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Benchmark Electronics, Inc. (BHE) Q4 2023 Earnings Call Transcript

Benchmark Electronics, Inc. (BHE)

Q4 2023 Earnings Conference Call

Company Participants

Paul Mansky - IR

Jeffrey Benck - President & CEO

Roop Lakkaraju - EVP & CFO

Conference Call Participants

Jim Ricchiuti - Needham & Co.

Steven Fox - Fox Advisors

Jaeson Schmidt - Lake Street Capital Markets, LLC

Presentation

Operator

Good afternoon, and welcome to the Benchmark Electronics Inc. Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Paul Mansky, Investor Relations and Corporate Development of Benchmark. Please go ahead.

Paul Mansky

Thank you, Andrea, and thanks, everyone for joining us today for Benchmark's fourth quarter fiscal year 2023 earnings call. Joining me this afternoon are Jeff Benck, CEO and President; and Roop Lakkaraju, CFO.

After the market closed today, we issued an earnings release pertaining to our financial performance for the fourth quarter of 2023, 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 at bench.com. This call is being webcast live, and a replay will be available online following the call.

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. Benchmark undertakes no obligation to update any forward-looking statements.

For today's call, Jeff will begin by providing a summary of our fourth quarter. Roop will then discuss our detailed financial results and our first quarter guidance. Jeff will then return to provide more insight and a demand trends by sector, business wins and then closing remarks.

If you'll please turn to Slide 3, I will turn the call over to our CEO, Jeff Benck.

Jeffrey Benck

Thank you, Paul. Good afternoon, and thanks to everyone for joining our call today. The fourth quarter was another period of solid execution for the company. Despite some revenue softening, which impacted our top line, we met or exceeded all other objectives for the quarter. And this directly reflects the company's focus on operational execution.

Let me step through a few highlights in the quarter. Total revenue of $691 million was down high single digits year-over-year, and mid single digits sequentially. I will point out that supply chain premiums or SCP have normalized ending the fourth quarter at slightly below $8 million versus $46 million in the same period last year. Excluding SCP, fourth quarter revenue was down low single digits versus last year.

Despite this challenge, our non-GAAP gross margin exceeded 10%, growing both sequentially and year-over-year, coupled with a 9% year-on-year reduction in non-GAAP operating expense in the quarter. We drove operating margin to greater than 5%. As a reminder, this margin includes approximately 50 basis points of stock compensation.

I want to congratulate the entire team for delivering such a strong set of results, which allowed us to report $0.58 in non-GAAP earnings per share above the midpoint of our guidance. Finally, as we've highlighted over the last few quarters, we've implemented a number of actions to drive free cash flow.

I'm pleased to report that we generated $126 million in Q4 and $97 million for the full year, well ahead of our objective of $70 million to $80 million. This was enabled in large part by reduction in inventory. Considering all the end market obstacles facing us and others, I'm proud of the team's execution in the quarter and throughout 2023.

Now let me pass it over to Roop to share more details on the December quarter, our fiscal year 2023 and guidance for Q1 2024.

Roop Lakkaraju

Thank you, Jeff, and good afternoon. Please turn to Slide 6 for our revenue by market sector. As Jeff mentioned, our total revenue was $691 million in Q4. The reconciliation of this and our sector level performance that excludes the effect of SCP can be found in the appendix section of the presentation materials.

Turning to Slide 7. As we look at our sector performance, our discussion will exclude the effect of SCP. Medical revenue for the fourth quarter was down 7% versus the prior year. The decline was due to general softness across the industry driven by inventory rebalancing and demand normalization post-pandemic. Semi-cap revenue decreased 5% year-over-year in line with our expectations.

A&D revenue was up 15% year-over-year due to commercial aerospace remaining strong and the defense sector benefiting from the ramp, existing programs and broadening of new wins within our customer base. Industrials revenue for the fourth quarter increased 8% year-over-year, driven by strength and with existing customers, providing energy efficiency solutions.

Advanced computing increased 3% year-over-year, aided by our build of subsystems for a new large high performance computing program that started in Q4 and is expected to continue into first half 2024. In the next generation communication sector, revenue was down 31% year-over-year. Our year-over-year performance was impacted by general softness across the sector due to reductions in capital spending. We expect this dynamic may persist throughout 2024.

Please turn to Slide 8. Our GAAP earnings per share for the quarter was $0.49. For Q4, our non-GAAP gross margin was 10.3%, 70 basis point increase sequentially and year-over-year. Gross margin benefited from our mix of revenue and improved operational execution, including the previously announced cost actions taken in the first half due to demand softness.

SG&A expense was $35.6 million, flat sequentially and down 10% versus the prior year due to cost actions taken coupled with lower variable compensation. Non-GAAP operating margin was 5.1%, up 40 basis points sequentially and 80 basis points year-over-year, benefiting from both improved gross margin and operating expense discipline. In Q4 2023, our non-GAAP effective tax rate was 20.6%. For Q4, non-GAAP EPS of $0.58 above the midpoint of our guidance. Non-GAAP ROIC in the fourth quarter was 9.3%.

Please turn to Slide 9 for our revenue comparison by market sector for the full year 2023 versus 2022. Total Benchmark revenue for 2023 was $2.8 billion. Turning to Slide 10, excluding the effect of SCP, revenue was up 6% year-over-year. Medical revenues increased 9% from growth with existing customers and new program ramps. Semi-cap revenues decreased 9% in line with our expectations and reflecting better than market performance.

The A&D sector increased by 6% due to continued strength in commercial aerospace, defense programs that continue to ramp and improved supply availability, enabling us to address more of our previously unmet demand. Industrials revenues were up 17% primarily from the continued ramp of our prior wins, notably in energy control systems and building infrastructure programs. Advanced computing was up 10% on the year, given the timing of our next generation high performance computing program deliveries. Next gen communications revenues were up 16% given first half strength in broadband infrastructure programs....

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