Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina Corporation's First Quarter Fiscal Year 2018 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator instructions]. Thank you. Miss Paige Bombino, Vice President of Investor Relations, you may begin your conference.

Thank you, Rob. Good afternoon, ladies and gentlemen, and welcome to Sanmina's first quarter and fiscal year 2018 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 the call today is Bob Eulau, Chief Executive Officer.

Hello everyone.

And Dave Anderson, Chief Financial Officer.

Hello, everyone.

Following their prepared remarks, we will open the call up for questions. Let me remind you 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. 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, operational or other inefficiencies, risks arising from our international operations, competition that could cause us to lose sales, reliance on a relatively small number of customers for majority of our sales and other factors set forth in the company's annual and quarterly financial filings 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 operation for the three months ending December 30, 2017, 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 certain other infrequent or unusual items to the extant material. Any comments we make on this call as it 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 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 Dave Anderson.

Thanks, Paige. Please turn to Slide three. Overall, as Bob mentioned during our pre-earnings call last Monday, we are extremely disappointed with our first quarter results. Revenue was challenged late in the quarter by cancellation and push outs, primarily in the communication segment. Revenue ended the quarter at $1.74 billion, down 0.6% from Q1 and up 1.4% from the first quarter of last year. From a GAAP perspective, we reported a net loss of $154.9 million, which resulted in a loss per share of $2.60 for the first quarter. This was down compared to last quarter by $2.49 per share. This resulted largely from a non-cash tax charge of $2.27 per share that was driven by the enactment in December of 2017 of the US Tax Cuts and Jobs Act, otherwise known as the Tax Act. The $2.16 loss per share was also impacted by restructuring costs of $0.33 per share that related primarily to our recently announced consolidated restructuring plan. I will discuss the impact of the Tax Act and our consolidated restructuring plan in more detail in a few minutes. My remaining comments will focus on our non-GAAP financials for the first quarter. At $112.5 million, gross profit was down $13.9 million from the prior quarter. Gross margin came in at 6.4%, which was 80 basis points lower than we reported in Q4. Operating expenses were flat with the previous quarter at $65 million or 3.7% of revenue. At $47.5 million, operating income decreased by 22.4% from the prior quarter and 33.8% from Q1 of last year. Operating margin was 2.7%, which was down 80 basis points from last quarter. Other income and expense of $3 million was basically flat when compared with last quarter and down approximately $1 million from the first quarter of last year. The…

Thanks, Dave. Good afternoon everyone. As we announced last week, our short term results are disappointing. We are confident these are short term challenges and the second half of fiscal 2018 will be significantly better. Please turn to slide 13 as I would now like to provide a few additional comments on our end markets for the first quarter. Industrial, medical and defense was 46% of our revenue, or $796 million, up 4.9% sequentially and up 2.3% from the first quarter last year, driven by broad based growth, with each segment up quarter over quarter. This was in line with our expectations for the quarter. Communications Networks was 39% of revenue or $679 million, down 4.9% sequentially and up 5.6% from the same period a year ago. Our Communication segment continues to be impacted by softness in the wireless area as a result of the transition from 4G to 5G. Optical products represent over 40% of our communications revenue, and in aggregate, those customers were down about the same percentage as communications overall. We have new programs in the optical area and we continue to work with our customers to get their products into production. I mentioned last quarter that 400 gigabit products are now shipping. While revenue is still small, this area is growing. The communications market continues to be an important market for us as we focus on leading edge technology with our customers. Embedded Computing and Storage was 15% of revenue or $270 million. This segment was down 4.4% sequentially and down 9.9% year over year. This segment missed our expectations. While automotive as a segment was up for the quarter, it was up less than we expected as new programs are ramping slower than anticipated. This is an exciting and growing market and we are well…

[Operator instructions]. And your first question comes from the line of Sean Hannan from Needham. Your line is open.

Yes, thanks. Good evening folks. So Bob, I was looking to see if now that we've conveyed the conviction again around a stronger expectation for the second half of the year, is there a way if you can elaborate on where we're going to see that strength come through in terms of new programs in your segments on a relative basis? I'm sure you'll probably have some degree of broad based set of ramps, but I'm sure it doesn't work out all perfectly. So any characterization would be helpful.

Yes, Sean. I mean one of the frustrations is we actually have a number of new wins across multiple markets. So when look in Industrial, Medical and Defense, we actually have new programs coming on in each of those areas in the second half. So we feel good about that. As I mentioned, on the Communication side, we have program ramps, both in the traditional networking as well as on the optical side. And then I mentioned automotive as well, which has been a good area for us and we expect to get even stronger in the second half. So it's not just one particular vertical where we're seeing a lot of opportunity in the second half. So it's a matter of working our way through these ramps, getting the yields up and getting the cost structure in place, and I think we'll see a nice second half.

Okay. And then on the automotive front, just to clarify and then I've got a follow up question. Where is it specifically that you folks are focusing within automotive in terms of the new programs that you're bringing on or that you're starting to ramp?

Yes. We’ve traditionally been very strong in infotainment and that continues to be a source of strength. And now we're getting into other subsystems in vehicles, like chronic subsystems within traditional cars as well as in electronic vehicles. It’s - again, I'd say we're diversifying within the automotive market as well, although infotainment is probably still the biggest piece the next few quarters.

Okay, that's helpful. And then last question here, jump back in the queue. So oil and gas was an issue you called out for the quarter. I mean that precision tuning that you’ve been doing there has not really been delivering huge numbers for a while now. So I'm just trying to understand how that’s been kind of ebbing and flowing and why it was specifically called out. I'm not sure if I really comprehend that, and how do we think about kind of a comeback or recovery relevant to that piece of your business. Thanks.

Sure. Yes, I'd say in general, we view oil and gas as sort of bumping along the bottom right now. It’s - as you know, we focus on the long term and we think eventually it will be a good market for us, but in the short term we’ve had a lot of challenges in terms of both customer demand, as well as our own profitability. So it's a matter again of making sure we have the right cost structure in place in the oil and gas arena, like a couple of other areas in the company. In terms of how the market's going, I mean we are seeing some signs of life. Our engineering business was up on the oil and gas side last quarter, and we're hoping that’s a little bit of a early indicator. But again, it's still pretty small and we're seeing order rates get a little bit better in oil and gas. I think this year will be better than last year. But we're - to be honest, it's still a challenge and we've got a lot of work to do to improve our profitability there.

Okay. Thanks, folks. I’ll follow up more offline.

Your next question comes from the line of Ruplu Bhattacharya from Bank of America Merrill Lynch. Your line is open.

Thanks for taking my question. Just first question on the communications side. I think you said that for fiscal 2Q, you're still seeing some softness in wireless. Does that imply that the networking part and the optical part is back to the normal level that you would have seen? And you've had good growth in optical over the last couple of years. How should we think about the growth rate in optical based on new programs that you have, when you look out let’s say over the next year or two years. Do you think the growth rate in optical maintains or does it get stronger or weaker? How should we think about the growth rate there?

Okay. Yes. A couple of questions in there. First, in terms of communications overall, I would say seasonally this first calendar quarter usually is a bit soft, and that's what we're seeing again. We are seeing as I mentioned, some program transitions on the networking and on the optical side, and I think that will continue to occur over the next three quarters probably. So I think comm will get better in the second half of the year. From an optical standpoint, it's actually the second quarter in a row where we saw sequential decrease in optical revenue, and that's obviously a disappointment coming off a couple, probably even longer, probably three years of really solid growth on the optical side. We think sequentially optical will probably start to get better even in the next quarter, but we definitely think that we'll see optical stronger in the second half of the year.

Okay. that's actually quite helpful. Maybe for my second question, if you can help us kind of bridge the gross margin improvement between 1Q and 2Q. I think you mentioned like a 40 basis point improvement in gross margins sequentially. I was trying to understand, I mean what is driving that? Is that - and how should we think about the improvement? I mean is it more on the CPS side or the IMS side? If you can give us any color that would be great.

Well, I think Ruplu, what we mentioned was that the improvement would be in the 20 to 60 basis point range from Q1 to Q2. And we don't specifically call it all out, but we would - we are seeing that in the CPS, there's some improvement there on a quarter over quarter basis that we're seeing and some slight improvement as well in the IMS piece, even though as Bob mentioned, we - on the IMS piece, we have the impact - bigger impact of the seasonality of the communications segment. So we’re expecting that on the margins quarter over quarter, as we start to find some of these savings that we're looking at and the optimization of our cost structure, that they will start to take effect, not fully in Q2 but some level of it. I don’t know, Bob, if you want to add anything to that.

No, I think that's a good summary I mean and we're making - I might add, we're making the margin improvement with pretty significant revenue headwind. So we’re - as Dave said, we're addressing the cost structure. We are - we do expect some of the programs to move up and absorb more overhead and we are taking a lot of actions to try and improve the business short term while not sacrificing the opportunities we have in the second half.

Okay. Thanks for that. And then just my last question, I think you had mentioned some weakness in fiscal 1Q in automotive. Any color on that? Was it any region specific or was it program specific? And is that weakness now gone in fiscal 2Q and do you expect strength in automotive in fiscal 2Q?

Yes. I think what I said was that automotive was in Q1, although not up as much as we anticipated. So we definitely are still seeing growth, even in a disappointing quarter from an automotive standpoint. We are absolutely expecting growth in the second quarter and we expect more growth in automotive as we move through the course of the year.

Okay. Thanks for taking the questions. Appreciate it.

Your next question comes from the line of Jim Suva from Citi. Your line is open.

Thanks very much. One question is, on the earnings for share guidance, it looks like the range is closer to $010 and then previously it looks like it was like five to six range. Is that due to the underutilization you have or lower visibility or the recent disappointment? I’m just trying to figure out why the bigger range.

Well, I think the reason why we put a wider range is it's also tied into the wider range that we have on the revenue is a $1.6 billion to $1.7 billion. We’re basically including here, taking into account the - our ability to get through the constraints we’ve had on our revenue. And so that's why we put a wider range on this.

Okay. Then my second and follow up question would be, you mentioned in your press release and your prepared comments about an improvement in sales in the second half of the year. Can you help us understand about that improvement? Is it fiscal year, like second half of the fiscal year compared to the first half of the fiscal year, or are you talking calendar year? Are you talking like year over year for Q3 and Q4?

Yes. So Jim, this is Bob. So yes, the reference was really to our fiscal year. So as I mentioned, it's been a challenging first half of the fiscal year, and we're doing everything possible to improve the situation here in the second quarter. And then we definitely expect the second half of the fiscal year to be stronger than the first.

Okay, thank you very much and thanks for the additional details.

Yes, thanks, Jim. So we have time for one more question.

Your next question comes from the line of Mitch Steves from RBC Capital. Your line is open.

Hey guys. Thanks for taking my question. One, and then just one small nuance. So basically for the Optical segment, that's 40% of the Communications business. How much of that is China Optical?

Well, we don't know exactly where our customers are shipping product. So we build product in multiple places in the world. We’ve got a very good optical footprint and pretty diverse actually geographically. And we don't know exactly where the customers are shipping those products. So it's a question I probably can't answer.

Okay, got it. And then just one small nuance. For the share count, you said $75 million plus or minus half a million?

Yes. We said 75 million plus or minus half a million.

Okay. That assumes no share repurchases, correct?

Correct.

Okay. Perfect. Thank you.

All right. Thanks, Mitch, and thanks again everyone. We really appreciate your time and look forward to talking to you next quarter. Thank you.

This concludes today's conference call. You may now disconnect.