Flex Ltd. (FLEX) Q2 2026 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call highlights strong growth in cloud and power sectors, significant margin improvements, and a positive impact from partnerships like Amazon. Despite some management vagueness, the overall sentiment is positive due to increased guidance and strong performance in key areas. The anticipated growth in higher-margin businesses and strategic investments further support a positive outlook.

Key Financial Performance

Revenue $6.8 billion, growing 4% over last year. Driven by strong data center growth across both Power and cloud.

Operating Margin 6%, up 55 basis points year-over-year. Reflects disciplined execution and a shift towards higher-value technology-driven businesses.

Adjusted EPS $0.79, up 23% over last year. Another record for Flex, driven by strong performance and disciplined cost execution.

Gross Margin 9.3%, up 80 basis points year-over-year. Improved due to favorable mix impacts and strong execution.

Reliability Segment Revenue $3 billion, up 3% year-over-year. Growth in Power and moderate growth in Health Solutions and Core Industrial, offset by pressure in auto.

Reliability Segment Margin 6.5%, up 105 basis points year-over-year. Driven by favorable mix impacts from Power and strong execution and cost management.

Agility Segment Revenue $3.8 billion, up 4% year-over-year. Driven by robust cloud demand, offset by softness in communications and consumer end markets.

Agility Segment Margin 6%, down 5 basis points year-over-year. Comparing against a very strong quarter last year.

Free Cash Flow $305 million, increased despite sequential investments in CapEx to support organic growth.

Net Inventory Down 4% year-over-year. Inventory, net of working capital advances, was 55 days, a reduction of 3 days versus the prior year.

Net CapEx $148 million or approximately 2% of revenue. Investments made to support organic growth.

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Operating Highlights

AI infrastructure platform: Flex unveiled a new AI infrastructure platform at the OCP Global Summit. This platform integrates power, cooling, and compute in scalable designs, enabling data center operators to deploy up to 30% faster and reduce execution risks.

Data center business: Flex's data center revenue is expected to grow at least 35% this year, driven by strong demand for cloud and power solutions. The company is outperforming industry growth rates and strategically shifting towards higher-margin technology-driven businesses.

Revenue growth: Flex achieved $6.8 billion in revenue for the quarter, a 4% year-over-year increase, with an operating margin of 6% and adjusted EPS of $0.79, up 23%.

Free cash flow: Free cash flow increased to $305 million, supported by investments in CapEx for organic growth.

AI-driven market positioning: Flex is partnering with leading technology companies, including NVIDIA, to support AI infrastructure build-outs with next-gen 800-volt DC AI factories, improving energy efficiency and reducing cooling costs.

Regionalization strategies: Flex is leveraging its global scale to support customers' regionalization strategies, bringing manufacturing closer to end markets to improve agility and reduce risks.

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Risk or Challenges

Facility Damage in Ukraine: The Mukachevo facility in Ukraine was damaged during a missile strike, leading to operational disruptions and a temporary loss of operations. This poses challenges in rebuilding operations and maintaining supply chain continuity.

Tariff Volatility: The company faces ongoing volatility from tariffs, which creates uncertainty in revenue guidance and requires adjustments to meet evolving trade requirements.

Softness in Consumer Devices and Lifestyle Segments: Weakening trends in consumer devices and lifestyle segments, coupled with the temporary loss of operations in Ukraine, are negatively impacting revenue in these areas.

Unfavorable Foreign Exchange (FX) Impacts: Unfavorable FX impacts are affecting the business, creating additional financial headwinds.

Pressure in Automotive Segment: The automotive market remains soft, though stabilizing, which continues to exert pressure on revenue growth in this segment.

Dynamic Supply Chain Challenges: The company is navigating a rapidly evolving supply chain environment, including regionalization strategies to mitigate risks and improve agility.

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Guidance & Outlook

Data Center Revenue Growth: Flex expects data center revenue to grow at least 35% this year, driven by AI infrastructure build-outs and partnerships with leading technology companies.

AI Infrastructure Platform: Flex unveiled a new AI infrastructure platform to help data center operators deploy up to 30% faster, reduce execution risk, and scale reliably to meet AI demand.

Health Solutions: Steady medical device demand is expected, with improvement in medical equipment anticipated later this year.

Communications and Enterprise: Strength is expected in optical switches and SATCOM devices supporting next-generation connectivity requirements.

Automotive Market: The automotive market is stabilizing compared to prior quarters, with new compute deals and focus on software-defined vehicles.

Full Year FY '26 Guidance: Revenue is expected between $26.7 billion and $27.3 billion, adjusted operating margin between 6.2% and 6.3%, and adjusted EPS between $3.09 and $3.17 per share.

Segment Outlook for Reliability Solutions: Revenue is expected to grow low to mid-single digits, driven by strong demand in data center power and medical devices, offset by a soft but stabilizing environment in renewables and auto.

Segment Outlook for Agility Solutions: Revenue is expected to grow mid- to high single digits, driven by continued strength in cloud, offset by weakening trends in consumer devices and lifestyle, and temporary loss of operations in Ukraine.

Third Quarter Guidance: Revenue is expected in the range of $6.65 billion to $6.95 billion, with adjusted operating income between $405 million and $435 million, and adjusted EPS between $0.74 and $0.80 per share.

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Shareholder Return Plan

share repurchase: repurchased $297 million of stock, which was approximately 5.6 million shares.

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Key Q&A

Q:Why was there no upside to the data center revenue guidance despite strong performance in cloud and power?

A:The company decided not to update the quarterly guidance for data centers as it is not a reporting segment. They had provided a full-year guide at the beginning of the year, which indicated at least 35% growth, a strong number compared to the industry. They will update the full-year guide at the end of the year.

Q:What is the mix of custom silicon versus merchant silicon in the cloud business, and how does Flex see its data center business benefiting from large projects?

A:Flex benefits significantly from hyperscale growth and new cloud players, with at least 35% year-over-year growth. They perform well in custom silicon due to specialization and complexity but also participate in merchant silicon. They expect strong growth rates in the cloud business driven by large projects and will provide updated guidance in May.

Q:What is driving the operational margin improvement in the second half of the year?

A:The improvement is driven by the mix of products and services businesses, which perform above the Flex average. These businesses are growing well and becoming a larger part of revenue, pulling margins up.

Q:How does Flex view the economics of the cloud and power business?

A:The cloud and power business is accretive to margins. Flex integrates compute, power, and cooling, with vertical integration in manufacturing racks and enclosures. The power business includes proprietary products and IP, contributing to margin improvement. They expect significant margin progression as the mix shifts towards power and cooling.

Q:What is contributing to the $500 million increase in full-year guidance?

A:The increase is driven by strong performance in data center and health solutions, as well as stabilizing trends in automotive. The Ukraine facility shutdown is a headwind, with a revenue impact of slightly over $100 million in the second half.

Q:What is the impact of the Amazon partnership on Flex's data center business?

A:The Amazon partnership, along with growth in other hyperscalers and Neo clouds, contributes to Flex's bullish outlook for the data center business. These partnerships and investments are long-term plays, and their impact will be reflected in updated guidance in May.

Q:Can the accelerating growth in the fourth quarter be used as a base for future growth?

A:Yes, the growth in the fourth quarter is driven by data center, power, medical devices, and capital equipment. Flex expects this momentum to continue into the next fiscal year.

Q:What is the outlook for the automotive business?

A:Flex sees stabilizing trends in automotive and continues to win compute projects across ICE, hybrid, and EV platforms. They aim for healthy growth with long-term commitments and will invest in the business if it meets return expectations.

Q:What is the value add from engineering and services, and how does it impact margins?

A:Value-added services, including vertical integration, are important for margin improvement. While specific numbers are not provided, these services are growing and contribute positively to margins, especially in the data center space.

Q:What is driving the sequential margin improvement from Q3 to Q4, and is it sustainable?

A:The improvement is driven by growth in higher-margin products and services businesses. Flex expects this momentum and margin performance to continue into the next fiscal year.

Q:Does Flex have sufficient capacity to support data center growth, and will it require increased CapEx?

A:Flex has made significant investments in capacity across regions, including new facilities in Poland, Guadalajara, and the U.S. They anticipate further CapEx and OpEx investments over the next 2-5 years to support growth, while maintaining cash flow and margin improvements.

Q:How is Flex utilizing AI and automation in its operations?

A:Flex is deploying AI and robotics to improve productivity and efficiency in factories and back-office operations. They are also partnering with NVIDIA to provide modular infrastructure for data centers, reducing lead times for deployment.

Q:Review of Unclear Management Responses

A:Management avoided providing specific numbers or detailed updates in several areas, including the exact mix of custom versus merchant silicon, the revenue size of value-added services, and the specific margin contributions of these services. They also deferred providing updated guidance for the cloud business and data center growth until May, using vague language about long-term plays and future updates.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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