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spk00: Ladies and gentlemen, thank you for standing by and welcome to the Sanmina Corporation's first quarter earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. And if you should require any further assistance, please press star 0. I would now like to hand the conference over to your speaker for today, Ms. Paige Melchik. Senior Vice President of Investor Communications. Thank you, ma'am. Please go ahead.
spk06: Thank you, Catherine. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first quarter fiscal 2021 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.
spk01: Good afternoon. Good afternoon.
spk06: and Kurt Adzima, Executive Vice President and Chief Financial Officer.
spk05: Good afternoon.
spk06: Before we jump into the results for the quarter, 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 three of our presentation or the press release safe harbor statement. During this conference call, we may make projections or other forward-looking statements regarding the future events and 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 a number of factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission. 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. You'll note in our press release and slides issued today that we have provided you with statements of operation for the quarter ended January 2, 2021, 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 unfrequent 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 now like to turn the call over to Yuri Sola.
spk01: Thanks, Paige. Good afternoon, ladies and gentlemen, and welcome. And thank you all for being here with us today. We are off to a good start for the fiscal year 2021. Despite the challenges around COVID-19 and component shortages, we delivered a strong result for the first quarter fiscal year 2021. Our industry is operating in a challenging environment, and it looks like COVID will be with us for a while. I can tell you that I'm proud of our leadership team and our employees for managing through it and supporting needs of our customers. For agenda today, we have is that Kurt, our CFO, will review the details of our financial results with you, and I will follow up with additional comments about Samina's results and future goals. Then Kurt and I will be open for questions and answers. And now I'll turn this call over to Kurt. Kurt? Thanks, Yuri.
spk05: Please turn to slide six. In the first quarter, we posted strong financial performance, including cash generation, despite the challenges and uncertainty associated with COVID and the macroeconomic environment. Q1 revenue of $1.76 billion exceeded the midpoint of our outlook of $1.7 to $1.8 billion. Revenue grew sequentially after adjusting for the fact that Q1 had 13 weeks while Q4 FY20 had 14 weeks. Q1 non-GAAP gross margin was 8.3%, the third consecutive quarter above 8%. Q1 non-GAAP operating margin was 5%, the second consecutive quarter of 5% or greater. Q1 non-GAAP other expenses were $2.9 million, $2.7 million lower relative to Q4. This was primarily due to a lower interest expense as the company paid off the balance of its revolver in the last month of Q4 and a $3.3 million gain compared to $2.5 million in Q4 related to deferred compensation assets. as the result of the appreciation in the stock market. As a reminder, gains or losses related to deferred compensation assets have no net impact on earnings per share. Finally, Q1 non-GAAP fully diluted earnings per share of $1.02 exceeded our outlook of $0.75 to $0.85. This was primarily as the result of management's focus on driving efficiencies and better mix. This was the second consecutive quarter that non-GAAP EPS exceeded a dollar per share. Now please turn to slide seven. This slide shows the quarterly trends of our financial results. You can see the benefit of the operating efficiencies and better mix that the company has been able to drive despite the challenges associated with COVID. Revenue grew sequentially for the third consecutive quarter after adjusting for the fact that Q4 FY20 had 14 weeks compared to 13 weeks in Q1, Q2, Q3 of FY20, and Q1 of FY21. As I mentioned earlier, non-GAAP gross margin has exceeded 8% for the last three consecutive quarters, and non-GAAP operating margin has been 5% or greater for the last two consecutive quarters. And again, non-GAAP fully diluted earnings per share has exceeded $1 for the last two consecutive quarters. Finally, Q1 FY21 non-GAAP operating margin of 5% and earnings per share of $1.02 increased from 4% and 79 cents in Q1 FY20 despite lower revenue of $85 million. This year-over-year comparison further demonstrates the impact of the operating efficiencies and better mix the company has been able to drive despite the challenges of COVID. Now, please turn to slide eight. IMS revenue was $1.5 billion and grew sequentially after adjusting for the fact that Q1 had 13 weeks while Q420 had 14 weeks. Non-GAAP gross margin for IMS improved from 7.2% to 7.3%. This was the third consecutive quarter that gross margins for IMS were 7% or higher. Consumer products and services revenue was 319 million. Non-GAAP gross margin for CPS was 12.4%. This was the third consecutive quarter CPS gross margin was 12% or higher. Now please turn to slide nine. Our balance sheet remains strong and the company is well positioned to operate in any economic environment. Cash and cash equivalents increased to $516 million. We continue to maintain a low debt-to-cash ratio of 0.7. Between cash and the availability under the revolver, we have approximately $1.2 billion of liquidity. In Q1, we generated $62 million of cash from operations and $51 million of free cash flow. Q1 net capital expenditures were $11 million compared to depreciation of $28 million. During Q1, we repurchased approximately 340,000 shares for $9.4 million at an average price of $24.60. Please turn to slide 10 now. Here you can see inventory was down approximately $42 million and inventory returns improved to 7.7. This improvement reflects our efforts to further improve the operational efficiency of the company. Cash cycle days were 55.2. Non-GAAP pre-tax return on invested capital was 28.4%. Now, please turn to slide 11, and we'll discuss the outlook. We expect Q2 revenue will be in the range of $1.65 billion to $1.75 billion. Overall, customer demand is expected to be relatively stable in all of our market segments. This revenue outlook reflects that Q2 is typically lower than Q1 due to seasonality, and there's some uncertainty related to the potential supply chain constraints. We expect non-GAAP gross margin will be in the range of 7.6% to 8.2%. We expect non-GAAP operating expenses to be in the range of $59 million to $61 million and non-GAAP operating margin in the range of 4.1 to 4.7%. Please note that the outlook for gross margin and operating margin is reflective of higher costs in Q2 compared to Q1 associated with no holiday shutdown, the annual resetting of the employer portion of payroll taxes, and any annual salary adjustment. We expect that non-GAAP other expenses to be approximately $7 million. Our non-GAAP tax rate is expected to be around 19%. We expect non-GAAP fully diluted share count to be approximately 67.5 million shares. When you consider all this guidance, Our outlook for non-GAAP diluted earnings per share for the quarter is in the range of 76 cents to 86 cents. We expect capital expenditures to be around 15 million and depreciation and amortization to be around 28 million. I believe we have navigated well through the impact of COVID and the macroeconomic environment to date. And I feel like we are very well positioned to benefit from the ultimate economic recovery. And with that, now I'll turn it back to Yuri.
spk01: Thank you, Kurt. Ladies and gentlemen, let me tell you more about business environment for the first quarter and outlook for second quarter and the rest of the fiscal year 2021. Just to add a few more highlights for the first quarter. As you heard from Kurt, Sanmina delivered strong financial results for our first quarter. Most important, we delivered consistent and predictable results. Our performance in the quarter is a testament that our strategy is working. Primary focus for management was on the four key things that drives our success. Number one, safety of our employees. Number two, customer satisfaction. Number three, driving efficiencies. and creating better mix, and of course, delivering a free cash flow. During the first quarter, we expanded our leadership with strategic customers by delivering mission-critical products, technologies, and services in the key markets that we serve. Again, in a summary, we are off to a good start for fiscal year 2021. Please turn to slide 14. Let me give you highlights of revenue for the first quarter by end markets. As you can see, overall, we had a stable demand for the first quarter. And if you compare it to a fourth quarter, this is a normal quarter of 13 weeks, where in the fourth quarter, we had 14 weeks. So from that point of view, we're slightly actually up over the last quarter. Communications, networks, and cloud infrastructure delivered 41% of our revenue. Industrial and medical defense automotive, 59%. Top 10 customers were 58.1% of our revenue. In the quarter, we had some component shortages, but it was manageable. Pipeline of new opportunities continue to be strong. Please turn to slide 15. Let's talk now about revenue outlook by market segments for the second quarter. Samina is well established in our right markets, mission critical, high complexity, heavy regulated markets. Samina is recognized as a leader in these markets by our customers. For the second quarter, today we are seeing good, relatively stable demand. We're forecasting approximately 60% of revenue will be from industrial, medical, defense, and automotive markets. and 40% in communication networks and cloud infrastructure markets. So let me break it down in more details. For industrial, we expect softer demand for some projects, seeing a typical seasonality. For medical, we expect to continue to do well, overall stable demand. For defense, we have very strong demand, and we are winning long-term projects. Bookings are expanding, I should say growing. Aramodium starting to see nice improvements in demand. For communication networks, which includes networking, IP routing, and advanced optical systems, we see stable demand. We see some typical seasonality, but overall, it's a fair demand. For mobile 5G networks, short-term, we're seeing improvements, and long-term, we're seeing a good growth. For cloud computing, for us that's a high-end computing and storage, we're starting to see some positive improvements with some seasonality impact. For second quarter, there's still some uncertainties around COVID and supply chain constraints, mainly with semiconductor components. Please turn to slide 16. Let me make a few more comments about business environment for the rest of the fiscal year 2021. We are focused on unlocking the total value by maximizing operating leverage in each of our business groups. Samina's strategy is to build businesses around customer needs, delivering right value add and delivering competitive advantage to our customer. and expanding to more profitable projects in our focus key markets. As Kurt mentioned, we delivered for the second consecutive quarter operating margin around 5%. We will continue to make progress and believe there is still room for improvement. And goal is to continue to drive efficiencies and a better mix. Today, I can say that management feels more comfortable that we can deliver to our long-term operating margin target of 5% to 6% in the future. And most important is that Samina has a strong customer base to build on for a better future. Based on present visibility, customers' forecasts, and pipeline of growth opportunities, we feel positive about the rest of the calendar year 2021. The goal for us is to deliver solid results for fiscal year 2021. Let me give you four more comments on management priorities. We'll continue to provide industry-leading end-to-end solution with the key technology components and products for key markets and our strategic customers. Managers will continue to build strong customer partnerships That's the key to our success. We're driving sustainable growth with financial discipline where everything is measured and looked how do we improve it. The goal is to continue to deliver operating margin growth and strong cash flow. And to unlock the total value of Samina's capabilities and maximize the shareholders value longer term. Still, a lot of leverage in Samina's business model. and we're excited about the future. Please turn to slide 17. In summary, we deliver respectable results for the first quarter. Revenue of 1.76 billion, exceeding midpoint of our outlook. Non-GAAP operating margin of 5%, and non-GAAP diluted EPS of $1.02, exceeding outlook. Free cash flow of 51 million. Non-GAAP pre-tax ROIC of 28.4%. For the second quarter, we see revenue outlook of 165 to 175. Non-GAAP diluted EPS outlook of 76 to 86. We are seeing relatively stable demand. We will continue to drive operational efficiencies and the mix. Also, during this quarter, we'll continue to monitor component supply environments. And as Kurt mentioned, we already factored this in into our quarterly outlook. So ladies and gentlemen, I would like to again at this time thank you all. And operator, we're ready for Q&A. Thank you again.
spk00: Ladies and gentlemen, just as a reminder, if you would like to ask a question, please press star and then the number one on your telephone keypad. Once again, I'm going to star on the number one. Our first question comes from the line of Ruplu Bhattacharya from Bank of America.
spk04: Thanks for taking my questions. I have a couple for Yuri and then a couple for Kurt, if I may. Yuri, you had expected stable demand for the first quarter. More or less, when I look at the communications networks and the cloud infrastructure segment, it was down a little bit. So can you help us parse through what happened? Maybe just talk a little bit about what you saw in optical versus networking. And last quarter you had said there were some pushouts in cloud. So did those come in? So just trying to understand what was strong, what was a little bit weaker in the quarter.
spk01: Yes, Rupu, again, thanks for all your support. Number one, yeah, optical for us overall was good and networking was good. We had a few pushouts, you know, based on some components that we couldn't get. But overall I would say it was a stable slightly down if you compare it to the last quarter But again, remember last quarter where I'm in fourth quarter of last year. We had a 14 weeks We're in this quarter. We only had 13 weeks. So you kind of have to look at it that way When comes to the cloud computing, yeah, we're starting to see some some improvements and mainly based on some of the new programs that we won in the last six months.
spk04: Got it. And then just a follow-up to that, Yuri, with respect to the 5G and mobile projects that you have, are they coming in as you had expected, or are they coming in faster or slower? Just your thoughts on the 5G rollout.
spk01: Yeah, first of all, the 5G, I would say they come in based on what our feeling was based on our customer inputs. You know, as I said earlier, I think we're starting to see improvements in that. You know, and we expect longer term, if we look at the forecast that we've seen from our customers and some of the other new projects that we are working on, we expect demand on that to go up.
spk04: Got it. And then, Kurt, if I can ask you, you know, just to get some more clarity around the operating margin performance, both in 1Q and your guide for 2Q, I think you had guided 1Q operating margin to be 4.3% at the midpoint. And even despite an extra week in the fourth quarter, I mean, revenues were down $120 million, but you still had 5% operating margin performance. So if you can talk about what were some of the factors that helped you maintain above 5% operating margin. And then when we look at your guidance for 2Q, I mean, it's at $1.7 billion at the midpoint, so another $50 million lower. But I think you're guiding, like, if I heard this correctly, 4.4%. So why, you know, what is driving that 60 basis points lower operating margin for 2Q? So if you can just help us frame the operating margin performance in 1Q as well as the guide for 2Q.
spk05: Sure, Rublu. So first we'll talk a little bit about Q1. Again, relative to Q4, I mean, the gross margin – was about the same, but the fact was we were able to control OPEX significantly in the quarter, especially when you compare it to Q4, which had 14 weeks. We did get some benefit this quarter for the holiday shutdown, which we typically have. So I think, you know, given the lower revenues It was really about controlling operating costs that allowed us to still come in at a 5% operating margin. So it was a lot of discipline around that. You know, as we look to Q2, I think as Yuri mentioned, first of all, you know, there's a lot of uncertainty not only around COVID but also around component shortages. So, you know, we've got to be conservative as it relates to that. It is a seasonally down quarter, so revenue will be down, and that will, you know, slightly impact gross margin. And if you look at our gross margin at range relative to where we were last quarter, it is down a little bit at the midpoint. And again, you know, operating expenses are going to be slightly up, as I mentioned, on down revenue. And as I mentioned in the script, it's really three things. It's no holiday shutdown, which you typically save some money there. It's the annual, the resetting of the employer portion of the payroll tax. And then finally, if there's any annual salary adjustments that kicked in at the beginning of the calendar year, we tend to see it there. So those are the gives and takes. Obviously, you know, we're always trying to improve on our our performance, and we'll continue to push it towards the upper end. But I think it's prudent to think about things conservatively, given the uncertainty around COVID and the uncertainty around the component supply chain.
spk04: Got it. And then for my last question, you've talked about component shortages. Can you just talk a little bit, give us your thoughts on on working capital days? I mean, how do you think inventory trends? I think your inventory was down quarter and quarter, but you talked about some component shortages. So do you think you expect to build inventory? And any thoughts on free cash flow for the year that would be appreciated? Thanks.
spk05: Sure. So I think inventory was down relative to Q4 and Q1 for two reasons, obviously. You know, when revenue goes down, inventory goes down. And, again, revenue went down mainly because of the 14 weeks in Q4 versus the 13 weeks. But I think we were also able to improve turns. I'd say we were very focused on the turns. Turns this quarter were 7.7. We were very happy with that, although certainly we're never satisfied. As you think about inventory in particular – In Q2, I think obviously we're trying to improve terms. At the same time, it is challenging when you have potential component shortages. And there's always a risk of bringing in, you know, 99% of the inventory and missing the one key part and not being able to get the product done. So, you know, I'd say I think our goal is certainly to keep inventory relatively flat given that dynamic. We always try to improve, but I think that dynamic makes it maybe a little bit harder than it would normally be. But certainly in terms of generating free cash flow, I think we've shown over the last many quarters now that we're generating consistent free cash flow and certainly expect to continue to do that in the future. So I think our balance sheet will only continue to get stronger.
spk01: If I can add to that, I think there's a fair amount of moving parts when it comes to just the supply chain. We're already planning around that, but there's still challenges. We expect to have a good quarter. Today, we feel better about this quarter than 90 days ago. As Kurt said, there's a lot of tune-up to be done as we continue to do this, and we expect to deliver a you know, good results.
spk04: Okay. Thanks, Yuri. Thanks for all the details. Appreciate it. Thank you.
spk00: Your next question comes from the line of Jim Subba with Citigroup Investment.
spk01: Hello, Jim.
spk03: Good afternoon to you and your team. A question, you gave some commentary around the component shortages, which are becoming pretty well-known. First of all, were your sales constrained by any of it in this quarter or the outlook?
spk01: Well, as I said, you know, there were some shortages that to me was manageable. There was a few orders that was pushed out. I think if you look at this quarter, just like any other quarter, except in this quarter we've seen more. It's part of our outlook definitely. We have certain projects that are going to be pushed out. But we're hoping that we're going to get what we need, Jim. But it's going to – I mean, the whole industry, you know, you have a lot of demand from automotive. You have a lot of demand from 5G coming up, the phones, and so on. And that's really creating some shortage, especially in a custom ASICs and things like that.
spk03: And then my last question is, on the component shortages – where you sit today, is it kind of getting, you mentioned demand is getting better and visibility better from 30, 50, 90 days ago. And is the component shortages getting stable or worse or better from 30, 50, 90 days ago?
spk01: I would say it's not getting better. I think 90 days ago, some of these things we thought they were going to get pushed out. I would say in the last maybe 30, 40 days, we're starting to see more of that where Right now, we have to go out on some components that are six months out.
spk03: Gotcha. Thank you so much for the clarifications. It's greatly appreciated.
spk01: Thanks, Jim. Thanks, Jim. Operator, we have time for one more call.
spk00: Thank you, sir. Your next question comes from the line of Christian Schwab with Craig Hallam Capital.
spk02: Hello, Christian. Hey, Gary. Good afternoon. So on the supply chain component shortages, can you kind of talk to your different businesses where the lead times for those type of products are stretched out the furthest? You know, I know a bunch of custom ASICs and networking certainly are, and even low-end power. I mean, MCUs, it seems like it's good. But as you look at your business, you know, So could you rate the top three that are going to be the most challenging?
spk01: I think for us, I would say custom ASICs, some of the components for 5G and automotive, those will be probably more challenging. But you already mentioned them. It's ASIC, MCUs, MPUs, things like that. But I think it's been driven – by that industry, you know, automotive, 5G, and then some custom networking product. But again, we're used to this. We're working very close with our key suppliers. Semina has a great supply chain team. Our customers, we have top customers in the world. So we're working together with that, and we hope to be able to navigate it to this and be able to deliver the the numbers that we just told you. Christian, did I lose you?
spk00: I do believe he disconnected.
spk01: Okay. All right. Well, maybe Christian, if you don't hear us, please give us a call and we can catch up. But ladies and gentlemen, I want to say thank you for your time and Looking forward to talking to you 90 days from now. And one key thing to our business, it's a fun business. We're still having fun, and we expect to work hard and deliver some respectable numbers in the next quarter. So with that, thank you very much.
spk00: Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.
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