Sanmina Corp (SANM) 2015 Q2 法說會逐字稿

Good afternoon. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sanmina Corporation's second-quarter FY15 earnings conference call.

(Operator Instructions)

Thank you. Paige Bombino, Vice President of Investor Relations, you may begin your conference.

Thank you, John. Good afternoon, ladies and gentlemen, and welcome to Sanmina's second-quarter FY15 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 the website.

Please turn to 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 volume, competition, and technological change.

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

You will notice in our press release, and the slides issued today, that we have provided you with the statements of operations for the three and six months ending March 28, 2015, 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 extent 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, we will be referring to our 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. Thank you all for being here today. With me on today's conference call is Bob Eulau, our CFO.

Hello, everyone.

For agenda we have is that Bob will review our financial results for the second quarter, and I will follow up with additional comments relative to Sanmina's results and future goals. Then, Bob and I will open for questions and answers. And now I will turn this call over to Bob.

Bob?

Okay. Thanks, Jure.

Please turn to slide 3. Overall, the second quarter was below our expectations. Non-GAAP revenue of $1.53 billion was down 8.6% on a sequential basis, but up 3.4% from the second-quarter last year. Non-GAAP earnings per share was $0.50, which was at the low end of our guidance for the quarter. This was based on 86.9 million shares outstanding on a fully diluted basis.

One bright spot for the quarter was our cash flow from operations, which was $70 million. This is up $76 million from the first quarter. During the quarter, we used $21.6 million to repurchase approximately 1 million shares of common stock. We have $103 million in remaining authorizations to repurchase common stock. I will discuss cash in more detail in a few minutes.

Please turn to slide 4. From a GAAP perspective, revenue was down 8.6% or $143 million from Q1, to $1.528 billion. We reported net income of $14.7 million, which resulted in diluted earnings per share of $0.17 for the second quarter. This was down relative to last quarter by $0.09.

During the quarter, we resolved several foreign tax issues, which resulted in a net charge of approximately $10 million, including adjustments for related interest expense and foreign exchange. The largest and most unfavorable of these items relates to 2006. We do not currently anticipate other material discrete tax events in the near future.

The restructuring costs for Q2 were $1.7 million. These costs were associated with the real estate that we have on the market to be sold. We expect these costs to be in the range of $2 million to $3 million next quarter.

Currently, we have about $55 million in real estate on the market at list price. During the quarter, we sold one building with net proceeds of $5.8 million.

My remaining comments will focus on the non-GAAP financials for the second quarter of FY15. At $117.2 million, gross profit was down $15 million from the prior quarter. Gross margin came in at 7.7%, which was down 20 basis points from Q1. Both gross profit and gross margin were negatively impacted by the lower revenue in Q2.

Operating expenses were down $3.5 million for the quarter, at $60.6 million. This represents a 20-basis-point increase in operating expenses as a percent of revenue compared to Q1. Spending was down this quarter, primarily due to lower accruals for incentive compensation.

At $56.6 million, operating income decreased by 17.2% from the prior quarter, but increased 6.4% from Q2 last year. Operating margin was 3.7%, which was a 40-basis-point sequential decrease. Other income and expense at $6.3 million was up 25% when compared with the last quarter, and down 9% from the second-quarter last year.

The tax rate for the quarter was 13.7% of pre-tax income, which was lower than we had expected. This decrease was driven by a shift in the mix of profitability to lower tax rate jurisdictions.

On a non-GAAP basis, we earned $43.4 million in net income, or $0.50 per share. Earnings per share were down $0.11 from Q1, and up $0.06 from Q2 last year.

On slide 5, we are showing you some of our key non-GAAP P&L metrics. Revenue was down $143 million, or 8.6%, from last quarter. Compared to Q2 last year, total revenue was up $51 million or 3.4%. Revenue was down sequentially across all market segments.

On a year-over-year basis, there was a substantial increase in our industrial, medical and defense segments, which continues to be a very good segment for us, and is helping us diversify our revenue base. This segment became our largest segment at 39.5% of revenue for the quarter.

Moving on to gross profit: Gross margin was lower in Q2, primarily due to the [loss] contribution on lower revenue than Q1. Gross profit was down $15 million from Q1, and down $3.7 million when compared to Q2 last year. Our operating income decreased 17.2% when compared to a strong first quarter. This led to $56.6 million in operating income, and operating margin of 3.7%.

Net interest expense was down $200,000 to $5.9 million for Q2 when compared to Q1, and down $1.4 million when compared to Q2 last year. Over the last few years, our net interest expense declined considerably as we reduced our debt. At this point, we expect to see interest expense continuing at roughly the level of Q2.

Please turn to slide 6. We are providing more information on the segments that we report. As you can see from the graph on the left, the integrated manufacturing solutions segment was down $148 million, or 10.8%, from last quarter. The decline in revenue led to a 60-basis-point decrease in IMS gross margin from Q1.

The second segment for us is components, products and services. In aggregate, the revenue for this segment was down $11 million, or 3.2%, with gross margin up 1.4 percentage points to 10.4%. This gross margin improvement reflects flat profitability in the components area, and improved profitability in the product and services businesses.

Now I would like to turn your attention to the balance sheet on slide 7. Our cash and cash equivalents were $408 million. Cash was up $17 million from the previous quarter. Accounts receivable were down $51 million, and inventory was down $50 million. These declines were primarily driven by the lower revenue level we had in Q2. Property, plant and equipment was down $12 million for the quarter.

From a liability standpoint, the major change was the $65-million reduction in accounts payable. This change is also primarily caused by the lower revenue for the quarter.

From a debt perspective, as of the end of the quarter, we have $427 million in long-term debt. At the end of the quarter, our gross leverage on total debt was approximately 1.4. Overall, our capital structure continues to be excellent, and the best it has been in 13 years.

Please turn to slide 8, where we will review our balance sheet metrics. Cash was up $17 million from Q1. We're very comfortable with our cash at $408 million. The cash levels were higher than normal in Q3 and Q4 of last year, as we were completing the debt refinancing.

Cash flow from operations for the quarter was $70 million, and net capital expenditures for the quarter were $17 million. This led to $53 million in free cash flow for the quarter. We expect to have positive free cash flow during the remainder of the fiscal year.

Inventory levels were a disappointment in the second quarter. Inventory dollars were down $50 million from last quarter at $858 million, while the inventory turns were down to 6.4. It is clear that we did not reduce material purchases quickly enough to reflect the lower revenue level. Compared to Q2 last year, inventory turns were also down [0.4] turns, but inventory dollars were up $58 million as a result of higher revenue.

In the lower-left quadrant, we are showing cash cycle days, which combines our cycle time for inventory and accounts receivable, and accounts payable. Overall, the cash cycle time increased from 40.1 days last quarter to 45.2 days. This change was driven by the 3.7-day increase in inventory, and a 3.2-day increase in days sales outstanding. This increase was partially offset by a 2-day increase in accounts payable days outstanding.

Overall, cash cycle time continues to be respectable. In conclusion, return on invested capital decreased to 14.1% for the quarter, which was okay, but not where we want it to be, or where it was over the last three quarters.

Please turn to slide 9. I would now like to share with you our guidance for the third quarter of FY15. Our view is that revenue will be in the range of $1.5 billion to $1.55 billion. We expect that gross margin will be in the range of 7.6% to 8.0%.

Operating expense should be $61 million to $63 million. This leads to an operating margin in the range of 3.5% to 3.9%. We expect that other income and expense will be in the range of $6 million to $7 million, and we expect the tax rate to be around 15%. And we expect our fully diluted share count to be around 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 $0.48 to $0.52.

For your cash flow modeling, we expect capital expenditures to be unusually large for Q3 at around $50 million. This is caused by an anticipated purchase of a building in June. The purchase of this building allows us to vacate leased space, and reduce operating expenses going forward. Finally, depreciation and amortization will be around $25 million for the quarter.

Overall, while Q2 was a disappointment, particularly from a revenue standpoint, our profitability and cash generation were respectable. We will continue to diversify our revenue base to position ourselves solidly for the future. Growth continues to be our number-one objective, but it is imperative that we grow with the right kind of profitable 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, again, welcome. What I would like to do is review our business environment for the second quarter, and also outlook for the rest of the calendar-year 2015. So, let me recap second quarter of FY15, and also make a few comments for calendar-year 2015. For the second quarter, we expected demand to be seasonally slower, but revenue in the quarter was a lot softer than forecasted, driven by weakness in our communication networks, and softer demand across all other market segments, with a lot of movements in forecast and order push-outs during the quarter.

Let me also give you year-to-year -- year-to-date comparisons. Revenue grew approximately 9% for the six months of FY15, and EPS grew by 31%. But overall, softer demand in the first half of calendar-year 2015 -- and we believe that is a short-term scenario, and we see better demand in the second half of calendar-year 2015.

Now please turn to slide 11. Second-quarter revenue by end markets: We continue to diversify revenue by end markets and customers. We also continued to add new customers in the quarter. Top 10 customers represented 49.6% of our revenue.

For communication networks, that was 39% of our revenue. We did forecast that segment to be down, but it was more down than our forecast -- down 13.2%. We believe we have an inventory correction in the market segment. We had some push-outs, and end customer, basically, a softer demand during the quarter, driven mainly by wireless segment.

Industrial, medical and defense -- we did forecast that to be flat for the quarter, but, again, that came down 5.9%. Industrial, medical and defense -- we basically had overall softer demand. For the year, that segment grew actually 20%, up to year to date. Embedded computing and storage was down 4.4%. Automotive was strong, and other segments were a lot softer.

Now please turn to slide 12. Let me talk to you about the revenue outlook by market segments for the third quarter. For the third quarter, we see continued headwind in our communications network segment. We forecast the communication networks to be down.

Basically, forecasting is still challenging, but we believe it is a short-term scenario, as we expect markets to stabilize in the second half of calendar-year 2015, and we also expect revenue growth in this segment in second half of the year. In this market, we're well positioned, and we are expanding into new projects.

Industrial, medical and defense, we're forecasting to be up for the quarter. For industrial, most of our segment is stable, except oil and gas segment. For this segment, we see continued weakness. For medical, we expect nice growth during the quarter. For defense, we're forecasting to be flat, but gradually improving. But in total, opportunities in pipeline still continues to be good in this segment.

For embedded computing and storage, for the quarter we're forecasting to be flat. We expect to see gradual improvements in the quarter, and we are continuing to diversify in this segment, and we also have a nice expanding customer base. Overall, a good pipeline.

Now let me make a few more comments about business environment, and revenue growth for the second half of calendar-year 2015. Short term, business environment has been more challenging, weakness in demand, and forecasts are difficult. Again, we believe this is a short-term scenario. More customers are working down inventory, and we see some push-outs in orders to the second half of calendar-year 2015. Most of our customers are still optimistic about the rest of the calendar-year 2015.

Book-to-bill for the second quarter was flat, and we are expecting a stronger bookings in our third quarter, and continued improvement in the second half of calendar-year 2015. I believe this is very important and very positive for us. We do expect stronger revenue growth from existing customer in second half of calendar-year 2015, and also growth from new projects, new customers that we won and expect to win in the near future.

Now let me make a few more comments about operations, and how we are positioned in our industry. Operationally, the Company is executing really well. Efficiencies are up and improving. Our quality results continue to be leading in our industries, and customer satisfaction is high.

We are continuing to build strong Sanmina, and we are well positioned for the future. We continue to build solid partnerships with our customer base, and we are investing in technologies and providing industry-leading solutions for our customers to drive better profitable future.

As I mentioned, we continue to add new customers. This looks exciting, as we are diversifying our customer base. We are focused on driving quality of the growth, which remains our number-one priority.

Now please turn to slide 13. In summary, second quarter, again, we operate in a challenging environment, broad-based weakness across our end markets. For third quarter, we're forecasting, as Bob mentioned, revenue flat sequentially, but a continued headwind in the communication networks. But we do expect growth in industrial, medical and defense, and we'll continue to diversify our end markets. And we expect also to continue to generate positive cash flow.

For the second half of calendar-year 2015, we expect overall better demand in our focused market segments than the first half. And as always, we continue to invest in talent, technologies, and providing a value to our customers to drive the growth.

Ladies and gentlemen, now I would like to thank you all for your time and support. And, operator, we're now ready to open the lines for questions and answers. Thank you again. Operator?

Certainly.

(Operator Instructions)

And our first question comes from the line of Mark Delaney from Goldman Sachs.

Hello, Mark.

Good afternoon. Thanks for taking the questions.

The first question is on the industrial defense medical segment. I understand the guidance for the June quarters, for that business to be up. Maybe you can help us understand what's giving you guys the confidence to guide that segment up?

And then, to what extent you're factoring in some potential softness? And just the industrial macro data points, just given some of the [ISMs] have been lower, and some core industrial companies have missed their revenue forecasts recently?

Yes. Well, Mark, first of all, we really grew this business nicely, if you look at just the year-over-year, this is up 20% year-to-date. We will diversify in industrial, medical, and defense.

And we have some pretty good pipeline in that segment that we've been qualified. It's really more now just driving the growth and getting these new programs to start shipping. So we feel positive.

The only major weakness that we have, and we're very excited about this industry, two-, three-quarters ago, is oil and gas. Oil and gas section for us will continue to be weak. We don't know how long, but definitely more than two quarters. In the meantime, we still believe in that business long-term.

We are going to continue to work on expanding a customer base there, but we have a major impact in the short-term. But overall, again on industrial, medical, and defense, we feel comfortable. Actually on the defense side of the business as I say, we're gradually improving. We've got some good new programs that we won, so we should see a nice growth.

And again, in that business, we want to expand that revenue in that business long-term. I think it's a good time, as we still believe that defense longer-term will be a good business for us. So overall, it's a good segment for us, Mark.

Okay. That's helpful.

And then, on the communications business, could you just elaborate a little bit more about what caused the weakness, either in terms of geographies or types of applications? And then, if any of that was related to your market share loss?

Well, I think for us -- first of all, we believe the biggest impact that we have in the communication network is some inventory correction, that that's basically what we're hearing from our customer. Some push-outs from the second quarter, and even from the third quarter, customers are still optimistic about demand. They will think they have it for a year, especially as we enter the September and December quarter.

Overall, we're very stable in that business. We're in a lot of new programs. As I mentioned earlier, Mark, biggest impact was there for us in the wireless.

And I would say that is probably globally. We supply that product in all regions of the world. So it's really hard for me to tell you exactly what it is, but I would say it's more global.

Okay. Appreciate that. And just last one from me, and I'll turn it over.

Could you just give us a sense for how much exposure Sanmina has to -- excuse me, Alcatel and Nokia? And then, just how this proposed deal could potentially impact the Company? And maybe if could you provide us or remind us about how the Company was impacted in the past, when Nokia and Siemens and Alcatel and Lucent had merged, and what sort of effect that had on Sanmina?

First of all, we have a long relationship with both of these companies, well over 20 years with each. We have a very strong relationship at every level in each of these companies. We're executing well.

Most of the product that we do for both of these companies, there's not a lot of overlap. So, i would say it's hard to predict the future, but the way I see things today, neutral to positive.

I believe as these two companies merge together, they will create a stronger company. I believe there's a positive opportunity for Sanmina.

If you look at the historical, it goes back all the way when Alcatel Lucent merged together, we had a positive result. And, of course, when Nokia and Siemens put these two companies together, we had a positive result. So I feel comfortable, but really that's all I can make a comment on right now, Mark.

Thank you very much.

And our next question comes from the line of Brian Alexander from Raymond James.

Yes, Jure, just to follow-up on that.

Hello, Brian.

Hey, Jure, hi, Bob.

Just any insights into what you think is driving the inventory correction at some of your communications customers, and how broad-based that is? I mean, their demand hasn't really been that strong. And if anything, maybe it will get better from here.

I'm just wondering why is there an inventory correction now? And do you think any of that relates to the merger that was just talked about, perhaps preparing for some integration activities? And then, I just have a follow-up.

Yes. Well, first of all on a merger, I can't make a comment on it, because I don't know much about it, [that] impact of inventory or not, Brian. But overall, what we really saw as we dig into that, there were a few quarters ago, there were some shortages for some of the critical components in this industry, and I think there was a little bit more buildup to catch up. And I think we kind of -- our end -- I should say, our customers are working that out a little bit. So we see that being cleaned up, hopefully this quarter.

And but at the same time, I think we had a softer demand across the board on some of the key programs that we're involved in. And we are -- the good thing, we are involved in the new technology in all of these programs. So we think it's a short-term scenario in this segment, and we are -- at least what we're hearing from the customer, we think the second half of the calendar year will be -- will get better for us in this segment.

Okay. And then, just maybe big picture question with the Alcatel and Nokia merger and some consolidation occurring amongst some of your suppliers on the component side. How does that change your thinking about the need for the EMS sector to consolidate, if at all?

I mean, the world around you is consolidating. Does that change your view on whether you need to be more acquisitive, or perhaps you need to be consolidating? Thanks.

Well, I think for us, I think our strategy is that I think, we need to continue to be more focused, and focused on things that we're good at. Sanmina, for example, is this segment is well-positioned.

I think we have one of the best solutions in our industry to service these customers. As you know, this customer base is becoming smaller. So I think our customers are looking for specialists.

We have proven ourselves with the long-term relationship we had with all these key customers for 20 plus years. I think we're, from an execution point of view, and type of supply chain, which includes technology, quality, flexibility that we provide today is very, very high. So from that point of view, we'll get -- I think we'll feel fine.

As I said earlier, I think this latest merger to us will be worst case neutral, but we feel it's positive because it creates a stronger customer going forward. And I think Sanmina is well-positioned to really compete whatever happens.

Okay. Thank you very much.

Thanks, Brian.

And our next question comes from the line of Sean Hannan from Needham & Company.

Hello, Sean.

Hey, folks, can you hear me?

Yes, we can, Sean.

Okay, great. So just want to see if I could dig into the EMS side a little bit. So I sort of understand some the dynamics, in terms of quarter-to-quarter, and how that kind of flowed through there in terms of margins.

But if we look at the business, you were up revenues year-over-year. The margins though, were down.

Can you provide us with a little bit more detail or color on what's really moved around there from the mix standpoint? Because I think intuitively, as I consider a higher piece, or contribution coming from these nontraditional segments such as industrial, medical, et cetera, that should I think typically be a little bit more helpful on the margin front. So any color would be great? Thanks.

Well, let me -- Sean, add a few comments, and I'll turn it over to Bob. Number one, you're right, our industrial, medical, defense business, and some of the services that go around it, including the products and -- are more profitable.

Overall, I mean, yes, our revenue was down substantially, if you look at it quarter-over-quarter. And I would say operationally, we're able to adjust and still deliver respectable results. Not that we are happy with, but the respectable results in environment when we had a weak demand.

The most important, what it showed me is that Sanmina has a lot of flexibility to adjust up and down. And even in this third quarter, we continue to tune up and hopefully improve the bottom line. And most importantly position us as hopefully as we think it will happen, that September, December will be a stronger quarters and will allow us to execute better.

So we've been tuning up our global operations. We're operating in an environment where market changes fast. And I think what we went through in the last two, three years, I think we prepared the Company to adjust to the environment that we face today.

So I would give my operational team a lot of -- how do I say -- a lot of credit for be able to create that flexibility, and be able to execute pretty well in this environment. So Bob?

Yes. I don't know that I have a lot to add. We haven't done a lot of analysis versus a year ago. I mean, most of our focus has been on the sequential change, and really the drop in gross profit is directly correlated with the revenue decline that we saw. We just lost the contribution margin on that revenue.

So I don't have a quick answer on how that compares in terms of mix from a year ago. But the classic answer is, it's some difference in mix.

Okay. All right, and I will probably follow up with a little bit of that off-line. Let me see if I can shift then.

In terms of the expectations for the back end of the fiscal year, I think you have already provided a little bit of color around that for where the confidence is. Could I perhaps get a little bit more detail, or some of us get a little bit more detail around what helps to drive that?

Are we thinking top line, and to the extent that we see mix having a margin impact beyond the benefit of just revenue leverage? Or what are some of the puts and takes, as we think about the optimistic points, as you consider the back end of this calendar year? Thanks.

Well, Sean, first of all, again, let me take the first part. Number one, I personally believe that as we continue to improve the mix that we can -- even at this revenue, I think there's a potential to improve the margin, some of the things that we are doing. We do also have a fair amount of new opportunities, customers that we won, the projects that we won, that will help us as these go out.

And number three, I think we have a very good pipeline of opportunities that we are going to be working on, in the last year, that I believe is going to benefit us in the second half, especially second half of the calendar year. At the same time as I mentioned earlier, we think overall we do expect a better demand, especially from communication network side, in the second half of the calendar year. So adding all those two together, should give us a better opportunity to improve the financial results (multiple speakers).

Yes, I really don't know. I don't have much to add. I mean, we get forecasts in from our customers, and they're never exactly right. But I think directionally they're typically pretty good, and it looks like the second half will be better.

Okay. And I just want to make sure I understand this correctly, because earlier I heard stabilization for the back end of the calendar year within com. And I think what I just heard from Jure, is it sounds like there would be relative second half growth versus first half. Did I hear that correctly?

And then, it sounds like the majority of where the remaining optimism would be, is that there is a strong backlog of new program ramps? Is that -- have I heard this correctly?

Yes, you heard it on the new program opportunities that we have, that's correct. And let me make sure that I -- that make sure that I say it correctly, when it comes to the net communication network. Based on our customer forecasts, we expect the market to stabilize and improve in the second half of the calendar year. That is true.

But again, it's a customer-driven scenario. I just want to make sure that -- but with all the other stuff, we still think we can make some improvements, and we make an improvements to help us to deliver better results. So as you -- put all these things in a bucket, I think opportunity is there.

All right. Thanks very much for taking my questions.

Thanks, Sean.

And our next question comes from the line of Joe Wittine from Longbow Research.

Hello, Joe.

Hey, guys. Going back to coms. So if we assume a 2% sequential down tick in the fiscal third coming up here, I know you've said down sequentially, you will be down on a year-over-year basis, kind of mid-teens. So I understand, it obviously is a down year for global wireless deployments, but you are lagging the industry on the customers certainly.

So can you go into any further of -- as far as what is driving that, especially when you say you are winning a lot of business, I think in coms too. So just further details to why you're trailing the customers would be helpful?

Well, I think in the short-term, we think it's the -- as I've talked to some of my customers they say, Jure, we're not losing market share, it's just that we -- it's a more normal environment, and we have some inventory to work out. So I believe it's inventory-driven, and some of the slower -- how do I say, softer demand from some of our customers.

When I talk about the new programs, I think of our existing customers or the new customers, we are participating in new programs that will help to drive their future demand, and expanding the customers into telecom industry that we didn't have it before.

I guess it will be the fourth year that coms is down on a year-over-year basis. So has there anything changed as far as the amount of business that you're winning, being enough to offset the typical program end-of-life? Or are we kind of still at the similar win rates that Sanmina has generated in the last few years?

Well, we did forecast year-over-year growth at the beginning of the year on this segment, and we work very close with our customers on this. And there is unfortunately, right now we see more softness than what we saw let's say, 90 days ago, and we'll see how things shake out. In the next 30 days to 90 days, I think we'll have a lot better picture, Joe, at that time.

But again, we are well-positioned in this market. I think we are -- providing the right value, and we are involved in a new program. So based on that, we are still optimistic on this segment.

And maybe finally here, why not be a little bit more sober on the tone, Jure? The last few quarters you've come on, and kind of -- reported a book-to-bill that's flat. I think, that's the tone every quarter, but here we are with sales kind of off 9% sequentially.

So the implication there, is customers aren't ultimately ordering what they're initial booking with you. So again, we're kind of faced with an optimistic back half scenario. Why come out, and say we're really confident in the back half uptick, and we're confident in the customer forecasts again?

Well, first of all, I think you really kind of need to see, Joe, what I just said. I said, based on our customer forecasts, and based on what they're telling us, the second half of the calendar year is, they're more optimistic on their demand. And that's all we can tell you.

That's basically what we share, and we don't control what they're going to take. But I can tell that you that we are well-positioned with these key customers. And, of course, in this type of business, you've got to execute every day, and we've been executing well. I think it's all demand-driven.

Okay. Thanks for taking the question.

Joe, just to put it in some context, on a year-to-date basis, com is only down 2%. So it's disappointing. We're disappointed that it's down. But again, the indication is that things will get better.

Thanks, Joe.

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

Thank you so much, to you and your team there at Sanmina. A quick question.

You gave a lot of commentary around communications improving in the second half of the year. I assume you are referring about sequentially quarter-over-quarter, like the second half of the year compared to the first half.

So maybe we could shift the comparison a little more to year-over-year. Or maybe it's not relevant, because typically I think of the winter months and springs people aren't digging and putting in as much infrastructure say, the summer and fall, and budget flushes, and getting things installed before the year end. Is that the way to think of it? And if so, can you help us more with year-over0year versus say, first half versus second half?

Okay. First of all, Jim, December -- I should say January, March, and February was definitely slower in communication networks than what we anticipated, let's say what it was going to be 90 days ago, when we reported it for this number. That softness continued into April, May, and June now. So we expect, based on what we're hearing from our customers, that we're going to have a better second calendar year, which will be a September and December quarter.

But if you strictly compare to, how do I say, fiscal year, year-over-year as Bob mentioned, if you look at the first six months, we're down a little bit, and we'll see how things shake up this quarter and next quarter. But overall, what we're hearing from our customers, we're not losing -- how do I say -- orders. It's basically some inventory correction, and we're going back to the normalized demand. And I'm talking mainly on the wireless side of the business, Jim.

Great. And do you expect the second half of the year to be up from the second half of last year or more stable?

It's hard to predict, I mean, what is -- how things are going to shake out. I mean, we're going to take one quarter at a time. But I would say today, if I compare a second half of the calendar year now going forward, I think we'll be a little bit better than the first half.

Great. And then my last question is on a different topic.

In this environment of kind of slower growth, do you look at M&A a little bit more? I know did you some acquisitions in the past on the industrial and oil side of things. Do you look at acquisitions a little bit more than maybe you would have say, in a growth environment?

Yes, Jim, we've been really focused on growth. Let me just -- our biggest issue today if you will look at Sanmina, we fixed a lot of things in the last couple of years. Now it's all about getting more growth, and we have been talking about quality of the growth. It's easy to get the growth, but what type of quality of the growth were you going to get?

We believe that we have some good opportunities that will help this year. We added -- we've been investing a lot in driving the new technology, the business development people. We added a fair amount there. We got some good opportunities in the pipeline. So organically, I think we're well-positioned.

At the same strategically, we're looking at the different deals that would make business sense for us to do this. But definitely, our main focus right now is profitable growth.

All right. Thank you so much to you and your team there at Sanmina.

Thanks, Jim.

Our next question comes from the line of Osten Bernardez from Cross Research.

Hello, Osten.

Hey, good afternoon. Thanks for taking my questions.

Just to begin, I wanted know if -- just to dig a little bit deeper on the guidance. Can you -- when you are looking at your H2 outlook, how dependent are you on new programs versus -- excuse me -- for the calendar second half, how dependent are you on new programs versus better market demand? And are you counting on any programs that you have yet to win for the optimistic view that you have for the second half?

No, I -- well, you don't -- first of all, you don't plan on an order that you didn't win. I think we -- first of all, we have some good programs, as I mentioned earlier, industrial, medical, and defense that we're able to diversify the customer base in the last 12 months. So we have some of those programs to help us.

Same thing in embedded computing and storage. We've got some new customers that we got qualified, and that's really what we are counting on. Now, at the same time, we are positioned to win some programs, but we are not putting those at the forecast at this time.

Got it. And then with respect to your [IPM] programs do you -- that you see offsetting the com weakness in the third quarter, what type of programs specifically are you counting on?

Osten, could you repeat the last question?

Yes. What type of IBM programs do you expect to offset (multiple speakers) industrial, defense, and medical (multiple speakers)--

Okay, okay (multiple speakers).

Excuse me, sorry, to offset the communications weakness that you still see for the third quarter?

We grew that business nicely last year, as you know. I mean, if you compare it year-over-year, or you should say year-to-date nicely, we have a strong customer base in both -- in all these three programs, especially in the industrial. The only weak area that we are, the industrial side that we're experiencing that we had high hopes was the oil and gas.

And oil and gas contributed to us a fair amount in the last 12 months. It's the area -- it's not going to be contributing a lot, at least for the next few quarters. Just the nature of the business.

But we still believe in that customer base. We still believe in the industry long-term. So we're not giving up on it. We continue to find a way to expand the customer base. But in the short-term forecast on that are very low.

The rest of the customers we expect that to grow, because of our expansion in that side of the customer base. As you can see, that their percentage is going to go up, grow to 39%, and we expect the percentage to continue to move in the right direction.

Got it. Thank you very much.

Thanks. Operator, we have time for one more question.

Certainly. And our last question comes from the line of Amit Daryanani from RBC Capital Markets.

Hello, Amit.

Hi. How are you guys doing? I'm glad I sneaked in. Couple of questions.

I guess, Jure, you have seen this com cycle happen several times before. In your assessment, do you think two quarters is a reasonable time frame for a recovery to happen, or it could be two quarters of down tick, then flatness, then you see an uptick in growth?

Yes, Amit, I think -- you know how this goes. For us, to be able to predict the market 100% is impossible. We've gathered the data from our customers, which is very detailed data, and they share a lot of information with us that we can't talk about. But we see it.

So assuming that those forecasts are correct, we believe the second half of the calendar year 2015 will be better than what we saw -- or what we're seeing right now in the first half of this calendar year. So that's really what we based on it. At the same time, we're looking at what programs are involved, what the future of these new programs.

So I'm more optimistic, first of all, our customer base today in the com is smaller. But it's healthier than let's say, in the lifecycle. So I feel the more -- and the market is completely different. So I think the market is stable. Yes, there is some ups and downs, but overall I think this market will be fine.

Got it. I know a few questions asked on the Alcatel and Nokia transaction. I'm curious, it has been [told] -- one of your peers potentially buying manufacturing sites as part of that transaction, is that something you guys would ever consider to look at, doing OEM asset acquisitions? Or is that more likely off the table for you guys?

Well, no, we did some acquisitions like that in the last couple of years. I think it all depends on the opportunity. Does that opportunity fit to us, does it make business sense?

We still have a few customers, they are doing some internal manufacturing. Yes, and some of those we are interested in.

Thank you.

Thanks, Amit.

Thanks.

Well, ladies and gentlemen, that's all we have for today. If there is any more questions, please give us a call. Otherwise, thank you very much, and we'll be talking in the next 90 days.

Yes. Thanks, everyone.

Bye-bye.

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