Good afternoon, ladies and gentlemen. And welcome to the Sanmina Corporation Third Quarter Fiscal 2024 Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Monday, July 29, 2024. And I would now like to turn the conference over to Paige Melching. Please go ahead.

Thank you, Ina. Good afternoon, ladies and gentlemen. And welcome to Sanmina’s third quarter fiscal 2024 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 Jon Faust, Executive Vice President and Chief Financial Officer.

Good afternoon.

Before I turn the call over to Jure, 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 and take note of our 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 factors set forth in the Safe Harbor statement. 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. Included in our press release and slides issued today, we have provided you with statements of operation for the third quarter ended June 29, 2024 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 also like to let investors know that Sanmina will be participating in the Jefferies’ Semiconductor, IT Hardware & Communications at the end of August and Citi’s 2024 Global TMT Conference at the beginning of September. I’d now like to turn the call over to Jure.

Thanks, Paige. Good afternoon, ladies and gentlemen, and 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 a great job. So to you, Sanmina’s team, thank you for your dedication and delivering excellent service to our customers, and let’s keep it up. Now let’s go to our agenda for today’s call. We have Jon, our CFO, to review details of our results for you. I will follow up with additional comments about Sanmina results and future goals. And Jon and I will open for questions and answers. And now I’d like to turn this call over to Jon. Jon?

Great. Thank you, Jure, and good afternoon, ladies and gentlemen, and thank you for joining us here today. Before we go through the financial results, I want to thank the entire Sanmina team for their hard work and dedication and for delivering results in line with our outlook. Now please turn to Slide 5 to discuss the P&L highlights. Third quarter revenue was $1.84 billion in line with our outlook of $1.8 billion to $1.9 billion and up 0.4% sequentially. We are beginning to see customer inventory absorption improve as the communications networks and cloud infrastructure end market grew 8.3% sequentially, partially offset by declines in the industrial and automotive end markets. Non-GAAP gross margin was 8.5%, just short of the midpoint of our outlook and down 40 basis points sequentially and 10 basis points compared to the same period last year, driven by unfavorable mix, which I will comment on in more detail on the next slide. Non-GAAP operating expenses were $60.2 million within the guided range. Non-GAAP operating margin was at the low end of our outlook at 5.3%, down 10 basis points sequentially and 40 basis points compared to the same period last year, driven by the lower gross margin that I referenced earlier. Our operating margin continues to be in line with the 5% to 6% short-term target range that we have previously communicated. Non-GAAP other income and expense was $7.7 million, favorable to our guidance of approximately $12 million. This was driven by our strong cash flow results as we generated higher interest income and incurred less interest expense. Non-GAAP earnings per share came in at $1.25 based on approximately 57 million shares outstanding on a fully diluted basis and in line with our outlook. Now please turn to Slide 6 to discuss the segment…

Thank you, Jon. Ladies and gentlemen, let me add a few more comments about our third quarter and I’ll also review our end markets and outlook for the fourth quarter, and I’ll make a few more comments about the next year, our fiscal year 2025. Please turn to Slide 11. For the third quarter, we delivered good results, as you heard from Jon, in line with our outlook. In our focus markets, we had a nice growth in communication networks, cloud infrastructure markets, as we continue to see softness in automotive and industrial during the quarter. I can also tell you that we are working very close with our customers as they are slowly burning through their inventory. We’re starting to see better forecasts from some of our customers. And in this environment, Sanmina team continues to demonstrate resilience by delivering solid financial results. Overall, we are seeing stabilization in some end markets. To talk more about it, please turn to Slide 12. As you heard from Jon, revenue for the third quarter was $1.84 billion, within our guidance. Revenue was slightly up quarter-over-quarter. Industrial, medical, defense, and aerospace and automotive was 64% of our revenue. That was down 3.6%, quarter-over-quarter. But for communication networks, cloud infrastructure, that was 36% of our revenue. Here, we had a nice improvement in demand and that was up 8.3% quarter-over-quarter. For third quarter, top 10 customers represented 49.7% of our revenue, and I can tell you that Sanmina is a well-diversified company. Regarding bookings, we had strong bookings in the last six months. Book-to-bill over the last two quarters was 1.1 to 1. Mainly newer products are driving better bookings. Please turn to Slide 13. Let me make a few more comments about our end markets. I can tell you that Sanmina has…

Thank you. [Operator Instructions] One moment, please, for your first question. Your first question comes from the line of Ruplu Bhattacharya from Bank of America. Please go ahead.

Hi. Thank you for taking my questions.

Hello, Ruplu.

Hi, Jure. I was wondering, Jure, can you give us more details on the communications end market? What are you seeing specifically within optical, within wireless and networking? What did you see in the third quarter and what are your expectations for the fourth quarter that you’re guiding?

Well, as we said in a prepared statement, Ruplu, communication networks, cloud infrastructure grew approximately 8% plus quarter-over-quarter. We expect this market to continue to move in the right direction. Again, as I said, I think, it’s been driven by our high-performance network, cloud-grade routing, IP routers, switches, some optical packaging systems. There we’ve been -- some of these are new programs and also we’re starting to see pickup from some of the existing customers that they’re working their inventory down, not at the level that they want it yet and not the level that we would like to see it, but it’s moving in the right direction. And some of the new programs that we’re able to ship, that basically last quarter there were some challenges around getting the material and test equipment. I think we mentioned that in our second quarter. That started to move in the right direction and we should see that to continue to move in the right direction in our fourth quarter.

So maybe let’s build on that point that you just mentioned. I think you talked about two programs that got pushed out in CPS. What caused that push out? How much was the dollar impact? And can you tell us which end markets that those programs were in?

Jon, do you want to talk about it?

Yeah. So just to touch on, so like we had said in the prepared remarks, we expect both to ship in Q4. The issues have been resolved. This is really just working with our customers on...

I think he’s asking about the Components, Product Group in this quarter.

The CPS program, correct?

Yeah.

Yeah. Exactly. So those that pushed out, we expect them in Q4. From a dollar perspective, Ruplu, if it was not for that, we would have been at the overall Sanmina level, a little bit above the midpoint of our revenue guide and the same for EPS. But on both fronts, the issues have been resolved and we expect to see the numbers in our Q4 results.

And Jon, just to clarify, the sequential decline in CPS margins, was that all because of just those two programs or did you have any other impacts or any other issues impacting margins?

Yeah. We -- like always, we have some puts and takes, but if you look at where the last couple quarters, we were at about 13%, right? This last quarter we were at 11.5%. And those two programs combined, Ruplu, were about a point to that impact, a little bit over. So we would have been down just slightly overall in CPS, but the majority of the impact was related to those two programs.

Okay. Okay. Got it. Maybe for the last one, Jure, if I can ask a little bit more detail on the IMDA segment, there are four different end markets there. What are you expecting for each of those end markets in the fourth quarter? How do you expect them -- how do you expect revenues to trend in the fourth quarter for these end markets?

As I said in my prepared statement, we have some softness in automotive and industrial. For automotive we -- at this time, we expect also the softness to continue. On industrial, I’m more optimistic. There’s a lot of good programs around the energy. We’ll see how we’re able to ship those out. I think the opportunities are there. Medical, I would say it’s flat down. It’s mainly driven -- we’re still having an impact, what happened during the COVID, because we had a very strong demand there. But I like where we are in the medical side of the business, with existing customers and also some of the new programs with existing and new customers that are coming up. So that is good. On defense and aerospace, there -- we’re in a good position there, demand is strong, and as I said earlier, we’re also expanding and we’ve been investing a fair amount into our circuit board fabrication for military boards, high technology military boards. Demand there is strong for us and also including system assembly. So expect the business to continue to move in the right direction. So, overall, we’re probably going to, I would say, if I had to guess today, flat, maybe slightly up.

Okay. All right. Thank you for all the details. Appreciate it.

Thanks, Ruplu.

Thank you. [Operator Instructions] And your next question comes from the line of Steven Fox from Fox Advisors. Please go ahead.

Hi. I have two questions as well.

Hello, Steve. How are you?

Hi. Good afternoon, Jure. Maybe just, Jon, can you start off with talking about inventories a little bit more from your own -- on your own balance sheet? You guys already have, like, I would say, best-in-class inventory turns, but it sounds like you think you could do better. Can you sort of give us a sense for how much better you could do, what’s driving that? And then I have a follow up.

Yeah. Sure, Steve. Thanks for joining the call today. So in terms of inventory, like I mentioned, we were at 4.9 turns overall and from a DOI perspective, that was about 75 days. If you go back into our history a couple of years back, we think we can get back into the mid-60s days. So, we definitely think that there’s opportunity there. And from a turns perspective, we’re driving towards -- more towards a number like 6, right? So we did make some progress. If you look at quarter-over-quarter sequentially inventory dollars on an absolute basis was pretty much flat, but made some progress, but more room to go on that front. So that’s what we’re driving from a cash conversion cycle perspective.

And just to be clear, is that based on your own improving internal capabilities, better efficiencies or is that like as demand recovers, mix recovers? How much of that is like under your control?

Yeah. It’s both, Steve, at the end of the day. So, certainly customers are still working through inventory absorption, like I was mentioning at the beginning of the call and that’s a little bit different by end markets. We are seeing some improving and getting back to the quote-unquote kind of normalized levels. But we think there’s some room on that front. Then for us, we’re always looking to drive efficiencies, right? And so I think there’s some on both sides.

That’s helpful. And then, Jure, can you talk a little bit more about the book-to-bill? So 1.1 for two quarters in a row, you mentioned newer products. Can you talk about one, what’s driving it, and like how much of the bookings is maybe longer term and how much maybe turns into revenues in the next two quarters? Thanks.

Yeah. Yes. I said, Steve, yeah. Bookings for the last couple of quarters were pretty strong, 1.1 to 1, mainly driven by new programs. And the way we look at the bookings is really the bookings that are released to build now. The next typically two quarter to three quarters, four quarters maximum, because we don’t put in bookings orders that are not released to be built. So that is clear. So, for example, in military, we might get a contract. But if -- there is, let’s say, over five years, I’m just throwing out an example, Steve, $100 million. But first year is only $20 million. And that’s released on a quarterly basis. We’ll only count bookings for what’s released. We do not count for projects that are booked but not released to build. So that’s pretty clear. So, all this stuff that I’m talking about is really released to be built. And also, we started to see with our existing customers as they’re developing the new programs, they’ve been working on in the last year, year and a half. Those are starting to come out and that’s also helping the bookings. So let me just go back. And overall, I know we’ve been going through this inventory correction, and our customers -- some of our customers have been affected by it. But I can tell you things are starting to improve. I can’t tell you for sure everything is going to be perfect for next four quarters or five quarters. But definitely all the signs are moving in the right direction and our customers -- most of our customers are more optimistic about the future as they’re starting to work their inventory more, I would say, next couple quarters or rest of this calendar year than I’ve seen it, let’s say, six months ago or so. So those are positive trends. And then, we’ve got a lot of good opportunities in our pipeline that, that’s going to drive our growth the next couple years, the stuff that we’ll be working on. So, as Jon mentioned in his prepared statement, we’ve been investing a fair amount. So we’re set up to do a lot more than what we are shipping today, Steve, and so a lot of focus internally is to grow. A good thing is that, we didn’t lose any customers. If anything, we’ve been winning some programs or in some lot of cases that customer had multiple sources. We believe we’re gaining there. So a lot of positive things. But we like to wait a little bit more before we can say everything is green.

Understood. That’s helpful. Thank you.

Thanks, Steve.

Thank you.

Operator? Go ahead.

Yes. Thank you. And your next question comes to the line of Christian Schwab from Craig-Hallum Capital Group. Please go ahead.

Hey.

Hey, Christian.

Hey, Jure. On last quarter, you guys talked about inventory headwinds and things bottoming, and now we’re kind of still being impacted by pushouts, and it kind of sounds like, we’re a little bit more guarded exactly what the customer inventory broadly across entire business kind of impacting the business maybe for multiple more quarters. Last quarter, I think you guys talked about an opportunity to exit this fiscal year and return to strong growth. And in 2025, what should we be thinking about as far as a topline growth range for next fiscal year, given the pushes and takes, strong bookings momentum, nice new design wins, but ebbs and flows of real visibility from the end customer regarding demand and inventory maybe remaining not crystal clear?

Yeah. So, Christian, let me take that one on. First of all, the last quarter, I would say that our forecast to shipments were pretty stable. When we’re talking about pushouts on these small projects in our Components, Product Group, we’re talking about $10 million, $15 million in revenue and more profitable business so it affects you a little bit, but nothing major. I would say that inventory, maybe it’s coming down at a slower rate than what I personally thought beginning of this fiscal year. I thought the second half will -- demand will be stronger and the inventory will be burned out at a faster rate. So inventory is continuing to be burned down, but it’s being burned down at a slower rate. What we’re saying today is that, demand -- we’re guiding up for this fourth quarter, as you heard from us, $1.9 billion to 2 billion, so it’s definitely a right step in a right direction. And as we both, Jon and I said, if you look at the customer forecast and visibility, that’s moving on a positive side. For 2025 and then I’ll turn it over to Jon and give you his comments, we definitely feel very comfortable based on all the key customers that we have, the key markets that we focus that we will have a positive growth in 2025 from the markets that we follow. So we’re ready to make a commitment that we expect today to grow in 2025. But we’re not ready to tell you today how much, we really want to go through this quarter into the fiscal year 2025 so that sometimes in that first quarter of 2025, I think that will be a smarter thing for us to tell you at that time what we’re going to do. But we are optimistic. I like what’s in front of us. I like the new programs that we want, some of the new programs that just basically, we just talked about it, what drove our communication up was mainly new program and that’s going to help us this quarter, next quarter, and hopefully, longer, and some of the new programs that we have coming up. So that’s my commitment today, but I can tell you again that we believe what we see today that the 2025 will be a growth year, but I’m not ready to tell you percentage today till about 90 days from now. Jon?

Yeah. Just to add to what Jure was saying, Christian, and the level set on some of the numbers. So if you think about our Q3 guide, so we came in just shy of the midpoint. We had guided the $1.8 billion to $1.9 billion, would have been a midpoint of $1.85 billion. If not for those two programs that I mentioned before, like when I was answering Ruplu’s question, we would have been slightly above that and be about a 1% sequential improvement. If you think about the Q4 guide of $1.9 billion to $2 billion revenue, the midpoint of that would be about a 6% sequential increase, right? So we do expect to be getting on the correct trajectory from that perspective. And inventory-wise, when we started this fiscal year, we were at $1.7 billion. We’re now down to about $1.384 billion, and we’ve improved our turns as well. And like I was mentioning just a little bit ago, we think that there’s more opportunity to work through that inventory on the customer side and then certainly efficiencies that we’re going to be driving to to get turns back up. So as we look ahead, we definitely see Q4 as that return to growth where we’re going to start to make that progress into the next fiscal year.

Great. Thanks for all the clarity. No other questions. Thank you.

Yeah. Thanks, Christian. Operator, it looks like we don’t have any further questions. I would like to thank everyone for joining us today and we look forward to speaking with you again in a few months to discuss our fourth quarter and our fiscal year 2025. Thank you very much.

Thank you.

Bye-bye.

This concludes today’s call. Thank you for participating. You may all disconnect.