Benchmark Electronics Q3 2024 Earnings Call Transcript

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October 30, 2024

Key Takeaways

  • Benchmark exceeded Q3 guidance with revenue of $658 million (above midpoint) and non-GAAP EPS of $0.57 (at the high end of the range).
  • End-market softness weighed on Industrial (–2%), Medical (–28%) and Advanced Computing & Communications (–27%), partially offset by Semi Cap (+13%) and Aerospace & Defense (+2%).
  • Non-GAAP operating margin reached 5.3%—marking 16 consecutive quarters of year-over-year expansion—and Q3 free cash flow was $29 million, with $245 million generated over the past 12 months.
  • Working capital initiatives delivered a year-over-year inventory reduction of over $140 million, debt was reduced by $11 million and cash balance rose to $324 million.
  • For Q4, the company guides revenue of $640–680 million, non-GAAP EPS of $0.53–0.59 and stable gross margin at 10.2%, reflecting a cautious outlook amid mixed demand trends.
AI Generated. May Contain Errors.
Earnings Conference Call
Benchmark Electronics Q3 2024
00:00 / 00:00

There are 7 speakers on the call.

Operator

Please note this call may be recorded and I will be standing by if you should need any assistance. It is now my pleasure to turn the conference over to Mr.

Operator

Paul Mansky, Benchmark Investor Relations. Please go ahead, sir.

Speaker 1

Thank you, Jess, and thanks everyone for joining us today for Benchmark's Q3 fiscal year 2024 earnings call. Joining me this afternoon are Jeff Bank, CEO and President Brian Shoemaker, our CFO and Arvind Kamal, VP of Finance. After the market closed today, we issued an earnings release pertaining to our financial performance for the Q3 of 2024, and we have prepared a presentation that we will reference on this call. Both are available online under the Investor Relations section of our website atbench.com. This call is being webcast live and a replay will be available online following the call.

Speaker 1

The company has provided a reconciliation of our GAAP to non GAAP measures in the earnings release as well as in the appendix to the presentation. Please take a moment to review the forward looking statements disclosure on Slide 2 in the presentation. During our call, we will discuss forward looking information. As a reminder, any of today's remarks, which are not statements of historical fact, are forward looking statements, which involve risks and uncertainties as described in our press releases and SEC filings. Actual results may differ materially from these statements.

Speaker 1

Benchmark undertakes no obligation to update any forward looking statements. For today's call, Jeff will start with an overview of the quarter, followed by an introduction to Brian, our new CFO. Arvind will then detail our Q3 results and Brian will provide Q4 guidance. As usual, we will conclude with Jeff sharing more insight into demand trends by sector, new business wins and some final remarks. If you'll please turn to Slide 3, I'll turn the call over to our CEO, Jeff Bank.

Speaker 2

Thank you, Paul. Good afternoon and thanks to everyone for joining today's call. The Q3 was another successful milestone for the company where we exceeded the midpoint of our guidance for revenue, margin and non GAAP EPS. Let me step through a few highlights. Total revenue of $658,000,000 was above the midpoint of our guidance range provided in July.

Speaker 2

We are pleased with the year over year growth in Aerospace and Defense and Semi Cap, the latter being well into the double digits. As anticipated, this was offset by declines in industrial, medical and advanced computing and communications. While demand over the last few quarters has certainly stabilized, we continue to see end market softness in several sectors weighing on our opportunity to grow revenue year over year. 3rd quarter non GAAP gross margin of 10.2% marked the 4th quarter in a row of 10% or better margin performance. I'm particularly thrilled to share non GAAP operating margin of 5.3% represents the 16th consecutive quarter of year over year operating margin expansion.

Speaker 2

This performance coupled with our revenue achievement enabled us to deliver $0.57 in non GAAP earnings per share in the quarter, which was at the higher end of our guidance. We continue to execute on our working capital initiatives led by inventory management, which enabled us to deliver $29,000,000 in free cash flow in the quarter, bringing our trailing 12 month total to 245,000,000 dollars I would now like to pass the call over to Brian, who has only been on the job a few weeks, but I'm already confident he will make a significant impact as we continue to drive our strategy forward. With that, Brian, over to you.

Speaker 3

Thank you, Jeff, and thank you to everyone for joining the call. Today marks my 3rd week at Benchmark. During this brief time, I've already come to further appreciate the customer first culture, the depth and quality of the team and the incredible opportunity in front of us driving significant shareholder value. As I consider joining Benchmark, it was clear the company has done a great job of focusing on high value sectors while maintaining operational discipline over the last several years. Looking forward, it is equally clear the EMS industry is entering a structural multiyear growth cycle regardless of any near term macro headwinds.

Speaker 3

I think Benchmark is uniquely positioned to capitalize

Speaker 4

on this

Speaker 3

And I'm thrilled to be a part of this of it as we seek to maximize our opportunity both operationally and as a trusted partner to our customers. With that, I'd like to turn the call over to Arvind for a review of our September financial results.

Speaker 4

Thank you, Brian, and good afternoon. Please turn to Slide 4 for our revenue by market sector. As Jeff mentioned, our total revenue in Q3 was 658,000,000 dollars Semi cap revenue increased 13% year over year supported by improving demand and new customer wins. Industrial revenue decreased 2%. The decline was driven by reduced demand from existing customers, partially offset by new program ramps.

Speaker 4

Medical revenue was down 28% versus the prior year. We continue to see inventory rebalancing and end demand weakness primarily impacting medical devices. A and D revenue was up 2%. Commercial aerospace demand remained strong, both within aviation and space applications. Meanwhile, we continue to see robust demand within defense, where we are benefiting from existing program ramps and the launch of new programs.

Speaker 4

AC and C decreased 27% year over year. This decline was driven by several large HPC programs being completed earlier in the year, coupled with continued weakness in our communications business. Please turn to Slide 5. Our GAAP earnings per share for the quarter was $0.42 Our non GAAP EPS was $0.57 which was at the high end of our guidance range of $0.52 to $0.58 As a reminder, our non GAAP results exclude stock based compensation, amortization of intangible assets and restructuring expenses. For Q3, our non GAAP gross margin was 10.2%.

Speaker 4

This represents a 50 basis point increase year over year. Non GAAP SG and A expense was $32,300,000 down 4% sequentially and flat year over year. Non GAAP operating margin was 5.3%, up 20 basis points sequentially and up 10 basis points year over year, driven by gross margin expansion. Our 3rd quarter non GAAP effective tax rate was 23.7%. Non GAAP ROIC in the 3rd quarter was 9.9%.

Speaker 4

Please turn to Slide 6 for trended financials on a non GAAP basis. As you will see, despite demand challenges among some of our end markets, we continue to focus on protecting operating margin, which again expanded year over year. Please refer to Slides 7 through 9 for a discussion of our cash conversion cycle, liquidity and capital allocation performance. Our cash conversion cycle days in the quarter were 90 days consistent with our performance in Q2. In Q3, we continue to execute on our working capital efficiency plan, which combined with our net income performance, enabled us to generate $39,000,000 in operating cash flow and $29,000,000 of free cash flow in the period.

Speaker 4

On a trailing 12 month basis, we have generated $245,000,000 in free cash flow. Our cash balance on September 30 was $324,000,000 a sequential increase of $15,000,000 During the quarter, we reduced debt by another $11,000,000 leaving $125,000,000 outstanding on our term loan and $155,000,000 against our revolver, from which we have $391,000,000 available to borrow. In the quarter, we invested approximately $8,000,000 in CapEx in support of continued growth and enhanced capabilities in our Mexico, Penang and Romania facilities. In support of returning capital to our shareholders, we have paid cash dividends of $6,000,000 in the quarter. Finally, in Q3, we repurchased approximately 127,000 shares at an average price of $40.27 per share, totaling $5,100,000 As of the end of the quarter, we had approximately $150,000,000 remaining in our existing share repurchase authorization.

Speaker 4

I would now like to turn the call back over to Brian to discuss guidance for the December quarter.

Speaker 3

Thanks, Arvind. Please advance to Slide 10. For our fiscal Q4 ending December, we expect revenue to be within a range of $640,000,000 to $680,000,000 We expect non GAAP gross margin to be 10.2%, which is consistent with our performance over the last several quarters. Non GAAP SG and A expense is expected to be within a range of $34,000,000 to $36,000,000 With those inputs, we would expect non GAAP operating margin to be between 4.9% and 5.1%. For Q4, we expect approximately $3,500,000 of stock based compensation, dollars 1,200,000 in amortization of intangible assets and $1,000,000 of estimated restructuring and other expenses.

Speaker 3

Our non GAAP diluted earnings per share is expected to be in the range of $0.53 to $0.59 Other expenses net are expected to be approximately $6,400,000 Although interest expense is expected to decline sequentially, this will be partially offset by an anticipated increase in foreign exchange costs. We expect our Q4 non GAAP effective tax rate will be between 22% to 24%. Our weighted average share count is expected to be 36,600,000. Finally, we expect to continue to deliver positive free cash flow in the quarter inclusive of $12,000,000 to $14,000,000 in capital spending. For the year, we expect free cash flow to be greater than $130,000,000 And with that, I would like to turn the call back over to you, Jeff.

Speaker 3

Thanks, Brian.

Speaker 2

Please turn to slide 12 for a discussion of our performance by sector. Our semi cap revenue grew 13% year over year driven by new wins and further share gains. We continue to see signs of recovery in the sector although it's clear to say this cycle has not followed historical patterns. We are long on the space and investing for the future, but the pace of the next up cycle has been a bit challenging to predict. While we expect 2025 to be a growth year, it seems the first half will continue to have pockets of weakness.

Speaker 2

Select OEMs are still bringing inventory levels down as others work to support incremental demand. Netted against each other, we believe we are still in the early stages of the market recovery. Despite this near term choppiness, I'm pleased with our continued win momentum. Coupled with our capacity expansion, including our new facility in Penang, which opened in September, we are well positioned to capture incremental share during the inevitable upturn in this critical sector to the world's economy. Supporting my confidence, we continue to score some meaningful new wins in this vertical.

Speaker 2

This past quarter, I was particularly encouraged by the large number of new engineering wins we achieved on next gen platforms. We also had a competitive takeaway with a large customer that includes both machining and assembly that will be manufactured here in the Phoenix area. Our strong position and incremental wins are enabling us to grow our semi cap revenue greater than 10% in 2024, which is more than 3 times the expected industry growth rate this year. In Medical, similar to the last few quarters, end demand softness has weighed on sector performance. This isn't concentrated within a specific program or customer.

Speaker 2

It's clear there is broad market weakness, most notably within medical devices, which we expect to continue for the next few quarters. We continue to pick up new wins in life sciences and Class III medical devices, which speaks to the long term growth opportunity in the sector. By way of example, this past quarter we had a number of key wins including a competitive takeaway with one of our largest customers. We also won the manufacturing for a new ultrasound device and had a key engineering win in the cardiology space with a new customer. As you know, engineering wins tend to drive future manufacturing wins.

Speaker 2

So I'm pleased to see us keep up the momentum both in our traditional medical sector and in our growing biotech business. Turning to complex industrials, we continue to win new business in key growth subsectors. This past quarter, we won an RF based monitoring module with applications across a number of industrial and commercial markets. Importantly, this key piece of business was awarded because of

Speaker 5

our engineering

Speaker 2

capabilities. In addition, we won an impressive number of new engineering engagements across multiple customers over the last 90 days. This ties directly to our continued investment in the complex industrial sector given the growth opportunities we see. Although this sector may be down sequentially in Q4, we expect to return to modest year over year growth in the period, which we look to build on in the quarters to come. Turning to A and D, this sector continues to perform very well for us.

Speaker 2

Although year over year growth moderated in Q3, we expect the pace to pick up and return to double digit growth in Q4 on both the sequential and year over year basis. Our Defense business continues to see demand strength from both existing programs and ramping new wins. At the same time, our supply chain efforts are enabling us to meet the growing demand. This past quarter, we were pleased to have a couple of new platform wins representing a significant expansion of our manufacturing partnership with an existing customer. 1 was in communication controls and the other in aircraft modernization.

Speaker 2

Within aerospace, demand has stayed strong for several quarters. I'm particularly pleased with the continued momentum in bookings from new space applications where just this quarter we secured several new wins across both engineering and manufacturing. Lastly, AC and C revenue declined 27% year over year in the September quarter. As we've been saying for some time now, we expect sector pressure to persist throughout the rest of 2024 and the first half of twenty twenty five driven by the completion of several large HPC programs and some delays in the timing of the follow on platforms. Within Communications, our customer disengagement we previously discussed continues to impact our year over year growth as expected.

Speaker 2

Looking forward, we are working on new product introductions across multiple programs for a large wireless transport customer. These efforts resulted in a sizable follow on booking in the quarter that's expected to begin contributing in the second half of twenty twenty five. Elsewhere within Communications, this past quarter we saw a key win in the geospatial imaging market, which carries the potential to be significant over time. In summary, please turn to slide 13. The September quarter was once again demonstrated Benchmark's ability to control what we can control while we remain committed to investing in our customer success in support of our mutual growth.

Speaker 2

We believe consistency is important and the breadth of our portfolio across sectors and customers has enabled us to weather the dynamic market environment while continuing to improve our operational execution and margins. Benchmark has now delivered 16 consecutive quarters of year on year non GAAP operating margin expansion. This has been irrespective of the demand environment, which has historically not been the case in our space. I believe this speaks to our maniacal focus on building the right portfolio and controlling our costs, particularly during periods in which revenue growth is challenged. We've also improved our working capital management led by our inventory reduction efforts.

Speaker 2

This past quarter inventory was down more than $140,000,000 year over year, making this the 5th consecutive quarter of annual inventory reductions. This has supported our free cash flow generation, which has totaled almost $1,250,000,000 over the last 12 months. We have leveraged our strong cash flow to further improve our balance sheet while returning capital to shareholders. We've significantly reduced our revolving debt balance and have now been net cash positive for the last two quarters. At the same time, we've consistently paid our quarterly dividend, which was increased to $0.17 per share last quarter.

Speaker 2

Finally, this past quarter, we resumed our share repurchase activity buying approximately $5,000,000 in stock. Let me wrap by saying regardless of the market environment, our mission remains the same. We're going to support our customers with anything they require to improve product realization and speed their time to market. We're also going to drive further operational improvements within the company, including efficient use of working capital. Lastly, we will return capital to our investors through the dividend and share repurchases.

Speaker 2

We're encouraged by the pipeline of significant new opportunities in front of us, the wins we've already secured and those that are ramping and the potential for an improved macro environment, all of which increases our confidence that we will see a return to growth in 2025. With that, I'll now turn the call over to the operator to conduct our Q and A session.

Operator

Thank you. We'll go first to Jaeson Schmidt with Lake Street.

Speaker 5

Hey guys, thanks for taking my questions. I know the outlook for the year for each sector is unchanged, but just curious if there are any sectors you're a bit more optimistic about now than you were last call?

Speaker 2

It's Jeff. I'll take it. Thanks, Chase, for your question. We certainly are encouraged by some of the semi cap recovery that we started to see. We did talk about there being some inconsistency across OEMs, but we feel that we have started to see the recovery even though once we get into 2025, we'll have a better feel.

Speaker 2

And then A and D just continues to be strong. And Q3 was a little bit of a pause in year on year growth, but we see that picking up again in the Q4. That's probably where I would center my thoughts.

Speaker 5

Okay. That's helpful. And just curious if sort of the pricing environment when you guys are going out to bid for programs has remained pretty rational?

Speaker 2

Yes, it's been very rational. There's always competition and we focus on what we're good at. We differentiate ourselves with the highly regulated complex solutions. Engineering content is always a plus. You saw we had one win where engineering helped us lead the engagement and really was the reason why we won.

Speaker 2

It is competitive, but the pricing environment is pretty rational and I think customers are in tough economic environment looking for cost savings. And so there's certainly focus on how we can drive operational improvements to meet those needs. But all in all, I'd say it's a pretty rational environment.

Speaker 6

Got you. And then just the last one for me and I'll jump back in

Speaker 5

the queue. You highlighted the continued operating margin growth going forward even against this kind of more challenging demand backdrop. When the demand profile flips back, how much further upside do you think you can drive that operating margin line?

Speaker 4

Yes. Jason, this is Arvind. You're seeing consistently we're delivering 10% gross margins, non GAAP operating margins in the kind of the 5% neighborhood. I would say one of the key things that we're looking and you're seeing small pockets of this is the semi cap recovery. But once we get that more to be more uniform, we anticipate anywhere from 25 to 50 basis points of additional OI, if you will, OI percentage, if you will, based on that recovery.

Speaker 4

So, and then as Jeff pointed out in his script, that's more back end of 2025. Anything you want to add?

Speaker 2

Yes. Maybe before, and Brian, you can certainly weigh in too, but this is Jeff again. I also think that we've done a good job of really watching costs and getting operational efficient. Revenue growth helps a lot just bring leverage. And so as we see return to growth particularly in some of the softness in industrial and medical, that will certainly help.

Speaker 2

But as you think about SG and A as a percent of revenue and what we might drop to the bottom line. So those things can contribute. But we're not saying we're done on operational improvements. We are maniacally focused on it and still look for areas. A lot of times that's due is there demand in particular sites where we may have under utilization.

Speaker 2

We've invested a lot in Mexico and Romania and now we've got capacity and as we fill that, that will help us there as well.

Speaker 4

Okay. Thanks a lot guys. Thanks, Jason.

Operator

We'll move next to Steven Fox with Fox Advisors.

Speaker 6

Hi, good afternoon everyone. Take a little bit of the corollary to the questions that were just asked. The markets that aren't performing well industrial, comm equipment, medical, Some of these markets have been sort of dragging on for longer than is typical on a downturn. And not that you guys are the only ones seeing that everyone in the supply chain is. But I guess, how do you get any kind of like even green shoots of improvements that may be coming?

Speaker 6

Do you see any of that at all? Or is this something that just could last even longer than even next year type of thing?

Speaker 2

Yes. Thanks, Stephen. Good question. We are seeing some, I would say, green shoots like in industrial, I would say for sure. We've seen a stabilization.

Speaker 2

You'll see some year on year growth in Q4. I think we're more constructive partly also because we've been weighing new business, which is going to help us there. Medical does seem to be dragging on a bit longer given the focus on inventories and where people are there and coming out of COVID where people right size, it does feel like it's a bit more prolonged. But I would say in industrial, we think that that's starting to turn the corner and see good opportunity there. And then in telecom, there's just some unique things going on there.

Speaker 2

We've got some good new wins in AC and C that we're pretty encouraged about. But I would say just based on the ramp that will be more back end of 2025 that we'll see stronger recovery there. But we feel like we see line of sight just because we know we're in NPI or new product introduction phase on that. So several new logos that will help us there.

Speaker 6

That's helpful. And then just on the engineering services piece of the business. I mean, it sounded like you mentioned it more in the script than you have in prior quarters. Not that you didn't mention it previously. I'm just wondering if anything has changed there or if not, where you're being more effective because you mentioned there, of course, a bunch of different markets.

Speaker 2

Yes, we did have a lot of wins in engineering. Not all of them were huge, but we did we probably had a more pronounced number. We still think we can certainly do more. We are seeing good engagement in the semiconductor sector, which is an area that's been growing for us and that's great because we want to help with engineering across all the sectors. We highlighted because I've hired a lot of folks in the industry and when they come to Bench, they're like, wow, we really design a lot of products.

Speaker 2

It's not just about having engineers that can do industrial engineering and plant layout. We do a lot of product development and that's such a great lead into them being the best person to build the product. So it's kind of core to our value prop and what differentiates us. There is a lot of focus in engineering within our team because we do think that it's higher value add and like I said it can lead to the manufacturing piece. And sometimes in tough environments there could be pressure on it.

Speaker 2

We see it holding up pretty well in the macro that's happening here and it's just important to us and that's why we try to give a little more color on it.

Speaker 6

Great, great. That's helpful. Thank you. Sure.

Operator

It appears we have no further questions at this time. I'd now like to turn conference back to Mr. Manske for any additional or closing comments.

Speaker 1

Thank you, Jess, and thank you everyone for participating in Benchmark's Q3 2024 earnings call. As a reminder, we'll be attending the Raymond James TMT and Consumer Conference in New York on December 10th. Also in New York, we'll be attending the 27th Annual Needham Growth Conference on January 14th. For updates to upcoming events and other conferences, please check the Events section of our IR website at ir.bench.com. With that, we thank you again for your support and look forward to speaking to you soon.

Speaker 1

Good evening.

Operator

Thank you. Ladies and gentlemen, this does conclude today's program. We thank you for your participation. You may disconnect at this time.

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