communication Networks, as Curt said, we did see some inventory adjustments relative to prior quarter with Few communication customers. The revenue for the quarter was $863,000,000 and year over year growth of 7.7%. Cloud Infrastructure continues to be stable and growing. For the Q3, top 10 customers were 47% of our revenue, and I can also tell you that book to bill was approximately 1 to 1. Please turn to Slide 15.

Speaker 2

Let me talk to you about Q4 fiscal year 2023 end markets outlook. For industrial, medical, defense, aerospace and automotive markets, for the Q4, we're seeing strength in automotive and defense. And for Industrial and Medical, we see a stable demand during the quarter. For Communication Systems, we see lower revenue due to inventory adjustments. Cloud Infrastructure outlook is stable and growing.

Speaker 2

Please turn to Slide 16. In this macro environment, we expect for a 4 quarter revenue outlook to be in the range of $2,100,000,000 to 2,200,000,000 We expect revenue growth for fiscal year 2023 to be approximately 14%. For the Q4 non GAAP EPS outlook, we expect to be in the range of $1.47 to 1 0.57 Our focus on margin expansion should deliver non GAAP EPS growth of approximately 35%. As you can see, these are strong year to date performance and we expect to deliver strong performance for fiscal year 2023. Now let me talk to you about Ciminas' future for fiscal year 2024 and beyond.

Speaker 2

We will continue to focus on profitable growth despite challenging macroeconomic environment. Armenia is in a great position for the future, strong balance sheet to build on, well diversified customer base in the high complexity and heavy regulated markets. Pipeline of new opportunities is exceeding exciting for the future. Our focus today is on quality of our diversified customer base, building and right partnerships with customers that have high complexity products, quality of earnings, the key focus is consistency, Margin expansion and growth of earnings, cash flow to support the growth and focusing on maximizing shareholders' value, both short term and long term. We're making investments for the future and we're expanding our capabilities to support new wins for fiscal year 2024 and beyond.

Speaker 2

Overall, we're expanding to more profitable projects by providing industry leading technologies in Engineering Solutions and R and D Support, investing in advanced components, products and integrated manufacturing services. We're expanding in these key focused markets such as medical, Defense, automotive, focusing around electrical vehicle, industrial, alternative energy and cloud infrastructure. Sanmina will continue to invest in talent and technologies to drive margin expansion and profitable growth for fiscal year 2024 and beyond. I can also tell you that Simeon is well positioned to manage through this dynamic market. Please turn to Slide 17.

Speaker 2

In summary, 3rd quarter was a good quarter. Our strategy continues to deliver results, Customer base and pipeline opportunities remain solid. So for the fiscal year 2023, As I mentioned, we expect to deliver solid revenue and non GAAP EPS growth. And we are investing to support long term growth opportunities. As a management, we are focused on quality, delivery and consistently meeting the needs of our customers.

Speaker 2

Ladies and gentlemen, now I would like to thank you all for your time and support. Operator, We're now ready to open the lines for question and answers. Thank you again.

Operator

We will now begin the question and answer session. And the first question will come from Anja Soderstrom with Sidoti. Please go ahead.

Speaker 2

Hello, Anja.

Speaker 4

Hi, and thank you for taking my question. So I'm sorry, I missed the first part. I don't know if you addressed or talked about the Indian joint Venture and what are you starting to see there? And also I'm curious, you said you expect that to be a €3,000,000 charge In the Q4 and that's sort of down from the 2nd and third quarter. So why is that coming down in the 4th quarter?

Speaker 2

Let me give you highlights of the strategy for India Venture and then I'll turn it over Curt to address another question. First of all, our JV venture in India is very exciting. This is about a year ago, we signed a deal with Reliance. This division is doing really well. Continue to actually, it's ahead of our strategy.

Speaker 2

We're looking at a lot of options right now. How do we grow that? We think there's a lot of upside potential in next couple of years. We have strong management in India that we've grown over the last 10 years. And with a few Your addition to that team, I think this team has a lot of upside.

Speaker 2

Reliance has been a great partner, And together, we have the same goals and we believe we are in the same pace. So personally, and I can speak for the rest of the team, we're very excited what's in India for Kurt?

Speaker 3

Yes. So again, just to clarify, it's not really a charge, right? So basically, we back out Reliance's 50.1 percent share of the net income. And last quarter that was about 5,000,000 This quarter, again, it's hard to forecast. We've forecasted $3,000,000 It's really a combination of 2 things.

Speaker 3

One of it has to do with The profitability of the business, the other variable that's a little bit harder to predict is The exchange rate and how that affects things. So I would say, we're forecasting a little bit lower this Quarter, candidly, we had forecast a little bit lower last quarter, but did better than expected. So I would say it's just a little bit hard to predict, especially given some of the foreign currency issues.

Speaker 4

Okay. Thank you. And then also in terms of the communication network, you said you saw some inventory adjustments there. What kind of visibility do you have there that gives you confidence that it's going to come back?

Speaker 2

Well, first of all, as we mentioned in our prepared statement, we believe based on some inventory adjustments, we saw some down Short term, I think we're confident because of the type of products we are involved, we're well involved On the new programs and based on what we see next 12 months, customers are still very optimistic. And plus, we have a strong pipeline of other businesses that we believe will make it up even if that area doesn't pick up as

Speaker 4

Okay. Thank you. And did you quantify how much revenue you left Behind in the quarter due to the supply chain challenges?

Speaker 2

No, actually supply chain has been very good. As I said in my prepared statement, Anja, It's coming back to some kind of normality, I can say that. And yes, there's still some sorting components How did they have a longer lead time, but it's manageable and I don't believe we left any major revenue that we couldn't ship because Of the parts.

Speaker 4

Okay, great. Thank you so much.

Speaker 2

Thanks, Anja.

Operator

The next question will come from Christian Schwab with Craig Hallum Capital Group. Please go ahead.

Speaker 2

Hello, Christian.

Speaker 3

Hey, guys.

Speaker 5

Hi, Jerry. So just a few follow ups. As far as the customer adjustments, on the inventory adjustments and comps, which Could be multi quarter in nature. Does that push out The fact that we can get our inventory days outstanding back into the 40 day level, Make that kind of a 4 to 6 quarter adventure? Or do you think that should normalize faster now that supply chain has normalized?

Speaker 2

Well, first of all, let me give you my view on that. We look at most of our customers still gives us Christian, about 12 months outlook. So based on that outlook, we definitely believe knowing where the lead times are, Our inventory turns should get better, and we expect to see improvements in every quarter. Next I think you should next three quarters, I think the goal there is to get as normal as humanly possible. There's a lot of work internally that we're working on.

Speaker 2

So I'm pretty optimistic that when it comes to the inventory that we'll work it down. I think back to the demand, we'll take as our policies take 1 quarter at a time. But As I said, as we looked at the 24, we don't see anything that is falling off the cliff.

Speaker 5

So, yes, I know you guys we look at 1 quarter at a time, but your customers, as you talked about, do give you a 12 month outlook. Directionally looking at that, could you give us a range of top line growth for next year?

Speaker 2

Well, Christian, we had the same we had also 12 months outlook a year ago and we didn't do that. So we'll stick with the 1 quarter at a time, but we expect To grow in 2024, and we'll probably talk a lot more about it when we finish our fiscal year 2023. But at this time, we do expect to grow.

Speaker 5

Great. And then my last question as it relates to the India joint venture, when do you expect that to be a material Positive contributor to the net income line. I know you guys in the past have said, I believe you've said, that, that business in India could ramp north of $1,000,000,000 As far as top line, but I believe. So just wondering how we should be thinking about that.

Speaker 2

Let me we're positive right now, right, Kurt?

Speaker 3

Yes. I mean, that JV makes good profit, good revenue, good margins. I think to the And how quickly we can grow that business, I think, as Yuri said, we're seeing good indications and a lot of interest from customers, But you don't ramp customers overnight, right? So I think we'll start to see it over the next year or 2. But that business is doing very well right now.

Speaker 3

It's definitely profitable. And so we're very pleased with where we stand.

Speaker 2

Just to add to that, Christian, it's I think we're in an excellent position to grow that business And this to be a multibillion dollar business for us sooner than later. Let's put it that way.

Speaker 5

That sounds great. No other questions. Thanks, Jerry.

Speaker 2

Thanks.

Powered by Quartr
Earnings Conference Call
Sanmina Q3 2023
00:00 / 00:00