Sanmina (SANM) Q3 2025: DPS Margins Surge 320bps as ZT Systems Acquisition Targets $6B Revenue Run Rate
Sanmina’s Q3 saw double-digit revenue growth and a breakout 320 basis point margin expansion in its DPS segment, fueled by operational discipline and favorable mix. The company’s pending ZT Systems acquisition is positioned to double revenue within three years and cement Sanmina’s end-to-end data center AI strategy. Management signals continued balance sheet strength and a disciplined approach to capital allocation as they enter a period of transformation and scale.
Summary
- DPS Segment Margin Expansion: Gross margin in DPS rose sharply, reflecting mix and efficiency gains.
- ZT Systems Acquisition to Double Scale: Pending deal targets $5–$6B in new run-rate revenue and broadens AI/data center reach.
- Balance Sheet and Cash Generation: Strong liquidity and cash flow underpin investment and capital return flexibility.
Performance Analysis
Sanmina delivered third quarter revenue of $2.04 billion, up 10.9% year-over-year, with broad-based growth across all end markets. Communications networks and cloud infrastructure stood out, growing 19.1% year-over-year and reinforcing Sanmina’s strategic pivot toward high-growth digital infrastructure. The company’s non-GAAP gross margin reached 9.1%—a 60 basis point improvement—driven by product mix and operational efficiencies.
Diversification remains a strength, with industrial, energy, medical, defense, aerospace, and automotive collectively contributing $1.26 billion in revenue (up 6.2% YoY). The standout in the quarter was the DPS (Diversified Products & Solutions) segment, which achieved an 8.8% revenue increase and a 320 basis point jump in gross margin to 14.7%. This surge is attributed to higher revenue, favorable mix, and ongoing cost discipline, with management noting the absence of one-time items and a continued focus on margin improvement.
- IMS Growth Outpaces Expectations: IMS (Integrated Manufacturing Solutions) revenue rose 11.6% YoY, supporting overall margin expansion.
- Inventory Turns Accelerate: Inventory turns improved to 6.3x from 5.1x, reflecting better working capital management and lower inventory levels.
- Free Cash Flow Remains Robust: Free cash flow was $168 million for the quarter, totaling $341 million year-to-date, supporting both investment and share repurchases.
Sanmina’s capital allocation remains disciplined, with $13 million in share repurchases this quarter and $239 million left under the current authorization. The company’s net cash position and low leverage (0.38x gross) provide ample flexibility heading into the ZT Systems acquisition, which is expected to be accretive to earnings and drive further scale in high-value markets.
Executive Commentary
"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're starting to see strong pipeline of new opportunities. So overall, a good quarter, but there's still room, as you heard from John, for improvements."
Yuri Sola, Chairman and Chief Executive Officer
"Non-GAAP gross margin was 9.1%, and our non-GAAP diluted earnings per share of $1.53 all exceeded 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."
John Faust, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. ZT Systems Acquisition: Doubling Down on Data Center AI
The planned acquisition of ZT Systems Manufacturing is transformative, with management reiterating a $5–$6 billion annual revenue run-rate expectation upon close. Leadership expects the deal to double Sanmina’s net revenue within three years and be accretive to EPS in the first year, leveraging ZT’s advanced manufacturing and integration capabilities for hyperscalers and OEMs. The integration will enhance Sanmina’s end-to-end offering in data center AI infrastructure, positioning the company at the heart of a projected $1 trillion global data center investment cycle by 2028.
2. Margin Expansion and Operational Discipline
Margin improvement remains a core focus, with non-GAAP operating margin at 5.7% (up 40 bps YoY) and DPS margins nearing the 15% target. Management attributes gains to ongoing investments in process efficiency, mix optimization, and targeted cost controls, especially in higher-value segments such as defense, advanced PCB fabrication, and custom optical modules.
3. Diversified Market Exposure and Regionalization
Sanmina’s well-diversified end-market exposure insulates the business from sector-specific volatility. Industrial, energy, medical, and defense are all showing stable to strong demand, while automotive softness is seen as temporary with growth opportunities in fiscal 2026. The company’s global manufacturing footprint and ability to regionalize production is a competitive advantage in an environment of shifting tariffs and supply chain regionalization.
4. Capital Allocation and Balance Sheet Strength
Sanmina’s net cash position and $1.7 billion in liquidity enable ongoing investment in capacity, technology, and strategic M&A while supporting shareholder returns. The company expects to maintain a net leverage ratio well within its 1–2x target post-acquisition, even as working capital temporarily increases to support business growth.
5. India Joint Venture: Platform for Growth
The India JV with Reliance is gaining traction, with management highlighting broad-based opportunity across industrial, medical, defense, and data center verticals. Capex and operational focus in India are expected to drive incremental growth and further diversification.
Key Considerations
Sanmina’s Q3 results highlight an inflection in both scale and strategic direction, as the company readies itself for a step-change in revenue and capabilities through the ZT Systems acquisition and continued margin discipline in legacy businesses.
Key Considerations:
- DPS Margin Upside: The 320 basis point DPS margin gain was driven by mix and operational efficiency, with management targeting further expansion above 15%.
- ZT Systems Revenue Stability: Management remains confident in the $5–$6B run-rate, seeing strong customer interest and highlighting profitability and growth prospects post-close.
- Inventory and Working Capital Management: Inventory turns improved, and the company is closely managing working capital, particularly as it prepares to absorb ZT Systems’ inventory-heavy model.
- Geopolitical and Tariff Navigation: Sanmina’s flexible footprint allows customer-driven program relocation, mitigating tariff risk and supporting regional supply chain shifts.
- Capital Allocation Flexibility: Strong cash generation supports both organic investment and capital returns, with $239 million left for buybacks and a robust capex pipeline.
Risks
Integration risk looms large as Sanmina prepares to absorb ZT Systems, particularly around inventory valuation, customer demand alignment, and realization of targeted synergies. Macro uncertainty, ongoing tariff volatility, and potential softness in automotive or semiconductor demand could pressure near-term growth. Management’s confidence is underpinned by strong liquidity, but execution on the ZT integration and sustaining margin gains will be critical to maintaining investor confidence.
Forward Outlook
For Q4 2025, Sanmina guided to:
- Revenue of $2.0–$2.1 billion
- Non-GAAP gross margin of 8.7%–9.2%
- Operating margin of 5.5%–6.0%
- EPS of $1.52–$1.62
- Capex of $65 million
For full-year 2025, management maintained guidance for:
- Revenue growth of 6%–8%
- EPS growth of 12.9% at the midpoint
Management highlighted:
- ZT Systems deal on track to close by year-end, with financial details to follow post-close
- Continued focus on cash flow, margin expansion, and customer-driven regionalization
Takeaways
Sanmina is entering a new phase of scale and capability, with Q3 execution validating its operational discipline and market positioning.
- DPS Margin Inflection: The 320bps margin surge is structural, not one-time, and reflects years of targeted investment and operational focus, particularly in high-value, lower-volume verticals.
- ZT Systems as Growth Catalyst: The pending deal is set to double revenue and deepen Sanmina’s presence in the data center AI supply chain, with initial customer response and profitability profile described as strong.
- Execution Watchpoint: Investors should monitor integration progress, working capital discipline, and realization of margin targets, especially as the company absorbs a larger, more complex business.
Conclusion
Sanmina’s Q3 2025 results demonstrate strong operational execution, margin expansion, and disciplined capital management ahead of a transformative acquisition. The company’s positioning in data center AI and diversified end-markets, combined with robust liquidity, sets the stage for outsized growth and resilience—but integration and execution risks will be key watchpoints as scale accelerates.
Industry Read-Through
Sanmina’s results and strategic moves underscore a broader industry shift toward end-to-end manufacturing for data center AI infrastructure, with hyperscaler and OEM demand driving both vertical integration and geographic diversification. The company’s experience managing inventory, regional supply chains, and margin expansion offers a template for peers navigating similar macro, tariff, and technology transitions. The ZT Systems acquisition signals that scale, advanced integration, and customer proximity are becoming decisive competitive levers in the electronics manufacturing and cloud infrastructure supply chains. Competitors lacking balance sheet flexibility or regionalized footprints may find themselves disadvantaged as customers demand both agility and capability at global scale.