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Sanmina (SANM) is flat following its Q1 (Dec) earnings report last night. This EMS provider beat analyst expectations on EPS, its largest EPS beat in the past four quarters. Revenues rose 7.0% yr/yr to $2.01 bln, which was a bit better than expected. The Q2 (Mar) EPS and revenue guidance ranges were both within analyst expectations. However, the mid-points of both EPS and revs were a bit below expectations, so maybe some disappointment there.

• Revenue, gross margin, operating margin and adjusted either met or exceeded its outlook. IMS segment revenue came in at $1.62 bln, up 7.8% yr/yr, driven by growth in the majority of end markets, but primarily in the communications networks and cloud infrastructure end markets. CPS segment revenue came in at $416 mln, up 5.4% yr/yr, driven by higher demand in most end markets. While Sanmina said it was pleased with the IMS and CPS businesses, there is still room to improve.
• Industrial & energy, medical, defense, aerospace and automotive was 63% of revenue, it came at $1.269 bln, up 1%. Within Industrial & Energy, Sanmina says it has a strong customer base and it sees new projects in the pipeline. Medical also has a solid and well-diversified customer base. Defense & aerospace is seeing strong market opportunities with new programs to drive growth. Automotive & Transportation continues to show solid demand.
• Communication networks and cloud infrastructure was 37% of revenue, or $737 mln, with growth of 19%. The Communications segment is improving because Sanmina is beginning to see customer inventory absorption improve. Sanmina expects this market to continue to move in the right direction, driven by high performance cloud, IP routing switches, and some optical packaging systems. Also, Sanmina is starting to see pickup from some existing customers as they are working their inventory down. Sanmina would like to see inventory worked down even more quickly, but at least it's going in the right direction.
• EMS industry margins are notoriously thin, so we watch this metric closely. Adjusted operating margin improved to 5.6% from 5.3% in SepQ and 5.5% a year ago. Sanmina is focused on margin expansion, including a focus on adding new customers with higher margin opportunities. Short term, Sanmina expects operating margin will be stable in the 5-6% area, but long term, sees that at 6+%. For Q2 (Mar), Sanmina has guided to the 5.3-5.7% range.

Sanmina had a bit of a rough FY24, but the good news is that yr/yr revenue growth returned in Q1, following five consecutive yr/yr declines. That was partly from a communications vertical that was digesting inventory. The good news is that this digestion seems to be on the tail end of this cycle. It is not over, but customers' inventories continue to come down. Sanmina is also starting to see new programs ramp up.

On a final note, Sanmina increased its share buyback authorization by $300 mln, which is a good amount for a $4.2 bln market cap company, roughly 7% of shares outstanding. Sanmina was pretty candid on the call, saying that it believes its share price is undervalued in the market and, as such, share repurchases remain an attractive capital allocation option. Sanmina says it has one of the strongest balance sheets in the industry with no net debt and a low gross leverage ratio, so it has money to spend on buybacks.