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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. And welcome to the Sanmina Corporation's First Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker for today, Ms. Paige Melching. Thank you, ma'am. Please go ahead.
Thank you, Catherine. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first quarter fiscal 2020 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. 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.
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 of operations may differ significantly as a result of various factors including adverse changes to the key markets we target, significant uncertainties that can cause our future sales and net income to be variable, reliance on a small number of customers for a substantial portion of our sales, risks arising from our international operations, the amount of restructuring charges related to the company-wide rightsizing plan actually recorded in the second quarter and other factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission.
You'll note in our press release and slides issued today that we have provided you with statements of operations for the quarter and fiscal year ended December 28, 2019, on a GAAP basis as well as certain non-GAAP financial information.
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 certain other infrequent or unusual items to the extent material.
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 Hartmut Liebel, Chief Executive Officer.
Thanks Paige, and good afternoon ladies and gentlemen. Welcome and thank you for being here with us today. In addition to Paige, our new CFO, Kurt Adzema is with me on today's call. Kurt and I assumed our current roles at the beginning of Q1. We're getting up to speed quickly and the transition is working smoothly. After the first few months with the company, I can tell you that Sanmina is a well -run organization with an exceptional management team. I think Kurt would echo that and both of us are excited to be part of the team.
With that, I will turn the call to Kurt to take us through the financial and operational results. After that, I will provide some color on the end markets we serve and our management team's priorities. Kurt?
Thanks, Hartmut. Please turn to Slide 3. I am pleased to report first quarter revenue of $1.84 billion exceeded the high end of the range, our prior outlook of $1.725 billion to $1.825 billion. Revenue was down 2.8% sequentially, primarily due to lower revenues in the communications sector as the result of excess inventory in the channel as we had discussed and had expected on our prior earnings call. Q1 non-GAAP gross margin was 7.5%, relatively flat with the prior quarter, despite lower revenue levels, as we started to see the benefits of our previously announced restructuring program and associated actions to create a more lean and flexible manufacturing processes.
The restructuring program is on schedule and is expected to be largely completed by the end of the second fiscal quarter. Q1 non-GAAP operating expenses declined relative to the prior quarter as we continue to drive efficiencies at the corporate level. Q1 non-GAAP other expenses were approximately $4.3 million. This was down approximately $4.4 million relative to the prior quarter. This was partially driven by a gain of approximately $2 million related to deferred compensation assets, which had no net impact on non-GAAP earnings per share as deferred compensation gains are equally offset with corresponding increases in manufacturing and operating expenses.
In addition, we benefited from lower borrowings under our revolver and lower amounts of accounts receivable factoring.
Finally, Q1 non-GAAP earnings per share were $0.79. This exceeded the high end of the range of our prior outlook of $0.65 to $0.75. Q1 GAAP earnings per share were $0.53. For cash flow purposes, depreciation and amortization was approximately $29 million, and capital expenditures were approximately $28 million in the first quarter.
Please turn to Slide 4. Here, you can see additional income statement details related to the first fiscal quarter and associated comparisons.
Now please turn to Slide 5. I will now discuss our two segments. As you can see from the graph on the left, IMS segment revenue was down approximately $57 million from the prior quarter. This was as expected primarily due to lower revenues in the communications sector as the result of excess inventory in the channel as we had discussed on our prior earnings call. The modest decline in non-GAAP gross margin sequentially was the result of this lower revenue level.
On the right is our second segment Components, Products, and Services. Revenues were down slightly by $6 million to the prior quarter. Non-GAAP gross margins improved over the prior quarter due to operating efficiencies.
Now please turn to Slide 6. Our balance sheet remains strong. Cash and cash equivalents were approximately $431 million at the end of the quarter. Inventory was down approximately $57 million, and inventory turns improved to 7.8x. We are very focused on reducing inventory levels to improve capital efficiency and generate cash flow. Cash cycle days were 52.9. Non-GAAP pretax return on invested capital was 22.2%, and cash flow from operations was $21.2 million. From a liability standpoint, we had an approximate $156.7 million decrease in accounts payable during the quarter. We continue to maintain a low leverage of 0.9x.
During the quarter, we repurchased approximately 300,000 shares for a total of approximately $9 million. As we generate strong free cash flow, we will continue to be opportunistic in repurchasing shares.
I would now ask you to turn to Slide 7. Here, you can see additional balance sheet details related to the first fiscal quarter and associated comparisons.
Now please turn to Slide 8. Our outlook for the second fiscal quarter is that revenue will be in the range of $1.7 billion to $1.8 billion. This expected sequential decline in revenue is primarily driven by seasonality. We are still positive about the longer-term revenue outlook beyond Q2, and Hartmut will discuss this more subsequent to my remarks. On a non-GAAP basis, we expect that gross margin will be in the range of 7.3% to 7.8%. We expect the benefits of our previously announced restructuring program will allow us to keep margin relatively flat compared to the last quarter despite the expected revenue --decline in revenue. The restructuring program is on schedule and we expect it to be completed by the end of the second fiscal quarter.
Non-GAAP operating expenses should be approximately $62 million to $64 million with non-GAAP operating margin in the range of 3.8% to 4.2%. We expect that non-GAAP other expenses will be in the range of $7.5 million to $8.5 million. Our non-GAAP tax rate should be around 17%, and we expect our non-GAAP fully diluted share count to be around 73.5 million shares. When you consider all this guidance, we believe that we will end up with non-GAAP earnings per share outlook in the range of $0.65 to $0.75.
Adjusting for an estimated stock-based compensation of $0.12 per share, GAAP diluted earnings per share is expected to be between $0.53 and $0.63. For your cash flow modeling, we expect capital expenditures to be around $28 million while depreciation and amortization to be around $30 million. We expect to generate free cash flow in the second fiscal quarter.
I will now turn the call to Hartmut for further comments on our market segments and the longer-term outlook as well as Sanmina's priorities.
Thanks Kurt. So let me add a few more comments about the current business environment and longer-term outlook for that. Please turn to Slide 10. As you know, Sanmina remained focused on high complexity, heavily regulated markets. Sanmina's largest market segment includes industrial, medical, defense and automotive and was approximately 60% of total revenues in the first quarter. The segment was pretty much flat sequentially. We had good growth in industrial, defense and aerospace offset by softness in medical and automotive. Working with our team, I see that Sanmina is really well positioned in these markets. In these complex, regulated markets, our expertise in engineering and design, end-to-end manufacturing, a one instance IT system and regulatory certifications really differentiate us.
These markets continue to expand as more companies in these segments look to partner with a company like Sanmina. We expect the segments to grow as we progress through fiscal year 2020. Communications Network is our second largest segment at about 32% of revenue in the first quarter. This market was down 7.8% sequentially primarily as a result of excess inventory in the channel. This is a very important market for Sanmina where we enjoy strong, long-standing customer relationships. I'm also pleased with a good pipeline of new opportunities, which we obviously work on improving with new projects and customers every day. As we said, on our prior earnings call, for the first half of our fiscal year, we are seeing softer demand in this segment. What I hear from our customers, they're telling us that longer-term demand should be improving primarily driven by the burning off of excess inventory in the channel. And as new programs ramp including 5G.
Sanmina is well-positioned with the right customers and programs. And I'm excited about what is ahead of us. Cloud Solutions grew modestly up 1.3% in the fiscal quarter and was about 8% of our total revenue. In this segment, we have eliminated some lower technology products such as setup box business, so that today we are strictly focused on high-end cloud solution products. I believe the trend toward cloud computing is beneficial to Sanmina and we have some good opportunities ahead of us. If I were to summarize our end markets in the short term, we see some inventory that needs to be flushed out and expect all of our market segments to be down sequentially in the second quarter, which as you recall from prior years is also due to seasonality.
Longer term, I believe Sanmina is focused on the right market and right customer opportunities. Based on what I hear from our customers and assuming a continued strong global economy, I believe 2020 will be a good year for us.
With that let me now turn to my priorities for management team. For that please refer to Slide 11. First and foremost is profitable revenue growth through a focus on key customers in high complexity, mission-critical end markets. I believe we are focused on the right end markets where we see plenty of opportunities to partner with current and future customers. So they can benefit from our lean manufacturing services offering. Second is market leading onboarding processes for new programs? Our customers really value this. It plays a big part in exceptional customer satisfaction and it helps us accelerate the time to revenue and boosting our return on invested capital.
Third is our continued to drive toward lean and flexible manufacturing processes that will allow the company to see attractive margins regardless of the business environment. Related to that at the last earnings call, we announced the corporate restructuring program and have started to see the benefits in the first quarter. And of course, we intend to continue this program to further improve operational efficiencies. Finally, a keen focus on cash generation. For example, we made good progress last quarter in reducing inventory. I believe there are additional opportunities to improve. A strong balance sheet and consistent cash generation gives Sanmina the flexibility to invest in growth with our customers, optimize the capital structure and minimize share dilution through opportunistic share repurchases.
I can say that our management team is locked into these priorities. And we are all excited about direction we're heading. With that let me summarize what we covered in today's call. Please refer to Slide 12. For the first quarter, we achieved revenue of $1.84 billion and non-GAAP earnings per share of $0.79 both exceeding the high end of the guidance range. In terms of revenue outlook for Q2, we expected to be modestly lower ranging between $1.7 billion to $1.8 billion, primarily due to seasonality. We expect non-GAAP EPS in the range of $0.65 to $0.75.
In addition, we expect to generate meaningful positive free cash flow during the quarter. In the long term, we believe that revenue growth will resume and margins will improve as excess inventory and the channel is burned off. And we continue to ramp new programs. We also covered the priorities for management team and the discipline focused on a few key initiatives that matter to drive profitable growth with our customers in high complexity, mission-critical end markets.
I would like to thank all of our employees for the great work and a good start to 2020. We couldn't do this without our global supplier partners, customers and investor support and confidence in Sanmina. Thank you for that. I'm glad to be part of this team. And we look forward to working with all of you to build a great company. And, Catherine, with that we can now open the call for the Q&A session.
[Operator Instructions]
Our first question comes from the line of Ruplu Bhattacharya with Bank of America.
Hi. Thank you for taking my questions. Maybe to start off with, I was wondering if you can delve a little bit deeper into what you saw in the communications end market. I think last earnings call, you talked about some delays with 5G and also you had talked about two quarters worth of inventory that probably -- that needed to be burnt off. So, is there anything different that you've seen in this quarter based on what you had expected and can you talk about what you saw in networking versus optical versus wireless?
Yes. Sure. Ruplu, good question. Now the overall situation pretty much remains the same as what we outlined in the last call. We're working through -- the market is working through the inventory burn off it in the channel. And so now we continue the dialog with our customers. I would say overall the outlook and information that we have has pretty much remained the same. And so, again as we outlined in our comments, the outlook is pretty much the same as what we had -- as we had outlined a few months ago. And I think it's very much a timing issue, so we're still working on the right programs with the right customers, and I think it's really just a timing matter at this point.
Okay. That's helpful. And Hartmut, I think you said longer term you see revenue growth. If I look at what you posted for the first quarter and the guidance for the second quarter, I mean revenue so far in the first half is down double digits year-over-year. Do you think in the second half with 5G programs coming on and other end markets recovering, do you think revenue in the second half of the year can grow year-over-year or should we still expect a decline year-on-year in the second half?
Yes. No, good question. We are really taking this like one day, one week at a time here. And with the visibility that we have here right now, we will be focusing on improving the company and making sure that we are ready to execute the revenue and the demand when it comes. And at this point, we really don't want to comment as in the past beyond the next quarter. So again, we are optimistic that we are working obviously on the right programs and we'll take it one week at a time.
Okay, okay. And maybe one question for Kurt on the margins for the CPS segment, I mean the sequential, the 70 basis points improvement can you delve a little bit into what led to that improvement and specifically within Components, Products, and Services, which segment within that actually improved and can you remind us and how should we think about margins going forward? What is the long-term target? What is the expectation for margins in that segment? And can there be further improvement in margins in CPS?
Yes, I would say, first of all we don't break out that business beyond the segment total as we've outlined here in the slides. But I would say in general, the reason why we saw the increase in this quarter was twofold. I think first of all, we're very focused on improving the efficiency of our operations, and so I think that was very helpful. I also think we had some positives related to mix there as well.
In terms of our goals long term, I would echo what Hartmut said earlier, which is we are taking this thing one quarter at a time. We are making sure that we are well positioned as the revenue comes back to continue to further improve margins and that's our goal. So, I think in general, what we saw in the first quarter on CPS was a positive note, but we've got to keep the momentum going.
Okay. Okay, and my last question would be, have you seen any disruption from the events in China with the Coronavirus? Have you seen any supply chain disruptions as a result of that?
Yes, so that's obviously, it's very much an evolving situation, which I think all of us are receiving updates almost on a day-to-day or hour-to-hour basis. Our entire team is very much focused on that. We have curtailed non-essential travel and our local operation has taken necessary steps. We have not -- nor do we anticipate at this point any material disruption to our business. I also want to remind you that in terms of our total business, our China operation is probably not as significant as maybe some of the other players in our industry, but we will continue to watch this very, very carefully and take necessary steps. But so far, the impact on our supply base is very much under control, but we have to continue to monitor this very, very carefully.
Our next question comes from the line of Jim Suva with Citi.
Hi, this is Tim Yang calling on behalf of Jim Suva. Thanks for taking the question. Your cloud solution outperformed last quarter. I think your guidance was down quarter-over-quarter and then you actually came out with positive growth on a sequential basis. So, can you maybe just provide some color on what's driving the strength in the segment? And then I have follow-up.
Yes, no, it's a -- it's an important sector for us -- segment for us. At the same time, it's a relatively small segment for us. So, the timing of a few programs here and there can easily change the percentage kind of ranges that we've estimated just a few months ago. So, it continues to be an important segment for us. It's a business that's very much a project-driven business, which makes the kind of revenue estimates for the next couple of months a little bit more difficult. So, you know we are happy how we are positioned there and look forward to executing on some exciting opportunities ahead of us.
Got you. So, it's the lumpiness of the business, the segment and the strength is more, just for this quarter and next quarter, I think you are guiding a sequential decline.
So, it's right, right. That's -- I think that's a good way of putting it. Yes.
Got you. Okay. My next question is on margins. I think in the past five quarters you have achieved operating margin expansion on a year-over-year basis. However, I think your implied margin guidance for March quarter, if we just use the midpoint of the guidance is a 10 basis points lower compared to a year ago. So I guess my question here is that how should we think about the margins for the full-year, because I think in the second half, your second half margin is simply stronger than the first half. Should we think about the same thing? Or what are the variables that could impact your margins going forward? Thank you.
Yes, so we're very focused on margins. We're focused on controlling what we can control. Relative to last year, obviously revenue right now is down. And so we're working very hard through our restructuring program and creating other operational efficiencies to still maintain that 4-plus percent operating margin range. And again, our hope is to create this lean and flexible manufacturing structure in the first half of the year. And should revenues come back as we hope in the second half, then we should get some leverage there. But as Hartmut said, we only guide one quarter at a time, and we'll take this one quarter at a time.
Okay, Catherine, we probably have time for one more question that would be great.
Yes, sir. Your last question comes from the line of Christian Schwab with Craig-Hallum.
Congratulations on a solid quarter. I just wanted to a couple of quick follow-ups to the series of first questions. The inventory in the channel situation that we talked about being in a multi-quarter situation. It sounded like in your implied guidance all segments down due to seasonality. Is the lion's share of all that excess inventory in communications worked through?
So the question is the, if the majority of the inventory that has --
Yes, the majority of the excess inventory in the channel works through following Q1.
Yes. So, no, we really don't have that detailed visibility. Again, we have ongoing communication here with our customers, who were --many of them also lack their own visibility. So, yes, so it's again --it's a mix between seasonality and inventory that needs to be burned off. And I wish I had the kind of complete understanding which of those two factors has a great effect in a given deal, given the week. But these are the two main factors that are -- that explain the variation here.
Right. And then just as we think about the communications business and the inventory correction. Is that broad-based or is that kind of historically your number, -- historically your one or two top customers inside of that end market?
Yes, no. It's definitely former. It's definitely rather broad-based. Just the way you stated it.
Okay, perfect. And then my last question is just a follow-up. Again, I know you guys have only been there a short period of time as a team, but do you have any idea besides day-to-day or quarter-to-quarter doing the business, when you may have an idea of coming back to analysts and investors with target gross margin and operating margin that you think the business can drive over time, if it's higher than what we're currently operating at?
Yes, so obviously we are -- I'm very, very happy with what I've seen here of how the company is being run. And as Kurt and I get more and more our hands engage, I think we will discover some opportunities. And we are obviously driving for margin expansion. At this point, we don't have a particular like one point goal in mind; I think it's more of a continuous process. And throughout 2020, I think we'll find some opportunities to update also some of you guys kind of what we see and what some of the opportunities are in the future. But I look at this as a continuous process to make this a better company, improve the quality of the business, so that we can execute, improve the margins, improve the cash flow, regardless of kind of the business environment that we are finding ourselves in.
End of Q&A
Great. Thank you. Thank you again for joining today's call. I think this wraps it up. We look forward to providing you an update on the business on our next earnings call. And thank you again for dialing in. And thank you for your support. Thank you so much. And have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.