Good day, and thank you for standing by, and welcome to the Sanmina Corporation's Second Quarter Fiscal 2021 Earnings Conference Call. [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.

Thank you, Catherine. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Second 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.

Good afternoon.

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

Good afternoon.

Before we begin our prepared remarks, 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 and the slides provided on our website. Please turn to Slide 3 of our presentation or the press release, safe harbor statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results could differ materially from those projected in these statements as a result of a number of factors set forth in the company's annual and quarterly reports filed with 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 the 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 on our press release and slides issued today, we have provided you with statements of operations for the quarter ended April 3, 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, noncash 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 information. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, taxes, net income and earnings per share, we are referring to our non-GAAP information. I'd now like to turn the call over to Jure Sola.

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome. Again, thank you all for being here with us today. I'd like to make a few comments. But first, I would like to say that I'm very proud of our leadership team and our employees for managing through challenges around COVID and material shortages. Despite these challenges, Sanmina team delivered strong results for the second quarter fiscal year 2021. Definitely, this was a great team effort, and most importantly, we were able to meet the needs of our customers. For the agenda we have is that Kurt will review the details of our financial results for you, I will follow with additional comments about Sanmina's results and the future goals, then Kurt and I will open for question and answers. And now I'd like to turn this call over to Kurt. Kurt?

Thanks, Jure. Please turn to Slide 5. In the second quarter, our team did an excellent job of managing through the challenges related to the supply chain constraints and COVID as well as the typical seasonality leading to strong financial results. Q2 revenue of $1.7 billion met the midpoint of our outlook of $1.65 to $1.75 billion. Q2 non-GAAP gross margin improved to 8.6%, primarily due to a favorable mix in the CPS segment. Q2 non-GAAP operating margin at 5% was consistent with the prior quarter despite lower revenues due to strong gross margins. Finally, Q2 non-GAAP fully diluted earnings per share of $1.01 exceeded our outlook of $0.76 to $0.86, primarily as a result of the favorable mix in the CPS segment and management's focus on driving efficiencies. Please turn to Slide 6. This slide shows the quarterly trends of our financial results. You can see the excellent job our team did managing through the challenges related to the supply chain and COVID. Non-GAAP gross margins have now exceeded 8% for the last 4 consecutive quarters. Non-GAAP operating margins have been 5% or greater for the last 3 consecutive quarters. And finally, non-GAAP fully diluted earnings per share has exceeded $1 for the last 3 quarters. If you now, please turn to Slide 7. Here, you'll see our IMS revenue was $1.37 billion. The decline in revenue was due to the impact of the typical seasonality and supply chain constraints. Non-GAAP gross margin for IMS declined to 6.9%. This was due to the lower revenue level as well as a less favorable mix. Components, Products and Services revenue grew to $361 million from $319 million in the prior quarter. Non-GAAP gross margin for CPS improved to 14.2%, primarily due to the higher revenue level and favorable mix. Again, overall,…

Thank you, Kurt. Ladies and gentlemen, let me tell you more about the business environment for the second quarter, and outlook for the third quarter, and the rest of the calendar year. As you heard from Kurt, Sanmina delivered strong financial results for the second quarter. Our performance in this quarter is a testament that hard work is paying off. Key drivers in this quarter were: we had a stable demand and was a broad-based end market demand; we had a favorable business mix, driven by growth in Components, Products and Services; we have great operational execution as we are continuing to drive efficiencies. I think our supply chain did a excellent job. I would say, management executed well despite some of the supply challenges that we are still wrestling with; and excellent cash management. We delivered strong cash flow. Sanmina is executing well in this dynamic environment. During the second quarter, we expanded and grew our leadership with our strategic customers in the key markets that we serve. In summary, we are building for a better future. Please turn to Slide 13. Now let me tell you more about second quarter revenue by end markets. We have stable demand, but material shortages impacted revenue by approximately $50 million to $75 million this quarter. Our top 10 customers were 53.6% of our revenue. Communication networks and cloud infrastructure was 42% of our revenue. And industrial, medical, defense and automotive markets were 58%. Overall, revenue was down slightly about 3% comparing to the first quarter of fiscal year '21, mainly driven by material shortages and some seasonality. And I also can tell you that the book-to-bill for the quarter was strong, over 1.1. Please turn to Slide 14. Let me give you a few more comments on the third quarter and…

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

Jure, during the prepared remarks, you said that visibility has improved. I was wondering if you can give us your thoughts on the second half of the fiscal year versus the first half. Do you think the second half can be stronger in terms of revenue than the first half? And then when we look at the full year fiscal '21, do you think you can grow revenues this year? I mean, can we -- do you think low single-digit year-on-year growth is possible? So just any thoughts you have on the second half and full year revenue outlook, just puts and takes, what are you seeing?

Well, Ruplu, first of all, definitely, as I mentioned, visibility is improving. Right now, our biggest challenge is around the materials, it's not about the demand. I think if we can get all the materials, definitely, we can see the growth year-over-year, like you said, small percentages. As we look at the calendar year for us, that will be a first quarter of 2022. Again, it's all about materials. Demand is there, what we're seeing today. The good thing -- but customer base that we have, Ruplu, is that they are planning ahead more now than I've seen for a long time. So we have in visibility, in some cases, as much as 4 quarters out. So as I said, it's all about managing the material. We have a good team in a place, both in purchasing and operations and planning. As I said, we have, I think, one of the best IT systems in the world. We're globally connected. We see -- we can look at everything what's going on real time. So we believe that we have a right systems in a place to be able to get through this thing. But the only way we're going to get through this is really working very closely with our customers and the key suppliers. So I'm very optimistic, but a lot of work left.

Yes. No, that makes sense. Jure, can you also drill down a bit into the communications end market? What are you seeing in optical versus networking versus wireless? Any details you can give us on that end market?

Well, first of all, let me make a comment on 5G mobile networks. That's starting to pick up nicely as we thought that it will start in the third and fourth quarter and rest of the year. So that's moving in the right direction. Our networking, as I said, the network in our optical, which is -- a lot of it is driven with our advanced optical systems and optical module that part of the business, it's very healthy. Customers given us upside now. It's just filling the orders up, to be honest with you. So especially short-term, a lot of demand in that market.

Got it. I also had a couple of questions for Kurt, if I can. The gross margins in CPS, the Components, Products and Services improved a healthy 200 bps sequentially. Can you just drill a little bit into that what drove that? Were there any one-times? And do you think that level of margin is sustainable going forward?

Sure, Ruplu. So I think, obviously, the biggest contributor was the growth. So we grew a revenue perspective, basically over 10% quarter-over-quarter, going from $319 million to $361 million. So that's the biggest part. And then obviously, inside of CPS, I think, the products that we were selling there are some of our better products. So we did have a favorable mix. So I think it's a combination of those 2. But certainly, volume or revenue level always helps. In terms of what's achievable in the long-term, I mean, we're continuing to -- as Jure talked about, we're continuing to drive efficiencies. There's going to be ups and downs in quarters depending on revenue level and mix, but we're not satisfied, and we'll continue to drive operational efficiencies. And certainly, as that business grows, that revenue growth will help us continue to improve margins over time.

Got it. And for the last one, Kurt, if I can ask you. Can you give us your priorities for cash in this environment? I mean how would you balance reducing any more debt or taking on debt to do acquisitions, share buybacks. So any thoughts on uses of cash?

Sure, absolutely. So our first priority is always investing in the business. And we have plenty of opportunities with our customers and looking at how we can expand those relationships and investing capital to serve our customers' needs. So that's always priority number one. Again, as you've seen, our cash continues to increase. And so we've been able to lower our leverage. So we'll continue to do that. In terms of M&A, we have a pretty high hurdle. We'll continue to opportunistically look at that. And certainly, if the right deal came along, we're going to look at that. But our priority is really focused on organic growth at this point, but we don't rule anything out.

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

It's been a tough year or two for the entire world and Sanmina, and your customers, suppliers and employees. As you look back, whether it'd be component shortages now, or previously airplane shipping shortages, and before that, shortages due to geopolitical sourcing and assembly, and even COVID? Is there a view that maybe footprints need to be changed? Or maybe the answer is working capital? I'm wondering if there's a need to hold more chips now more than ever to meet demand because it seems like the demand is there. So any strategic views of -- is that kind of the best use of working capital? And should we kind of think about days of inventory kind of permanently changing? Would that be kind of prudent? Or maybe some other priorities?

Yes. Jim, those are all great questions, and I'm not saying that because just to make you feel good, but they are great questions that we rest all every day with. First of all, yes, you're right. These were challenging years for a lot of different reasons. But I will say this pandemic was probably a biggest challenge to the -- all management around the world, and it was the biggest challenger to Sanmina's management. But we also learn a lot. We learn a lot how to maybe look at things differently. And we're able to tune things up, and we got a lot of great ideas from our people around the world and made us a better company today. And we had to tighten things up to be able to get through this environment. Yes. You're right, material, logistics. I mean both of those are still challenges. Back to your question regarding a global structure. Yes, the worlds are different today than they were 10, 20 years ago. I think that will be a different in the next 5 years. So we tuned that up pretty well in Sanmina case. I think we have a very lean structure today around the world. So we don't need to do anything crazy. It's really more tuning up. If I look at our structure today, it's really more going to be driven by the growth. As the growth comes back, we're going to be adding more capacity around the world. Not too much face wise, but just adding more capabilities to be able to meet our customers' demand. Back to the working capital, I mean, as you know, you've been in this business long time, we all hate extra inventory. Our customers hate it. We hate it. We can't afford to have…

[Operator Instructions]. We do have a question from the line of Christian Schwab with Craig-Hallum Capital Group.

Congrats on the good execution, Jure and team.

Thank you. We always leave you for the last because, the best questions.

So you talked about $50 million to $75 million impact in component shortages in the most recent quarter. What is the impact that you're guiding for in the most current quarter?

Well, first of all, we already give the guidance, and that's all calculated in that. And hopefully, what we plan, everything is going to be there. Yes, definitely, we discount that, and we'll see if we can get more materials, I think, then it will be easier to ship it. But yes, that's all taken in consideration. And I'm not trying not to answer that directly. But really, right now, there's a lot of moving parts in the material. We are definitely planning. We have a lot more on the floor that we are planning to bring the material in that what we are forecasting, because certain things we know will move out. So we're bringing everything else in to be able to fill in once we get the right components in. So fair amount of moving parts, but we feel confident, Christian, that we'll be able to manage it and deliver in our guidance.

That's great. So a follow-up on that, Jure, is there -- should we assume that there's a long shelf life to the type of products that are being impacted, meaning that we kind of lost out on shipping $50 million to $75 million you thought due to component shortages? Should we assume these are long life products. And this is forever lost revenue, it's revenue that happens as soon as the components can occur?

I wouldn't say this is specifically what we couldn't ship last quarter, we will be shipping that this quarter. These are all custom-made products for infrastructure. As you know, we build all these mission-critical type of products that are needed. These are long-term programs. So I would say majority of this stuff just does not disappear.

Great. That's what I expect. My last question has to do on operating margins. We have successfully navigated COVID and component supply shortages and operate at a 5% or greater operating margin. Can you kind of give us the puts and takes to why we're not kind of at those type of levels, the midpoint being below that?

Could you repeat that question regarding, I missed you there first?

No, I was just saying that you guys have operated at 5% operating margins for 3 quarters during COVID issues as well as supply chain issues. Now you're guiding a little bit below that at the midpoint. Is that conservatism given the environment? Or is there some type of mix change in the business that we should all be aware of?

Yes. So let me try, and then Kurt can take it over. First of all, we are still operating, and I hate to repeat myself with a lot of uncertainties around the COVID. As you know, right now, if you look at what's going on in India, what's going on in Southeast Asia, some of those countries. So we don't know what's going to happen with COVID. So there's a lot of stuff and go in those regions. So far, we've been lucky. We've never been shut down. We kept our -- I think our management, kept our people pretty safe, and we hope to continue with that, but there's still risk in there. I think we're trying to be real. Our goal is both Kurt and I said it and maybe more me than even Kurt, I believe there's still room for improvement in the margin. We know there is. Not everything is running perfectly. So I think it's all about mix of the business. I think if that comes in and, on the growth, if we get the growth and the mix, the margin will improve a lot faster. Kurt, anything else you want to add.

No, I echo that. I mean, it comes down to -- given the uncertainty of the supply chain, it's hard to know what the revenue is, much less what the composition of the revenue is. And so I think from a gross margin perspective, obviously, we want to try to be conservative there, and then that obviously goes down to the operating margin level. But certainly, our goal is to provide consistent financial results quarter-to-quarter, and we're going to do our best to do that again this quarter.

Well, ladies and gentlemen, that's all we have today. Hopefully, we answered some of your questions, if not all, please get back to us. Otherwise, we'll be talking to you in the next, I guess, 90 days from now. So thank you very much for your support. Bye, bye.

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