Sanmina Corp (SANM) 2014 Q2 法說會逐字稿

At this time, I would like to welcome everyone to the Sanmina Second Quarter FY14 Earnings call.

(Operator instructions)

I will now turn the call over to Paige Bombino, Director of Investor Relations.

You may begin your conference.

Good afternoon, ladies and gentlemen, and welcome to Sanmina's Second Quarter FY14 Earnings call.

A copy of today's release is available on our website in the Investor Relations section. You can follow along with our prepared remarks in the slides posted on our website.

Please turn to page 2, the 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 of operations may differ significantly as a result of various factors, including the state of the global economy, economic conditions in the electronics industry, changes in customer requirements and sales volumes, competition and technological change.

We refer you to our quarterly and annual report filed with the Securities and Exchange Commission. These documents contain risk factors that could cause actual results to differ materially from our projections or forward-looking statements.

You will note in our press release and slides issued today that we have provided you with a statement of operations for the three months and six months ended March 29, 2014, 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 infrequent or unusual items to the extant material.

Any comments we make on this call, as they 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 Jure Sola, Chairman and Chief Executive Officer.

Thanks, Paige.

Good afternoon, ladies and gentlemen, and welcome. Thanks again for being here today.

With me on today's conference call is Bob Eulau, our CFO.

Good afternoon, everyone.

For agenda, we have that Bob will review our financial results for our second quarter. I will follow with the comments relative to Sanmina's results and future goals. Then Bob and I will open for question and answers.

And now, I would like to turn this call over to Bob.

Bob?

Okay. Thanks, Jure.

Please turn to slide 3.

Overall, the second quarter was better than expected, from both a revenue and a margin perspective. Revenue of $1.477 billion was up 2% on a sequential basis and up 3.4% from the second quarter last year.

Our gross margin came in at 8.2%, which was up 40 basis points from the first quarter and up 1.1 percentage points from the second quarter last year.

Operating margin increased 20 basis points from last quarter and 80 basis points from the second quarter last year, to 3.6%.

Non-GAAP earnings per share was $0.44, which was above the high end of our guidance for the quarter. This was based on 86.1 million shares outstanding on a fully-diluted basis.

Cash flow from operations was at $8.5 million this quarter. We repurchased about $19 million of our Common Stock in open market repurchases. I'll discuss the balance sheet in more detail in a few minutes.

Please turn to slide 4.

Revenue was up $30 million, or 2% from Q1, to $1.477 billion. From a GAAP perspective, we reported net income of approximately $21 million, which results in earnings per share of $0.24.

This was down relative to last quarter by $0.02. This decline was driven by a $7 million increase in GAAP taxes for the quarter. The increase in GAAP taxes was primarily due to an increase in pretax income, changes in the jurisdictional mix of where income was earned, and a decrease in the beneficial discrete tax event, such as the changes in Mexican tax law that we recorded in Q1.

The restructuring costs for Q2 were $2.6 million. Going forward, the restructuring costs we expect are associated with real estate we have on the market to be sold. We expect these costs to be around $2 million to $3 million again next quarter.

As of the end of March, we had about $75 million of real estate on the market at list price.

My remaining comments will focus on the non-GAAP financial results for the second quarter. At $121 million, gross profit was up $8 million from the prior quarter and up $19 million from Q2 of last year. Gross margin came in at 8.2%, which was 40 basis points higher than Q1.

This is the best quarterly gross margin that we've recorded since 2001. This was achieved with relatively modest revenue, and the best news is that there is still plenty of room for margin improvement. I'll discuss this more when we review the segment results.

Operating expenses were up $3.8 million for the quarter, at $67.8 million. This represents a 20-basis-point increase in operating expenses as a percent of revenue.

Operating expenses were higher than last quarter, primarily due to increased investment in research and development and increased accruals for incentive compensation. At $53.2 million, operating income increased by 9.3% from the prior quarter.

Operating margin was 3.6%, which was a 20-basis-point sequential increase.

Other expense, at $6.9 million, was up 20% from last quarter, primarily due to lower interest income, and down 32% from the second quarter last year, which was primarily driven by lower net interest expense.

The tax rate for the quarter was 17.2% of pretax income, which was what we had expected. The tax situation continues to be dynamic, with challenges in multiple jurisdictions.

On a non-GAAP basis, we earned $38.3 million in net income, or $0.44 per share. Earnings per share were up 9.3% from Q1 and up 49% from Q2 last year.

On slide 5, we're showing you some of our key non-GAAP P&L metrics.

Revenue was up $30 million from last quarter. Demand was good in the Medical Defense Industrial segment, which was more than enough to offset softness in other market segments. Compared to Q2 last year, total revenue up 3.4%, again driven by the Medical Defense Industrial segment.

Moving on to gross profit. Gross profit was up $8 million in Q2, while gross margin, at 8.2%, was the best it has been in over a decade. While volume and mix have varied in each quarter, we are pleased with the consistency of gross margin over the last year.

Our operating profit increased 9.3% from last quarter, to $53.2 million. This led to operating margin of 3.6%. This was up 20 basis points from last quarter, and it was up 80 basis points from Q2 last year.

Net interest expense was up $600,000 from last quarter, primarily due to lower interest income. And net interest expense was down $2.9 million from the second quarter last year to $7.3 million for the second quarter this year.

Please turn to slide 6, where we are providing more information on the segments that we report.

The Integrated Manufacturing Solutions segment represents printed circuit board assembly test, final system assembly and test, as well as direct order fulfillment. As you can see from the graph on the left, the IMF segment revenue was almost flat with last quarter, at $1.147 billion.

While our gross margin was down 10 basis points following the excellent mix we had last quarter, we are pleased with the improvement in this segment over the last year.

The second segment for us is Components, Products and Services.

Components include printed circuit board fabrication, backplane assemblies, cable assemblies, enclosures, precision machining, and plastic injection molding.

Products include computing and storage products, defense and aerospace products, memory and solid state drive modules, as well as optical and RF modules.

Services include design and engineering, as well as logistics and repair services.

In aggregate, the revenue for this segment was up 10.6% from Q1. As we expected, we saw a good increase in gross margin in the CPS segment, which was up 1.6 percentage points from the disappointing Q1 results. The improvement was driven primarily by the Components businesses.

Now I'll turn your attention to the balance sheet on slide 7.

Cash was $391 million this quarter, which was lower by $16 million. The decline was the net effect of several items, including $18.8 million, which was used to repurchase 1.1 million shares of our Common Stock at an average price per share of $16.77.

Inventory was up $8 million from Q1 to Q2. Accounts receivable increased by $36 million, primarily due to unfavorable linearity during the quarter. And accounts payable decreased by $8 million, primarily due to supplier terms.

Property, Plant and Equipment was down $16 million, based on depreciation and asset retirements. Other assets were down primarily due to a decline in deferred tax assets and a decline in the value of our interest rate swap.

From a liability standpoint, our 2019 debt is now callable, and we are evaluating several capital structure alternatives, which include maintaining our current structure. Our growth leverage is at 2.1, which provides us with flexibility in terms of what we do going forward.

Please turn to slide 8, where we will review our balance sheet metrics for the second quarter.

Cash was down $16 million from Q1. Cash flow from operations for the quarter was $8.5 million, and net capital expenditures for the quarter were $16.3 million. This led to negative free cash flow of $7.8 million.

We believe our free cash flow was unusually low this quarter, and that we will return to positive free cash flow next quarter, in spite of the growth that we have planned.

Inventory reduction and cash generation are an ongoing priority for our team. Inventory dollars were up $8 million from last quarter, at $800 million, while inventory turns were the same, at 6.8.

We're showing cash cycle days, which combines our cycle time for inventory, accounts receivable and accounts payable. Overall, cash cycle time increased from 47.3 days last quarter to 48.5 days this quarter.

This was the result of a decrease of 2.3 days in accounts payable days outstanding, which was not fully offset by 0.9 day reduction in accounts receivable, days sales outstanding and a 0.2 day decrease in days of inventory. When compared to Q2 last year, our cash cycle time has improved by 3.5 days.

In conclusion, return on invested capital was 13.1% for the quarter, which was up by 70 basis points from Q1.

Please turn to slide 9.

I'd now like to share with you our guidance for the third fiscal quarter of FY14.

Our view is that revenue will be in the range of $1.5 billion to $1.6 billion. We are using a bigger range this quarter, because we have significant business that will begin to ship in the second half of the quarter.

We expect that gross margin will be in the range of 7.8% to 8.2%. Operating expense should be $67 million to $69 million. This leads to an operating margin in the range of 3.4% to 3.8%.

We expect that other income and expense will be in the range of $7 million to $8 million. We expect the tax rate to be 17.2%, plus or minus a percentage point. And we expect our fully-diluted share count to be 86 million shares, plus or minus 0.5 million shares.

When you consider all this guidance, we believe that you will end up with earnings per share in the range of $0.45 to $0.49.

Finally, for your cash flow modeling, we expect that capital expenditures will be around $25 million, while depreciation and amortization will also be around $25 million.

Overall, we are pleased with our results in the first half of the fiscal year. We knew that we were going to have soft revenue; and our teams executed quite well, which is demonstrated in our gross margin.

We expect to see solid growth in the second half of the fiscal year, which should help us to continue to diversify our revenue base. Remained focused on driving growth, but it is imperative that we grow with the right kind of business.

At this point, I will turn the discussion back over to Jure for more comments on our target markets and our business strategy.

Thanks, Bob.

Ladies and gentlemen, I'd like to add a few comments about the business environment for the second quarter, focusing on short-term business environment and also what's happening for our June quarter. I'll also add a few more comments about outlook for the rest of the fiscal year 2014.

So now, let me recap second quarter, just to add a few more things to what Bob already said. I am pleased with the second-quarter results.

We continue to improve margins, continue to diversify our base of business and our customer base. And we continue to focus on quality of our customers, as quality of the growth remains our priority number one.

Sanmina customer relationships are continuing to expand, and Sanmina is well positioned with its key customers. And market opportunities for us are a lot more exciting as we look at the future.

Overall, good quarterly results, as we continue to build towards a better future.

Now please turn to slide 11.

Let me make some more comments about the second quarter revenue by end-markets. As you can tell, the top 10 customers were 49% of our revenue. And we had one customer at 10% plus of our revenue.

For communication networks, we're forecasting to be a bit slightly down, basically came 2.6% down. Overall demand during the quarter was stable. We had a few push-outs during the quarter. But we had a nice growth from new projects, and that helped the revenue.

We also have a well-balanced customer portfolio of market leaders in this segment, which should give us nice improvements the rest of FY14.

For Defense, Industrial and Medical, we forecasted nice growth, which we got, approximately 11%. It was driven by strong industrial growth.

Medical continues to also drive the growth through our new products. Defense was slightly down. We had a choppy demand, and we expect for Defense to continue to be choppy for the next couple quarters.

Computing and Storage, we did forecast to be flat. It was basically down 0.5% on a flat demand.

On the positive side, we continue to add new projects during the quarter for this segment. And we continue to invest in new projects.

For Multimedia, we were forecasting to be slightly down. And actually that was flat, down 0.5% on our overall stable demand. We continued to expand some good customers to diversify in this segment. We have some good projects in our pipeline, which will help us improve the revenue in the future.

Now please turn to slide 12.

Now let me talk to you about outlook for the third quarter by market segment.

Third-quarter outlook is looking better, as Bob mentioned. We are forecasting $1.5 billion to $1.6 billion; so it is nice growth quarter over quarter.

And also for second half of our year, we remain optimistic, driven by new programs ramping and demand is improving across our key customers. As we look at the third quarter, more details, we're forecasting communication networks revenue to be up for the quarter.

Basically, we have better demand, with a nice and stable improvements both in networking and wireless infrastructure.

Defense/Industrial/Medical, we're forecasting also revenue to be nicely up. Industrial is going to continue to give us a strong growth in the third quarter.

Also, we expect medical to continue to expand. We got some new programs and new customers that are driving the growth.

As I mentioned, Defense for third quarter, we are forecasting to be down short term. But we believe this is a good segment for us.

We got some fair amount technology. We continue to invest in new programs that we believe are going to drive the future demand. And, again, opportunities in Defense for us are promising.

Overall for Defense/Industrial/Medical, this segment, we believe for third quarter we have a good upside potential.

Computing and Storage, we forecasting revenue to be slightly up for the quarter. We expecting stable demand in this market segments, as some of these new programs are starting to ship in the third quarter. Also on a positive side, we continue to add new projects in this market segment as we continue to invest in the new programs.

For Multimedia, we're forecasting revenue to be flat quarter over quarter. Again, we expect stable demand. Good new opportunities will drive the growth in this segment in the future.

Now let me talk to you about sales bookings.

Bookings for second quarter, book-to-bill was positive. For third quarter, we remain encouraged by better customer forecasts. And we are expecting to improve sales bookings in the third quarter and should continue to improve for the rest of FY14, driven by better demand from our existing and new projects and additional new customers.

Overall, market opportunities remain attractive for us.

Now let me make a few comments regarding our growth strategy.

We continue to invest in opportunities that will drive sustainable and profitable growth, as Bob talked about. We are continuing to diversify our businesses.

We are focusing on the right customers, with strong long-term growth potential. We are investing in the right technologies that will drive future demand and better profitability.

We are investing in talent, technologies and new projects as we are providing more value to our customers. This is our competitive advantage, and it is working.

We also believe the revenue and profitability will continue to improve. And we still have lots of leverage in Sanmina's business model.

Please turn to slide number 13.

In summary, second quarter, we delivered a good result per our expectations. For third quarter, programs are ramping; and demand is improving.

We do have a strong customer base; and also it's growing, it's expanding. And for fiscal year second half, we remain very positive about our business opportunity. I think the key for us is to continue to deliver predictable and sustainable results going forward.

Ladies and gentlemen, now I would like to thank you all for your time and support.

Operator, we're now ready to open the lines for question and answers.

Thank you, again.

(Operator instructions)

Your first question is from Wamsi Mohan with Bank of America.

Hello, Wamsi.

Hi, Jure, hi, Bob. Can you talk a little bit about the strength you saw in the components business? How concentrated or diversified was that strength? It looks like the revenue levels were significantly higher, but the margins were still not quite at the levels that you saw two quarters ago. And I know you have a lot of moving pieces within the mix, so I'm just trying to isolate how widespread that strength was.

I would say it is well spread through our components and products. I would say components grew better. But overall, definitely, we're not where we want to be on our components and products, but things are moving in the right direction. We continue to really grow each of these businesses, from high technology printed circuit boards, mechanical. And then on the products, on the defense, storage, and our Sanmina global services.

So each of these units is making progress. Some have a higher demand than others, but we are satisfied where we are today. And most importantly, we like what the potential of these components, products and services that we have in front of us. But there is a lot more out there, hopefully, as long as the economy continues to be on our side.

Thanks.

Yes, I don't have a lot to add. I would say products and services were pretty consistent with -- in aggregate with what we saw before, and the improvement was fixing some of the mechanical issues. And then we also saw some improvement, as Jure said, in printed circuit boards and backplanes.

Okay. Thanks, Bob. And then as a quick follow-up, Jure, given the improving balance sheet and profitability across the MS players, are you expecting to see any industry consolidation here over the next few years? What are your thoughts on that? Thanks.

Let me make a comment to what we're doing. First of all, we're really focused what's in front of Sanmina here. We have a very exciting, how do I say, position. We brought Sanmina to a really good position now. We have a strong balance sheet. We improved our customer base. We really focused on quality of the customers. We added some really good customers in the last 12 months.

So where Sanmina is really more focused on growth, personally, we don't need to do anything crazy. We're going to continue to focus, adding some strategic projects, mainly driven by our customers' requirements, or partnering with our customers. So that is all I'm focused on. I'm not interested in anything else at this time.

Thanks, Jure.

Brian Alexander, Raymond James.

Yes, just a quick clarification on the guidance, Bob. Just curious why you narrowed the EPS range, despite widening the revenue range for the June quarter. I think you mentioned some significant business that will ship in the second half of the quarter as the reason for widening the revenue range. But wouldn't that impact earnings similarly? Or was there another reason for narrowing the EPS range? And could you elaborate on the magnitude of the business that you're referencing that could ship in the second half of the quarter?

Yes, I can't get too specific on the business. Obviously, if you look to the midpoint of the range, we're planning on pretty significant growth from Q2 to Q3. We think that -- everything is very dependent on mix. We are confident enough in the mix that we're likely to see that we felt that that was an appropriate EPS range. So there is not a lot to that.

And if I can add to it, we have a lot of new programs coming up in that mix itself.

Okay. And just a follow-up. So if we look at industrial, defense, medical, I think it's up over 30% year over year. I guess the first question is, how much of the strength in that business is coming from the new oil and gas customer that you talked about on the last call? And if the other segments are all still declining year-over-year, yet you sound more optimistic about each of the businesses going forward. And I'm wondering, specifically on communications, Jure, when do you think this optimism translates to revenue growth for that segment?

First of all, on communication, we expect to see a revenue growth in the third quarter, and we expect it to continue in the next quarter. I think for us, if you look at our customer base there, it's basically -- it's all leaders in communication side of the business. As you know, there is not too many customers in that segment. We're well positioned there in the new products, so we expect that to continue to move in the right direction.

Also, to make a comment on industrial, oil and gas, it's -- we just got into this business. We got a great customer there, and we expanding the customer base. That part of the business will continue to contribute to a lot more in the future. But we're really bullish on our industrial segment of our business.

Sorry, just to clarify, when you said communications will be up next quarter, I think you meant sequentially. You also mean year over year that you think communications will start growing?

(multiple speakers) To be honest with you, Brian, I'm only looking right now quarter over quarter.

Right. So any sense --

And my answer to you was a quarter over quarter.

So any sense when we might see a return to growth year over year for that business? Is that more next fiscal year? Or do you think you can get there by the fourth quarter?

I would expect -- let me put it this way. I would expect, unless things really change, that we will ship more in that segment the next four quarters than what we did in the last four quarters.

Okay. All right. Thank you very much.

Thanks, Brian.

Next question is from Sean Hannan with Needham and Company.

Yes, good evening. So I guess if I could pick on another segment for a moment here. You talked about expectations for computing, to see a little bit of an uptick this next coming quarter. So just trying to get a better understanding of what, perhaps, is driving that. I think that you had alluded to some new programs and wins there.

Don't know if there are any contributions, at this point, that start to layer in. Coming from, say, some of the Newisys business, or any other types of themes that could help to support that type of growth? If there is any color that you could provide there, that would be helpful.

Sean, as I said in my prepared statement, we are expecting the growth for a third quarter in our communication and storage. Definitely, we expect some nice improvements in our product that we deliver to our customer from our Newisys product alone. It is probably moving a little bit slower than we want it to, but we believe that we have a lot of projects there that would allow us to see some nice growth going forward. But overall, we believe in the market segment. We are working in the segment itself. We got some good programs, and so on.

But I think it is important to understand what Sanmina's strategy is. We really focusing on quality of the project itself. We can find lot of revenue. That's not an issue. For us, it's quality of the revenue.

And also, going after the project and customer that what we say sustainable growth, that will repeat itself for many years to come, as long as Sanmina does its own job. And that's why we have been diversifying into the project that requires more technology, requires that we bring a lot more value to these customers. That's really that we believe it is our competitive advantage.

I think we did a lot good things positioning the Company in the last two years. It's starting to pay off. But I still believe we are in a second inning. There is a lot of upside here. As long as we have economy that cooperates with us, I think Sanmina has a lot of leverage. So we're going to take small steps, but we have just got to make sure those are quality steps in the right direction.

Okay. And so it sounds like, that from a growth perspective, as you look to June quarter, and I would have to assume you folks typically see a seasonal uptick in September. And want to see if we can validate that at least theoretically, that that should be at least still be intact. New programs seem to be driving, certainly, a lot of this.

Wanted to understand then, separately, how you might characterize your capacity utilization today? If you folks feel you're properly outfitted with your existing facilities for the nature of program builds you expect for the year? Or if there are any material adjustments or capital investments you might need to make? Thanks.

First of all, I would say that a lot of our growth that is happening today, and even the next quarter, it will come from the key projects that we have been working with our existing customers, and new programs that we won in this year and last year. So those are starting to drive the -- some of the stability in our growth. But at the same time, we do believe that economy is starting to cooperate. We still have to be cautious there. And we have to go out there and make sure that we're working the right programs.

When it comes to capacity, first of all, based on space, we got plenty of capacity. We are -- so that is not an issue. We are in the midst of -- we've been upgrading our equipment with the latest technology. And if you come to Sanmina's factory, these are all state of art factories. So we have been investing for the future. So we are well positioned to grow.

At the same time, we have to spend smart. We don't -- it's -- this is a business that requires a lot of details. And -- but we are ready to invest more if we need to, to support the growth. But nothing unusual. We are forecasting the next coming quarter CapEx around $25 million. Bob, I think we're going to be staying around at $80 million, $100 million right now, unless we see a lot more growth coming in the future.

Okay. That's helpful. And just to back-check on the assumption around a September quarter that is still, I think, Jure, from the comments I'm hearing, that should still seasonally be up from a June period, correct?

We believe that economy will continue to improve, so based on that, I would expect it to move in the right direction. But a lot of our -- when we use the word positive and better, the rest of the fiscal year is based on the programs that we know that we have today, and based on the forecast that we see on those programs.

Okay. All right. Thank you.

So answer is yes, I guess.

Okay. (laughter) Thanks very much.

Thanks, Sean.

Jim Suva with Citi.

Thank you, and congratulations to you and your team there at Sanmina. Great profitability, and nice to see the growth. When you talked about a little bit more back-end loaded of the quarter, has something changed in the mix of the business? Because typically, I always envision that the business that you guys have in the mix is typically back-end of the quarter loaded, and now even more so.

And if the upside is from industrial, maybe I don't fully grasp the ramp of the program. Because normally, I think of industrial as being a little bit more predictable, rather than end of quarter rushes or rebates, like associated with storage or enterprise, or things like that.

Jim, you're talking about the third quarter here, right?

Correct.

Yes. So basically, some of the growth that would come in in the third quarter, second half, is really based on some of the new customers that we have and some of the new programs. So based on when these things are coming, the materials, and so on and so on, we believe fair amount of that will be shapeable end of the quarter. So, Bob, do you want to --

I agree with what Jure said. We have a significant new program that we've won that is coming on in the second half. And as you know, any time you bring on new programs, you're not 100% sure how it's going to play out. But (technical difficulty) a quarter, it will mean that we ship more at the end.

And that's industrial segment. Is that correct?

It is, yes.

And then once that program gets ramped, am I correct that it is more predictable? Or a lot more linear than some of the other traditional items that you guys have produced, say, for telecom or high-end computing?

Yes, we believe so.

Great. And then switching gears, my last question is on the storage side of things. I think you guys brought back Newisys a while ago, but yet some of the other storage companies out there, the main enterprise ones, are seeing some slow-down and challenges there.

Can you get us up to speed about how Newisys is progressing? And did you find a niche for it? Is it doing okay? Is it facing some more challenges that the other enterprise storage companies are seeing?

First of all, it is a challenging market. We are trying to, for -- with our product, we try to go up to the niche area, more high end, and where we can add a lot of value. So that's one. And then also, majority of our business still there is our traditional customers that we have in that, what we call computing and storage.

So -- and with us, we have been involved in a lot of new customers, lot of projects, and we are hoping that some of these things will start moving in the right direction. We are starting to see some of that in the third quarter, and we expect those to continue to move in the right direction through the rest of this fiscal year.

(multiple speakers) Okay. Thank you.

The one thing I would add is, it's -- obviously, we sell into enterprises, and we partner with enterprise OEMs. But the cloud environment is also very disruptive, and there are a number of customers in that arena who are interested in the kinds of products we have in Newisys. So I think there is still a lot of evaluation going on. Like Jure said, we're hopeful that we'll really start to get some points on the board there soon.

Okay. Congratulations to you and your team there at Sanmina.

Thanks, Jim.

Your next question is from Mark Delaney from Goldman Sachs.

Thanks very much for taking the question. (multiple speakers) How are you guys doing? I was hoping, first, you could help me better understand the organic revenue growth in the March quarter? So I know it was up about 2% quarter on quarter, about 3% year on year. What was that organically? So in other words, if we -- if you didn't have the benefit of the oil and the gas acquisition, what would have revenue growth been?

I would say majority of that is organic growth.

Okay.

Oil and gas is not a big impact. There is some there, but it is not a huge impact in the second quarter.

Okay. And then I'm hoping to better understand some of the comments you made about the new programs coming on in the back half? And I understand that there are some larger industrial programs that you're going to be shipping for, and that that could come on later in the June quarter.

You guys said it would be -- you think that is a more predictable business? Does that imply that this is a step function higher to a new level of revenue? Or you just have more visibility of when these things typically will be shipping?

First of all, it is a new program, so there is always fair amount of moving parts when you get involved in this, Mark. But we expect that after the third quarter, even as we enter into the fourth quarter, to be a very stable business, and it is incremental business, hopefully, for many years to come.

Okay. That's helpful. And then if I could just last -- ask one last question. Jure, in your prepared remarks, you mentioned there was push-outs in the comms business, but then you also benefited from some new programs that started to ship.

And so maybe you can just provide some more color on where you saw the push-outs, what the expectation are -- is for those going forward? And then elaborate a little bit more on what the strength was in some of the newer programs?

The push-outs in that comm section was rally based on a few of our customers that they push some of the demand out, the short term push-out. And then some of these newer programs that we have, mainly driven in our network and optical side and optical side, and LT type of programs, did better, and they helped out. But overall, I would say communication segment for us came per our expectation. There was really no major surprises there, one way or another.

Thank you very much.

Thank you.

Thanks, Mark.

Your next question is from Joe Wittine with Longbow Research.

Congrats on the quarter. Maybe, when you talk about the R&D increase, is there any strategy worth talking about? Where are you investing, which end markets, et cetera? And along with that, what is a go-forward run rate? Does it tick up higher from the second quarter?

First of all, Joe, we have been trying to diversify our segment of the businesses that we have. And the way to do that is really put some more R&D money, both in the technology and process -- system processes, and really the -- our own products that we have taken to the market. We expect that to be stable in our -- where it is today. Maybe up slightly in the next couple of quarters, but it's a part of our business model. As we diversify into more profitable businesses, I think it is the right thing to do. So that is one of the reasons that R&D went up a little bit. Bob?

Yes, we -- as you probably know, we do invest a fair amount of R&D in the product area. We have invested for many years in defense, and we have increased our investment in R&D and storage over the last few quarters. I think, for the remainder of the year, I don't see a lot of increase from here. You might even see it tick down a little bit. But we're going to continue to invest in R&D. We're very committed to the product platforms we're focused on.

Okay. So if anywhere, it is concentrated in storage and defense?

Those are the two biggest areas, yes.

Okay, got it. And then with regards to the balance sheet. Bob, can you, with the 2019s now on the table, can you just walk us through, theoretically, how you're looking at the -- how you're evaluating, I guess, debt versus equity at this point? And maybe along with that, what is the minimum cash balance you're willing to run with? It has been a while since we've had those discussions, right?

Yes, our focus is always looking on what is the net present value of any given transaction. We try and risk adjust that, of course. And so we're very analytical and very methodical in terms of what we do when we look at the capital structure. And of course, we're -- as I mentioned in the remarks, we're definitely looking at it right now.

In terms of cash levels, we don't have a specific target of cash. I can tell you we can run the Company at far lower cash balances than what we've shown in the last few quarters. We've been around $400 million for several quarters in a row, but it doesn't take that much cash to run the company.

Okay. Great. Thanks, and congrats on the sales and margin progress in components.

Thanks, Joe.

Osten Bernardez with Cross Research.

How are you?

Doing well, thank you. So it sounds as if some of the upside in the CPS segment this quarter -- in the second quarter came from demand that you saw within industrial and medical, perhaps. You can correct me if I'm wrong. But not necessarily from the recent oil and gas exploration assets that you acquired. So would you be able to elaborate, where you can, on the types of industrial products that -- programs that contributed to the gains there, and the upside that you saw during the quarter?

Yes. For CPS, let me also correct you there a little bit, Osten. Definitely, we had some help from oil and gas. But it's a new project for us. And any time you take a new project, there is a lot of, how do I say, moving parts you got to take care of. But I'm very happy with the progress we made.

The most important thing when we take a project like this is taking care of customer, making sure that we deliver what we made a commitment on and more, and we did a great job there. And we are excited about the future. But it did help us on the revenue, and especially on the revenue side.

But back to -- as we build up components, we build across all our markets, from telecommunication, industrial, medical, semiconductor, and so on, and so on. So as those markets move in the right direction, of course, there is a -- we get benefits on, let's say, on the component side of the business. The product itself, both in -- on a defense, was slightly down last quarter. Probably wasn't a huge impact for components and -- for, I should say, for components. But from a product side, it was overall still a good quarter.

So I would say, a solid quarter for CPS Group.

I think, we move in the right direction there. We have a lot more excited about the future. I think it is not going to happen overnight. The key for us there is that we can move this in a right direction. But the most important -- what we focus in on components [processor], it is a solid customer base that is going to be there for many years to come. So we believe we're well positioned there, and we'll continue to expand that business.

(multiple speakers) The only thing I might add is, I really view Q2 in that segment as a recovery from a disappointment in Q1. I think the aberration was more in Q1. I think Q2 is an okay quarter. It's not the best we have done with that segment. And like Jure said, it is not nearly as good as we think we can do with that segment.

That is helpful. And then following on with respect to the comments earlier on the defense segment. The -- what will it take for that to become a less choppy business? Is it a matter of budgetary constraints, or a willingness by some of your customers to increase their outsourcing (multiple speakers) conversations?

Osten, for us, I think it is the biggest issue, because we -- is government programs, because most of the stuff that we sell, the big project that we design and make, get sold directly to the government. So definitely, government budgets and programs affecting short-term choppiness. At the same time, the programs that we involved, and new programs that we have been investing, we believe they have a lot of -- let me put it this way -- a good future, so we continue to invest in those programs.

So we're still excited what we have. As you know, we sell there under SCI brand. We made a lot of positive things in the last 12 months. And we know that business will come back, especially the type of products that we are involved in.

Okay, I think the other thing that we expected, and it is beginning to happen, is with cost pressure on the prime contractors, we're seeing more opportunity on the IMS side and defense than we have seen in quite a while. So we have got a good pipeline there on the IMS side, and we are going to continue to invest on the product side. And we think we will be successful over the long term.

And then lastly from me, with respect to communications, can you highlight what type of linearity you're expecting for the fiscal third quarter? Do you -- are you expecting significant program revs in the second half of the quarter there as well? Or is it -- are you expecting a more linear quarter there?

My view is, communications will be fairly normal, in terms of the linearity within the quarter. I think what we've seen as a Company, as a pattern, in communications, tending to see a weaker first half and a stronger second half. And it's our belief that's what we'll see again this year.

Thank you very much.

Thanks, Osten.

Thank you.

Your next question is from Sherri Scribner with Deutsche Bank.

Thank you. I apologize for the background noise. Bob, I just wanted to ask about the gross margins. You guys have done a good job of improving the gross margins to about 8% now, and the midpoint of your guidance is for 8% gross margins. Do you see that as a sustainable level going forward, based on the new mix of business with more components? Thanks.

Thanks, Sherri. Yes, we definitely see that as a base from which we can build. If you look at the last four quarters, we had three quarters in a row of 7.8%. The most recent quarter was 8.2%. As you noted, we're guiding to a midpoint of 8% for next quarter. I really think that is more of a base level. And as we have more strength on the CPS segment, we really should be able to expand margins pretty significantly for the Company and that's a very integral part of our strategy.

Okay. And then thinking longer term about your different segments, obviously, communications has been challenged for a while. Computing and storage has been challenged. Do you see those as growing next year? Thanks.

Sherri, Jure here. And as I mentioned earlier, everything that we see today, we will expect those two markets to be stronger for us, unless this whole economy stop growing and everything falls off the cliff. That's -- but I made a comment earlier. I believe that the communications sector for us will be stronger the next four quarters than what we had in last four quarters. I think we are well positioned. We have a great portfolio of the leaders in that segment. And we expect, if that industry grows, Sanmina itself will grow in that segment.

On a computing and storage side, I think we have been investing a lot in our customer development side. Both from R&D point of view, I think we've got some good products to compete there, and again, very strong customer base. We also expect, at least next quarter and next couple of quarters, to grow. And we'll see where it goes from there.

Great. Thank you.

Thanks, Sherri.

(Operator instructions)

We have one more -- time for one more question, operator.

And our last question comes from Amit Daryanani with RBC Capital Markets.

Thanks a lot. Good afternoon, guys. Just a couple of questions. I guess first, Jure, you talked a couple of times about expectation that the communication segment should see year-over-year growth for the next four quarters. I'm just curious, is that comfort coming from better organic demand that you are seeing from your customers? Or are there new ramps that give you that confidence?

I don't know if -- I would say I'm neither -- I'm not an expert to exactly know what is going to happen from overall demand. What I'm talking about, if I look at the projects that we are involved in, and the customers that we are working in, we expect definitely next quarter to be up. And we expect the fourth quarter to be also moving in the right direction. But based on an economical demand and what I'm getting from my customer, I said I believe the next four quarters will be better than the last four quarters.

Got it.

But it's really new project that we are involved in.

Fair enough. And then I guess if I just look at the gross margin guidance that you guys have of about 8%, it implies down about 20 basis points sequentially. I'm curious, where are you seeing that headwind? Is it more on the component side? Or on the individual manufacturing solution, where you think gross margins could inch lower in the June quarter?

We're actually being cautious in terms of the mix in both segments. We've enjoyed, I think, very good mix on the IMS side the last two quarters, and hopefully, we'll be able to sustain that. But we have to be careful there. And then -- so on the components products and services, we've got to be cautious. So we feel comfortable with that range of gross margin. It is very consistent with where we have been for the last year, and we're going to do everything we can to do even better than that.

And we believe we're positioned to continue to move in the right direction with regards to the margin. I think it is all driven by, I think, our new strategy, our new businesses. We are a different company than two years ago or even a year ago. So you have to look at Sanmina's opportunity and potential a little bit different than in the past.

Fair enough. And then just finally for me, the industrial ramp, and that's the one big ramp that you guys will have in the back half of calendar 2014, does that start to kick in in the June quarter, and then more meaningfully in the back half? Or is that something that goes live on September quarter, per se?

It will start in the June quarter, and should be continued to be pretty solid business for us for many years to come.

Perfect. Thanks a lot. And best of luck, guys.

All right. Thanks.

Ladies and gentlemen, I got one more comment before I let you go. Paige just reminded me that -- and I want to remind you that Sanmina will be hosting an investor and analyst day in New York May 6, which is next Tuesday. Two weeks from today, I'm sorry. Thanks, Paige. We have a great event planned, and we are hope you will be able to join us. For those that want to attend this meeting, please contact Paige Bombino for additional details. Her number is 408-964-3610. We're looking forward to seeing you there.

Otherwise, if you have more questions regarding our quarter, please give us a call. We're here to answer any questions that you might have. Again, thank you very much for your support.

Yes, thanks, everyone. Hopefully, we'll see you in a couple weeks.

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