Sanmina - Earnings Call - Q3 2025

Executive Summary

• Q3 FY2025 delivered revenue of $2.04B, non-GAAP gross margin of 9.1%, and non-GAAP diluted EPS of $1.53; all were above management’s outlook and marked solid execution in a dynamic macro environment.
• Versus Wall Street consensus, revenue and EPS were beats: revenue $2.04B vs. $1.98B*, EPS $1.53 vs. $1.415*; however EBITDA came in below consensus at $133.2M vs. $144.6M*; estimates based on 2 covering analysts*. Values retrieved from S&P Global.
• Q4 FY2025 guidance implies revenue of $2.0–$2.1B and non-GAAP EPS of $1.52–$1.62, maintaining the full-year growth trajectory of ~6–8% and reinforcing margin discipline (non-GAAP operating margin 5.5–6.0%).
• Strategic catalyst: announced definitive agreement in May to acquire AMD’s ZT Systems data center infrastructure manufacturing business—expected to add $5–$6B annual net revenue run-rate and double Sanmina’s net revenue within three years; accretive to non-GAAP EPS in year 1 post-close.

What Went Well and What Went Wrong

What Went Well

• Strong beat on EPS and revenue vs. guidance and consensus; CEO: “Revenue, non-GAAP gross margin, and non-GAAP diluted earnings per share exceeded our outlook”. Values retrieved from S&P Global.
• CPS margin expansion to 14.7% (+320 bps YoY) on higher revenue, favorable mix, and operational efficiencies; CFO emphasized progress and target above 15% medium term.
• Robust cash generation and balance sheet strength: CFFO $201M; FCF $168M; cash and equivalents $798M; revolver undrawn, ~$1.7B liquidity; pretax ROIC 24.8%.

What Went Wrong

• EBITDA underperformed vs. Street despite top-line/EPS beats: actual ~$133.2M vs. consensus ~$144.6M*, suggesting mix and investment spend effects. Values retrieved from S&P Global.
• IMS gross margin dipped slightly YoY to 7.5% (-10 bps), reflecting mix within the segment.
• Automotive/transportation softness noted; CEO cited slower demand near-term, with recovery expected in FY2026.

Transcript

Speaker 5

This call is being recorded on Monday, July 28, 2025. I would now like to turn the conference over to Paige Melching, Senior Vice President of Investor Communication. Please go ahead.

Speaker 1

Thank you, Chloe. Good afternoon, ladies and gentlemen, and welcome to Sanmina's third quarter fiscal year 2025 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. Joining me on today's call is Jure Sola, Chairman and Chief Executive Officer.

Speaker 2

Good afternoon.

Speaker 1

Jon Faust, Executive Vice President and Chief Financial Officer.

Speaker 8

Good afternoon.

Speaker 1

Before I turn the call over to Uri, let me remind everyone that today's call is being webcast and recorded and will be available on our website. You can follow along with our prepared remarks in the slides provided on our website. Please turn to slide three of our presentation and take note of our Safe Harbor Statement. During this conference call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We caution you that such statements are just projections. The company's actual results could differ materially from those projected in these statements as a result of factors set forth in the Safe Harbor Statement.

The company is under no obligation to and expressly disclaims any such obligation to update or alter any of the forward-looking statements made in this earnings release, the earnings presentation, the conference call or the Investor Relations section of our website, whether as a result of new information, future events or otherwise, unless otherwise required by law. Included in our press release and slides issued today, we have provided you with statements of operation for the third quarter ended June 28, 2025 on a GAAP basis as well as certain non-GAAP financial information. A reconciliation between the GAAP and non-GAAP financial information is also provided in the press release and slides posted on our website. In general, our non-GAAP information excludes restructuring costs, acquisition and integration costs, non-cash stock-based compensation expense, amortization expense and other unusual or infrequent items.

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, total taxes, net income and earnings per share, we are referring to our non-GAAP information. I'd now like to turn the call over to Uri.

Speaker 2

Thanks, Paige. Good afternoon, ladies and gentlemen. Welcome and thank you all for being here with us today. First, I would like to take this.

Opportunity to recognize Sanmina leadership team.

Employees for doing a great job.

To you Sanmina's team, thank you for your dedication, hard work and most.

Important, delivering excellent service to our customers. For the third quarter fiscal year 2025, you delivered solid revenue of $2.04 billion and non-GAAP EPS of $0.53 per share. Again to Sanmina employees, thank you. Let's keep it up. This is hard work and I know that. Now let's go to our agenda for today's call.

We have Jon, our CFO, to review details of the results for you.

I will follow up with additional comments about Sanmina Corporation results and future goals.

Jon and I will open for question and answers.

Now I'd like to turn this call over to Jon Faust.

Speaker 0

Thank you, Yuri, and good afternoon, ladies and gentlemen. We appreciate your participation in today's earnings call. Before I discuss our third quarter performance, I would like to thank the entire Sanmina team for their dedication, diligent execution, and support in a highly dynamic environment. The team has demonstrated exceptional agility in meeting our customers' evolving needs. Yuri and I, along with the entire Sanmina management team, commend these efforts, which have resulted in a solid third quarter and year-to-date fiscal 2025 performance. Now, please turn to Slide 5, where I'll speak to the financial highlights. We're very pleased to report that our fiscal third quarter results either met or exceeded our previously communicated outlook. More specifically, our revenue of $2.04 billion, non-GAAP gross margin of 9.1%, and our non-GAAP diluted earnings per share of $1.53 all exceeded our outlook.

Furthermore, our non-GAAP operating margin of 5.7% was at the high end of our outlook. These strong results, along with our Q1 and Q2 performance, have established a solid foundation for the fiscal year and have positioned us well to achieve our long-term financial goals of driving growth and expanding margins. Now, please turn to Slide 6, where I'll speak to our P&L performance for the third quarter. As previously noted, we generated revenue of $2.04 billion, which represents an increase of 10.9% year over year. This growth was primarily driven by broad-based demand across all of our end markets, with particular strength in the communications networks and cloud infrastructure end markets, which Yuri will speak to in more detail in his prepared remarks. Non-GAAP gross profit was $186 million, representing 9.1% of revenue and a 60 basis point improvement versus the same period last year.

This expansion in our gross margin was a result of favorable product mix and ongoing operational efficiencies. Non-GAAP operating expenses totaled $70.3 million, slightly above our outlook, reflecting our continued strategic investments aimed at driving future growth. Non-GAAP operating income was $115.7 million, or 5.7% of revenue, representing a 40 basis point improvement versus the same period last year. This improvement was driven by a combination of revenue growth, favorable mix, and disciplined execution. It is important to note that our non-GAAP operating margin consistently remains within our previously communicated short-term target range of 5% to 6%. Non-GAAP other income and expense resulted in a net expense of $4.5 million, which was slightly favorable to our guidance largely due to our strong cash flow generation. Finally, non-GAAP diluted earnings per share was $1.53 based on approximately 54.5 million shares outstanding, representing a 22.8% increase versus the same period last year.

Now, please turn to slide 7 where I'll speak to our P&L performance for the nine months of fiscal year 2025 as compared to the same period last year. Revenue for the nine months increased by 8.7% year over year. This growth was driven by a solid performance across all end markets with notable improvements in the communications networks and cloud infrastructure end markets. Non-GAAP diluted earnings per share for the nine months increased by 13.5% year over year. As communicated at the start of the year and in our earnings call since then, we anticipated fiscal 2025 to be a growth year for both revenue and profitability, and our nine months results put us on the right trajectory to achieve this objective. Now, please turn to slide 8 where I'll speak to our segment results. IMS revenue came in at $1.65 billion, up 11.6% year over year.

This was driven by growth across all end markets with particular strength in the communications networks and cloud infrastructure end markets. IMS non-GAAP gross margin was 7.5% and down 10 basis points versus the same period last year. CPS revenue came in at $422 million, up 8.8% year over year, driven by increased demand across all end markets. CPS non-GAAP gross margin was 14.7%, an impressive 320 basis point improvement year over year. This performance was driven by higher revenue, favorable mix, and ongoing operational efficiencies. While we're pleased with the performance of both the IMS and CPS businesses this quarter, we recognize the ongoing opportunity for further improvement in both revenue growth and margin expansion, which will remain key focus areas going forward. Now, please turn to slide 9 where I'll speak to the balance sheet highlights.

For many years, Sanmina has had one of the strongest balance sheets in the industry, and we continued to add to that strong foundation. This quarter, cash and cash equivalents were $798 million. At quarter end, we had no outstanding borrowings on our $800 million revolver, leaving us with substantial liquidity of approximately $1.7 billion. We ended the quarter with inventory net of customer advances of $1.2 billion, representing a 12% decrease in absolute dollar terms versus the same period a year ago. Inventory turns net of customer advances improved to 6.3 times for the quarter as compared to 5.1 times in the same period a year ago. While we're pleased with these results, we still see room for further optimization. Our non-GAAP pretax ROIC for the quarter was 24.8%, well above our weighted average cost of capital and an improvement from 21.1% in the same period a year ago.

The company continues to be in a net cash position and our gross leverage ratio was 0.38x. This robust financial profile enables us to effectively execute on our strategic initiatives while still navigating macroeconomic uncertainties. Now please turn to slide 10 where I'll speak to the cash flow highlights. As a direct result of our team's disciplined working capital management, cash flow from operations for the third quarter was a strong $201 million and $422 million for the nine months of the fiscal year. Capital expenditures for the quarter were $33 million, which was lower than our outlook driven by the timing of receipts and totaled $80 million for the nine months of the fiscal year. As previously communicated, we remain committed to making strategic investments in the capabilities and technologies necessary to strengthen our market position and support our long-term financial objectives.

To that end, we anticipate ongoing targeted investments in both capacity and technology across our operations in the U.S., India, and Mexico. Based on our spend for the first nine months and our fourth quarter projections, we now expect full year capital expenditures to be about 1.8% of revenue. Free cash flow for the quarter was $168 million, bringing the nine months total to $341 million. During the quarter we repurchased 0.2 million shares for approximately $13 million and year to date we have repurchased 1.4 million shares for $114 million. As of June 28, 2025, we have $239 million remaining under our authorized share repurchase program. Our strong cash flow performance has provided us with the financial flexibility to allow continued investments in the business while also returning capital to shareholders, all within a disciplined and balanced capital allocation framework.

Now please turn to slide 11 where I'll cover our outlook for the fourth quarter. Our guidance is based on current customer forecasts and incorporates market uncertainties stemming from tariffs and the geopolitical landscape. Our fourth quarter outlook is as follows. We expect revenue between $2.0 billion to $2.1 billion, at the midpoint of $2.05 billion. That would put us up 6.8% on a full year basis, in line with our prior outlook. Non-GAAP gross margin is projected to be between 8.7% and 9.2%, subject to mix considerations. Operating expenses of $64 million to $68 million, non-GAAP operating margin of 5.5% to 6.0%. We expect other income and expense to be a net expense of approximately $4 million, an effective tax rate of 20% to 22%. We estimate an approximate $4 million noncash reduction to our net income to reflect our India JV partner's equity interest.

Non-GAAP diluted EPS in the range of $1.52 to $1.62 based on approximately 54 million fully diluted shares outstanding, at the midpoint of $1.57. That would put us up 9.8% as compared to the same period a year ago and up 12.9% on a full year basis. Capital expenditures are expected to be around $65 million and finally, depreciation of approximately $30 million. In summary, we are very pleased with our Q3 performance despite the uncertainty around tariffs and the geopolitical, and we're confident in our ability to deliver solid revenue and profitability growth in Q4 and beyond. Now please turn to slide 12 where I'll provide an update on our previously announced planned acquisition of the ZT Systems manufacturing business. We are progressing nicely and remain on track to close the transaction near the end of the 2025 calendar year, pending regulatory approvals.

We are also on track with all of our required regulatory filings. As we mentioned when we announced the transaction, we expect it will add $5 billion to $6 billion of annual net revenue on a run rate basis and anticipate it will double Sanmina's net revenue within the next three years. As a reminder, we expect the transaction to be accretive to non-GAAP diluted EPS in the first year after closing, with additional non-GAAP EPS accretion from both growth and synergies over time. The syndication of our permanent debt financing is also on track and we'll provide further updates on that front very soon. I also want to briefly discuss what this transaction means for our balance sheet and how it fully aligns with our capital allocation strategy, which will continue to focus on growth and cash generation while following a disciplined ROI-based approach.

We've built one of the strongest balance sheets in the industry with a net positive cash position, strong liquidity, and a low gross leverage ratio of 0.38 times as of our third quarter. I want to emphasize our commitment to maintaining a strong balance sheet, having ample liquidity to invest in the business, and execute on our strategy. This transaction is an investment in working capital, primarily inventory, property, plants and equipment, and a critical set of capabilities which we believe will generate solid returns over time. At the time the transaction closes, we expect our net leverage ratio to be well within our target range of 1x to 2x and in line with our peer group.

For a period of time after closing, we expect working capital to build to support investment in the growth of the business, which we anticipate will temporarily push our net leverage ratio above 2x. To reiterate, we are committed to preserving our existing credit rating, and our goal is to become investment grade over time. This is a compelling transaction for Sanmina as it positions the company to capitalize on long-term growth trends in the data center and AI infrastructure end market. In summary, we're excited about the opportunities ahead, and we look forward to discussing the financial profile of the business in more detail at the time the transaction closes. With that, I will now turn the call over to Jure.

Speaker 2

Thank you, Jon. Ladies and gentlemen, let me add a few more comments about our.

Results for the third quarter and the rest of the fiscal year 2025.

Please turn to Slide 14. As you heard from Jon, our team delivers solid execution and excellent service to our customers.

Revenue, non-GAAP gross margin, and non-GAAP EPS exceeded our outlook.

We delivered non-GAAP operating margin of.

5.7% and long term we expect to improve our operating margin to greater than 6% plus.

We generated a strong cash flow for the quarter, and we expect to continue to generate positive cash flow from operations.

To drive future growth, we delivered year over year growth for all end markets as I can tell.

You know that our customers are still positive.

About their future, we are starting.

To see a strong pipeline of new opportunities.

Overall, a good quarter, but there's.

Still room, as you heard from Jon, for improvements. To talk more about it, please turn to Slide 15.

Let's look at the now revenue by.

End market for the third quarter: industrial, energy, medical, defense, aerospace, and automotive.

Segment came in at $1.256 billion growth of.

6.2% year over year.

Very strong overall segment for communications networks.

Cloud infrastructure came in at $786 million, growth of 19.1% year over.

Year for the third quarter.

Total revenue of $2.04 billion.

We delivered another solid quarter, up 11% year over year. Top 10 customers for the quarter was.

52.8% of our revenue bookings.

Continued to see solid demand overall, book.

The bill came around $1 to $1.

As you can see, we are a well-diversified company. We continue to see positive trends for fiscal year 2025 and beyond for industrial and energy. We have very solid customer.

Base that is doing well. We have some great opportunities in pipeline around energy and safety equipment. We see exciting new projects in the.

Pipeline that should drive the growth in fiscal year 2026. For medical, we see stable demand driven.

By medical devices and digital health. Again, we have strong customer base of customers well diversified within market. We also see good pipeline of new opportunities for the future.

Fiscal year 2026 and 2027 for defense.

In aerospace segments, we continue to see solid demand from critical defense projects. Our advanced printed circuit board fabrication business in this segment is doing well.

We are growing and expanding defense.

Aerospace segment and other capabilities of Sanmina. Overall, we expect this segment to continue to grow nicely from technology components all the way to full systems for automotive and transportation segment. Short term, we've seen some softness in.

This market overall slower demand for this segment.

Long term, we have some good opportunities in pipeline that we expect to grow again in fiscal year 2026.

For communications networks and cloud infrastructure, we see very positive trends, solid demand for high performance routers and switches, optical network systems, optical, advanced packaging, and enterprise storage.

We're also starting to see some positive.

Signs about our mobile 5G business driven.

Both by cloud infrastructure and service providers.

For this segment, Sanmina is well positioned, and we should continue nice growth in 2016 and beyond. Let me talk a little bit more.

About fourth quarter and fiscal year 2025 outlook, as you heard from Jon, we are pleased with our performance for the first nine months of fiscal year 2025 as revenue was up 8.7% compared to the same period a year ago. We have grown the non-GAAP EPS.

For the first nine months to 13.5% and we generated strong cash flow from operations.

Based on our results for the first nine months and outlook for the fourth quarter at midpoint, this puts us on a track to deliver nice growth. In fiscal year 2025, we expect to see a growth of 6% to 8%.

While we continue to manage through very.

Dynamic environment, we remain focused on operational.

Execution, customer satisfaction, cost management, and consistently.

Delivering value to our customers. Please turn to slide 16. Now let me talk to you about our strategic.

Acquisition of ZT Systems from Advanced Micro Devices (AMD).

Let me add a few more comments to Jon's comments. This acquisition advances Sanmina Strategic Data Center.

AI strategy. It positions Sanmina to capitalize.

On the long term growth trends in.

Data center AI infrastructure spend. If you look at the chart next.

The forecast is that global data center investments will be over $500 billion, and as we go into 2028, that number could be over $800 billion, potentially over $1 trillion. There is plenty of opportunity for us. I can tell you that we are getting a lot of great interest in.

Our new capabilities, both from existing and new potential customers.

We do expect to expand our relationship with hyperscalers and OEM customers across all.

Platforms and technologies in the industry.

This strategic acquisition brings industry-leading manufacturing capabilities and capacity here in the U.S.

Europe reinforcing Sanmina S16 footprint.

This complements Sanmina's well-established vertical integration strategy. Our strategy is to provide end-to-end solution for data center AI and.

Market, so please turn to slide 17.

I can tell you more about it.

Our end-to-end capabilities for data center AI.

On this slide you can see Sanmina end-to-end solution for data center AI and markets. Data center AI requirements continue to evolve at a rapid pace and is driving technology advancement. Sanmina has been investing and expanding our capabilities to meet this present and future demand. We expanded and grown our high technology printed circuit boards. We've been assembling most advanced systems that are available out there. Continue to fabricate and invest in mechanical racks and enclosures. We're expanding our lithium cooling rack systems.

We're investing in cooling manifolds and ROCs busbars for ROCs. We're growing our ODM services and storage business, custom memory, a custom optical module.

With this strategic acquisition, our strategy now provides industry-leading capabilities from design.

To full system end-to-end solution.

For data center AI infrastructure and market, these strategic acquisitions from AMD complement Sanmina advanced data center AI technology and give us ability to do a full system integration at scale. I can also tell you that we'll continue to invest in this market to drive the future growth. Please turn now to Slide 18.

In summary, we are executing well in this dynamic environment. Third quarter results were in line or exceeded our outlook. We delivered strong year.

To date, and year to year performance across the majority of our end markets.

Fourth quarter 2025 outlook aligns with achieving.

Our fiscal year 2025 growth and profitability objectives.

As you heard both from Jon and I, third quarter was a busy time for us.

We signed a definitive agreement with AMD to acquire ZT Systems. It's a strategic transaction for us, very exciting. This fits well with Sanmina's strategic growth priorities.

We feel good about our future now.

Programs win, and we expect demand improvements to drive the growth in fiscal year 2026.

Sanmina is well positioned to be a bigger and stronger company in the future. I'm personally excited about opportunities ahead. Ladies and gentlemen, now I would.

Like to thank you all for your time and support.

Operator, we're now ready to open the lines for question and answers again.

Thank you again.

Speaker 5

Thank you, ladies and gentlemen. We will now conduct the question and answer session. If you would like to ask a question, please press Star and the number one on your telephone keypad. If you would like to withdraw your question, please press Star two. If you're using a speakerphone, please lift the handset before pressing any keys. We'll pause for just a moment to compile the Q and A roster. Our first question comes from the line of Ruplu Bhattacharya from Sanmina. Your line is open.

Speaker 3

Hi, thank you for taking my questions. On slide 12, you gave an update for the ZT Systems acquisition and it still says $5 to $6 billion of net revenue run rate. Is that still your expectation for annual revenue? Is this still a declining revenue business or have the revenues now stabilized? If you can also talk about your plan to turn this business around. Do you think you need to hire any sales force to go after hyperscale customers? AMD kept the design engineers. Are you planning to hire any engineers to invest in the RAC configurations? Just talk about what you see as the annual revenue run rate as of today and what is your plan to turn and expand this business?

Speaker 2

All right, it's a great question and I will give you a lot of information. As you know, we're not the owners of this organization yet, so I have to be careful what I can say, what I cannot say. First of all, Ruplu, we are very excited today. You know, we announced this deal on May 19, I believe. Personally, I'm more excited today than I was then, and I was very excited then. The reason I'm more excited today is as we talk to basically the critical customers out there with hyperscalers and critical OEM potential customers, we find out there's a lot of interest. We also find out a lot more about the ZT Systems itself. We believe they have some advanced capabilities, some great people. In this business, it's all about people. I believe they got some great people.

When I look at what's a potential, it's a great potential. You know, when AMD acquired this thing, their goal was to eventually, you know, find the right partner and separate engineering and manufacturing. I would say that we're fortunate that we're becoming a critical partner to AMD and taking over this operation. We believe working together will give us a lot of opportunity. Not believe, I see it today, all these key capabilities that we have. The industry really needs capacity and capabilities that we have. To be honest with you, I wish we could close this deal today because I'll be able to tell you a lot more. Personally, I'm not worried about revenue and Jon can comment later on that. I think the revenue is there. I think there's a lot more. ZT has some older products that have been doing it for a long time.

This place is profitable. It was profitable. It is profitable today. We expect it to continue to be profitable in the future. Opportunities are bigger for the future than the past. Let me leave it at that. Today we are already selling Sanmina plus ZT to our critical partners. That's going on every day across all our critical people. We are adding some technical support, more about technology to add more value to our customers. We know exactly what that is. We are also picking a lot of great people from ZT. They got a lot of network people in the manufacturing and also around testing and so on. This is a very, very strong team. I think partnering with AMD is very critical. They got a lot of exciting technology that is coming up.

I believe that we can help them get that product to the market at a faster rate with the technology that is required for hyperscalers and OEM customers. We are definitely investing in sales. As you can see, our SG&A is a little bit higher because of that. I don't know what else to say except to tell you I'm excited. I think there's a lot of opportunity there. As I said before in my prepared statement, I think we're ready to build a lot bigger Sanmina from a very, very strong position. We have a strong foundation. Give us some time here, at least for the next 6 to 12 months, to give you some good results. John, you want to add comments to that?

Speaker 8

Yeah, just one point, Ruplu. I'll add Ruplu just to help answer the question around revenue. Back at the time of the announcement on May 19, we said that we expected revenue run rate, the net revenue run rate, to be about $5 billion to $6 billion or between $5 billion and $6 billion at the time of the close. We don't intend to change that forecast. As Ruplu mentioned, we'll come out with a lot more details when we close the transaction. That's still the case. The business has a very stable foundation of general purpose kind of compute and also storage. It's the accelerated compute component that's going through a transition as we had mentioned. We've got full confidence in what's happening on that part of the business too.

Speaker 0

is more to come when we close the deal.

Speaker 2

Let me add to that. I didn't answer the question. We are adding, you know, at Viking we have a very strong core engineering team that basically can do the same or similar thing that all ZT engineering team could have. Now, ZT was a bigger scale, but we're expanding our team. We do have a core right now that specifically for this data center that it can do the job today. We are going to be expanding and growing that team.

Speaker 3

Okay. Now I appreciate all the details for my follow up. Can I ask, you know, you had very strong growth in fiscal 3Q. I mean, you reported 11% year on year growth. When we look at the guide for fiscal 4Q, there seems to be somewhat of a meaningful slowdown. I think the midpoint of the guidance implies 1.6% year on year growth. Can you just talk about if any markets are weaker than you expected? Like you said, Jure, if you look at the full year, you're going to be growing revenues in fiscal 2025 at 7% almost year on year. Can you give us your early thoughts into fiscal 2026? I mean, let's say even without ZT Systems, do you think the base business can continue this 7% year on year growth?

Just any thoughts you have on fiscal 4Q, what is driving that and your thoughts on fiscal 2026?

Speaker 2

First of all, comparison from this fourth quarter to the last year to the 2024, you're right, it's not a huge growth, but the business is not slowing down. I would say the business expanding. If you look at the last year, we were kind of coming out of inventory. It was choppy, was a transition year. It was really choppy for most of our competitors, too. It just happened to be a fourth quarter last year better than what it was. Third and second today, the business is a lot more stable. Yes, we have some uncertainties out there with this geopolitical issue, the tariffs and so on. It looks like that temperature is coming down, so we feel a little bit more comfortable and we can predict the future better.

Our customers are a lot more positive about the future.

If I look at the customers' forecast, they look very positive. Today we're kind of discounting those. For us to forecast 2026, we'd like to wait more, probably another 90 days. I can tell you right now, and what I said earlier in prepared statement, we're excited. We expect to grow our core business, hopefully at the same or faster rate next year. Overall, I wish we have a, unless something really, you know, falls off the cliff, that we are completely out of our control, we expect to have a great year next year.

Speaker 3

Okay, and if I can just put in one more quick question, Jon. CPS margins were up 320 bps sequentially. Was there any one-time items, and can this continue? Thank you so much for taking my questions.

Speaker 0

No, it's primarily driven just by the business mix.

Speaker 8

You know, Ruplu. As you know, CPS margins in that profile, that's an area that we've been focused on for a long time. We've been making a lot of investments there.

Speaker 0

We are very pleased with the results.

Speaker 8

For many, from one quarter to the next, you can see some ups and downs just because of the nature of that business. There are so many different components within it, but pretty much across the board, we've been looking to improve the margin profile of each individual division. What I believe that we're seeing now is the result of some of those investments coming through to fruition. Very happy with the results. Nothing one time in nature that we'd want to call out. As far as the future goes, we're going to continue to drive that profile. Both Jure and I have said before that we expect that business to be above 15% and we're getting very close to that number already today.

Speaker 3

All right, thank you so much.

Thanks, Ruploo.

Speaker 5

Our next question comes from the line of Steven Fox from Fox Advisors. Your line is open.

Speaker 7

Hi, good afternoon, guys. First of all, I had another question on the ZT Systems deal. Now that you've had a little bit more time with it, can you just talk about the risk on the inventory side, Jon? I know it's a big piece of the valuation. Do you guys get a last look at valuing that, the inventories before you close? I guess my bigger concern is anything that you might inherit that could be sort of lagging generation on the GPU side that you might have write downs on. Can you just sort of talk about that risk? I had a follow up.

Speaker 8

Yeah, absolutely, Steve, thanks for the question. We do have a working capital target of about $2 billion. As a part of the transaction, we talked about that when we announced the deal back on May 19th. You can basically think of that as primarily related to inventory. There's the property, plant and equipment too of $250 million, but the $2 billion is primarily around inventory. As a part of the deal, we spend a lot of time evaluating that inventory position. A lot of discussions with AMD and ZT Systems. We'll make sure, just like we always do in this business, in our business around manufacturing, to make sure that that inventory is supported by customer demand and forecasts. There's always risk, there's some risk there. Our intent is to fully evaluate that and both AMD and ZT Systems are committed to that as well.

Speaker 7

Great, that's helpful. On the legacy business, Jure, I know you just mentioned what you've been doing on the CPS side. I was wondering if you could just sort of, because I'm looking, it looks like that was a record CPS margin. I was wondering if you can maybe help us step back a little bit more, talk about how CPS is helping your business by serving markets a little bit. It seems like it must be helping growth, not just margin. Any help there would be useful.

Speaker 2

Yeah, Steve, first of all, not everything is perfect at CPS today, but we believe, as Jon mentioned, you know, we always target over 15%, but I would say that our target is higher than 15% right now because we know there's more opportunity. You know, we still have some softness in some of the semiconductor business that typically we have, but we also have some great opportunities in defense. If you look at our advanced printed circuit boards here in North America, that's mainly high technology product for defense. That business is doing well. We expand in that business and we expect to continue to have at least a few good years in that segment when it comes to demand. Our mechanical business is doing well, especially around the data center. As I mentioned earlier, we are expanding, investing in liquid cooling racks. Demand for racks is very strong.

It's all around for data center and we expect that business actually to increase now with acquisition of ZT Systems. We see a lot of positive things there. We are also expanding our precision machining into the military side of the business. We are expanding and have been investing a fair amount and hopefully we'll get a lot of returns on optical modules, specifically pluggables, custom memory around the military for jet fighters and so on. There's a lot of exciting stuff that we have in our segment of what we call Components Technology Group with a lot of upside potential and a lot of growth opportunities. Yes, we are very comfortable with our core business and we're still pushing those plans that we talked about a year ago.

We need to grow our core business at a higher rate and we expect, we believe we are positioning right now that we're going to start seeing that nice growth in 2026 and beyond.

Speaker 7

Great, that's super helpful. Thank you.

Speaker 2

Thanks, Steve.

Speaker 5

Our next question comes from the line of Andres Orders from Sidoti. Your line is open. Hi.

Speaker 1

Thank you.

Speaker 6

My questions. Hi Jure, how you doing?

Speaker 2

Good, good.

Speaker 6

Congrats on doing nice performance here in the third quarter with the additional revenue that expect from the ZT Systems acquisition and doubling the revenue in three years. Where do you expect the operating margins to be?

Speaker 2

First of all, we are improving our margin across existing business and we believe that end-to-end solution that we will be providing for data center AI and market. We're adding a lot of value to our customers and a lot of capabilities that will allow us to deliver the better margins than historical. I'm saying today higher than 6%, but I believe there's an upside to that and we like to talk to you more about it 90 days from now and hopefully we'll be in control of ZT by that time. We'll talk more, but we're excited what's in front of us. Like I said, there's some great people at ZT. We are committed.

We've been investing fair amount money in these critical components that go for data center and I think with now capabilities for full system integration at the scale, you know, we should be able to continue to improve our margin going forward.

Speaker 6

Okay, thank you. For the Indian joint venture, how's that progressing? It seems like you had a little bit higher payout to them or actually was in line with what you had expected. You didn't really give a guidance for that for the fourth quarter either, I think, or maybe I just missed it.

Speaker 8

Yeah, on that point, Anja, we always guide on the adjustment to our net income to reflect their equity interest. The JV overall has done very well. I mean, we're very pleased. It's coming up on almost three years now that we've had the JV in place.

Speaker 0

India is a very important market to us.

Speaker 8

We expect to see a.

Speaker 0

Lot of growth in that market.

Speaker 8

As far as the business goes, you know, we're looking to expand the different end markets that we serve. You know, it's an area that we're investing in as well. I mentioned that from a CapEx perspective and Jure might want to comment on that as well. We see a lot of opportunity in there. Yeah, we do just guide and comment specifically on the net income adjustment.

Speaker 2

Yeah, India is a very exciting project for us. First couple years, you know, when you do a joint venture, it takes to kind of get to know each other pretty well. What are our goals? I believe Reliance and Sanmina are on the same page. We want to build something big in India. We are expanding, and we'll also make more comments on that at the end of this year. A lot of opportunities in India across all our markets, from industrial, medical, defense, automotive, transportation, definitely.

For, you know, data center AI opportunities.

That will be, we believe, in India, and we are positioned to play across all of those key markets. Great decision on our part to go with the JV with Reliance. We still run that thing 100%, but I think having a good partner in a market like this is very critical. I believe we have a great partner.

Speaker 1

Okay, thank you.

Speaker 6

Just one last one. In terms of the tariffs, what are you seeing in terms of the tariffs and potential headwinds from that?

Speaker 2

I'll give that to Jon.

Speaker 8

Yeah, I mean, there's still a very dynamic environment out there when you think about tariffs and % changes and things of that nature. Our approach has been the same as it's been since all of this started, very close to our customers to understand what they're trying to do and what they're trying to achieve. Based on the footprint that we have, we can certainly move programs around, but it's up to them at the end of the day. Typically, what we're seeing is current programs are staying in place. There's a lot of discussion and evaluation for new programs because we think supply chain on a broad basis is becoming more regionalized, and we've got the right footprint to enable that and support that. Not just our footprint but also our system structure, our single ERP, our single shop floor system with 42Q.

All those things enable us to be able to support our customers regardless of where they want to do manufacturing.

Speaker 0

Just as a reminder from.

Speaker 8

a business model perspective, you know, these costs are actually borne by our customers. We're essentially a pass through from that point of view. Our objective at the end of the day is to help them, you know, make those decisions, decide where to manufacture and what makes the most sense for their business.

Speaker 6

Thank you. Do you see any customers having sort of a wait and see, then maybe for the new programs, I guess?

Speaker 0

Yeah, at this point we haven't seen.

Speaker 8

Anything like any current programs on a material basis shift because that does take time and investment to do that. Certainly for new programs there's a lot of evaluation and discussion going on. Our goal or our objective is to make sure that we understand the rules and regulations as they're changing.

Speaker 0

We partner closely with our customers to.

Speaker 8

Help them do that analysis and decide what makes the most sense for them.

Speaker 2

Yeah, but Anja, just to add to that, I think the model is that we are going more in this geopolitical world in the future. We're going more to a regional type of manufacturing. Definitely there'll be more business manufacture here in North America, but it's not going to happen overnight because it takes time to bring the technology up to date and so on. Our customers are trying to balance, you know, they look at their market globally, you know, what are they going to do in Asia, what are they going to do in India, what are they going to do in Europe, what are we doing in North America? We're trying to help them balance those requirements not just for a short term, but also long term. There's a lot of talk about the long term, how their strategy is going to play.

We had a customer a couple days ago here, it's a European customer that is basically looking at the whole world, how they're going to supply and service their customer in the future. A lot of work, but I think it'll be positive for us. It's just the way we are structured. We've got a very good structure globally. I believe that our structure is lean, it's a state-of-the-art structure and I think we'll be fine.

Speaker 6

Okay, thank you. That was all for me.

Speaker 2

Thanks, Anya.

Speaker 5

Once again, if you would like to ask the question, please press star 1 on your telephone keypad. There are no further questions at this time. I would like to turn the conference back to Jure, please. Go ahead, sir.

Speaker 2

Ladies and gentlemen, again, thanks for your time that you spent with us today. Looking forward to talking to you. If you have any questions, give us a call. Otherwise, we'll be talking to you 90 days from now and hopefully we'll continue to deliver some great news for you. Thanks a lot.

Speaker 8

Thank you, everyone.

Speaker 2

Bye.

Bye.

Speaker 5

This concludes today's conference call. Thank you for participating. You may now disconnect.