Jabil Inc. (JBL) Q1 2026 Earnings Call Transcript

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Overview

The earnings call highlights positive financial guidance, including strong AI-related revenue growth and optimistic guidance for the Intelligent Infrastructure segment. The Q&A section reveals confidence in margin expansion and strategic investments in healthcare and cloud businesses. Despite some uncertainties, such as unchanged free cash flow projections and conservative automotive outlook, the overall sentiment is positive. The company's strategy to focus on higher-margin opportunities and the potential for new partnerships with hyperscalers further support a positive stock price reaction over the next two weeks.

Key Financial Performance

Net Revenue $8.3 billion for Q1, at the high end of guidance range.

Core Operating Income $454 million for Q1, supported by revenue mix and cost discipline.

Core Operating Margin 5.5% for Q1, reflecting strong execution.

GAAP Operating Income $283 million for Q1.

GAAP Diluted Earnings Per Share $1.35 for Q1.

Core Diluted Earnings Per Share $2.85 for Q1, at the upper end of guidance range.

Regulated Industries Revenue $3.1 billion for Q1, up 4% year-over-year, driven by steady performance in Healthcare and expected results in Automotive and Renewables.

Regulated Industries Core Operating Margin 5.8% for Q1, up 110 basis points year-over-year, due to disciplined execution and strength in Healthcare.

Intelligent Infrastructure Revenue $3.9 billion for Q1, ahead of expectations, driven by strong performance in cloud, data center infrastructure, and networking.

Intelligent Infrastructure Core Operating Margin 5.2% for Q1, up 40 basis points year-over-year, supported by mix and strong execution.

Connected Living & Digital Commerce Revenue $1.4 billion for Q1, ahead of expectations, with strength in automation, robotics, and retail warehouse programs.

Connected Living & Digital Commerce Core Operating Margin 5.5% for Q1.

Inventory Days 70 days for Q1; net of inventory deposits, 57 days, within the targeted range of 55-60 days.

Cash Flow from Operations $323 million for Q1.

Net Capital Expenditures $51 million for Q1.

Adjusted Free Cash Flow $272 million for Q1.

Net Debt to Core EBITDA 1.2x for Q1.

Cash Balances $1.6 billion for Q1.

Share Repurchase $300 million of shares repurchased in Q1.

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Operating Highlights

AI-related revenue: Expected to reach approximately $12.1 billion in fiscal 2026, representing 35% year-over-year growth. This growth is driven by designing and delivering integrated systems for AI capacity scaling.

Hanley Energy acquisition: Expected to close in January, contributing approximately $200 million to Cloud & DCI revenue. This acquisition strengthens capabilities in modular power distribution and energy systems for next-gen data centers.

Intelligent Infrastructure: Revenue for fiscal 2026 is raised by $900 million, driven by higher revenue in Cloud & DCI and networking. Cloud & DCI is expected to grow by $600 million to $9.8 billion, supported by program wins and data center power business.

Regulated Industries: Fiscal 2026 revenue is tracking $100 million above expectations, driven by better-than-expected results in renewables and steady performance in Healthcare and Automotive.

Connected Living & Digital Commerce: Revenue is expected to decline by 11% year-over-year due to customer pruning, but offset by $100 million incremental revenue from automation, robotics, and advanced retail warehouse programs.

Core operating margin: Improved to 5.7% for fiscal 2026, reflecting a 10 basis point increase due to strong mix and execution.

Free cash flow: Adjusted free cash flow for fiscal 2026 is expected to exceed $1.3 billion, consistent with prior guidance.

AI strategy: Focus on integrated systems combining compute, networking, power distribution, and advanced cooling to reduce deployment timelines and costs for customers.

Liquid cooling retrofitting: East Coast rack and server factories are being retrofitted for liquid cooling, positioning the company well for the second half of fiscal 2026 and fiscal 2027.

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Risk or Challenges

Interest Expense Increase: The company anticipates an increase in interest expense due to additional debt associated with the acquisition of Hanley Energy Group and the refinancing of existing senior notes maturing in April. This could impact financial performance.

Connected Living & Digital Commerce Revenue Decline: Revenue in this segment is expected to decline by 10% in Q2 due to planned program attrition and customer pruning, which could affect overall revenue growth.

Regulated Industries Cautious Outlook: While the segment is tracking above expectations, the company remains cautious about renewables, indicating potential risks in this area.

Dependence on AI-Driven Growth: A significant portion of revenue growth is driven by AI-related activities. Over-reliance on this sector could pose risks if demand fluctuates.

Supply Chain Adjustments: The company is retrofitting factories to accommodate liquid cooling for AI-related products. Delays or issues in these adjustments could impact operations.

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Guidance & Outlook

Second Quarter FY 2026 Revenue: Expected to be in the range of $7.5 billion to $8 billion.

Second Quarter FY 2026 Core Operating Income: Expected to be in the range of $375 million to $435 million.

Second Quarter FY 2026 GAAP Operating Income: Expected to be in the range of $312 million to $382 million.

Second Quarter FY 2026 Core Diluted Earnings Per Share: Expected to be in the range of $2.27 to $2.67.

Second Quarter FY 2026 GAAP Diluted Earnings Per Share: Expected to be in the range of $1.70 to $2.19.

Full Year FY 2026 Revenue: Expected to be approximately $32.4 billion, an increase of $1.1 billion from prior outlook.

Full Year FY 2026 Core Operating Margins: Expected to be roughly 5.7%, an improvement of 10 basis points versus earlier view.

Full Year FY 2026 Core Diluted Earnings Per Share: Expected to be $11.55, an increase of $0.55 from previous estimate.

Full Year FY 2026 Adjusted Free Cash Flow: Expected to exceed $1.3 billion.

Intelligent Infrastructure FY 2026 Revenue: Expected to increase by $900 million, driven by higher revenue in Cloud & DCI and networking. AI-related revenue expected to grow 35% year-over-year to $12.1 billion.

Regulated Industries FY 2026 Revenue: Tracking above September expectations by $100 million, driven by better-than-expected results in renewables.

Connected Living & Digital Commerce FY 2026 Revenue: Expected to decline by roughly 11% year-over-year due to customer pruning, offset by growth in automation, robotics, and retail warehouse programs.

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Shareholder Return Plan

Share Repurchase: During Q1, we repurchased $300 million of shares under our existing share repurchase authorization.

Capital Return Commitment: We continue to expect adjusted free cash flow of more than $1.3 billion, consistent with the framework we outlined in September, which will allow us to continue to invest in future growth while continuing to return capital to shareholders.

Buyback Focus: Our priorities remain the same: profitable growth, diversified mix, margin expansion, consistent cash generation and strong commitment to buybacks, which was evident in Q1.

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Key Q&A

Q:Can you provide more details on the new wins in the Intelligent Infrastructure space and the impact of factors like retrofitting factories for liquid cooling and acquiring Hanley Energy Group?

A:The Intelligent Infrastructure segment is performing well, with revenue increasing from $9 billion in FY '25 to $12.1 billion in FY '26, a 35% increase. The $900 million revenue increase is split into two buckets: $600 million from Cloud & DCI (including $200 million from Hanley Energy Group) and $300 million from Networking and Comms. Hanley Energy Group, a power and energy management solutions company, is expected to contribute $200 million in FY '26 and be more accretive in FY '27. The guidance is considered appropriately conservative.

Q:Is it reasonable to assume that Jabil's operating margin can exceed 6% in fiscal '27, and how high can it go longer term?

A:The operating margin for FY '26 is 5.7%, up from 5.6% in FY '25 due to better mix, improved capacity utilization, and SG&A leverage. The margin is expected to benefit from the full-year impact of Hanley in FY '27. Management feels confident about reaching 6% and sees potential for further increases beyond that, though the timeline for reaching 7% is uncertain.

Q:What are the growth prospects for the Healthcare & Packaging business, and can it accelerate beyond low single digits?

A:The Healthcare & Packaging business is growing at low single digits to $5.6 billion in FY '26. Croatia is performing well and is expected to deliver higher returns by the second half of FY '27. The company is actively pursuing capability-driven deals to go vertical in the Healthcare space, similar to the GLP-1 OSD transaction.

Q:How much of the upside in Intelligent Infrastructure is due to better execution versus customer demand, and what is the revenue scale for the second hyperscaler?

A:The upside in Intelligent Infrastructure is attributed to both better execution and strong customer demand. The revenue scale for the second hyperscaler is now roughly $1 billion, up from the previously stated $750 million. Discussions with additional hyperscalers are ongoing, and the pipeline is strong.

Q:Why were gross margins lower in Q1 despite higher revenues, and what is the gross margin outlook for FY '26?

A:Gross margins in Q1 were 8.9%, up 10 basis points year-over-year but slightly lower quarter-over-quarter due to mix. The gross margin range for FY '26 remains at 9% to 9.5%.

Q:What are the prospects for investing more aggressively in the Healthcare business given its steady growth and good margins?

A:The company is evaluating M&A activity and B2B discussions in the Healthcare space. Healthcare is considered a steady business with higher margins, long product life cycles, and steady cash flows, making it a key area for potential investment and diversification.

Q:How is Jabil planning capacity to meet demand in the cloud business, and what are the expansion plans?

A:Jabil is retrofitting and expanding facilities to meet demand, including surplus capacity in Mexico, a combination of existing and new capacity in India, and a new facility in North Carolina. Memphis is also seeing growth and may expand sooner than North Carolina. The CapEx outlook remains consistent at 1.5% to 2% of revenue for FY '26.

Q:What is the long-term strategy for Hanley Energy Group, and how does it fit into Jabil's offerings?

A:Hanley Energy Group is a services organization providing power and energy management solutions. It complements Jabil's offerings by enabling deployment, installation, and maintenance of low and medium voltage switchgear, creating an ongoing revenue stream. The acquisition is expected to close in January and is seen as highly accretive.

Q:What is the outlook for the automotive business, and how is Jabil positioned in this market?

A:The automotive business is expected to remain conservative in FY '26, with potential upside in FY '27 and beyond. Jabil is investing in powertrain-agnostic technologies like software-defined vehicles and ADAS, which are applicable across all platforms. Program wins today will impact FY '27-'28.

Q:What is the status of discussions with a third hyperscaler, and what products are being considered?

A:Discussions with a third hyperscaler are ongoing, but it is premature to discuss specific products or revenue. Jabil's design and engineering capabilities are driving interest, and the company is not including potential revenue from a third hyperscaler in current numbers.

Q:Why is the free cash flow outlook unchanged despite higher revenue and margin guidance?

A:The free cash flow outlook remains at $1.3 billion+ due to slightly higher CapEx and working capital requirements associated with growth in the second half of the year. The guidance is considered prudent.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the timeline for reaching a 7% operating margin, the exact impact of customer demand versus execution in Intelligent Infrastructure, and the specifics of discussions with a third hyperscaler. Additionally, they did not clarify the extent to which consignment models might apply to new hyperscaler programs.

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Earnings Word Cloud

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