Sanmina Corporation (SANM) Earnings Call Transcript & Summary

Good morning, everyone. Good afternoon to those listening in Europe. I'm David Vogt. I am the hardware networking analyst here at UBS. Thank you for joining the UBS Tech Conference. We're excited to have Sanmina here. Yuri Sola, Chairman of the Board, Chief Executive Officer. In the crowd is Paige from Investor Relations. So if anyone has any follow-up questions, you can reach out to Paige. So Yuri, thank you for joining us today.

Well, David, it's good to be here.

So I think before we get started, I think you have a brief...

Yes. For everybody on this call, I'd just like to remind you to please look at our risk filings latest with the SEC. And after that, we can talk about anything.

Prefect. So I thought it would be helpful since the business has sort of transformed fairly recently, if we can maybe have some sort of quick historical context of the traditional Sanmina EMS business. Where we were? Where we are today following the ZTS transaction, ZT Systems transaction with AMD. Maybe we'll start there, and then we'll dig deeper into each of the sort of the individual.

For those of you that are not familiar with Sanmina, I'm one of the co-founders. We started the company 45 years ago. We have approximately 40,000 people now with ZT. Really excited about the acquisition. Company always focused on mission-critical type of products. We are known for building a high technology stuff that has to work for many, many years. It's not a throwaway product. As we looked at the expansion into AI when ZT became available when AMD decided to find a real partner, it wasn't just a sales job and to pick it up, but it was a strategic move on our part, and I personally believe it was strategic for AMD to find the right partner to be able to work with them and get their product to the market. So personally very excited. Yes, definitely, this will transform the company. We see a lot of upside potential. I think our core business will continue to do well. We had a great '25. We're excited about '26. And most importantly, I think we'll have a lot of growth.

Great. So maybe we'll dig into kind of the strategy. So when you looked at your portfolio prior to the availability of ZT Systems, what made ZT Systems attractive to your current portfolio, right? So it's kind of a new -- it's not a new vector per se, but it does deepen your relationship and ties into sort of the data center AI market effectively. So what -- when you looked at ZT Systems specifically, what drew you to that asset? And what's the strategic justification for taking that portfolio into in-house effectively?

Yes. If you look at our capabilities, they're more focused on the high end, and we've been looking to expansion into the more cloud business. We already -- if you look at our cloud telecommunication business in the last few years, about 40% of our total revenue and very solid customer base in that market. But in the last couple of years, we saw a lot of opportunities for growth in the data center, and we start building this on our own. And our model is really taking our customers all the way from engineering point of view, all the way through subsystem to the full system. So strategically, when ZT became available, it really gave us a step up instead of building ourselves, taking it -- especially when it comes to the power and so on, it takes a couple of years just to get the power alone. ZT had not just the capabilities, but they had a capacity. And AMD has been investing in a critical technology for the future. So as I said earlier, it really just made a lot of sense for us. So we worked very hard on this one. We convinced AMD. We got the best capabilities, which I think we do. And we have a great customer base. And as the AMD talked to our customers, they also supported us basically saying Sanmina is the best partner for the future. So strategically fits. We're excited what's in front of us. A lot of work left, though, but besides that, it's fun.

So how does -- so obviously, now you have more -- you had high-end capability. Now you go from subsystem to full system. So when you go out and you speak to potential partners and customers, how does that change sort of the dynamic of Sanmina a year ago or 18 months ago versus today? Like what do those conversations look like? And how has -- how have they changed to the extent that you're driving potentially deeper, more meaningful relationship with these cloud partners effectively?

Yes. So let me make sure that we will not forget our other markets, too, because other markets are very critical to us, and we want to be a diversified company from industrial, medical, defense and then communication and cloud. Cloud for us, we have a better story today. We have a complete story, which we can take them end-to-end. And that's what our -- especially hyperscalers are looking for that. And with having a right partner like AMD, it now exposes us to all those critical projects. Addition to AMD product, we also -- as we're talking to the hyperscalers, especially, they say, well, we're going to use other AI in the future and what can you do? So Sanmina is -- ZT Systems is set up to basically be able to handle all of these things. So our message to them, we're a strong company. We're stronger today. And I think putting Sanmina plus ZT together, it puts us as a -- basically as a leader right now in North America AI manufacturing.

So given the full solution that you currently have, we get asked -- although we don't cover the company, but we get asked questions about how you stack up from a capability perspective to some of the other EMS, ODM companies in the marketplace, whether it's U.S. domestic out of Asia. Maybe if you can help your compare and contrast how you see yourself positioned in this new -- or maybe not new, but expanding opportunity within data center vis-a-vis some of the competitors in the marketplace today.

ZT acquisition puts us in a leadership role in North America. So -- and also the partnership that we're building that they already had. I mean to build a company, it's easy to build a building. It's easy to buy equipment, but it takes people. ZT has been in the business for well over 10 years. They built this company from bottom up. We're keeping the whole management. We're putting one individual over from Sanmina's side to integrate this long term. So we have a great team. We've got great capabilities, and we can do it today. And that is our competitive advantage. And I think having been an NPI partner for AMD really opens the door for us in these new capabilities that we can bring that right solution for our customers, which is a big competitive advantage for us over our global competitors and also the local competitors.

So you brought up the NPI relationship with AMD. Maybe just for clarity, can you talk to how the relationship with AMD today is structured post the deal closing, right? So obviously, AMD and ZT was a completely integrated solution. Obviously, that's not the case anymore. So how does your relationship with AMD evolve? And what does that mean for your ability to work with other partners outside of the AMD ecosystem?

Yes. So for AMD product, we are fully integrated because the old engineering team of ZT is still with us under AMD logo and all the manufacturing is under Sanmina logo, okay? So together, nothing really changed. Their engineering team is operating from the same building as we are, so that we're working very close together on their product. In the model that we have, we are allowed to also work with other suppliers in this case around AI. And Sanmina always had a small team of engineering in the ODM side of the business. And now we are expanding, and we're working very close with ODM and hyperscalers where we need to add more talent. But that's our long-term goal.

Right. So -- but there's nothing in the agreement that precludes you from working with other [indiscernible] going forward. It's not exclusive AMD. I think that's an important let's put a clarification.

Yes. I think about Sanmina is that we are an extension of our customers. That's the way we build the company. Our business is really protect our customers. And our average relationship with our customers is well over 20, 25 years. So our reputation is, we're not perfect, but we're transparent, and we get the job done.

Got it. And so we get this question all the time. Obviously, it's a fairly big deal -- it was a fairly large deal for you. How do we think about the key outside milestones that we should monitor, whether it's strategic wins with potential customers? Is it -- I know John is not here, but is it financial metrics that we should look at over the next 12, 24, 36 months, leverage targets coming down, strategic wins? Like what are you most focused on? And what should we monitor to highlight that this has been a successful deal and being integrated well at this point?

Well, we have to deliver results. I'm a firm believer. We can talk all day long. I grew up on a farm until [ Kowls ] come home. How did they say that? You have to have a result. So for us, number one is understanding at the end of the day, what our customers want. And together with AMD and other partners, that is the key focus, is there's about 10 key customers that we're going after. And good thing is that we know who they are because we've been doing business with them at the Board level, mechanical level, liquid cooling level, and now we've taken it to the next level. So I think building that relationship with those key end customers is -- for us, that's the most important part, build everything around the customer. And then it's execution. And I think as investors, we have to deliver what we said, and we're not going to go after just a business just for a business sake, just to look good for short term. We're building business for the long term. And as you asked the question earlier, this will transform the company, but we're going to make sure that get repeated every year and how public market is. We're just as good what we ship...

That was going to be my follow-up question. So I'm glad you brought that up. When you talk about winning or landing and expanding with existing relationships. You know who these customers are already. There's a lot of concern in the marketplace, not around Sanmina, but in the general marketplace about profitability, profitable growth, in the infrastructure side of the market. So how should we think about -- you just mentioned, I think you just kind of offhand said, look, we're not chasing business for the sake of chasing business. Are there sort of return thresholds, return on capital thresholds? Like how are you thinking about like, hey, I have customer, A, we've worked with them in the past for 10 years, 15 years. They want me to do this, but this doesn't necessarily sort of equate to what we had envisioned when we took ZT Systems in from a profitability perspective or a margin perspective?

First of all, what we build is a very, very difficult technology to build. This is not something you build today and you can transfer it to somebody else and they can build it tomorrow. So from our customers' point of view, they want to choose the right partner they can depend on for many, many years. So it comes to quality, time to market and is it repeatable, okay? So that is the key. The margin, this requires a major investment. As you know, the power alone, when some of these hyperscalers come to us and say, in order for us to do business, we need 50 megawatts of power. We need 100. Some of them saying we need 150. That costs money, right? So you have to have a right return. We guided the Street in the last quarter that we say short term, last year, we delivered on the Sanmina legacy business around 5.7% fourth quarter, we delivered 6% operating. We guided the first quarter between 5.6% and 6.1%. We feel comfortable what we guided. And we said longer term, we think we can get operating margin 7% to 6%. And we still feel good about that. And our model allowed us to do that, being vertically integrated and be able to supply some of these critical components. Like, for example, we are a major supplier today to a lot of hyperscaler and mechanical enclosure mechanical, including liquid cooling and so on. So we know how they operate. And as much as they always beat you on a price, that's just a normal thing. But they also need results. And in order to get results, you've got to hire good people. And without a good people, you're going to fail. I think Sanmina has good people, and we think we'll be able to stay. And this industry has to improve the margin. Otherwise, there's no way we can continue to invest in this business.

So as you incorporate more ZT Systems and you target more expansion opportunities, and you mentioned margin targets longer term, 6%, 7%. How do you -- how do we think about what's embedded in your upcoming quarter and next fiscal year margin from the ZT System investment? Like are ZT systems effectively revenue coming in at a lower margin because of the investment cycle to build and ramp that capability for the long term versus the rest of your business? And then how do we think about over time, our margins by segment, if you will, comparable across defense, industrial, cloud, data center?

Yes. Basically, what we said and we basically told investors, we're going to talk a little bit more in January. We just acquired ZT. So we're talking to our end customers. So we'll know a lot more in the next few months where the world going. But we believe what we see today that ZT operating margin for existing business will be very similar to Sanmina legacy business, which in that is around 6%, let's just call it.

Stand-alone today when you build...

Stand-alone. If you look at the longer term, the more product -- the more difficult the product is more risk in it as you build it, you should be able to make a little bit better margins on that stuff. And as long as we apply our model from engineering, Board level to mechanical level, EMS level, integration level, I think we'll be able to generate equal or better margins in the future.

So when you say risk in that equation, does that mean IP or just complexity. You own some of the IP? Or is it just the complexity of the solution makes it riskier effectively, and therefore, you can get more value through price for that offering?

It's more complexity. So the more complex product you build, you should be able to make a little bit better margin. Otherwise, [indiscernible] consumer. We don't build consumer products. So everything that we build, it has to last for more years. And even a data center, these data center guys, they want to plug and play, just like when I get a phone and you get a phone, you want to bring it home, you plug it in and it works. On the multimillion dollar deal, I mean, rocks, they want to do the same thing. So the companies that can deliver the high yields, they typically will let you make a little bit more money because they're afraid to change. This is not something you can move it like a consumer product.

And then along those lines, do you see where you sit -- I know it's early days, the deal just closed. But do you see yourself as sort of a primary lead supplier in some use cases or a secondary source supplier depending on the customer, the opportunity -- in a lot of different environments, there's always sort of the initial partner that -- EMS ODM partner that has 60%, 70%, 80% of that particular opportunity set? Like how do you think about where you fit in given that for all intents and purposes, you're kind of the newish player fairly recently in this space and a full complete solution?

Yes. First of all, if you look at our legacy business, we're not used to play in second.

That's why I'm asking, right?

So we are a primary supplier to a lot of these critical customers. I can't talk about all of them, but I'm sure you analysts, you know my customers for a long time. They've been with us a long time. These are customers demand high quality, a lot of flexibility and trust. Trust is in this technology is very important. I think in the hyperscalers around AI, especially some of these new technology, I think there's too much focus on price. I'm telling you the difficulty of that price, the companies who can deliver performance, quality and flexibility will deliver respectable margin. And trust me, my goal is not to be secondary, but primary supplier. And I think we will be on some of the technology because we are playing at a new product. You have to play as an R&D and new product introduction. Because once you establish yourself and you show to you customers that you can perform, your product is working and you can now tell them you can deliver thousands of these in the next 6 months or 12 months and you have all the capabilities, they don't want to take any risk. They're going to stay with you.

Got it. Okay. It feels like price is not a lever to be used against the EMS partners by the hyperscalers, given what should be increasing complexity for solutions over the foreseeable future, right? Things are only going to get more power consumptive, more technologically challenging, topology challenged, and that's where the value add comes in from your perspective.

Yes. For us, it's to create more value. You have to provide a solution. At the end of the day, they're not going to pay you extra money because you are a supplier, they're going to pay you extra -- if you give better support, better quality, better time to market, all the basic things. This is -- ZT or AI is nothing new to us, we've been doing this for 45 years, okay? So -- but it's all about execution. That's what I said at the beginning, how are you going to judge us. Our customers judge us based on execution. Our investors should do the same thing.

Got it. So when you think about this business, I think industrial has its own sort of GDP-like growth cadence with some multiple or spread upon that. Other markets have their normal, I think, cyclical cadence too. How are you thinking about what this could mean for the longer-term growth trajectory of the business? So. If we think out -- and I'm not going to put your feet to the fire next year, but obviously, the end markets are growing meaningfully faster than your other verticals that you've been really strong in over the last 30 to 40 years. Is that kind of -- one of the reasons why this is so attractive to you that it adds sort of a layer of vertical market growth that you just don't see in the core portfolio today on a broad-based basis?

Let me first of all talk about our core legacy business for a second. We said on our last call, we're going to grow that high single digits, let's call that 6% to 10%, okay? We feel very confident about that other business. I think this AI business, I don't know what's going to happen 5 years from now, but I can tell you, based on what I'm hearing from the key customers, in next 2, 3 years, the numbers are crazy, right, okay? I think the key for us is that to make sure we execute to those requirements. So demand, I don't think will be an issue. But back to what it does for Sanmina is basically it give us opportunity, as we said on the call, when we started working on this deal and we got to know end customers, we felt that, hey, we can double the company, think like a rule of thumb from 16 -- I'm sorry, from $8 million to $16 million in the next 3 years. But as we went through the time and we start talking to these customers and so on, on the last call, we said, I think we can do this in 2 years. So we feel that we have a better visibility today, what's in front of us. I think if you want to look at what's going to happen in '28 and if we believe in those numbers, then you shouldn't lose any sleep. It's all about execution.

Can you level set then? So you said originally, the goal was we can grow double this business in 3 years. Now it sounds like 2 years. But can you remind us again, post the sale, post the closing of the transaction, what the revenue run rate that you acquired at ZT Systems is today, given the moving pieces around the transaction?

We basically -- right now, we sit in -- we only have it for 11 months. 11 months, 5.5 to 6. The average year out for 11 months comes about 5.7. So we think there's more upside than downside to that number right now. But we're really not focused on that. We're really focused on -- end of '26, our fourth quarter of fiscal year '26, first quarter '27 and then calendar year '27. That's where the base.

But that 5.5 to 6 accounts for the adjustment, right? When you originally bought the deal, I think there was a discussion of like how much revenue is sticky staying with the business and how much doesn't make sense to stay with what you acquired and is -- so that's the approach.

Yes, this is the latest number. Actually, some of the business -- when AMD decided to sell ZT, a couple of key customers will say, well, who's going to buy it, we know. We feel that after our meetings, when they realize we're buying it, we already had a relationship with this company. That relationship is a lot more stable today, and we're executing well. And I always believe as long as I execute, there's no reason for customers to leave.

Okay. I just want to level set. We talk about supply chain, the rest of your business, maybe just pivoting away from infrastructure AI. Supply chain has a lot of challenges historically over the last 2 to 3 years. It doesn't seem to go away. Maybe kind of talk about how you're thinking about where your supply chain is today, where it needs to be? Obviously, tariffs were an issue back in April, maybe a little bit less so today. But has that driven the need for more reshoring, onshoring, Mexico, U.S.? How are you thinking about how you're positioned and what your strategy is for the core business?

Yes. So first of all, Sanmina is -- when it comes to supply chain structure, we run everything in One IT System right. Now ZT has another system will eventually integrate ZT into Sanmina, One Global IT System. So our supply chain is global and regionalized. So the world is going to regional manufacturing. It's already -- it doesn't matter who the President is, it doesn't matter what happens in North America, what happens in Europe. The world is going to regional. World is a lot more political than what it was 10 years ago. So we're going to regional. So how -- what do we do? We have -- we're setting ourselves to be a global company that can support regional customers and they give a global solution. So if you look at what's happened, we learned a lot during the COVID. I'm telling you that was as much as that was confusing, but also taught us a lot of lesson because all the shortages that we had and so on. The lead times are starting to go out right now. So we are working with our customers today, and they's great. If you need these numbers, we're got to do the planning. In our model, we just can't -- we just don't go out there. Our industry doesn't go out and buy a bunch of material that we don't know who's going to buy. So the material that we buy is always 100% guaranteed by a customer. We don't buy anything on a risk unless it's approved by a customer or they do prepay. So the supply chain for us is very, very, very critical. It's stuff where we spend a lot of energy on a daily, weekly basis. But Sanmina has one of the state-of-the-art best capabilities in the world. I mean we can compete with anybody when it comes to the IT.

What's pushing lead times to the right? I know there's a lot of supply chain variability and availability of substrates and memory and other proverbial golden screws out there. But like what are you seeing in your business from a customer perspective that they need that maybe is a little bit more challenging to procure today than maybe 6 months ago?

Well, maybe you've got to go back to '22 and '23, what happened there. There was a lot of demand. There was a lot of more orders out there that were not real, okay? So when it came to '24, we went to what we call transitional year, we had to work inventory down. At the same time, a lot of these people in these components, they didn't invest. They didn't know what was going on. I would say '25 was, we don't have enough capacity. And if you look at the memory, it's crazy right now. I mean -- and it comes to connectors, it comes to circuit boards, it comes to a lot of these PCBs. Yes. So a lot of these things right now, it's -- I think semiconductor, I mean, they're starting to recover now, maybe now because they really didn't invest. With AI driving the demand, you can see...

So is there risk, though?

I mean, I'm not an expert.

No, no, I know. But is there a risk like so PCBs are in short supply, memory is in short supply. There's a lot of things in short supply, and there's not a lot of capacity coming online that you pointed out that supply chain didn't know what to do. Even now, I think the supply chain doesn't know how confident or comfortable they should be about adding capacity. And so as you tell your partners, hey, you better order 18 months in advance instead of 12, is there a risk that there is -- you have the demand, but you can't ship, you can't procure, you can't build, you can't ship. Is that like a risk for the industry, not just for Sanmina, but for the industry going forward?

I don't know if -- is there enough capacity to fill the whole demand. I think overall, shipments are going to go up, okay? The question is the supply chain, the subcomponents, let's put it in semiconductor, mechanical circuit board, are they going to be able to fill those things in. That's a million-dollar question. But there's a lot better planning. I just had a customer -- we had a 15-minute break, called me up and he says, "Hey, we got this huge order. We do with this customer well over $1 billion. And they said, we got this huge order on this one part number. You said they want it now, but I need $200 million of that product now. And I know this guy for the last 20 years, I said, how are we going to do it? So -- but there's a lot of planning. So of course, we've got everybody working, his team working, our team working on it, and we'll find a way. But it's also a good problem to have. I think you got to understand what happened in '23, '24 and '25. I would say when it comes to supply chain, '24, '25 was like a kind of transition feeling what's happening. I think people today are finally getting confidence besides AI because [ AI is the more traditional ]. Other business is growing, too. Medical is starting to expand because the medical was really flat down after COVID, nobody bought anything. Industrial around power, it's also going crazy, not just for data center, we just don't have enough power. So that part of the business. Only business that today is kind of a little bit kind of flattish will be automotive, around especially electrical cars. But everything else, it seems like it's moving in the right direction.

So maybe in the interest of time, Yuri, I'd like to give companies an opportunity to kind of discuss why they think the market is wrong or misjudging your business. What is the market missing post the ZT transaction and sort of the transformative deal that it is for your business going forward?

Well, first of all, some of this is our own fault for not probably communicating properly with our investors. Sanmina was a bigger company. And then in 2010, '11, we decided to get rid of all the consumer and PC business. And when we acquired SCI, most of their business was a consumer. At the same time, we had a major restructuring that everything was shut down in the United States and everything went to China, Asia, that restructuring is done. At that time, we kind of pulled back, let's not chase revenues, let's just focus on quality of the earnings and so on, which we accomplished that. We had a great balance sheet. So when we acquired ZT, we acquired it from the strength point of view. I think today, they still look at -- we just did this -- I think people don't appreciate what EMS companies do. And there's no -- EMS engineering capabilities are better than ODM capability. They just -- ODM focuses on 1 or 2 things. We build 1,000 parts. Our capability is a lot more advanced when it comes to supply chain. So I think we, as an industry, not just -- we are a lot more critical to all these technology companies to be successful. So for hyperscalers, we have to execute. Otherwise, they don't create everything. I think for Sanmina, I think we're in a very good position and a very strong company right now, and we expect to grow this year comparing to the last year. I know including ZT acquisition, well over 50%. I think EPS will grow at least 50-plus percent, but we'll tell you a lot more in January. We love what's in front of us.

Great. No, I think that's a great synopsis. I think we'll end it there. I think we're out of time. So Yuri, thank you for your time. Paige, thank you for your time. Thank you, everyone, and have a great day.

Thank you, Dave.