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Sanmina Corp (NASDAQ:SANM)
Q4 2019 Earnings Call
Oct 28, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Sanmina Corporation's Fourth Quarter and Fiscal Year-End 2019 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker for today, Ms. Paige Melching, Vice President of Investor Relations. Thank you, ma'am. Please go ahead.

Paige Melching -- Vice President of Investor Relations

Thank you, Catherine. Good afternoon, ladies and gentlemen, and welcome to Sanmina's Fourth Quarter and Fiscal Year 2019 Earnings Call. A copy of our press release and slides for today's discussion are available on our website at sanmina.com in the Investor Relations section. Let me remind everyone that today's call is being webcasted and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. 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 adverse changes to the key markets we target, significant uncertainties that can cause our future sales and net income to be variable, reliance on a small number of customers for a substantial portion of our sales, risks arising from our international operations, the amount of restructuring charges related to the companywide rightsizing plan actually recorded in the first quarter and other factors set forth in the company's annual and quarterly reports filed with the Securities and Exchange Commission.

You'll note in our press release and slides issued today that we have provided you with statements of operations for the quarter and fiscal year ended September 28, 2019, 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, noncash stock-based compensation expense, amortization expense and certain other infrequent or unusual items to the extent material. Any comments we make on this call as it relates to the income statement measures will be directed at our non-GAAP financial results. Accordingly, unless otherwise stated in this conference call, when we refer to gross profit, gross margin, operating income, operating margin, taxes, net income and earnings per share, we are referring to our non-GAAP information.

I would now like to turn the call over to Jure Sola, Executive Chairman. Jure?

Jure Sola -- Executive Chairman

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome, and thank you all for being here with us on this call. Also on this call today, we have Hartmut Leibel, our Chief Executive Officer.

Hartmut Liebel -- Chief Executive Officer

Good afternoon.

Jure Sola -- Executive Chairman

Also Kurt Adzema, our new Chief Financial Officer.

Kurt Adzema -- Chief Financial Officer

Good afternoon.

Jure Sola -- Executive Chairman

And David Anderson, our former Chief Financial Officer.

David Anderson -- Former Chief Financial Officer

Good afternoon, everyone.

Jure Sola -- Executive Chairman

Before we talk about our financial results, I would like to provide you with some background on 2 new members of Sanmina's executive team. Hartmut Liebel joined Sanmina in July of 2019 as the Chief Operating Officer and was promoted to Chief Executive Officer on October 1. I've known Hartmut for over 10 years. I believe he is the right person for the job and has a strong knowledge of our markets and our industry. The Board of Directors and I are excited for Hartmut to lead the Sanmina as our Chief Executive Officer. Kurt Adzema joined Sanmina only few weeks ago on October 14 as our Chief Financial Officer. Kurt will succeed David Anderson who announced his plans to retire. Kurt brings over 20 years of strong financial experience. He will be a great fit into our team, and he understands Sanmina's markets well. Kurt will work closely with David Anderson to ensure smooth transition. David Anderson, as I mentioned, announced his retirement in January of this year. On this call, I would like to really take this opportunity, David, to say thank you for being a great team player for many years and most importantly, our financial leader for last 17.

David Anderson -- Former Chief Financial Officer

Thank you, Jure.

Jure Sola -- Executive Chairman

We're going to miss you. I would like to also say that I'm very proud of Sanmina's management team, and with the addition of Kurt Adzema and Hartmut Leibel, Sanmina has a strong leadership team in place to lead our company for a better future. And now I would like to turn this call over to Kurt. Kurt?

Kurt Adzema -- Chief Financial Officer

Thank you, Jure. I'm very excited to have joined Sanmina. Sanmina's keen focus on profitable growth, cash generation fits well with my business philosophy and what it takes to create and maintain a successful company. I'm looking forward to working with Jure and Hartmut in the coming years. I'm also fortunate to have Dave Anderson remain as an advisor over the coming months to effect an orderly transition. Since I joined the company just 2 weeks ago, I'll ask David to provide the results for fourth quarter and fiscal 2019.

I'll now turn the call over to David.

David Anderson -- Former Chief Financial Officer

Thanks, Kurt, and welcome to Sanmina. As Jure said, we're excited to have Hartmut and Kurt as part of the Sanmina team. With their depth of knowledge of our customer base, markets and overall industry, we are confident that they will lead Sanmina to the next level of operational and financial performance. Please turn to slide three. Overall, our fourth quarter revenue and non-GAAP diluted earnings per share were in line with our outlook. While revenue was at the low end of our outlook at $1.9 billion, non-GAAP diluted earnings per share at $0.84 exceeded the top end of our outlook by $0.01. Revenue was down 6.6% sequentially or $134.8 million and up 0.8% or $15.9 million from the fourth quarter of last year. Fiscal 2019 revenue ended at $8.23 billion, up 15.8% from fiscal 2018 and in line with the full year revenue outlook we provided on our prior earnings call. Revenue was up on a full year basis across all of our end markets. I will discuss our end market performance in more detail in a few minutes.

Please turn to slide four. From a GAAP perspective, in the fourth quarter, we reported net income of $19.8 million, which resulted in diluted earnings per share of $0.27. This was down $0.32 sequentially and up $0.26 from Q4 of last year. The sequential drop in GAAP diluted earnings per share was largely driven by the contribution margin impact on gross profit, resulting from the sequential drop in revenue as well as the increase in the GAAP tax provision that resulted from a tax restructuring transaction that required us to remeasure certain deferred tax liabilities. The increase in GAAP diluted earnings per share over Q4 of fiscal 2018 was largely driven by certain items that were included in Q4 of 2018's financial results: a $30.6 million noncash goodwill impairment charge, a $12.5 million out-of-period adjustment related to long-term government contracts in one of our CPS divisions and a $10.8 million increase in restructuring costs. This was partially offset by a $6.1 million reduction in stock compensation expense.

For the year, we had GAAP net income of $141.5 million, an increase of $237 million from fiscal 2018. GAAP diluted earnings per share for fiscal 2019 was $1.97 compared to a negative $1.37 in fiscal 2018. Fiscal 2018's GAAP loss per share included a noncash tax charge of $2.33 per share as a result of the U.S. Tax Cuts and Jobs Act enacted in December 2017, the noncash goodwill impairment charge of $0.44 per share and $0.42 per share restructuring costs primarily associated with the restructuring actions that we announced in January of 2018. My remaining comments will focus on the non-GAAP financial results for the fourth quarter and fiscal 2019. At $144.4 million, gross profit was down $5.4 million or 3.6% sequentially and up $20.6 million or 16.7% from the same period a year ago. Gross margin came in at 7.6%, which was 20 basis points higher than we reported in Q3 and 100 basis points higher than a year ago. For the full year, gross profit was up $130.2 million and gross margins were up 70 basis points. We continue to focus on improving our program mix and operational execution in fiscal 2019 in order to expand our gross margins and drive higher levels of profitable growth. I will discuss our margins in more detail when I review our segment result.

Operating expenses were down $3.9 million for the quarter ending at $64.7 million. Our operating expenses came in below the low end of our outlook, which was primarily driven by continued cost containment across our operating expense departments including the refocusing of our investment in our sales and R&D efforts as well as lower-than-anticipated incentive costs. At 3.4%, our operating expenses as a percentage of sales were flat with the third quarter even though revenue was down $134.8 million sequentially. For fiscal 2019, operating expenses were up $9.1 million compared to fiscal 2018. This increase was largely driven by higher incentive costs resulting from the significant improvement in our financial results in 2019 including the increase in revenue and operating margins. While absolute operating expense dollars were up, as a percentage of sales, operating expenses were down 40 basis points as a result of our ability to contain our operating expenses as we grew our revenue 15.8%. At $79.6 million, operating income decreased by $1.5 million from the prior quarter. It was down 1.8% and was up $20.9 million or 35.5% from Q4 of last year. For the full year, operating income ended at $333.9 million and grew 56.9% over the prior year.

Operating margin was 4.2%, up 20 basis points sequentially and at the high end of our outlook and up 110 basis points compared to Q4 of last year. Fiscal 2019's full year operating margin was 4.1%, which was up 110 basis points over fiscal 2018. We ended fiscal 2019 in line with our goal of driving operating margins to the 4% plus range. Other income and expense at $8.7 million was down $900,000 when compared with last quarter and up $1.8 million from the fourth quarter of last year. We continue to see reduction in our funding costs during the quarter from lower short-term working capital needs throughout the quarter that were driven by our efforts to reduce our inventory levels. On a full year basis, other income and expense grew in 2019, largely driven by increased funding costs to support higher short-term working capital needs that were largely driven by higher inventory levels. The tax rate for the full year was 16.6% of pre-tax income with the rate for the quarter coming in at 14.6% of pre-tax income due to the full year true-up. This was better than we expected and was largely driven by a more favorable distribution of our profits during the quarter. We earned $60.6 million of net income with our non-GAAP diluted earnings per share coming in at $0.84, which exceeded the top end of our outlook by $0.01 for the fourth quarter.

Non-GAAP diluted earnings per share was up $0.02 or 2% from Q3 and up $0.24 or 40.9% from Q4 of last year. This was based on 72.3 million shares outstanding on a fully diluted basis for Q4. For fiscal 2019, non-GAAP diluted earnings per share at $3.40 was up $1.27 from fiscal 2018, an increase of 59.8 percentage points. This significant year-over-year improvement in our financial result was driven by growth in revenue as well as the continued improvements in the mix of our business that drove strong profitable growth. This was coupled with the continued focus by the whole Sanmina team on driving better operational execution and cost efficiencies while continuing to contain our operating expenses. Please turn to slide five. I will now give you some color around our end market segments for the fourth quarter. Communications networks was $629.7 million or 33.3% of Q4's total revenue. This was down 14.5% sequentially and down 8.8% year-over-year. Communications declined during the quarter more than we anticipated in our Q4 outlook. This higher decline largely resulted from late quarter pushouts by our customers, driven by excess inventory in the channel, a slower than originally expected 5G ramp and overall global economic uncertainties.

Industrial, medical, automotive, defense was $1.1 billion or 58.8% of revenue for the quarter. This was flat on a sequential basis, which was in line with our outlook and was up 11.4% compared to the same period a year ago. Cloud solutions consists of cloud computing, storage systems, point-of-sale and casino gaming. This segment was $149.9 million or 7.9% of revenue for the fourth quarter. It was down 15% sequentially, which was in line with our outlook and down 19.7% compared to Q4 fiscal 2018. Our top 10 customers were 55.7% of revenue for the quarter. Please turn to slide six. For the full year, communications was $2.9 billion or 35.3% of revenue. This grew nicely up 8.3% over fiscal 2018. The supply constraints we experienced in fiscal 2018 started to stabilize early in fiscal 2019, which allowed us to satisfy our customers' pent-up demand. We also started to move 5G deployments from prototype NPI builds to low-volume production, although this ramp is progressing slowly. In fiscal 2019, the industrial, medical, automotive, defense and market segment had revenue of $4.6 billion or 55.5% of revenue.

This was up a healthy 24.2% compared to fiscal 2018. We grew across all the subsegments on a year-over-year basis with medical, defense and automotive driving the bulk of the growth. New program wins across all these subsegments and our ability to procure components helped drive the growth in this segment. This segment is made up of markets that are mission-critical and highly regulated, which fits well with Sanmina's core higher technology capabilities. We believe there continues to be significant opportunities for profitable growth in this segment going forward. Cloud solutions was $755 million or 9.2% of revenue for the full year. Cloud solutions was up 1.6% over fiscal 2018, which was basically in line with our outlook for the full year. Please turn to slide seven. The integrated manufacturing solutions segment includes printed circuit board assembly and test, final system assembly and test as well as direct order fulfillment. As you can see from the graph on the left, the IMS segment revenue is down $119.2 million from last quarter ending at $1.6 billion. IMS gross profit dollars were basically flat with Q3 on a declining revenue, driving an increase in gross margins by 40 basis points from the third quarter to 6.8%.

The IMS gross margin improvement on a declining revenue was largely driven by operational improvements including the resolution of certain cost recovery and excess inventory claims with our customers. On a full year basis, IMS gross margins were up 40 basis points over fiscal 2018 to 6.4% with gross profit dollars increasing by 26.1%. IMS profitability improved in fiscal 2019, largely driven by the contribution flow-through on increased revenue as well as the improvements in operational execution, productivity, claims management and materials and overhead cost control that the IMS sales, operation, supply chain and finance teams drove throughout the year. On the right is our second segment, components, products and services. Components include printed circuit board fabrication, backplane assemblies, cable assemblies and closures, precision machining and plastics injectable molding. Products include computing and storage products, defense and aerospace products, memory and SSD 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 down sequentially by $19.8 million to $342.3 million with gross margin down 100 basis points from Q3 to 10.2%. CPS segment gross margins declined sequentially, mainly driven by reduction in the gross margins within our components subsegment.

On a full year basis, CPS gross margins were up 190 basis points over fiscal 2018 to 10% with gross profit dollars increasing by 32.6%. CPS profitability improved in fiscal 2019, largely driven by the contribution flow-through on increased revenue as well as improvements in the business mix within the CPS segment and operational improvements that the various CPS teams have driven throughout 2019 including some continued benefits flowing through the segment from the restructuring actions we announced in January of 2018. Please turn to slide eight. Here, we are showing you the quarterly trend in our key non-GAAP P&L metrics. Revenue was down 6.6% from last quarter and up 0.8% over Q4 of last year to $1.89 billion. Gross profit decreased 3.6% from last quarter to $144.4 million and gross margin at 7.6% was up 20 basis points from last quarter and 10 basis points higher than the midpoint of our outlook. Our operating profit decreased 1.8% from last quarter to $79.6 million and this led to operating margins of 4.2%, which was at the high end of our outlook.

Operating margins in Q4 were at the high end of our outlook, driven largely by operational improvements including certain cost recoveries in our IMS segment, combined with continued cost containment of our operating expenses. As you can see, we continued our goal of driving operating margins to be in the 4% plus range with fourth quarter's operating margins of 4.2% up 110 basis points over the fourth quarter of fiscal 2018 and returning to the level last reached in the third quarter of 2017. Non-GAAP diluted earnings per share were $0.01 above the high end of our outlook at $0.84 and up $0.02 sequentially. Please turn to slide nine.We're providing you the year-over-year trends in our non-GAAP P&L metrics. Revenue was up 15.8% from last year to $8.23 billion. Gross profit increased 27.7% from FY '18 to $600.4 million. Gross margin at 7.3% was up 70 basis points from last year. Our operating profit increased 56.9% from fiscal 2018 to $334 million, a new high over the past six years. This led to operating margin of 4.1%, another new high. Non-GAAP diluted earnings per share is up from fiscal 2018 by 59.8% to $3.40, the highest level reached over the past six years. Please turn to slide 10. Our balance sheet remains strong. Our cash and cash equivalents were $455 million at the end of the year.

Cash was up $40.5 million from the previous quarter, accounts receivable was down $106.6 million, contract assets were up $9 million and inventory was down $14.6 million. We will talk more about contract assets and inventory in a moment. From a liability standpoint, we had a $13.2 million decrease in accounts payable during the quarter. Our short-term debt was $38.4 million, down $116.3 million from the prior quarter. Short-term debt includes the current portion of our long-term debt. Our long-term debt decreased by $4.5 million to $347 million with our gross leverage ratio ending the fourth quarter and fiscal 2019 at approximately 0.9 based on our total debt. Please turn to slide 11. Since fiscal year 2014, we have repurchased 26.4 million shares at an average per share price of approximately $24.6 and an aggregate purchase price of $649.2 million, leaving $100.8 million of Board authorized share repurchases available under the prior Board authorized share repurchase program. Today, we announced our Board has authorized an additional $200 million of share repurchases, increasing the amount available for future share repurchases to $300.8 million.

Since the inception of the share repurchase plan, we've provided a strong return of capital to our shareholders. As we continue to generate strong free cash flow from our business, we will continue to return our capital to our shareholders on an opportunistic basis, in line with our capital allocation priorities, which I will discuss in more detail in a few minutes. Please turn to slide 12. Here, we are showing you the quarterly trend in our balance sheet metrics. Cash increased $40.5 million to $454.7 million. This was largely driven by our positive free cash flow generation during the fourth quarter. Cash flow from operations for the quarter was a positive $190.2 million. Net capital expenditures for the quarter were $29.2 million, which was below our expectations. Net capital expenditures for the full fiscal year of $127.1 million ran slightly below our expected range of $130 million to $140 million that we mentioned during Q3's earnings call. We ended the quarter with positive free cash flow of $161 million.

Our cash generation for the fourth quarter was positively impacted by strong cash collections, while the combination of contract assets and inventory remained relatively flat. I will provide more details on our inventory in a moment. For the full year, we generated cash flow from operations of $383 million and free cash flow of $255.8 million. Our cash generation was strong as a result of our strong cash collections and our ongoing focus on reducing our inventory levels. In the upper right quadrant, we are showing you the trend in inventory turns and dollars with the fiscal 2019 quarter shown on the old versus new basis for comparative purposes. As of the first quarter of fiscal 2019, Sanmina adopted the new revenue recognition standard referred to as ASC 606 on a modified retrospective basis. As I previously indicated, we did not expect the adoption of ASC 606 to materially impact our revenue or earnings per share, which was again the case for our fourth quarter of 2019.

However, ASC 606 does have an impact on our balance sheet. With the recording of revenue on an overtime basis for the majority of our nonproduct revenue stream, we are required to reflect work in progress and finished goods inventory along with the profit element as contract assets, which is essentially unbilled receivables. As a result, at the end of Q4, we had $396.3 million of contract assets and $900.6 million of inventories on the balance sheet. For comparative purposes, from an inventory turns perspective, we have provided the inventory turns calculation for fiscal 2019 under the old methodology and the new methodology. Our inventory dollars under the old methodology were down $9 million sequentially to $1.27 billion and our turns were down sequentially 0.2 of a turn to 5.4 turns. Our fourth quarter inventory levels were negatively impacted by the inventory correction and slower 5G ramp in the communications segment. For fiscal 2019, our sales, operations and supply chain teams drove a number of initiatives that drove our inventory levels down $102 million from the fourth quarter of fiscal 2018 to 1.72 $1.27 billion at the end of the fourth quarter of fiscal 2019 on an apples-to-apples comparison using the old methodology.

we remain focused on reducing our inventory levels and improving our turns. Inventory continues to be a challenge, mostly recent most recently driven by the inventory correction in the channel and the slower 5g ramp in the communication segment. Well, we saw continued improvement in lead times during q4 some capacitor supply is still tight, and suppliers continue to reduce capacity on legacy technology commodities, which we expect to potentially further tighten in the first half of calendar 20. lead times while recently declining are still extended on certain times. oddities when compared to a more normal market. We continue to work with our customers to better understand the demand outlook, so that we can plan for the requirements with our suppliers and minimize any potential negative impact on our inventory levels and cash flow. Our supply chain organization and operations teams continue to do a good job partnering with our customers and suppliers to secure constrained parts. We expect to continue to make improvements in our operational efficiencies and materials execution in the areas we can control during Q1. In the lower left quadrant, we're showing cash cycle base, which combines our cycle time for inventory, contract assets, accounts receivable and accounts payable.

Overall, cash cycle time was down slightly on a sequential basis to 52.1 days, which was largely driven by better supply supplier payment terms mix and stronger cash collections during the fourth quarter. On a full year basis, our cash cycle days were up from 47.2 days in Q4 of last year to 52.1 days in Q4 of this year. This was largely driven by a reduction in our accounts payable days outstanding. Finally, pre-tax ROIC was 23.6%, up 1.4 percentage points from the prior quarter. Compared to the fourth quarter of last year, pre-tax ROIC improved 6 percentage points and remains above our target of 20%. Please turn to slide 13. I will now provide you with a few remarks on our capital structure and capital allocation priorities. As we mentioned on our last earnings call, we refinanced our long-term debt in the third quarter by putting in place a $375 million secured delayed draw term loan with a maturity date of November 30, 2023. Through interest rate swaps, we effectively converted $350 million of this loan from a variable interest rate to an effective fixed interest rate of approximately 4.3% through December 1, 2023. We also improved the flexibility of our capital structure by increasing the revolving commitments under our credit facility by $200 million to a total of $700 million, and we maintained the flexibility to increase our commitments by another $200 million under the accordion feature, which is subject to lender approval.

At the end of fiscal 2019, we had $692 million of liquidity available under our credit facility. And as I previously mentioned, our gross leverage ratio dropped to 0.9 at the end of fiscal 2019 based on total debt. In fiscal 2019, we generated $383 million of cash flow from operations and $256 million of free cash flow. Our business model has generated average annual cash flow from operations of $271 million and free cash flow of $160 million over the past five years. Our capital allocation priorities have been consistent over the years, and we expect them to remain the same going forward. Our first priority is to invest in the business through capex and R&D spending. Our second priority is to invest in tuck-in acquisitions, where the valuation and technological capabilities make sense. Our third priority is the opportunistic repurchasing of shares, supported by the Board authorization we just announced. And our last priority is debt reduction, which we will consider when it makes sense to do so. We have a high financial hurdle rate of at least 20% pre-tax ROIC that we use to assess any investments we are considering acting on. Overall, our balance sheet and capital structure remain in great shape and our capital allocation priorities remain the same.

Please turn to slide 14. I will now share with you our outlook for the first quarter of fiscal 2020. Our view is that revenue will be in the range of $1.725 billion to $1.825 billion. This reduction in the revenue outlook range compared to Q4's actual is driven by softness in the customer demand that we are seeing in the first half of fiscal 2020 that is based on our customers' current forecast. This decline in customer demand is largely driven by excess customer inventory in their channels, slower-than-anticipated 5G deployment and macro-level global economic uncertainties. To align our cost structure to this first half softness in customer demand that we are currently seeing, we have initiated a companywide rightsizing plan. This rightsizing plan will continue to improve our operational efficiencies and further optimize our cost structure. We expect to incur between $10 million to $20 million in restructuring charges, consisting primarily of cash severance costs. We expect to execute this rightsizing plan over the first half of fiscal 2020. This rightsizing coupled with our continued focus on the quality of our revenue will support our ongoing operating margin, non-GAAP earnings per share and cash generation objectives. GAAP diluted earnings per share will be between $0.52 to $0.62. This includes estimated stock-based compensation expense of $0.13 per share. On a non-GAAP basis, we expect the gross margin will be in the range of 7.3% to 7.9%.

Operating expense will be $62 million to $64 million, this leads to an operating margin in the range of 3.8% to 4.2%. We expect that other income and expense will be in the range of $9.5 million to $10.5 million. Our tax rate should be around 17%, and we expect our fully diluted share count to be around 73 million shares plus or minus 0.5 million shares. When you consider all of this guidance, we believe that we will end up with non-GAAP earnings per share in the range of $0.65 to $0.75. For your cash flow modeling, we expect the capital expenditure will be around $30 million while depreciation and amortization will also be around $30 million. We expect to once again generate positive cash flow from operations in Q1. Overall, we delivered solid operating margins, earnings and free cash flow in the fourth quarter. While revenue was at the low end of our outlook, operating margins were at the high end of our outlook at 4.2%, and once again, met our goal of being in the 4% plus range. Non-GAAP diluted earnings per share of $0.84 exceeded our outlook, and we generated $161 million of free cash flow during the quarter. We are pleased with our results for fiscal 2019. Revenue was up 15.8%, operating profit was up 56.9%, operating margins improved 110 basis points to 4.1%, in line with our 4% plus short-term goal and the highest operating margin reached over the past six years.

Non-GAAP diluted earnings per share were up 59.8% to $3.40, again, the highest level reached over the past six years. The whole Sanmina team contributed to driving these solid operational and financial results during fiscal 2019, and I want to thank each of you for your contributions as they are well deserved. As we move into fiscal 2020, we remain committed to delivering on our ongoing operating margin, non-GAAP earnings per share and cash generation objectives. In closing, I want to welcome Kurt Adzema to Sanmina as our new Chief Financial Officer and congratulate Hartmut Leibel on his recent appointment as our new Chief Executive Officer. I am committed to helping Hartmut and Kurt transition smoothly into their new roles over the next few months. I wish to thank all the Sanmina employees for all their support over the 17-plus years that I've been at Sanmina including the past two years as Sanmina's Chief Financial Officer. We've experienced a lot together since I joined Sanmina right after the Sanmina-SCI merger back in 2002. I greatly appreciate all the dedication, sacrifice and extra effort that you've put into supporting me, Sanmina's executive management, the board, customers and suppliers and our other stakeholders and most importantly, our shareholders. I want to send a special thanks to Sanmina's finance team, both past and present.

You are an extremely professional and dedicated team, you should be proud of the contributions that you make on a daily basis in both creating and protecting shareholder value for our company. I have truly enjoyed working with and leading such a highly dedicated and professional team over the years. I also want to personally thank our executive management team and Jure and the Board, both past and present, for all the support of my career at Sanmina. Your support and mentoring over the years helped me become Sanmina's Chief Financial Officer. I greatly appreciate Jure and the Board's confidence in me that led to my appointment as Sanmina's CFO two years ago. Jure has a depth of experience and knowledge of Sanmina and EMS industry that is unsurpassed, and I sincerely thank him for all the time he has spent mentoring me during my tenure at Sanmina.

Last, but not least, I want to thank Paige and Bob Eulau for supporting me with my transition into the CFO role two years ago and by helping me get connected with our investors and analysts. I've truly enjoyed interacting with our investors and analysts over the past couple of years during our earnings calls, Investor Day and at various investor conferences. I hope that you will give the same support to Hartmut and Kurt that you have given to me as they transition into their new roles at Sanmina. Sanmina is a strong company that is well positioned to continue to deliver superior service, innovation and support to our customers as well as enhanced value to our shareholders. I'm confident that Hartmut and Kurt's strong with Hartmut and Kurt's strong leadership supported by the whole Sanmina team, Sanmina will reach the next level of operational and financial performance and will meet or exceed its midterm financial objectives.

I will now turn the call back to Jure for further comment on our outlook.

Jure Sola -- Executive Chairman

Thanks, David. Thanks for those compliments. Of course, you're going to be missed, but you're not going away very easy. I know you're going to be around to help us get to the next level. I appreciate your comments. Anyway, ladies and gentlemen, let me add a few more comments about business environment for the fourth quarter and fiscal year 2019 and I'll talk about outlook for fiscal year 2020. As David mentioned, we delivered good financial results for the fourth quarter, exiting fourth quarter with operating margin 4.2%. It shows us that even with a low revenue, with the improvements that we're making, efficiencies that we're driving, we can improve the margins. With that, we delivered the non-GAAP EPS of $0.84. For fiscal year 2019, I will rate as a solid year. We really focused on few things. Number one was our customer satisfaction. Number two, margin improvements as I promised you a year ago that we will get back to that operating margin of 4-plus percent.

Number three, we're focused on cash flow, cash flow from operations was strong of $383 million and free cash flow of $256 million, this should continue. Number four, we recovered very well from supply environment constraints that we experienced during the year and delivered a non-GAAP EPS growth of 60% to $3.40 per share. Please turn to slide 16. Let me summarize our end markets and give you my outlook. Sanmina end markets were strong in fiscal year 2019. 80% of revenue growth was driven by high complexity, heavy regulated markets, driven by industrial, medical, defense and automotive segments. For fiscal year 2019, we delivered a great growth in these markets at 24.2%. Industrial, medical, defense and automotive markets continued to expand, in last year was 50% of our revenue. Industrial, medical, defense, automotive market should continue to be solid in fiscal year 2020. For the first quarter, we are forecasting some softness in demand, but we expect first quarter to be flat. But for defense market, we are seeing a strong trend to continue. Long term, we expect to continue to see growth in this market. Communications networks was 35% of our revenue. It grew 8.3% last year. Communications networks for Sanmina is very important market, and we do have a very strong customer base in place.

We are involved with the key existing programs. Also we have a good pipeline of new opportunities, and we're working on adding new projects and new customers in this segment. For the first quarter, we are seeing softer demand in communications segment, and we are focusing a slower demand and we are forecasting a slower demand during the first quarter. Also, short term, we see some extra inventory in channels that needs to be worked out. Long term, we see communications networks improving. Sanmina is well positioned with the right customers and projects including deployment of 5G infrastructure. For cloud solutions, that was about 9% of our revenue last year, that also grew 1.6%. In this segment, we also eliminated a lot of the lower technology products, such as set-top box business, so that we are strictly focused on high end cloud solution products itself. For the first quarter, we are forecasting slower demand in this segment, but we're working at some good opportunities in this segment. We do expect to expand customer base this year, and we think long term, this will be a good segment for Sanmina. In summary, for end markets, in short term, we see some inventory that needs to be flushed out, but longer term, I believe Sanmina is focused on right market and right customer opportunities.

Global economy is very hard to predict, but I believe based on our customer inputs, fiscal year 2020 will be a good year. Most important for us is that Sanmina is a strong company, that I will say stronger than a year ago. We have a strong management in place, solid structure in place to drive profitable growth, a strong balance sheet as David mentioned, and we are well positioned for any economic environment. We will continue to drive operational discipline, margin improvements and cash generation in fiscal year 2020. We know this will yield continued improvements in operating model and drive shareholder value. I can tell you Sanmina strategy is working. Sanmina is well aligned with the key end markets as we're focused on high complexity and heavily regulated markets. And for these markets, Sanmina has competitive advantage. Sanmina provides industry-leading end-to-end solutions for our customers. Sanmina is also continuing to invest in talent, right technologies and services for the future. Simply put, we remain focused on the quality of the growth. That's our model. Our customer base is still positive about the future and Sanmina has a lot of leverage in its business model. Now ladies and gentlemen, I would like to thank you all for your support.

Now I will turn this call over to Hartmut. Hartmut?

Hartmut Liebel -- Chief Executive Officer

Sure. Thank you, Jure. Very glad to be here, and I look forward to working with our excellent management team to continue building a great company. It's been a couple of months since I joined Sanmina. So I thought you might be interested in my initial observations. First and foremost, we enjoy an exceptional reputation among our customers. Many of our key accounts have been with us more than 10 years, and we continue to win next generation programs with them. Second, we own the right technical capabilities, operational and financial discipline that are so important to be successful in our end markets. That is really a great asset to have. Third, our global teams will coax to earn our customers' trust every day to execute flawlessly and to win the next program. Over many years, our management team has profitably grown this business and successfully diversified Sanmina's revenue stream. So after the first couple of months, all this gives me great confidence that we are well positioned, and I believe the best years for Sanmina are still ahead of us. With that, let me now turn to my priorities for this upcoming year.

They fall into 3 main categories. First, the company enjoyed solid margin expansion in 2019. I believe we are taking the right steps to continue this trend in pursuit of our long-term goal, which as you know remains a 4% plus operating margin. At the same time, we will continue to be relentless in our effort on cash flow generation. Second, we will continue to focus on key customers in high-complexity, mission-critical end markets, there we'll drive initiatives to further improve efficiencies and reach even higher level of customer satisfaction through a variety of programs, such as market-leading onboarding processes for new programs and customer wins. And third, the rightsizing of the outline today further reinforces our strategy for our target markets. Lean dedicated teams in right locations can execute even faster for our regional and global customers and together with continued focus on the quality of our revenue will support our cash generation objectives. I have communicated these priorities clearly to our company, and the management team is excited about this strategy. With that, I would like to draw your attention to Page 18 and summarize what we covered in today's call. We're pleased with the results for the fourth quarter. Revenue at $1.9 billion was lower than expected, however, operating margin increased 20 basis points sequentially.

We enjoyed full year revenue growth of 16% while the operating margin of 4.1% was in line with our 4% plus margin objective. Non-GAAP EPS increased by a strong 60%, and we generated $383 million in cash flow from operations. In terms of outlook for Q1, we expect demand to be soft in the first half of the fiscal year for the reasons outlined earlier. That said, I'm confident that our efforts in operational excellence, as highlighted before, will support our margin targets in Q1 of 2020 and beyond, all while our sales team is mobilized to return Sanmina to future growth. I anticipate to share more details on the measures we are taking in our next call. Let me express my appreciation to David. Since I joined Sanmina, he has been a great help to get me up to speed. Thank you, David, and yes, we will definitely miss you. And of course, a big thank you goes to all of our employees for a solid 2019 as well as our vendor partners, customers and investors around the globe for their support and confidence in Sanmina. I'm glad to be part of this team and look forward to working with all of you to building a great company.

Catherine, with that, we can open the call for Q&A session.

Questions and Answers:

Operator

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

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Hi, thank you for taking my questions I'll also start by congratulating Dave for job well done, and we're certainly going to miss you as well. So please keep in touch. Maybe a question for Jure and Hartmut. You've talked about maintaining margins and possibly growing margins going forward. As a general overview, are you happy with the portfolio as it is? And how do you see that mix evolving over time? Are you going to drive a better mix? Or do think there are more operational efficiencies that you need to concentrate on to get the margins? Just your thoughts on how to improve margins going forward.

Jure Sola -- Executive Chairman

Yes, Ruplu, we already started at, I'll say, in fiscal year 2019, to really focus driving efficiencies. We still believe we have more room to drive efficiencies, and we're going to continue to do that. Back to the markets, we were able to grow our industrial, medical, defense and automotive industry very well. I think the customer base is there to continue to grow. So we expect to improve the quality of revenue and the quality of the revenue in combination with improvement in operating margin should drive better margins. Even with a lower revenue, we expect to drive better margins in the short term. Communication networks to us, even there, it's about timing. We are well positioned with the key programs there.

We have some good opportunities in our pipeline, both with existing and some new opportunities. So to us, it's about timing. The 5G deployment is going to be is going to happen. It's just, when? So I think overall, we don't control the market, but we control what we do internally. We are very aggressively driving expansion of our customers in new markets, the markets that we're not around maybe a few years ago, and with our capabilities, we're able to attract and enter those relationships with some key customers. So a combination of all of these things and with our new CEO right now, I definitely believe we should be able to increase. Hartmut, any other comments you...

Hartmut Liebel -- Chief Executive Officer

Yes. I think the position that we have with our customers and with the existing programs are strong. We have the right initiative in terms of cost containment and rightsizing the company in place. So I'm optimistic that we are positioned well irrespective of how the markets will drive it up or down in the next few quarters.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay. That's helpful. And Jure, you mentioned the communications segment. I think you said the first half is going to be weak. Maybe any color you can provide on what you saw in optical versus networking and wireless? And do you think that this is really a 2-quarter problem? And do you think that the inventory gets better situation gets better in the second half?

Jure Sola -- Executive Chairman

Yes. I mean we don't see everything our customers share so much and even some of the stuff they share we can't talk about it. But we definitely feel like it's going to be a 1- to 2-quarter scenario here. But we are really taking 1 quarter a time and then that's why we are taking this rightsizing, making sure that our construction meets our present demand. We are well positioned on the networking and wireless part of the business. We believe that 5G deployment will happen. It's just the timing. On optical side, again, we're well positioned there. There's some softness on that side of the business. But as we are talking to the customer, I had a few weeks ago a nice meeting and a dinner with one of our customers, and basically, they see that overall year-over-year will be a growth year for them. It's just about timing. So I'm optimistic that this is just a temporary combination of soft demand and inventory because I definitely see a little bit of extra inventory in the pipeline that needs to be flushed out.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay. And the last one from me. I mean you've talked about a weak first half, but maybe a stronger second half. Any thoughts for the overall year? Do you think, I mean, given the first quarter is down, the revenue guidance is about down 19% year-on-year at the midpoint. Do you think that fiscal '20 can be a year where you grow revenues? Or do you think that at this point, it's too unclear to comment on that?

Jure Sola -- Executive Chairman

Yes, I think for us, let's wait for that. Right now, I mean, we're going to drive our business. If the opportunity is there, structure is there, we can deliver a lot more. But in the meantime, we're going to just focus in what we have and focus on quality. So it's a time really to tune things tune things up, and also we have a fair amount of new programs that we need to bring to the market. So overall, I'm optimistic about next 12, 18 months, but it's a short term, it's really hard to say we're going to do X, Y and Z because it's hard to see it today. But I know that we will drive what we control, and we will continue to make big improvements there. That's my promise to you.

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Okay, thank you for all the details.

Jure Sola -- Executive Chairman

Thank you.

Operator

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

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

I want to say congratulations for just a job well done of running the entity, and big shoes to fill, a lot of muscle to put behind what's going on and keep it going, so we're looking forward to that.

Jure Sola -- Executive Chairman

Hey, Jim, Kurt brought the big shoes, so he's going to he's starting to walk them around here at offices. He will do well.

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

Quick question. On the excess inventory in the channel, are you referring to kind of specifically the 5G communications end market or was a broader-based.

Jure Sola -- Executive Chairman

Jim, my comment is more broad-based. 5G is still in what I would call in the development. I will say other parts of the business, I think that's where we have some inventory.

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

And your thoughts on the reason for this is because the component shortage of this exasperated the need to maybe double order or hope to get the product through the supply chain in time, do you think that's what the issue was or a big slowdown in demand?

Jure Sola -- Executive Chairman

I think Jim, you've been around long time and that one is always hard to figure out 100%, but any time when you have shortages, there's a little bit panicking goes on where our customers do double order and buy more than they need. And I that's kind of what I see today. I think we need to flush that out first, and I'm hoping that, that demand will continue to be OK after that.

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

Okay. My last question. The restructuring, seems like you're doing this pretty proactively, which is great. But it also sounds like that the demand pause is going to be a little bit longer than a couple of quarters because a couple of quarters you could probably keep your employees not happy and announce such meaningful I mean restructuring is hard to do because people lives are impacted. So any commentary, it sounds like that there will be more than couple of quarters slowdown?

Jure Sola -- Executive Chairman

Yes, well, Jim, let me make it clear. There's 2 questions there and I want to break those up. I don't know how long we're going to see some of the slower demand. Is it 1 quarter or 2 quarters, I'm really not smart enough to forecast it today, and I don't think my new management is ready to forecast on that either. But when it comes to the people, Jim, we are very sensitive to that. Our strength has always been our management and our employees, but in nature of our business, you constantly have to tune things up. As we experienced growth last year around the world, customers moved the product around and sometimes, you have to time comes that you need to tune things up. And I will say that's kind of what we're doing right now, tuning things up to make sure, for a lot of reasons, is to be really ready for upside and when things come back to the demand that we're looking for that we can deliver better margins. But in the meantime, the key here is that even at the lower level that we continue to deliver the respectable numbers.

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

Thank you so much, and we're looking forward to working with your management

Jure Sola -- Executive Chairman

Thank you, Jim. Thanks for your support.

Hartmut Liebel -- Chief Executive Officer

Catherine, operator, we have time for one more question at this point.

Operator

Your last question comes from line of Christian Schwab with Craig-Hallum Group.

Christian Schwab -- Craig-Hallum Group -- Analyst

Hey Congratulations to the new management team and congratulations on retirement. And Jure, congratulations on coming back for another conference call. So if I could, just a little bit further elaboration on Jim's earlier question on the excess inventory. If you look at your top 10 customers, does everybody have excess inventory?

Jure Sola -- Executive Chairman

I don't think, Craig Christian, I can't really comment on that, but I will say this is broad-based. And what happens when you have a shortage is basically for almost 1.5 years, two years, if you look at historically, unfortunately, there's always people buy more than they need and it's kind of that's what we see today. I hope we're right. And that's but in the meantime, we're just continuing to do what is in our control, and we will continue to make better Sanmina.

Christian Schwab -- Craig-Hallum Group -- Analyst

Right, right. So kind of a textbook semiconductor correction might be happening, right, now that MLCCs are no longer an allocation; MCUs, MPUs lead times gone from 26 weeks to 8 weeks, maybe 10 weeks in some parts. So what you're saying is maybe we're just seeing an inventory drawdown by customers to generate cash, not the type of demand destruction that maybe your year-over-year guidance would suggest, is that fair?

Jure Sola -- Executive Chairman

Yes. We're not really at this moment, I would say, we don't really not ready to guide year-over-year. I mean we're optimistic from our capabilities point of view and what we're working on from that point of view. But I think in short term, I definitely believe there is some correction in inventory for those reasons because of shortages.

Christian Schwab -- Craig-Hallum Group -- Analyst

Right. Okay. And then, my last question, again, following up on the rightsizing, can you elaborate on who exactly is being rightsized? Is that should we be assuming quarterly operating expenses change or is a bunch of that in COGs?

David Anderson -- Former Chief Financial Officer

No. Christian, it's going to be a combination. The rightsizing is not we haven't finalized it totally, but in terms of the bulk of it, as I mentioned, is going to be severance costs, it would be across both COGs and opex.

Christian Schwab -- Craig-Hallum Group -- Analyst

Great. I don't have any other questions. Thank you,

Hartmut Liebel -- Chief Executive Officer

Well, with that, thank you, everybody, for joining today's call, and we look forward to providing an update on the business on our next earnings call. Again, thank you so much for your support and speak to you next time.

Jure Sola -- Executive Chairman

Thanks, everyone.

Operator

[Operator Closing Remarks]

Duration: 64 minutes

Call participants:

Paige Melching -- Vice President of Investor Relations

Jure Sola -- Executive Chairman

Hartmut Liebel -- Chief Executive Officer

Kurt Adzema -- Chief Financial Officer

David Anderson -- Former Chief Financial Officer

Ruplu Bhattacharya -- Bank of America Merrill Lynch -- Analyst

Jim Suva -- Citigroup Global Markets Inc. -- Analyst

Christian Schwab -- Craig-Hallum Group -- Analyst

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