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Sanmina Corp (NASDAQ:SANM)
Q1 2021 Earnings Call
Feb 2, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sanmina Corporation's First Quarter Earnings Conference Call. [Operator Instructions] After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker for today, Ms. Paige Melching, Senior Vice President of Investor Communications. Thank you, ma'am. Please go ahead.

Paige Melching -- Senior Vice President, Marketing and Investor Communications

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 Jure Sola, Chairman and Chief Executive Officer.

Jure Sola -- Chairman and Chief Executive Officer

Good afternoon.

Paige Melching -- Senior Vice President, Marketing and Investor Communications

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

Kurt Adzema -- Chief Financial Officer

Good afternoon.

Paige Melching -- Senior Vice President, Marketing and Investor Communications

Before we jump into the results for the quarter, let me remind everyone that today's call is being webcasted and recorded and we will be -- 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 operations 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 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 now like to turn the call over to Jure Sola.

Jure Sola -- Chairman and Chief Executive Officer

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 results for the first quarter fiscal year 2021. Our industry is operating in a challenging environments, 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 Sanmina's results and future goals. Then Kurt and I will be open for question and answers. And now, I will turn this call over to Kurt. Kurt?

Kurt Adzema -- Chief Financial Officer

Thanks, Jure. 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 billion to $1.8 billion. Revenue grew sequentially after adjusting for the fact that Q1 had 13 weeks, while Q4 FY'20 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 focuses on driving efficiencies and better mix. This was the second consecutive quarter that non-GAAP EPS exceeded a $1 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 the COVID. Revenue grew sequentially for the third consecutive quarter, after adjusting for the fact that Q4 FY'20 had 14 weeks compared to 13 weeks in Q1, Q2, Q3 of FY'20 and Q1 of FY'21.

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 FY'21 non-GAAP operating margin of 5%, and earnings per share of $1.02, increased from 4% and $0.79 in Q1 FY'20, 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 Q4 '20 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. Components, 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 turns 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 will 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 is 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 adjustments. 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 of this guidance, our outlook for non-GAAP diluted earnings per share for the quarter is in the range of $0.76 to $0.86. 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 Jure.

Jure Sola -- Chairman and Chief Executive Officer

Thank you, Kurt. Ladies and gentlemen, let me tell you more about business environment for the first quarter and outlook for the second quarter and the rest of the fiscal year 2021. Just to add few more highlights for the first quarter. As you've heard from Kurt, Sanmina delivered strong financial results for the 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 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 our first quarter. And if you compare it to the fourth quarter, this is a normal quarter of 13 weeks, wherein 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, 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. Sanmina is well established in the right market, mission critical, high complexity, heavy-regulated market. Sanmina is recognized as the leader in these markets by our customers. For the second quarter, today, we are seeing good relatively stable demand. We are forecasting approximately 60% of revenue will be from industrial, medical, defense and automotive markets, and 40% in communication networks and cloud infrastructure market.

So let me break it down in more details. For industrial, we expect solid -- softer demand for some project 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. As you say, growing. Automotive, starting to see a nice improvement in demand. For communication networks, which includes networking, IP routing and advance optical systems, we see stable demand. We see some typical seasonality, but overall it's a fair demand. For mobile 5G network, short-term, we've seen improvements and long-term, we've seen a good growth. For cloud computing, for us that's a high-end computing and storage, we're starting to see some positive improvements and some seasonality impact. For second quarter, there are still some uncertainties around COVID and supply chain constraints, mainly with semiconductor components.

Please turn to slide 16. Let me make 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. Sanmina strategy is to build businesses around customer needs, delivering right value add and delivering competitive advantage to our customers, and expanding into 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 Sanmina 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 few 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 partnership, that's the key to our success. We're driving sustainable growth with financial discipline, what 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 Sanmina's capabilities and maximize the shareholders' value longer term. Still, a lot of leverage in Sanmina's business model, and we are excited about the future.

Please turn to slide 17. In summary, we delivered respectable results for our first quarter. Revenue of $1.76 billion, exceeding the 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 a second quarter, we see revenue outlook of $1.65 billion to $1.75 billion. Non-GAAP diluted EPS outlook of $0.76 to $0.86. We are seeing a relatively stable demand. We will continue to drive operational efficiencies and the mix. Also during this quarter, we will continue to monitor component supply environment. And as Kurt mentioned, we already factor 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.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Ruplu Bhattacharya from Bank of America.

Ruplu Bhattacharya -- Bank of America -- Analyst

Thanks for taking my questions. I have a couple for Jure, and then a couple for Kurt, if I may. Jure, 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, like, maybe just talk a little bit about what you saw in optical versus networking? And last quarter, you had said there were some push outs in cloud. So, did those come in? So just trying to understand what was a strong, what was a little bit weaker in the quarter?

Jure Sola -- Chairman and Chief Executive Officer

Yes, Ruplu, again, thanks for all your support. Number one, yeah, optical for us, overall, was in good and networking was good. We have some few pushouts, 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, we had -- in the fourth quarter of last year, we had 14 weeks. Wherein this quarter, we only had 13 weeks. So you kind of have to look at it that way. When it comes to the cloud computing, yeah, we're starting to see some improvements mainly based on some of the new programs that we won in last six months.

Ruplu Bhattacharya -- Bank of America -- Analyst

Got it. And then just a follow-up to that, Jure. 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?

Jure Sola -- Chairman and Chief Executive Officer

Yeah. First of all the 5G, I would say, they come in and based on what of feeling was based on our customary inputs. As I said earlier, I think we're starting to see improvements in that. It's -- and we expect longer term, if you look at the forecast that we're seeing from our customers and some of the other new projects that we are working on, we expect to demand and that to go up.

Ruplu Bhattacharya -- Bank of America -- Analyst

Got it. And then, Kurt, if I can ask you, 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 of 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 -- 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?

Kurt Adzema -- Chief Financial Officer

Sure, Ruplu. 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 Q4, which had 14 weeks. We did get some benefit this quarter for the holiday shutdown, which we typically have. So I think given the lower revenues, it was really about controlling operating costs that allowed us to still come in at a 5% operating margin. So a lot of discipline around that.

As we look to Q2, I think as Jure mentioned, first of all, there's a lot of uncertainty not only around COVID, but also around component shortages. So 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 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, operating expenses are going to be slightly up, as I mentioned, on down revenue. And as I mentioned in the script, I mean, 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, we are always trying to improve on our performance and we'll continue to push it toward 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.

Ruplu Bhattacharya -- Bank of America -- Analyst

Got it. And then for my last question, if you -- you've talked about component shortages. Can you just talk a little bit -- give us your thoughts on working capital days. I mean, how do you think inventory trends? I think your inventory was down quarter-on-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.

Kurt Adzema -- Chief Financial Officer

Sure. So I think inventory was down relative to Q4 and Q1 for two reasons, obviously, 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 are also able to improve turns. So I'd say, we're very -- we're probably [Phonetic] very focused on the turns, turns this quarter were 7.7. We are very happy with that. All certainly -- although, certainly we're never satisfied.

As you think about inventory in particular in Q2, I think, obviously, we're trying to improve turns, at the same time, it is challenging when you have potential component shortages. And there's always a risk of bringing in 99% of the inventory and missing the one key parts and not being able to get the product on. So I would 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 may be a little bit harder than it would normally be. But certainly in terms of generating fee-free cash flow, I think we've shown over the last many quarters now that we're generating consistent free cash flow and certainly I expect to continue to, to do that in the future. So I think our balance sheet will only continue to get stronger.

Jure Sola -- Chairman and Chief Executive Officer

And if I -- Ruplu, if I can add to that. I think, yeah, there is a fair amount of moving parts when it comes to just a supply chain. We're already planning around that, but there is still challenges. We expect to have a good quarter. I mean, today, we feel better about this quarter than 90 days ago. So as Kurt said, there is a lot of tune up to be done as we continue to do this and we expect to deliver good results.

Ruplu Bhattacharya -- Bank of America -- Analyst

Okay. Thanks, Jure. Thanks for all the details. Appreciate it. Thank you.

Operator

Your next question comes from the line of Jim Suva with Citigroup Investment.

Jure Sola -- Chairman and Chief Executive Officer

Hello, Jim.

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

Good afternoon to you and your team. A question, you gave some commentary around the component shortages, which you're becoming pretty well known. First of all, were your sales constrained by any of it in this quarter or the outlook?

Jure Sola -- Chairman and Chief Executive Officer

Well, as I said, there were some shortages that to me was manageable. There were some few orders that was pushed out. I think if you look at this quarter, just like any other quarter, except in this quarter, we are seeing more. We already -- it's part of our outlook. Definitely we have certain projects that are going to be pushed out. Just -- but we are hoping that we're going to get what we need, Jim. But it's going to. -- I mean, the whole industry, 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 shortages, especially in a custom ASICs and things like that.

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

And then my last question is, on the component shortages, where you sit today, is it kind of giving -- you mentioned demand is getting better and visibility better from 30, 60, 90 days ago. And is the component shortages getting stable or worse or better from 30, 60, 90 days ago?

Jure Sola -- Chairman and Chief Executive Officer

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. We're -- right now, we have to go out and some components that are six months out.

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

Got you. Thank you so much for the clarifications. It's greatly appreciated.

Jure Sola -- Chairman and Chief Executive Officer

Thanks, Jim.

Kurt Adzema -- Chief Financial Officer

Thanks, Jim.

Jure Sola -- Chairman and Chief Executive Officer

Operator, we have time for one more call.

Operator

Thank you, sir. Your next comes from the line of Christian Schwab with Craig-Hallum Capital.

Jure Sola -- Chairman and Chief Executive Officer

Hello, Christian.

Christian Schwab -- Craig-Hallum -- Analyst

Hey, guys. Hey, you had a good quarter. So I think the supply chain component shortages, is it your auto [Phonetic]. Can you kind of talk to your different -- this is where the lead times for those type of products are stressed out the furthest, you know -- I know, bunch of custom ASICs and networking certainly are in [Phonetic] and even low end power, I mean, MCUs, it seems [Indecipherable]. As you look at your business, is there -- could you rank the top three that are going to be the most challenging -- I think potentially --

Jure Sola -- Chairman and Chief Executive Officer

I think for us -- 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, it's ASIC MCUs, MPUs, things like that. But I think it's been driven by that industry, automotive, 5G and then some customer networking product. But again, we used to this. We're working very close with our key suppliers. Sanmina has a great supply chain team. Our customers, we have a top customers in the world. So we are working together with that and we hope to be able to navigate it through this and be able to deliver the numbers that we just told you. Christian, did I lose you?

Operator

I do believe he disconnected.

Jure Sola -- Chairman and Chief Executive Officer

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. Looking forward to talking to you in 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.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Paige Melching -- Senior Vice President, Marketing and Investor Communications

Jure Sola -- Chairman and Chief Executive Officer

Kurt Adzema -- Chief Financial Officer

Ruplu Bhattacharya -- Bank of America -- Analyst

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

Christian Schwab -- Craig-Hallum -- Analyst

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