At this time, I would like to welcome everyone to the Sanmina Corporation’s first quarter fiscal year 2015 earnings call. [Operator instructions.] I will now turn the call over to Paige Bombino, vice president, investor relations. You may begin your conference. Paige Bombino Thank you, operator. Good afternoon, ladies and gentlemen and welcome to Sanmina’s first quarter fiscal year 2015 earnings call. A copy of today’s release is available on our website in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on our website. Please turn to page two, the Safe Harbor statement. During this conference call, we may make projections or other forward-looking statements regarding the future events or the future financial performance of the company. We caution you that such statements are just projections. The company’s actual results of operations may differ significantly as a result of various factors, including the state of the global economy, economic conditions in the electronics industry, changes in customer requirements and sales volume, competition and technological change. We refer you to our quarterly and annual reports filed with the Securities and Exchange Commission. These documents contain risk factors that could cause actual results to differ materially from our projections or forward-looking statements. You will note in our press release and slides issued today that we have provided you with statements of operations for the 3 months ended December 27, 2014, 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 infrequent or unusual items to the extent material. Any comments that 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 our gross profit, gross margin, operating income, operating margin, taxes, net income, and earnings per share, we are referring to our non-GAAP financial information. I would now like to turn this call over to Jure Sola, chairman and chief executive officer.

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome. Thank you all for being here today. With me on today’s conference call is Bob Eulau, our CFO.

Good afternoon, everyone.

For the agenda today, we have for you that Bob will review our financial results for the first quarter, and I will follow up with additional comments relative to Sanmina’s results and future goals. Then Bob and I will open for question and answers. And now, I’ll turn this call over to Bob. Bob?

Thanks, Jure. Please turn to slide three. Overall, the first quarter was a good start to fiscal year 2015. Non-GAAP revenue of $1.67 billion was down 1% on a sequential basis, but up 15.5% from the first quarter last year. Non-GAAP earnings per share was $0.61, which was at the high end of our guidance for the quarter. This was based on 86.7 million shares outstanding on a fully diluted basis. The disappointment for the quarter was cash flow from operations, which was negative $6 million. I’ll discuss cash in more detail in a few minutes. Please turn to slide four. From a GAAP perspective, revenue was down 0.9% or $15 million from Q4, to $1.671 billion. We reported net income of $22.7 million, which resulted in earnings per share of $0.26 for the first quarter. This was down relative to last quarter by $1.26. You may recall that last quarter, our GAAP results included an incremental release of our valuation allowance against deferred tax assets. The tax benefit recorded last quarter totaled $87.6 million, or $1.01 per share. The restructuring costs for Q1 were $3 million. Going forward, the restructuring costs we expect are associated with the real estate that we have on the market to be sold. We expect those costs to be in the range of $2 million to $3 million next quarter. Currently, we have about $65 million in real estate on the market at list price, after having sold around $93 million of property in the last five years. There’s one property which should be sold this quarter for net proceeds of around $5 million. My remaining comments will focus on the non-GAAP financials for the first quarter of fiscal 2015. At $132.5 million, gross profit was down $900,000 from the prior quarter. Gross margin…

Thanks, Bob. Ladies and gentlemen, yes, I would like to add a few additional comments and review our business environment for the first quarter and outlook for the rest of the fiscal year 2015. Basically, as Bob mentioned, first quarter results came in per our expectations. Overall, good quarter. Operations executed well. We delivered a solid operating margin of 4.1%, but we had some challenging product mix in our components, products, and services businesses, and also, we had a lot of movement in the forecast during the quarter. Bookings. For the first quarter, book-to-bill was flat. So in summary, results per plan. A good quarter. But even with this revenue, we still believe we can do better. Now, please turn to slide 11. I want to make a few comments on our end markets breakdown, but before I do that, as you can see on the slide 11, we are changing the segment, the way we report going forward. We’re going to three segments instead of four. So communication networks, that stays the same. Industrial, medical, and defense, also the same. But we did combine multimedia with computing and storage. And the reason behind that is that we are getting more and more involved as we’re expanding this segment, adding a lot of embedded computing. We felt it’s the best way, to combine it and to make more sense going forward. So going forward, we’ll be reporting in three segments, as you see on this slide. At the same time, it gives you a lot of history, so that you can compare going forward. So, now, please turn to slide 12. Most important, in the first quarter, that we are continuing to diversify revenue by end markets and our customers. Top ten customers represented approximately 50% of our revenue. Communication…

[Operator instructions.] The first question is from Mark Delaney with Goldman Sachs.

I was hoping you guys could help us understand how orders trended during the quarter just in terms of linearity of the orders. And then how much visibility do you have into the pickup you’re talking about into the second half of the fiscal year?

First of all, linearity wasn’t that bad. As I mentioned earlier, our mix in our components, products, and services wasn’t the best. Revenue was down, and that affected our margins there. And we had some movement in our forecast, and that’s kind of normal for the December timeframe. We had all the holidays and a lot of our customers were shut down between Christmas and New Year, so that really kind of affected that. But overall, I think it was a good quarter for us. As we look at the rest of the calendar year, I would say visibility is good. Most importantly, we have a very good communication with our customers, and those are positive. We expect a growth year. I think we’re well-positioned and most importantly, I think we have some good opportunities in the pipeline that we can maybe see more growth from that point of view. But we feel comfortable.

And for a follow up, I was hoping you could quantify just roughly how much of total revenue is tied to oil and gas, and then if you’ve seen any change in orders tied to the oil and gas segment.

Oil and gas, for us, is a new market that we entered, as you know, about 18 months ago. It’s still a small percentage of our business. Don’t want to really put a percentage on it. Yes, definitely, there’s some slower demand in the short term, some orders being moved around. But we are still very high on this segment, for us. I think we look at this as an opportunity, as there’s a lot of pressure on this industry to improve the cost, to improve, in this type of environment. As we’re entering this market, we look to this opportunity. But we are really focused on this area, and we’re looking in the longer term, because we still believe long term this is the area that we fit well. We add a lot of value to our customers and we provide actually savings in a lot of these projects that we get involved with our customers. So slower right now, but we are still focused on it longer term.

The next question is from Brian Alexander of Raymond James.

I just wanted to follow up on the gross margins in the CPS business. So it looks like that’s been trending lower the last several quarters on a year over year basis, despite what’s been pretty good growth, particularly last fiscal year. And this quarter, it looks like you had flat revenue and roughly flat gross margins in CPS on a year over year basis, and you’re at about 9% on $350 million in revenue. But back a couple of years ago, the margins in that business were 10% to 11% on lower revenue levels. So given this is a key source of operating leverage for the company, could you just maybe drill into that a little bit and help us understand what’s driving the downward margin trend in CPS? Is it just timing? Is it mix? And more importantly, what’s the catalyst for that margin expansion going forward?

Well, Brian, first of all, as I mentioned in my prepared comments, we had a challenging mix in that part of the business. We did, as you know, in a couple of years, we invested more in this side of the business. So I would say it’s a timing issue with us. I think it’s more revenue driven than mix. We’re very optimistic that we will see improvements in this coming quarter, in the second quarter, and we expect to see improvement definitely on the margin for the rest of the year, in 2015. So nothing is wrong, except we need more revenue in there, and a little bit better mix.

Yeah, I agree with Jure. In my view, these are very high contribution margin businesses, and the number one issue is the decline in revenue. And the mix is a little different than it was a year ago, but I think we’ve got room to improve, both in terms of revenue growth and mix.

So you think you could be back in that 10% to 11% range with not a whole lot of revenue lift off the $350 million, Bob? And then I know your long term goal is to have operating margins in that business 8% to 10%. What’s the right revenue base that you think you need to achieve to get to that kind of leverage?

I did not mean to imply we didn’t need revenue growth. We definitely need revenue growth. There’s a lot of contribution margin there, so anytime we get revenue growth, we drive a lot of gross margin improvement.

So, to get to the 8% to 10% long term, what kind of revenue should we be thinking about?

I don’t want to say what the right revenue level is in the future, but if you just look at the graph, you can see that $40 million in increased revenue, you’ve got 2 percentage points improvement in gross margin. Just look at what we did in Q3 versus Q1.

And just a follow up, just the nature of the distressed customer charge in the quarter, and whether you expect any lingering effects going forward?

I don’t think we have any lingering effects at this stage. It’s the same customer we had to take a charge for in the prior quarter. We got new information this quarter, better view on the dollar value of our exposure. So I think this should be the final charge.

The next question is from Joe Wittine with Longbow Research.

Jure, you mentioned you saw a lot of movement in the customer forecast during the quarter. I think later, in the Q&A, you mentioned oil and gas. Anywhere else as far as end markets go that you saw some unevenness?

First of all, because of the holidays, it’s kind of normal, sometimes we have some push outs, push ins, and good thing is there was no major cancellation. Most of the stuff, it was really moving because of the holiday. So they usually affect your numbers, and so on. But I think as we said, operationally, I think our team executed really well, and that’s what allows us to deliver what I call good, decent margin, and deliver, I would say, great EPS for the first quarter. This is the best EPS we had for first quarter for many, many years to come. So visibility is still good. We think the second quarter will be very stable. I think on the components side, we see some improvement in the short term, and then getting better as the year progresses. So back to oil and gas, yeah, we’re going to have some moving parts in oil and gas in the short term, but we are continuing to focus on this area, because I think there’s a benefit to Sanmina long term.

Bob, from a financial perspective, could you be clear on why both opex and other income would trend higher sequentially?

Yeah, the main thing on the opex side was basically we returned to a normal run rate of administrative expenses. They were unusually low, actually, in Q4, so that’s the opex background. In terms of other income and expense, the main thing still is interest expense, although it’s dramatically lower than it once was. And then the second contributor is FX in that category.

Could you quickly address what the asset impairment was too, if you didn’t already?

Yeah, the assistant impairments actually related to the restructuring that we did, I believe over two years ago, in Kuching, Malaysia. And we still have a building there that we’re in the process of selling, and so we have a better idea of what the proper valuation is.

The next question is from Sean Hannan of Needham & Company.

So just to follow up on some questions a little bit earlier, one from a segment exposure standpoint. When we think about oil and gas, is that now at a point where we’re doing maybe about 5% to 10% of revenues within that subsegment? Or how can you characterize the exposure there to that end market?

It’s a lot less than that, Sean. So our exposure to the market is not very high. We have some really exciting projects in there that will still do reasonably well during this period. We’re probably not going to see a lot of growth in a short time. That’s really the only area that will affect us, but we’re well covered on the project that we’re involved in. And as I said earlier, I believe this is a [unintelligible] area for us, because we’re just entering this industry. Anytime the market like this goes through a change, there’s opportunities, and that’s kind of how we look at it, and we are involved in a lot of good new technology products that will continue to develop as time goes on.

Okay, so just to confirm, sub-5%, then?

Oh yeah.

And then also to follow up on some of the comments around components, products, services, just want to see if we can get a little bit more detailed in terms of the drivers from the current point forward. I would suspect that repair logistics are a part of that. Not sure exactly where your comfort is right now with boards. You, I think, have some momentum building a little bit within the Newisys business. So if we could get a little bit more detail to understand some of the puts and takes as we progress into the March quarter and moving forward, that would be very helpful.

We are very excited about, for example, our global repair services. That business has been strong with us, and we expect it to continue to be strong for the rest of the year. On the component side, yeah, we had probably a little bit more challenge on the mix and the demand in the short term. And as I mentioned, we will start seeing some improvement in this quarter, and we’re expecting that to continue the rest of the fiscal year. On some of our product side, you mentioned Newisys. We’ve got a lot of opportunities there. We continue to qualify a lot of customers. They’re expanding, but the potential is really high, assuming that all these good seeds that we planted so far are starting to grow. So on the defense side, you know, the market actually is stable for us. Almost I can say it might even be going up. But we have, again, a lot of good opportunities there. We’re not a big player in defense and aerospace yet, but we have a niche product in there that I believe allows us to expand. So overall, we feel comfortable in that area. I think it’s the mix in the demand in the short term, but again, it’s important to note that we are going to see improvements in the second quarter. And on the positive side, I think our IMS business last quarter did really well. We had a great mix, and that helped us deliver the results as we did.

The next question is from Osten Bernardez from Cross Research.

I just wanted to follow up on that last question again. Could you just specify for me if you can, what sort of business within the CPS did you have a year ago that you don’t have as much of this time around? Is it more so within the components side, where the revenue was lacking? How do I think about that mix?

Well, I would say definitely component side was a little bit bigger impact. But it was really across the board. Nothing specific that you could say. It’s really more the overall demand and mix.

Okay, I was just trying to clarify on the mix issue, because you noted that that contributed to the mix, but I’ll follow up later.

No, just to add to that, if you look at it, the margins came down again because it’s the mix itself. That’s what drove the margin. And as we’re starting to now improve that mix and then the revenue, those margins should be slowly coming up in the right direction. That’s basically what we’re saying. So I just want to make sure there’s no misunderstanding there.

Okay. Thank you for that. And then just lastly for me, how do I think about the type of cash flow generation we should be expecting in the second quarter at the midpoint of the guide that you provided?

We don’t give specific guidance on cash, but I did say in my remarks that we expect to be cash flow positive for the remainder of the year, and that includes the second quarter. We think there were several anomalies in Q1. So I think if you look at the last two or three years, we should be able to deliver quarterly cash flow more in line with that.

The next question is from Jim Suva with Citi.

When we think about the raw material environment and your components, products, and services, I believe there’s a fair amount of plastics, maybe metal and closures, machining products and stuff like that. Can you walk us through, is there any impact to your gross margin or raw material input costs, assuming that your metal costs are likely to go lower? Or is that like a pure passthrough to your customers?

It depends. As you know, a lot of these are fixed costs on some of this stuff, where we negotiate on these expensive metals, together with the customer, like copper, gold, aluminum, things that we sometimes use a lot of. Also, with the commodities going down, definitely we’re going to be getting some benefits in the future. A lot of these things we had at the same time. So it depends, quarter to quarter, when you get benefits.

And then as a follow up, maybe to Bob, on your future outlook for what you’ll be using cash for, now that you’ve pretty much deleveraged your balance sheet so much in a very impressive way, in the past few years, can you help us understand your priority in uses for cash? I would assume it’s of course organic growth, but now that debt is so much lower, are you looking more now at strategic tuck-ins? Or how should we think about your priorities for use of cash?

I would say our priorities haven’t changed that much. As you noted, we have plenty of cash for organic growth, and that will continue to be our top priority. As we said, we want to find profitable growth opportunities. And we will also look at M&A situations. Again, it will be of the nature you’ve seen from us in the past, smaller and something that’s very synergistic with what we’ve been articulating as our strategy for many years. So we’ll continue to look at M&A, and we look at a lot of deals every year. We don’t pull the trigger that often, but we’ll continue to, I’m sure, do some deals going forward. And then finally, we’ll look at repurchasing equity, and again, continuing to look for opportunities to repurchase equity when we think it makes sense for our shareholders.

The next question is from Sherri Scribner with Deutsche Bank.

I was hoping to get more detail on the segments. I think the communications segment was down a little bit, a little below what your expectations were three months ago. Can you give us some detail on what you’re seeing there? And also, on the server and storage side, you mentioned that that was soft. If you could provide a little additional detail?

As I mentioned earlier, communication was down approximately 2.5%. But if you look at it, we didn’t see really major changes there this quarter. I think we had a few push outs. We analyzed the last three years. It just seemed like the December quarter for us is not always the strongest, best segment, which it seemed like a second half, getting to the June, July, and September, seemed like it’s stronger. We expect the same thing this year. I think we’re well-positioned there, as I mentioned. I think we’re going to start seeing some more positive demand, even by the end of this quarter, driven by 4G and IP networks that we are involved in. I think we’ve got a good customer base, and more importantly, we have a solid relationship on the projects that we are involved in, and we continue to drive that growth. So we are optimistic longer term. Short term, first half, if you compare it on a quarterly basis, it will be slightly down. On the storage side, as I mentioned earlier, we have a fair amount of opportunity there. For a year, we still think that segment will grow, year over year. And we expect a good year. Short term, we are forecasting slower demand, but longer term, and I say longer term, rest of the fiscal year, we should see some growth. So overall, we expect a better year than last year. We’re a lot better positioned, and we’re going to continue to focus whatever it takes to drive the shareholder value up. That’s it.

And then just thinking about the growth for the first half of the year, 10%, would you expect those rates to continue to the second half of the year, or do you think it slows down, because the compare gets a little more difficult?

It will be a little bit more difficult, but we’re not giving up on anything. So we do expect to see a growth, if you just compare second half to the last year. I would expect growth over that. But you know, we’re driving very aggressively to drive right growth. I think the company is well-positioned to grow in any environment. Now, I like where we’re at. It’s a lot more exciting than two years ago. So we’ll see, but we’re not giving up.

And Bob, just quickly, were there any buybacks in the quarter?

We did not have any share repurchases. As I said in my remarks, we spent $50-some million on debt reduction. That was the main use.

The next question is from Amit Daryanani with RBC Capital Markets.

I just had a quick question on the comms business, the networking business. So basically, you guys guided for the second half to grow, or to pick up in speed, from a revenue perspective. Just wondering what gives you confidence in this beyond just the 4G ramps.

I think what gives me confidence is the projects that we are involved in globally, and talking to our customers and knowing their forecasts. Of course, those can change any day, but we have a close relationship on those. Also, some of the new programs that we’re both involved, in both of our key segments that we’re involved. That’s 41% of our revenue, and we’re very confident with the segment. We know the segment. We’ve integrated providing the product end to end. So yeah, we’re pretty confident that we’ll see some growth year over year.

And if I look again to the end of the year, is there the potential for you guys to break out of the 7.8% to 8.2% gross margin range towards the back half of the year?

I’ll leave that to my CFO.

[laughs] Again, we’re only giving guidance out for the March quarter at this point in time, but I think if you look at the numbers, and you see what we’ve achieved over the last seven quarters, and you think about if we start to see some revenue recovery in components, products, and services, it’s certainly feasible that we can be above where we’ve been.

Operator, we have time for one more call, please.

The last question is from Christian Schwab with Craig-Hallum Capital Group.

On the debt reduction, are we almost done with everything that’s kind of easy to do?

[laughs] Yeah, good question. If you think about it, I think the answer has to be yes. We just issued new debt last May. I don’t see that changing. It’s five-year debt, and there’s not that much left in terms of short term debt. We just refinanced the campus here, so yeah, I think we’re pretty much set on the debt side.

Well, you guys have done a wonderful job of creating nice earnings growth over the last few years by reprofiling debt in an environment that still remains challenging to acquire top line growth, not just for you, but for your entire industry. But you’re in a special situation. When we met many years ago, I said that if you could profile debt, you’d be a huge stock. And also, I suggested to you that if you can now take all that money and repurchase your shares, you’re one of the few companies with a revenue base as large as you have with as few shares outstanding as you do. So in line with the earlier question asked by someone else, I would reiterate that I think a top priority for you should be repurchasing stock at current levels, for whatever it’s worth.

Thank you, Christian. Ladies and gentlemen, that’s all we have for today. Hopefully, we answered most of your questions. If not, we’re all available at any time to give us a call and we’ll get back to you as soon as possible. With that, thank you very much for your time that you spent with us today. Goodbye.