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TTM Technologies, Inc. (NASDAQ:TTMI): Transforming into a More Differentiated and Less Cyclical Business
Published on September 24, 2024 | Ticker: TTMI

TTM Technologies, Inc. (NASDAQ:TTMI) is a leading global manufacturer of technology solutions, including mission systems, radio frequency (RF) components/RF microwave/microelectronic assemblies, and quick-turn and technologically advanced printed circuit boards (PCBs). The company has been on a strategic journey to transform its business to be less cyclical and more differentiated, with a focus on adding value to the product solutions it delivers to customers, particularly in the aerospace and defense market.

Financials

In the fiscal year ended January 1, 2024, TTM reported annual revenue of $2,232,567,000 and a net loss of $18,718,000. The company generated annual operating cash flow of $187,284,000 and annual free cash flow of $27,042,000. These financial results demonstrate the scale and liquidity of TTM's business, despite the net loss for the year.

During the first quarter of 2024, TTM delivered a solid performance, with non-GAAP earnings per share above the high end of the guided range and demonstrating solid year-over-year growth. Revenues were at the high end of the previously guided range and returned to year-over-year growth, driven by demand strength from the aerospace and defense and data center computing end markets, which was partially offset by lower-than-expected results from the medical, industrial and instrumentation, and automotive end markets.

Business Overview

Strategically, TTM has emphasized adding value to the product solutions it delivers to customers, particularly in the aerospace and defense market. As a result of strategic transactions, over 50% of TTM's revenues in the aerospace and defense end market are now generated from engineered and integrated electronic products, with PCBs contributing less than 50% overall. This shift towards more differentiated and higher-value offerings is a key part of the company's strategy to transform its business.

New Manufacturing Facility in Penang

Another important element of TTM's differentiation strategy is its investment in a new state-of-the-art, highly automated PCB manufacturing facility in Penang, Malaysia. This facility is designed to service the company's customers in its commercial end markets, such as networking, data center computing, and medical, industrial, and instrumentation. The decision to build this new factory is a direct response to customers' increasing concerns about supply chain resiliency and regional diversification, as well as the need for advanced multilayer PCB manufacturing options outside the Greater China region.

The Penang facility is currently in the ramp-up phase, with limited revenues expected in the second quarter of 2024 and further ramp-up in the second half of the year. The company expects the Penang facility to have a headwind of approximately 180 basis points on gross margins in the first half of 2024, before the impact decreases to around 100 basis points for the full year.

Manufacturing Footprint Consolidation

In addition to the Penang facility, TTM has also been consolidating its manufacturing footprint by closing three small manufacturing facilities in Anaheim and Santa Clara, California, and Hong Kong, and consolidating the operations into the company's remaining facilities. This consolidation is expected to improve total plant utilization, operational performance, customer focus, and profitability.

Expansion in Aerospace and Defense

TTM is also expanding its advanced technology capability for the aerospace and defense market through the construction of a new facility adjacent to its existing Syracuse, New York campus. This new facility will focus on specialized high-technology PCB production, providing customers with reduced lead times and a significant increase in domestic capacity for ultra HDI PCBs in support of increasing national security requirements.

End Market Diversification

The company's end market diversification is another key aspect of its strategy. In the first quarter of 2024, the aerospace and defense end market represented 46% of total sales, up from 43% in the same quarter of the prior year. The data center computing end market contributed 21% of total sales, up from 10% in the first quarter of 2023, driven by strength in data center customers building products for generative AI applications.

The medical, industrial, and instrumentation end market accounted for 14% of total sales in the first quarter, down from 19% in the year-ago quarter, primarily due to inventory reductions at a number of customers. The automotive end market represented 13% of total sales, down from 17% in the first quarter of 2023, due to continued inventory adjustments and soft demand at several customers. The networking end market contributed 6% of revenue, down from 11% in the first quarter of 2023, as customers continued to focus on inventory digestion and experience weak end market demand.

Advanced Technology and Engineered Products

TTM's advanced technology and engineered products business, which includes HDI, rigid-flex, RF subsystems and components, and Engineered Systems, accounted for approximately 48% of revenue in the first quarter of 2024, up from 41% in the year-ago quarter and 47% in the fourth quarter of 2023. This demonstrates the company's progress in increasing the value-added content of its offerings.

Outlook

Looking ahead, TTM provided guidance for the second quarter of 2024, projecting net sales in the range of $560 million to $600 million and non-GAAP earnings per share in the range of $0.32 to $0.38 per diluted share. The company expects gross margins to improve sequentially, with the Penang facility headwind of approximately 180 basis points in the first half of the year before decreasing to around 100 basis points for the full year.

Conclusion

In conclusion, TTM Technologies is transforming its business to be less cyclical and more differentiated, with a focus on adding value to the product solutions it delivers to customers, particularly in the aerospace and defense market. The company's strategic investments in new manufacturing facilities, consolidation of its footprint, and diversification of its end markets position it well for future growth and profitability, despite the net loss reported in the most recent fiscal year.

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