Hello, and welcome to the Sanmina Corporation's First Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to the Senior Vice President of Investor Communications, Paige Melching. Please go ahead.

Thank you, MJ. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first quarter fiscal 2023 earnings call. A copy of our press release and slides for today's discussion are available on our website at sanmina.com in the Investor Relations section. Joining me 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 in 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 these projections 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 and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in this earnings release, the earnings presentation, the conference call or the Investor Relations section of our website, whether as a result of new information, future events or otherwise, unless otherwise required by law. Included in our press release and slides issued today, we have provided you with statements of operations for the quarter ended December 31, 2022 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.

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome, and thank you all for being here with us today. First, I would like to take this opportunity to recognize Sanmina leadership team and our employees for doing an exceptional job. So, to you, Sanmina's team, thank you for delivering strong and consistent results for the first quarter of fiscal year 2023, and let's keep it up. For agenda, we have Kurt, our CFO, to review details of our results for you; I will follow up with additional comments about Sanmina results and future goals; then Kurt and I will open for question and answers. And now, I would like to turn this call over to Kurt.

Thanks, Jure. Please turn to Slide 5. As Jure mentioned, our team did an outstanding job delivering strong revenue and profit growth for the quarter. Q1 revenue of [$2.136] (ph) billion grew nicely by approximately 7.2% from the prior quarter and exceeded the high end of our outlook of $2.1 billion to $2.2 billion. This was primarily due to strong customer demand, as well as continued improvements in the supply chain. Non-GAAP gross margin was flat at 8.3%. Non-GAAP operating margin was 5.8% compared to 5.6% in the prior quarter. This was primarily due to operating expense leverage. Non-GAAP fully diluted earnings per share grew approximately 9% to $1.64 compared to $1.50 in the prior quarter, and exceeded the upper end of our outlook of $1.41 to $1.51 by $0.13. Finally, Q1 GAAP fully diluted EPS was $1.48. Please turn to Slide 6. This slide shows the quarterly trends in our financial results. You can see here that non-GAAP operating margins have continued to improve over time. Furthermore, earnings per share grew over 50% from $1.08 in Q1 FY '22 to $1.64 in Q1 FY '23. Please turn to Slide 7. Q1 IMS revenue increased to $1.94 billion, an increase of 7.7% over the prior quarter, primarily due to strong customer demand and continued improvements in the supply chain. Non-GAAP gross margin for IMS was 6.9% compared to 7.2% in the prior quarter. This decline was primarily due to a reserve taken during the quarter related to a start-up customer. We expect IMS gross margins to return to a more normalized level in fiscal Q2. Components, Products and Services revenue grew to $464 million, an increase of 3.8% over the prior quarter. Non-GAAP gross margin for CPS improved to 13.3% compared to 11.9% in the prior quarter, primarily due to…

Thank you, Kurt. Ladies and gentlemen, let me add few more comments about our financial highlights for the first quarter and I'll review our end markets and outlook for the second quarter and the rest of the fiscal year 2023. As you heard from Kurt, for the first quarter, Sanmina delivered strong and consistent results. The key highlights were: growth was broad-based, driven by strong demand from our end markets; and performance of our supply chain organization was excellent by working closely with our customers and suppliers. We can also tell you that the lead times for semi components is getting better. We saw nice improvements in the first quarter. Despite ongoing macroeconomic uncertainty, these results are a reflection of our continued focus on execution of our strategy. Our Sanmina team has done an outstanding job as we continue to differentiate our industry-leading capabilities, and all of this is continuing to translate into growth and margin expansion for Sanmina. Please turn to Slide 12. Let's look at the revenue for our first quarter by end markets. I can tell you that the demand for our products was strong across all markets. For Industrial, Medical, Defense and Automotive segments, we delivered a revenue of $1.345 billion, which was quarter-over-quarter growth of 4.5% and year-over-year, 27.5%. For Communication Networks & Cloud Infrastructure, we delivered $1.016 billion, which was quarter-over-quarter growth of 11% and year-over-year, 44.6%. Total for our first quarter, we delivered $2.361 billion. It was nice organic growth, quarter-over-quarter growth of 7.2% and year-over-year growth of 34.4%. For the first quarter, top 10 customers were 50.6% of our revenue. Overall, we are seeing strong demand and solid backlog for our future. In summary, we are off to a good start for fiscal year 2023. Please turn to Slide 13. Now, let…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Jim Suva with Citigroup. Please go ahead, Jim.

Hello, Jim.

Hello. Good evening. Thank you so much for the details. Some of your peers have talked about some inventory digestion or inventory buffer that needs to be worked down. Are you seeing that in any of your markets? And if so, which ones and how long? Or I'm just kind of curious on that topic and I probably have a follow-up.

Yes. Jim, definitely during this period, as you know, when our customer gives us a forecast, we're basically bringing inventory based on their needs, but then there was a lot of shortages, and sometimes we had to wait for those shortages a little bit longer and in end of the day inventory went up. We believe we're at the peak. As we look at the next couple of quarters, we expect to work that inventory down and generate more cash. So that's kind of where we are at. It's across all the markets, Jim. It's not just one then another, it's all -- really more customer-driven than just the markets itself.

Okay. So, across several. And then, you have seen a lot of success in recent years with your cloud hyperscaler server storage. And just, can you update us on that and give us some view on additional colors on that effort?

Well, that segment for us, if you look at the last quarter, communication network and cloud computing did pretty well, grew about 11%-plus. So, we always were well positioned in that market. It's, again, we got a lot of new programs there. Overall, we're very positive. Jim, we take one quarter at a time. We're a lot more confident about '23, let's say, today than we were six months ago. So, I will take one quarter at a time and we expect to grow these markets.

Thank you so much for the details, and congratulations to you and your teams at Sanmina.

Thank you, Jim.

The next question comes from Anja Soderstrom with Sidoti. Please go ahead.

Hi, and thank you for taking my questions. So, you're talking about...

Hi, Anja.

Hi, and congratulations on the good quarter.

Thanks.

You're talking about a nice improvement for fiscal 2023, but you don't really quantify it. If I think about the growth for the next couple of quarters, the second quarter seems to be stronger even though you normally have seasonal weakness there. So, should we expect sequential revenue increase throughout the year?

Well, Anja, let me put it this way, we had a great start to a year. So, I think, first quarter speaks for itself. I believe our guidance for the second quarter are very solid. So, we'll take one quarter at a time, Anja. As we operate in this macro environment, we're very positive about the year based on our customer forecast. But at the same time, we read papers. Inflation is up, it's going up and still up, my opinion. I think Sanmina is positioned to weather no matter what happens. And we're very positive on what's in front of us, especially with the new programs that are coming up. As Kurt mentioned, we're spending a little bit more money on expansion. And the reason we're doing that is all driven by the new programs in our high-technology product mission-critical customers. So, we are -- we believe in a better future.

Okay. Thank you. And can you just talk a little bit about the end markets that you participate in? And you're talking about new programs. Can you just tell us a little bit about those programs and what excites you about them?

Well, as we talked in our last quarter, we continue to drive in these mission-critical programs, such as industrial, medical. In industrial, we're well-established there. I think, our alternative energy market is going to be expanding there substantially. I think on automotive, same thing. On EV vehicle, we are well positioned there. When Jim asked the question regarding communication network, cloud -- and cloud infrastructure, we are also well positioned there, and of course, medical and defense. So, a lot of the new programs are really across all our markets.

Okay. Thank you. And have you seen any changes to the competitive landscape at all recently?

Competition is always there, but I'm more worried about ourselves than competition. I always believe it's what we do. We are focused to really build a strong partnership with our customer. We're focused on mission-critical products, heavy regulated markets that require a lot of technology, and that's what we're spending energy in.

Okay. Thank you. That was all from me.

Anja, that's -- thank you very much. Operator? That's all for today. We appreciate everybody's input. And if there's any more questions, please let us know. Thanks a lot.

[Operator Instructions]

Go ahead.

Please, go away -- go ahead.

Yes. Thanks for -- we'd like to thank everybody for joining this call. Again, if there's any more questions, please let us know, we're available for next 90 days.

Thank you.

Thank you.

Bye-bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.