Ladies and gentlemen, thank you for standing by and welcome to the Sanmina Corporation's First Quarter Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [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 first 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 jump into the results for the quarter, 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 the future events or 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 projections in these statements as a result of 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 to and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in this earnings release, their 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. You'll note in our press release and slides issued today that we have provided you with statements of operations for the quarter ended January 2, 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, 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, and welcome and thank you all for being here with us today. We are off to a good start for the fiscal year 2021. Despite the challenges around COVID-19 and component shortages, we delivered a strong result for the first quarter fiscal year 2021. Our industry is operating in a challenging environments and it looks like COVID will be with us for a while. I can tell you that I'm proud of our leadership team and our employees for managing through it and supporting needs of our customers. For agenda today we have is that Kurt, our CFO, will review the details of our financial results with you and I will follow up with additional comments about Sanmina's results and future goals. Then Kurt and I will be open for question-and-answers. And now I'll turn this call over to Kurt. Kurt?

Thanks, Jure. Please turn to Slide 6. In the first quarter, we posted strong financial performance, including cash generation, despite the challenges and uncertainty associated with COVID and the macroeconomic environment. Q1 revenue of $1.76 billion exceeded the midpoint of our outlook of $1.7 billion to $1.8 billion. Revenue grew sequentially after adjusting for the fact that Q1 had 13 weeks while Q4 FY 2020 had 14 weeks. Q1 non-GAAP gross margin was 8.3%, the third consecutive quarter above 8%. Q1 non-GAAP operating margin was 5%, the second consecutive quarter of 5% or greater. Q1 non-GAAP other expenses were $2.9 million, $2.7 million lower relative to Q4. This was primarily due to a lower interest expense as the company paid off the balance of its revolver in the last month of Q4 and $3.3 million gain compared to $2.5 million in Q4 related to deferred compensation assets as the result of the appreciation in the stock market. As a reminder, gains or losses related to deferred compensation assets have no net impact on earnings per share. Finally, Q1 non-GAAP fully diluted earnings per share of $1.02 exceeded our outlook of $0.75 to $0.85. This was primarily as the result of management's focuses on driving and better mix. This was the second consecutive quarter that non-GAAP EPS exceeded $1 per share. Now please turn to Slide 7. This slide shows the quarterly trends of our financial results. You can see the benefit of the operating efficiencies and better mix that the company has been able to drive despite the challenges associated with COVID. Revenue grew sequentially for the third consecutive quarter after adjusting for the fact that Q4 FY 2020 had 14 weeks compared to 13 weeks in Q1, Q2, Q3 of FY 2020 and Q1 of FY 2021. As I…

Thank you, Kurt. Ladies and gentlemen, let me tell you more about business environment for the first quarter and outlook for second quarter and the rest of the fiscal year 2021. Just to add few more highlights for the first quarter, as you heard from Kurt, Sanmina delivered strong financial results for the first quarter, most important we delivered consistent and predictable results. Our performance in the quarter is a testament that our strategy is working. Primary focus for management was on the four key things that drives our success. Number one, safety of our employees; number two, customer satisfaction; number three, driving efficiencies and creating better mix, and, of course, delivering a free cash flow. During the first quarter, we expanded our leadership in strategic customers by delivering mission critical products, technologies, and services in the key markets that we serve. Again in a summary, we are off to a good start for fiscal year 2021. Please turn to Slide 14. Let me give you highlights of revenue for the first quarter by end markets. As you can see overall we had a stable demand for our first quarter. And if you compare it to our four quarter, this is a normal quarter of 13 weeks, where in the fourth quarter we had 14 weeks. So from that point of view, we're slightly actually up over the last quarter. Communications networks and cloud infrastructure delivered 41% of our revenue; industrial, medical, defense, automotive 59%. Top 10 customers were 58.1% of our revenue. In the quarter, we had some component shortages, but it was manageable. Pipeline of new opportunities continue to be strong. Please turn to Slide 15. Let's talk now about revenue outlook by market segments for the second quarter. Sanmina is well-established in the right markets, mission-critical, high…

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

Thanks for taking my questions. I have a couple for Jure and then a couple for Kurt if I may. Jure, you had expected stable demand for the first quarter. More or less when I look at the communications networks and the cloud infrastructure segment, it was down a little bit. So can you help us parse through what happened? Like maybe just talk a little bit about what you saw in optical versus networking? And last quarter you had said there were some push outs in cloud. So did those come in? So just trying to understand what was strong? What was a little bit weaker in the quarter?

Yes. Ruplu, again thanks for all your support. Number one, yes, optical for us, auto was good, and networking was good. We had some – few push outs, based on some components that we couldn't get. But overall I would say it was a stable slightly down if you compare it to the last quarter. But again, remember last quarter, where, in fourth quarter of last year, we had 14 weeks, but in this quarter we only had 13 weeks. So you kind of have to look at it that way. When it comes to the cloud computing, yes, we're starting to see some improvements mainly based on some of the new programs that we won in last six months.

Got it. And then just a follow-up to that Jure, with respect to the 5G and mobile projects that you have; are they coming in as you had expected or are they coming in faster or slower? Just your thoughts on the 5G roll out?

Yes. First of all 5G, I would say they come in and based on what our feeling was based on our customer inputs. As I said earlier, I think we're starting to see improvements in that, and we expect longer term. If you look at the forecast that we've seen from our customers and some of the other new projects that we're working on, we expect to a demand on that to go up.

Got it. And then Kurt, if I can ask you, just to get some more clarity around the operating margin performance, both in 1Q and your guide for 2Q? I think you had guided 1Q operating margin to be 4.3% at the midpoint. And even despite an extra week in the fourth quarter, I mean, revenues were down $120 million, but you still have 5% operating margin performance. So, if you can talk about what were some of the factors that helped you maintain above 5% operating margin? And then when we look at your guidance for 2Q, I mean, it's at $1.7 billion at the mid-point to another $50 million lower, but I think you're guiding, like if I heard this correctly 4.4%. So what is driving that 60 basis points, lower operating margin for 2Q? So if you can just help us frame the operating margin performance in one queue, as well as the guide for 2Q?

Sure, Ruplu. So first, we'll talk a little bit about Q1, again relatively Q4, I mean the gross margin was about the same. But the fact was we were able to control OpEx significantly in the quarter, especially when you compare it to Q4, which Q4, which had 14 weeks, or we did get some benefit this quarter for the holiday shutdown, which we typically have. So I think, given the lower revenues, it was really about controlling operating costs that allowed us to still come in at a 5% operating margin. So it was a lot of discipline around that. As we look to Q2, I think as Jure mentioned, first of all there's a lot of uncertainty, not only around COVID, but also around component shortages. So we've got to be conservative as it relates to that. It is a seasonal laid down quarter, so revenue will be down and that will, slightly impact gross margin. And if you look at our gross margin at range, relative to where we were last quarter, it is down a little bit at the midpoint. And again operating expenses are going to be slightly up. As I mentioned on down revenue, and as I mentioned in the script it's really three things. It's no holiday shut down, which you typically save some money there. It's the annual, the resetting of the employer portion of the payroll tax. And then finally if there's any annual salary adjustments that kicked in at the beginning of the calendar year, we tend to see it there. So those are the – those are the gives and takes, obviously, we're always trying to improve on our performance and we'll continue to push it towards the upper end. But I think it's prudent to think about things conservatively, given the uncertainty around COVID and the uncertainty around the component supply chain.

Got it. And then for my last question, if you – you've talked about component shortages; can you just talk a little bit; give us your thoughts on working capital days? I mean, how do you think inventory trends? I think your inventory was down quarter-on-quarter, but you talked about some component shortages. So do you think you expect to build inventory? And any thoughts on free cash flow for the year that would be appreciated? Thanks.

Sure. So I think inventory was down relative to Q4 and Q1 for two reasons, obviously. When revenue goes down, inventory goes down, and again revenue went down mainly because of the 14 weeks in Q4 versus the 13 weeks. But I think we were also able to improve turns. I'd say we're very focused on the turns. Turns this quarter were 7.7. We're very happy with that although certainly we're never satisfied. As you think about inventory in particular in Q2, I think obviously we're trying to improve turns at the same time it is challenging when you have potential component shortages and there is always a risk of bringing in 99% of the inventory and missing the one key parts and not being able to get the product on. So, I'd say, I think our goal is certainly to keep inventory relatively flat. Given that dynamic, we always try to improve, but I think that dynamic makes it maybe a little bit harder than it would normally be. But certainly in terms of generating free cash flow, I think we've shown over the last many quarters now that we're generating consistent free cash flow and certainly expect to continue to do that in the future. So, I think, our balance sheet will only continue to get stronger.

And Ruplu if I can add to that, I think, yes, there's a fair amount of moving parts when it comes to just a supply chain. We're already planning around that, but there are still challenges. We expect to have a good quarter. I mean, today we feel better about this quarter than 90 days ago. So, as Kurt said, there's a lot of tune-up to be done as we continue to do this and we expect to deliver a good results.

Okay. Thank Jure. Thanks for all the details. Appreciate it. Thank you.

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

Hello, Jim.

Good afternoon to you and your team. A question you gave some commentary around the component shortages, which are becoming pretty well known. First of all, were your sales constrained by any of it in this quarter or the outlook?

Well, as I said that there were some shortages that to me it was manageable. There were a few orders that were pushed out. I think if you look at this quarter, just like any other quarter, except in this quarter we've seen more. We already – it's part of our outlook. Definitely, we have certain projects that are going to be pushed out just – but we're hoping that we're going to get what we need, Jim. But it's going to – I mean the whole industry, you have a lot of demand from automotive. You have a lot of demand from 5G coming up, the phones and so on. And that's really creating some shortage, especially in a custom ASICs and things like that.

And then my last question is on the component shortages, where you sit today, is it kind of getting – you mentioned demand is getting better and visibility better from 30, 60, 90 days ago. And is the component shortages getting stable or worse or better from 30, 60, 90 days ago?

I would say it's not getting better. I think 90 days ago, some of these things we thought they were going to get pushed out. I would say in the last maybe 30, 40 days, we're starting to see more of that. We're right now we have to go out in some components that are six months out.

Got it. Thank you so much for the clarifications. It's greatly appreciated.

Thanks, Jim.

Thanks, Jim.

Operator, we have time for one more call.

Thank you, sir. Your next question comes from the line of Christian Schwab with Craig-Hallum Capital.

Hello, Christian.

Hi, guys. You had a good quarter. So I mean the supply chain component shortages, is it your out – can you kind of talk to your different this is where the lead times for those types of products are stressed out the furthest. I know a bunch of custom ASICs and networking certainly are and even low end power. I mean, MCUs, it seems I guess – but as you look at your business, who – is there – could you rate the top three that are going to be the most challenging?

I think for us, I would say, custom ASICs, some of the components for 5G and automotive, those will be probably more challenging, but you already mentioned, and it's ASIC, MCUs, MPUs things like that. But I think it's been driven by that industry, automotive, 5G, and then some costumer networking product. But again we're used to this. We're working very close with our key suppliers. Sanmina has a great supply chain team. Our customers, we have the top customers in the world. So we're working together with that and we will hope to be able to navigate it through this and be able to deliver the numbers that we just told you. Christian, did I lose you?

I do believe he disconnected.

Okay. All right. Well maybe Christian, if you don't hit us, please give us a call and we can catch up.

But ladies and gentlemen, I want to say thank you for your time, looking forward talking to you 90 days from now and one key thing to our business. It's a fun business. We're still having fun and we expect to work hard and deliver some respectable numbers in the next quarter. So with that, thank you very much.

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