Sanmina (SANM) Q3 2026 earnings review
Record Margins Eclipse Sequential Revenue Dip
Sanmina delivered a blockbuster third quarter, defined by unprecedented margin expansion. While revenue of $3.46 billion represented a sequential deceleration from Q2's pull-in fueled peak of $4.01 billion, it still marks a massive 70% YoY growth. The standout metric is the non-GAAP operating margin, which accelerated to 8.0%—shattering the company's historical ~6% ceiling. This operational leverage allowed non-GAAP EPS to grow sequentially to $3.31 despite the revenue drop. Management responded by aggressively raising full-year revenue and profit guidance, signaling that ZT Systems integration synergies are materializing faster than anticipated. However, the cost of this hyper-growth is visible on the cash flow statement, where surging CapEx and working capital needs compressed Free Cash Flow to just $24 million.
🐂 Bull Case
The jump to an 8.0% non-GAAP operating margin proves the ZT Systems acquisition is highly accretive. Generating higher EPS ($3.31) on lower sequential revenue ($3.46B vs $4.01B) demonstrates exceptional cost discipline and favorable product mix.
Management significantly raised the FY26 outlook, bumping the EPS midpoint from $11.05 to $12.05. Demand momentum is extending deep into FY27 and FY28.
🐻 Bear Case
Free Cash Flow collapsed to $24M from $342M sequentially and $168M a year ago. Heavy AI capacity investments and working capital absorption are straining near-term liquidity.
While expected due to Q2's AMD pull-ins, the Q3 revenue drop to $3.46B and flat Q4 guidance ($3.45B midpoint) suggests top-line growth is pausing to digest the ZT acquisition before the next ramp.
⚖️ Verdict: 🟢
Bullish. While the sequential revenue pause and cash flow compression require monitoring, expanding operating margins by a full 200 basis points in a hardware-intensive business is a monumental achievement that drastically upgrades Sanmina's earnings power.
Key Themes
ZT Integration Drives Explosive Margin Expansion
Non-GAAP operating margin accelerated to 8.0% in Q3, up from 6.0% in Q2 and 5.7% a year ago. This shatters management's historical long-term target of '6% to 7%+'. The margin expansion indicates that Phase 3 of the ZT integration (vertical integration synergies, where Core Sanmina builds subassemblies for ZT) is yielding massive profitability improvements.
Cash Generation Takes a Hit from CapEx and Working Capital
Contradicting the record profitability narrative, Free Cash Flow decelerated abruptly to $24M (down from $342M in Q2 and $168M in Q3'25). Operating Cash Flow of $124M was dragged down by a $97M use in net working capital, while Capital Expenditures surged to $100.8M (up 3x YoY). Inventory has ballooned to $3.15B. The company is spending heavily to build AI capacity, which restricts excess capital for buybacks.
AI & Cloud Infrastructure Momentum Extends to FY28
CEO Jure Sola confirmed the company secured more customer orders in both core Sanmina and ZT Systems during Q3. The integration is moving past the initial AMD dependency, with management citing 'strong demand for fiscal 2027, with growth ramping throughout the year and into fiscal 2028.' This validates the strategy of creating an end-to-end AI infrastructure manufacturer.
Macroeconomic & Tariff Uncertainties
Management explicitly updated their Safe Harbor language to warn against 'recent or future changes in tariffs and trade policy, which may adversely affect our costs, supply chain, and customer demand.' Furthermore, they flagged geopolitical uncertainty in the Middle East. With a sprawling global supply chain and high-value AI node assembly, sudden tariff shifts could immediately pressure the newly expanded gross margins.
Other KPIs
Accelerating significantly. Up from $682 million at the end of FY25. This 54% expansion in the physical asset base reflects the aggressive CapEx deployment ($244M YTD) required to scale ZT Systems operations and stand up new facilities like the Texas energy plant.
Accelerating sharply compared to $15.0 million in the prior year. This reflects the full weight of the $2.0B+ term loans taken on to finance the ZT Systems acquisition. While the 8.0% operating margin easily covers this, it represents a permanent drag on GAAP net income.
Guidance
Accelerating vs prior expectations. Management raised the floor of guidance from $13.7B to $14.0B. The $14.15B midpoint represents a massive 74% YoY growth over FY25's $8.13B, entirely driven by the ZT Systems integration and sustained Cloud/AI demand.
Accelerating sharply. Raised from the prior outlook of $10.75 - $11.35. This massive $1.00+ hike at the midpoint ($12.05) proves the structural jump in operating margins is durable for the remainder of the fiscal year.
Stable sequentially, but Decelerating in YoY growth rate. The $3.45B midpoint is essentially flat against Q3's $3.46B, reinforcing that Q2's $4.01B was an anomaly due to pull-ins. YoY growth for Q4 will be approximately 64%.
Stable at elevated levels. After hitting 8.0% in Q3, management expects margins to remain structurally higher than historical norms. Even the low end of the guide (7.5%) is 150 basis points above what the company was achieving prior to the ZT integration.
Key Questions
Sustainability of 8% Margins
Non-GAAP operating margin surged to 8.0% this quarter, significantly above your historical target of 6-7%. How much of this is driven by favorable one-time product mix versus permanent structural synergies from the ZT integration?
CapEx Run-Rate
Capital expenditures tripled YoY to $100 million this quarter, severely compressing Free Cash Flow. Is this $100M quarterly run-rate the 'new normal' required to support the AI capacity buildout heading into FY27?
Working Capital Dynamics
We saw a $97 million cash use from working capital changes this quarter, and inventory now sits above $3.1 billion. How are you managing the working capital intensity of ZT Systems' accelerated compute ramps, and when do you expect cash conversion cycles to normalize?
Tariff Mitigation Strategy
You explicitly called out tariff risks in the release. If blanket tariffs are enacted on electronics imports, how much of that cost can be contractually passed through to hyperscaler customers, and what is your footprint redundancy strategy?