Q3 2025 Sanmina Corp Earnings Call

Speaker #1: Good afternoon, ladies and gentlemen, and welcome to the San Minas Q4 fiscal 2025 earnings conference call. At this time, all lines are in listen-only mode.

Speaker #1: Following the presentation, we will conduct a question-and-answer session. If at any time during this call you require immediate assistance, please press star 0 for the operator.

Speaker #1: This call is being recorded on Monday, July 28, 2025. I would now like to turn the conference over to Paige Moching, Senior Vice President of Investor Communication.

Speaker #1: Please go ahead.

Speaker #2: Thank you, Chloe. Good afternoon, ladies and gentlemen, and welcome to San Minas Q4 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.

Speaker #2: Joining me on today's call is Yuri Sola, Chairman and Chief Executive Officer—

Speaker #3: Good afternoon.

Speaker #2: —and John Faust, Executive Vice President and Chief Financial Officer. Before I turn the call over to Yuri, 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.

Speaker #2: Please turn to slide 3 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.

Speaker #2: 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.

Speaker #2: 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.

Speaker #2: 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 Q3 ended June 28, 2025, on a gap basis.

Speaker #2: As well as certain non-gap financial information. A reconciliation between the gap and non-gap financial information is also provided in the press release and slides posted on our website.

Speaker #2: In general, our non-gap 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-gap financial results.

Speaker #2: 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-gap information.

Speaker #2: I now like to turn the call over to Yuri.

Speaker #3: 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 San Mina Leadership Team, our employees for doing a great job.

Speaker #3: So, to you, San Mina's team, thank you. For your dedication, hard work, and most important, delivering excellent service to our customers. For the Q3 fiscal year 2025, you delivered solid revenue of $2.04 billion and non-gap EPS of $1.53 per share.

Speaker #3: Again, to San Mina employees, thank you. Let's keep it up. This is a hard work, and I know that. Now, let's go to our agenda for today's call.

Speaker #3: We have John, our CFO, to review details of the results for you. I will follow up with additional comments about San Mina results and future goals.

Speaker #3: Then John and I will open for question and answers. And now, I'd like to turn this call over to John. John?

Speaker #4: Great. Thank you, Yuri. And good afternoon, ladies and gentlemen. We appreciate your participation in today's earnings call. Before I discuss our Q3 performance, I would like to thank the entire San Mina team for their dedication, diligent execution, and support.

Speaker #4: In a highly dynamic environment, the team has demonstrated exceptional agility in meeting our customers' evolving needs. Yuri and I, along with the entire San Mina management team, commend these efforts, which have resulted in a solid Q3 and year-to-date fiscal 2025 performance.

Speaker #4: Now, please turn to slide 5, where I'll speak to the financial highlights. We're very pleased to report that our fiscal Q3 results, either met or exceeded our previously communicated outlook.

Speaker #4: More specifically, our revenue of $2.04 billion non-gap gross margin of $9.1% and our non-gap diluted earnings per share of $1.53 all exceeded our outlook.

Speaker #4: Furthermore, our non-gap 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.

Speaker #4: Now, please turn to slide 6, where I'll speak to our P&L performance for Q3. As previously noted, we generated revenue of $2.04 billion which represents an increase of 10.9% year over year.

Speaker #4: 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.

Speaker #4: Non-gap 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.

Speaker #4: Non-gap operating expenses totaled $70.3 million, slightly above our outlook, reflecting our continued strategic investments aimed at driving future growth. Non-gap operating income was $115.7 million, or 5.7% of revenue, representing a 40 basis point improvement versus the same period last year.

Speaker #4: This improvement was driven by a combination of revenue growth, favorable mix, and disciplined execution. It is important to note that our non-gap operating margin consistently remains within our previously communicated short-term target range of 5% to 6%.

Speaker #4: Non-gap 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.

Speaker #4: Finally, non-gap 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.

Speaker #4: Now, please turn to slide 7, where I'll speak to our P&L performance for the 9 months of fiscal year 2025 as compared to the same period last year.

Speaker #4: Revenue for the 9 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.

Speaker #4: Non-gap diluted earnings per share for the 9 months increased by 13.5% year over year. As communicated at the start of the year, end in our earnings call since then, we anticipated fiscal 2025 to be a growth year for both revenue and profitability, and our 9 months results puts us on the right trajectory to achieve this objective.

Speaker #4: 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.

Speaker #4: This was driven by growth across all end markets with particular strength in the communications networks and cloud infrastructure end markets. IMS non-gap gross margin was 7.5% down 10 basis points versus the same period last year.

Speaker #4: DPS revenue came in at $422 million up 8.8% year over year driven by increased demand across all end markets. DPS non-gap gross margin was 14.7% an impressive 320 basis point improvement year over year.

Speaker #4: 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.

Speaker #4: Now, please turn to slide 9, where I'll speak to the balance sheet highlights. For many years, San Mina has had one of the strongest balance sheets in the industry and we continued to add to that strong foundation this quarter.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: Inventory terms, 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.

Speaker #4: While we're pleased with these results, we still see room for further optimization. Our non-gap pre-tax 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.

Speaker #4: The company continues to be in a net cash position and our gross leverage ratio was 0.38 times. This robust financial profile enables us to effectively execute on our strategic initiatives while still navigating macroeconomic uncertainties.

Speaker #4: 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 9 months of the fiscal year.

Speaker #4: 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 9 months of the fiscal year.

Speaker #4: 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.

Speaker #4: To that end, we anticipate ongoing targeted investments in both capacity and technology across our operations in the US, India, and Mexico. Based on our spend for the first 9 months and our fourth quarter projections, we now expect full-year capital expenditures to be about $1.8% of revenue.

Speaker #4: Free cash flow for the quarter was $168 million, bringing the 9 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.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: Non-gap gross margin is projected to be between 8.7% and 9.2% subject to mixed considerations. Operating expenses of $64 million to $68 million. Non-gap operating margin of 5.5% to 6.0%.

Speaker #4: 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 non-cash reduction to our net income to reflect our India JV Partners equity interest.

Speaker #4: Non-gap diluted earnings per share 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.

Speaker #4: 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 landscape, and we're confident in our ability to deliver solid revenue and profitability growth in Q4 and beyond.

Speaker #4: 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.

Speaker #4: 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 to 6 billion dollars of annual net revenue on a run-rate basis in anticipate it will double San Mina's net revenue within the next 3 years.

Speaker #4: As a reminder, we expect the transaction to be accretive to non-gap diluted earnings per share in the first year after closing with additional non-gap EPS accretion from both growth and synergies over time.

Speaker #4: The syndication of our permanent debt financing is also on track and will 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.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: 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.

Speaker #4: At the time the transaction closes, we expect our net leverage ratio to be well within our target range of one time to two time and in line with our peer group.

Speaker #4: 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 two times.

Speaker #4: 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 San Mina as it positions the company to capitalize on long-term growth trends in the data center and AI infrastructure and market.

Speaker #4: 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.

Speaker #4: And with that, I will now turn the call over to Yuri.

Speaker #2: Thank you, John. Ladies and gentlemen, let me add a few more comments about our results. For a third quarter and the rest of the fiscal year, '25.

Speaker #2: Please turn to slide 14. As you heard from John, our team delivered solid execution and excellent service to our customers. Revenue non-gap gross margin and non-gap EPS exceeded our outlook.

Speaker #2: We delivered non-gap operating margin of 5.7% and long-term we expect to improve our operating margin to greater than 6 plus percent. We generated a strong cash flow for a quarter and we expect to continue to generate positive cash flow from operations to drive future growth.

Speaker #2: We delivered year-over-year growth for all end markets. So I can tell you that our customers are still positive about their future. And we are starting to see strong pipeline of new opportunities.

Speaker #2: So overall, a good quarter but still room, as you heard from John, for improvements. To talk more about it, please turn to slide 15.

Speaker #2: Let's look at the now revenue by end market for a third quarter. Industrial energy medical defense aerospace and automotive segment came in at $1.256 billion.

Speaker #2: Growth of 6.2% year-over-year very strong overall segment. For communication networks and cloud infrastructure that came in at $786 billion growth of 19.1% year-over-year. For a third quarter total revenue of $2.04% billion we delivered another solid quarter up 11% year-over-year.

Speaker #2: Top 10 customers for the quarter was 52.8% of our revenue. Bookings continue to see solid demand overall. Book to bill came around one to one.

Speaker #2: As you can see, we are well diversified company. We continue to see positive trends for fiscal year '25 and beyond. For industrial and energy we have very solid customer base that is doing well.

Speaker #2: We have some great opportunities and pipeline around energy and safety equipment. We see exciting new projects in the pipeline that should drive the growth in fiscal year '26.

Speaker #2: 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.

Speaker #2: We also see good pipeline of new opportunities for the future fiscal year '26 and '27. For defense and aerospace segments we continue to see solid demand from critical defense projects.

Speaker #2: Our advanced printed circuit board fabrication business in this segment is doing well. We are growing and expanding defense and aerospace segment in other capabilities of San Mina.

Speaker #2: 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.

Speaker #2: For this segment, long-term we have some good opportunities in pipeline that we expect to grow again in fiscal year '26. For communication networks and cloud infrastructure, we see very positive trend.

Speaker #2: Solid demand for high performance routers and switches optical network system optical advanced packaging and enterprise storage. We also starting to see some positive signs about our mobile 5G business.

Speaker #2: Driven both by cloud and service providers. For this segment, San Mina is well positioned and we should continue nice growth in '26 and beyond.

Speaker #2: Let me talk a little bit more about fourth quarter and fiscal year '25 outlook. As you heard from John, we are pleased with our performance for the first nine months of fiscal year '25.

Speaker #2: As revenue was up 8.7% compared to the same period a year ago, we have grown in non-gap EPS for the first nine months to 13.5% and we generated strong cash flow from operations.

Speaker #2: Based on our results for the first nine months and outlook for the fourth quarter, at midpoint, this puts us in a track to deliver nice growth in fiscal year '25.

Speaker #2: 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.

Speaker #2: Please turn to slide 16. Now let me talk to you about our strategic acquisition of ZT Systems from AMD. Let me add a few more comments to John's comments.

Speaker #2: This acquisition advances San Mina's strategic data center AI strategy. It positions San Mina to capitalize on a long-term growth trends in data center AI infrastructure spend.

Speaker #2: If you look at the chart, next year the forecast is to that global data center investments will be over $500 billion and as we go into '28 that number could be over $800 potentially over $1 trillion.

Speaker #2: So there's plenty 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.

Speaker #2: 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 US and Europe.

Speaker #2: Reinforcing San Mina as 16 footprint. This complements San Mina well-established vertical integration strategy our strategy is to provide end-to-end solution for data center AI and market.

Speaker #2: So please turn to slide 17 so I can tell you more about our end-to-end capabilities for data center AI. On this slide you can see San Mina end-to-end solution for data center AI and markets.

Speaker #2: Data center AI requirements continue to evolve at a rapid pace and is driving technology advancement. San Mina has been investing and expanding our capabilities to meet its present and future demand.

Speaker #2: 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 liquid cooling rack systems we investing a cooling manifolds and racks bus bars for racks we're growing our ODM services and storage business custom memory a custom optical module.

Speaker #2: And 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.

Speaker #2: This strategic acquisitions from AMD complement San Mina advanced data center AID technology and gives us ability to do a full system integration at scale.

Speaker #2: I can also tell you that we'll continue to invest in this market through drive the future growth. Please turn now to slide 18. In summary, we are executing well in this dynamic environment.

Speaker #2: Third quarter results were in line or exceeded our outlook. We deliver strong year-to-date and year-to-year performance across the majority of our end markets. Fourth quarter '25 outlook aligns with achieving our fiscal year '25 growth and profitability objectives.

Speaker #2: As you heard both from John and I, third quarter was a busy time for us. We signed a definitive agreement with AMD to acquire ZT System.

Speaker #2: It's a strategic transaction for us. Very exciting. This fits well with San Mina's strategic growth priorities. We feel good about our future. New programs went and we expect the main improvements to drive the growth and physical year '26.

Speaker #2: San Mina is well positioned to be a bigger and stronger company in the future. And I'm personally excited about opportunities ahead. So ladies and gentlemen, now I would like to thank you all for your time and support.

Speaker #2: Operator, we're now ready to open the lines for question and answers. Again, thank you again.

Speaker #1: Thank you. Ladies and gentlemen, we will now conduct the question and answer session. If you would like to ask a question, please press start and the number one on your telephone keypad.

Speaker #1: If you would like to withdraw your question, please press start too. If you're using a speakerphone, please lift the handset before pressing any keys.

Speaker #1: We'll pause for this a moment to compile the Q&A roster. Our first question comes from the line of Ruplu Bhattacharya from San Mina. Your line is open.

Speaker #2: Hi. Thank you for taking my questions. Yuri on slide. Hi Yuri. On slide 12, you give an update for the ZT Systems acquisition and it still says five to six billion of net revenue run rate is that still your expectation for annual revenue?

Speaker #2: Is this still a declining revenue business or have the revenues now stabilized? And Yuri, if you can also talk about your plan to turn this business around.

Speaker #2: Do you think you need to hire any sales force to go after hyperscale customers? And AMD kept the design engineers. Are you planning to hire any engineers to invest in this the rack configurations?

Speaker #2: So 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 #3: All right. It's a great question and I will give you a lot a lot of information. As you know, we are we're not the owners of this organization yet.

Speaker #3: So I have to be careful what I can say, what I cannot say. But first of all, Ruplu, u, we are very excited today.

Speaker #3: You know, we announced this deal in May 19th, I believe. And personally, I'm more excited today than I was then. And I was very excited then.

Speaker #3: And the reason I'm more excited today as we are you know, talk to basically the the critical customers out there with hyperscalers and critical OEM potential customers.

Speaker #3: We find out there's a lot of interest. Also, we found out a lot more about ZT System itself. We believe they have some advanced capabilities, some great people.

Speaker #3: You know, in this business, it's all about people. I believe they got some great people. And you know, when I look at what's a potential, it's a great potential.

Speaker #3: You know, when AMD acquired this thing, their goal was to eventually you know, find the right partner and separate engineering and manufacturing. And I would say that we're fortunate that we becoming a critical partner to AMD and taking over this operation.

Speaker #3: We believe working together will give us a lot of lot of opportunity. Not not believe. I see it today. All these key capabilities that we have and and and industry really needs capacity and capabilities that we have.

Speaker #3: So to be honest with you, I wish we can close this deal today because there's a you know, I'll be be able to tell you a lot more.

Speaker #3: Personally, I'm not worried about revenue and junk and comment later on on that. I think the revenue is there. I think there's a lot more you know, ZT has some some older products that that they've been doing it for a long time.

Speaker #3: This this place is profitable. It was profitable. It it is profitable today and we expect it to continue to be profitable in the future.

Speaker #3: But opportunities are bigger for the future than the past. Let me let me leave it at that. Today, we already selling San Mina plus ZT.

Speaker #3: To our critical partners. That's going on every day. Across all our critical people. We are adding some you know, technical support more about technology.

Speaker #3: To to to we add more value to to our customers. We know exactly what that is. But we also picking a lot of great people from ZT.

Speaker #3: They got a lot of network people in the manufacturing. You know, and also around testing and so on. So this is a very very strong team.

Speaker #3: I think partnering with AMD is very critical. They got a they got a lot of exciting technology that coming up. And again, I I believe that we 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.

Speaker #3: We are definitely investing in sales as you can see our SG&A is a little bit higher because of that. And again, I don't know what else to say except tell you I'm excited.

Speaker #3: I think there's a lot of opportunity there. You know, as as I said, be before in my prepared statement, I think we're ready to build a lot bigger San Mina.

Speaker #3: From a very very strong position, we have a strong foundation. So give us some time here at least for next six to 12 months to give you some good results.

Speaker #3: So with that, I'll John, you want to add comments to that?

Speaker #2: Yeah. Just just one point, Yuri, I'll I'll add Ruplu just to help answer the question around revenue. So back at the time of the the announcement on May 19th, we said that we expected revenue run rate, the net revenue run rate to be about five to six billion or between five and six billion at the time of the close.

Speaker #2: And we don't intend to change that forecast. You know, as Yuri mentioned, we'll come out with a lot more details when we close the transaction.

Speaker #2: But that's still the case. You know, the the business has a very stable foundation of general purpose kind of compute and also storage. You know, it's the accelerated compute component that's that's going through a transition as we had mentioned.

Speaker #2: But you know, we've got full confidence in what's happening on that part of the business too. But more to come when when we close the deal.

Speaker #3: Yeah. And to add that just like let me add to that you know, answer the question. We are adding you know, at Viking, we have a very strong core engineering team that that basically can do the same or similar thing that all ZT engineering team could now ZT was the bigger scale.

Speaker #3: But we we're expanding our team. But we do have a core right now that for specifically for this data center that that it can do the job today and we are going to be expanding and growing that team.

Speaker #1: Okay. No, 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.

Speaker #1: 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.

Speaker #1: Can you just talk about if any markets are weaker than you expected? And then like you said, Yuri, if you look at the full year, you're going to be growing revenues in fiscal 25 at 7% almost year on year.

Speaker #1: Can you give us your early thoughts into fiscal 26? I mean, let's say even without ZT Systems, do you think the base business can continue this 7% year on year growth?

Speaker #1: So just any thoughts you have on on fiscal 4Q, what is driving that? And and your thoughts on fiscal 26?

Speaker #3: Yeah. First of all, comparison from this four quarter to the last to the 24, you're right. It's it's not a huge growth. But the business is not slowing down.

Speaker #3: I would say the business expanding. If you look at the last year, we were kind of coming out of inventory. It was a choppy.

Speaker #3: It was a transition year. So it was really choppy for most of our competitors too. It just happened to be a four quarter last year better than what it was third and second.

Speaker #3: Today, the business is a lot more stable. Yes, we have some uncertainties out there with the this geopolitical issue, the tariffs and so on.

Speaker #3: Looks like at that you know, that temperature is coming down. So we feel a little bit more comfortable and we can predict the future better.

Speaker #3: Our customers a lot more positive. But the future, if I look at the customers forecast, they look very positive. And we you know, today we kind of discounting those.

Speaker #3: So for us to forecast 26, we like to wait more probably another 90 days. But I can tell you right now and what I said earlier in prepared statement, we're excited.

Speaker #3: We expect to grow our core business hopefully at the same or faster rate next year. But overall, I wish you 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 #1: Okay. And if I can just put in one more quick question, John, CPS margins were up 320 bips sequentially. Was there any one time items and can this continue?

Speaker #1: Thank you so much for taking my question.

Speaker #3: No. I and it's primarily driven just by the the business mix. You know, Ruplu and as you know, CPS margins in that profile, that's an area that we've been focused on for a long time.

Speaker #3: We've been making a lot of investments there. So we're very pleased with the the results. You know, for many from one quarter to the next, you you can see some ups and downs just because of the nature of that business.

Speaker #3: There's 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.

Speaker #3: So what I I what I believe that we're seeing now is the the results of some of those investments coming through to fruition. So very happy with the results.

Speaker #3: Nothing one time in nature that that we'd want to call out. And as far as the future goes, you know, we're going to continue to drive that profile.

Speaker #3: Both Yuri and I have said before that we expect that business to be above 15%. And and we're getting very close to that number already today.

Speaker #1: All right. Thank you so much.

Speaker #3: Thanks, Ruplu.

Speaker #1: All right. Next question comes from the line of Stephen Fox from Fox Advisors. Your line is open.

Speaker #4: Hi. Good afternoon, guys. First of all, just I had another question on the ZT deal now that you've had a little bit more time.

Speaker #4: With it, can you just talk about the risk on the inventory side, John? I know I know you it's a big piece of the valuation.

Speaker #4: Do you guys get a last look at valuing that that you know, the inventories before you close? And I guess my bigger concern is like any anything that you might inherit that could be sort of lagging generation on the GPU side that you might have write downs on.

Speaker #4: Can you just sort of talk about that risk? And I had a follow up.

Speaker #2: Yeah. No. Absolutely, Steve. Thank thanks for the question. So so yeah, we do have a working capital target of about 2 billion. You know, as a part of the transaction, we talked about that when we announced the deal back on May 19th.

Speaker #2: You can basically think of that as you know, primarily related to to inventory. There's the property, plants, and equipment too of 250 million but the the 2 billion is primarily around inventory.

Speaker #2: And as a part of the deal, we spent a lot of time evaluating that inventory position. A lot of discussions with with AMD and ZT.

Speaker #2: And so we'll make sure just like as we always do in this business and our business around manufacturing, to make sure that that inventory is supported by customer demand and forecasts.

Speaker #2: So there's always always risk. There's some risk there. But you know, our intent is to to fully evaluate that and and both AMD and ZT are committed to that as well.

Speaker #4: Great. That's helpful. And then on the on the legacy business, Yuri, I know you just mentioned you know, what you've been doing on the CPS side.

Speaker #4: I was wondering if you could just sort of because I'm I'm looking it looks like that was like a record CPS margin. So I was wondering if you can maybe sort of help us step back a little bit more talk about how CPS is sort of you know, helping your business by serve markets a little bit.

Speaker #4: Like it seems like it must be helping growth not just margins. Any help there would be useful.

Speaker #3: Yeah. Steve, first of all, yeah, we not everything is perfect at CPS as today. But we believe as as John mentioned, you know, we always target over 15.

Speaker #3: But I I I would say that our target is higher than 15 right now because we know we there's a more opportunity you know, we still have some softness in some of the semiconductor business that that typically we have.

Speaker #3: And but we also have some great opportunities in defense defense business. If you look at our advanced printed circuit boards here in North America, that's mainly you know, high technology product for defense.

Speaker #3: That business is doing well. We expanding that business and we expect to continue to to have at least few few great years in that segment in when it comes to demand.

Speaker #3: Our mechanical business is is doing well especially around the the data center. As I mentioned earlier, we are expanding investing in liquid cooling racks.

Speaker #3: Demand for for for racks is is is is very strong. You know, it's all around for data center. And and we expect that business actually to to increase now with acquisition of ZT.

Speaker #3: So we see a lot of positive things there. We also expanding our precision machining into the military side of the business. We are expanding and being investing fair amount and hopefully we'll get a lot of returns on optical module modules specifically pluggables.

Speaker #3: You know, custom memory around the military for jet fighters and so on. So there's a lot of exciting stuff that we have in our segment of what we call components technology group.

Speaker #3: With a lot of upside potential and a lot of growth opportunity. So yes, we are we're very comfortable with our core business and we still pushing those plans that we talked about a year ago.

Speaker #3: Hey, we we need to grow our core business at a higher rate and we expect we we believe we are positioning right now that we're going to start seeing that nice growth in 26 and beyond.

Speaker #4: Great. That's super helpful. Thank you.

Speaker #3: Thanks, Steve.

Speaker #1: All right. Next question comes from the line of Anders Soderström from Cedota. Your line is open.

Speaker #5: Hi. Thank you for taking my questions. Hi, Yuri. How are you doing?

Speaker #3: Good. Good.

Speaker #5: Congrats on doing nice performance here in the in the third quarter. With the additional revenue that's expected from the ZT acquisition and and doubling the revenue in three years, where do you expect to operating margins to to be?

Speaker #3: Well, definitely first of all, we 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 adding a lot of value to to our customers and a lot of capabilities that will allowed us to deliver the better margins than historical.

Speaker #3: So 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.

Speaker #3: So we'll we'll talk more. But we're excited about some front of us. Like I said, we we there's some great people at ZT. We are committed.

Speaker #3: We investing 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 a scale you know, we should be able to continue to improve our margin going forward.

Speaker #5: Okay. Thank you. And and for the Indian joint venture house, that's progressing it seems like you had a little bit higher payout to them or actually it was in line with what you had expected.

Speaker #5: But you didn't really give a guidance for that for the fourth quarter either I think. Or maybe I just missed it.

Speaker #3: Yeah. On on that point, Anja, we we always guide on the adjustment to our net income to reflect their equity interest and but the JV overall is is done very well.

Speaker #3: I mean, we're very pleased. It's coming up on almost three years now that that we've had the JV in place. But India is is a very important market to us.

Speaker #3: You know, we expect to see a lot of growth in that market. And as far as the business goes, you know, we're looking to expand the the different end markets that we serve.

Speaker #3: You know, it's an area that we're investing in as well. You know, I mentioned that from a capex perspective and Yuri might want to to comment on that as well.

Speaker #3: But we see a lot of opportunity in there. But yeah, we do just guide and comment specifically on the net income adjustment to begin.

Speaker #2: Yeah. India is 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 our goals.

Speaker #2: But I believe Reliance and Sunmin are on a page on the same page. We're going to build something big in India. You know, we are expanding.

Speaker #2: And we'll also make more comments on that end of this year. But a lot of opportunities in India across all our markets from industrial, medical, India defense.

Speaker #2: Automotive in India. 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.

Speaker #2: So great decision on our part to to go with JV with Reliance. You know, we still run that thing 100%. But I think having a good partner in a in a market like this is very critical.

Speaker #2: And I believe we have a great partner.

Speaker #5: Okay. Thank you. And just one last one in terms of the tariffs. What are you seeing in terms of the tariffs and potential headwinds from that?

Speaker #3: I'll give that to John. Yeah. I mean, so there's still a very dynamic environment out there when when you think about tariffs and and percentages changes and things of that nature.

Speaker #3: So our our approach has been the same as it's been since all of this started. Very close to to our customers. Understand what they're trying to do and what they're trying to achieve.

Speaker #3: But based on the footprint that that we have, you know, we can certainly move programs around. But it's it's up to them at the end of the day.

Speaker #3: And typically what we're seeing is current programs are staying in place. But there's a lot of discussion and an evaluation for new programs. Because we think supply chain you know, on a broad basis, is becoming more regionalized.

Speaker #3: 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.

Speaker #3: You know, all of those things enable us to be able to support our customers. Regardless of where they want to do manufacturing. And then just as a reminder from a business model perspective, you know, these these costs are actually borne by our customers.

Speaker #3: So we're essentially a pass through from from that point of view. But our 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 #5: Thank you. And do you see any customers having a sort of a wait and see then for mostly maybe for the new programs I guess or?

Speaker #3: Yeah. We have we have at this point we haven't seen anything like any current programs on a material basis. Shift. Because that does take time and investment to do that.

Speaker #3: But but certainly for new programs there's a lot of evaluation and discussion going on. So our our goal or our objective is to make sure that we understand you know, the rules and regulations as they're changing and then partner closely with our customers to 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 I think in the future we're going more to a regional type of manufacturing.

Speaker #2: Definitely you know, there'll be more business manufacture here in North America. But it's it's not going to happen overnight because it takes time to to bring the technology up to date and so on.

Speaker #2: But there's our customers that are trying to balance you know, they look at their market globally. You know, what are they going to do in Asia?

Speaker #2: What are they going to do in India? What are they going to do in Europe? What are we doing in North America? And then we're trying to help them balance those requirements.

Speaker #2: Not just for a short term but also long term. So there's a lot of talk about the long term how do they strategy is going to play.

Speaker #2: And we had a customer last couple days ago here it's a it's a European customer that they basically looking at the whole world how they're going to supply and service their customer in the future.

Speaker #2: So 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.

Speaker #2: I I believe that we structure is lean. It's a state of art structure. And you know, I think we'll be fine.

Speaker #5: Okay. Thank you. That was all from me.

Speaker #2: Thanks, Anja.

Speaker #1: Once again, if you would like to ask a question, please press star one on your telephone keypad. There are no further questions at this time.

Speaker #1: I would like to turn the conference back to Yuri. Please go ahead, sir.

Speaker #3: Well, ladies and gentlemen, again, thanks for your time that you spend with us today looking forward to talking to you. If you have any questions, give us a call.

Speaker #3: 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 #2: Thank you, everyone.

Speaker #3: Bye-bye.