Sanmina (SANM -4%) is experiencing a downturn following its Q3 earnings report. The EMS provider missed analyst expectations on both EPS and revenue, although its results were within prior guidance ranges. Sanmina also provided Q4 guidance below analyst expectations. Q3 revenue fell 16.6% year-over-year to $1.84 billion, but saw a slight sequential increase, marking the first sequential revenue growth in six quarters.
- Industrial, medical, aerospace/defense, and automotive segments represented 64% of revenue, down 3.6% sequentially. The communication segment, including cloud infrastructure, accounted for 36% of revenue and was up 8.3% sequentially.
- The medical segment is driven by digital health and medical devices. Sanmina has a strong base of medical customers with positive long-term trends and new opportunities in the pipeline. In the automotive sector, the focus is on EVs, car connectivity, ADAS, and electrical chargers. The industrial and energy sectors have a solid customer base with new projects in the pipeline.
- The Communications segment is improving as customer inventory absorption gets better. Sanmina expects continued progress in this market, driven by high-performance cloud, IP routing switches, and some optical packaging systems. Existing customers are also starting to work down their inventory, although Sanmina would prefer a faster pace.
- Non-GAAP operating margin declined to 5.3% from 5.7% a year ago and 5.4% in Q2. This was at the low end of its prior outlook, driven by gross margin coming in just below the midpoint of its prior outlook. However, it was in line with its 5-6% short-term target range. Given that EMS is a low-margin business, even small declines in this metric can impact EPS significantly.
Overall, Sanmina has faced challenging times with revenue declining year-over-year for four consecutive quarters. The Q4 guidance was disappointing for investors. The highlight was the sequential improvement in the Communications segment and the progress in inventory absorption. However, Sanmina continues to see softness in the Automotive and Industrial sectors. The stock had been moving higher in recent weeks, indicating high sentiment that Sanmina was turning a corner, but today's results were disappointing.
