Flex Ltd. (NASDAQ:FLEX) Q1 2026 Earnings Call Transcript

Flex Ltd. (NASDAQ:FLEX) Q1 2026 Earnings Call Transcript July 24, 2025

Flex Ltd. beats earnings expectations. Reported EPS is $0.72, expectations were $0.63.

Operator: Thank you for standing by. Welcome to Flex’s First Quarter Fiscal 2026 Earnings Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. I will now turn the call over to Mrs. Michelle Simmons. You may begin.

Michelle Simmons: Thank you. Good morning, and thank you for joining us today for Flex’s First Quarter Fiscal 2026 Earnings Conference Call. With me today is our Chief Executive Officer, Revathi Advaithi; and Chief Financial Officer, Kevin Krumm, will give brief remarks followed by Q&A. Slides for today’s call as well as a copy of the earnings press release are available on the Investor Relations section at flex.com. This call is being recorded and will be available for replay on our corporate website. Today’s call contains forward-looking statements, which are based on our current expectations and assumptions. These statements involve risks and uncertainties that could cause actual results to differ materially. For a full discussion of these risks and uncertainties, please see the cautionary statements in our presentation, press release or in the Risk Factors section in our most recent filings with the SEC.

Note, this information is subject to change and we undertake no obligation to update these forward-looking statements. Please note, all growth metrics will be on a year-over-year basis unless stated otherwise. Additionally, all results will be on a non-GAAP basis, unless we specifically state it’s a GAAP results. The full non-GAAP to GAAP reconciliations can be found in the appendix slides of today’s presentation as well as in the summary financials posted on our Investor Relations website. Now I’d like to turn the call over to our CEO. Revathi?

Revathi Advaithi: Thank you, Michelle. Good morning, and thank you for joining us today. So starting on Slide 4. Flex just wrapped up an exceptional quarter, delivering positive results against our guidance. The groundwork we have laid out over the last several years continues to position us well in driving profitable growth with a growing data center business as well as serving as a manufacturer of choice for our partners. The benefits we are seeing from our global footprint are a result of our actions that started years ago as we focused on being able to meet the needs of our customers wherever there in the world. Our revenues were up — were $6.6 billion, up 4%. Our adjusted operating margin was 6%, and we delivered adjusted EPS of $0.72, a record Q1 number for Flex.

Our great start to fiscal year ’26 gives us improved confidence in our ability to hit our fiscal year commitments, which has been reflected in our improved FY ’26 guidance. But we’re not done. So let’s turn to Slide 5. Our portfolio mix continues to shift as data center becomes a larger and more strategic contributor, and this quarter was no exception. We delivered strong performance across both our cloud and power portfolios, and we continue to expect this business to deliver approximately $6.5 billion in revenue, growing at least 35% year-over-year and representing 25% of our total revenue. But what makes this business truly compelling isn’t just the size of the growth. It’s the architecture and integration behind it. So let’s take a moment to unpack what this means.

On the cloud side, we deliver vertically integrated IT hardware and infrastructure solutions, including metal fabrication, custom rack assembly, and direct-to-chip liquid cooling technology. On the power side, our solutions span the full stack, from board level modules managing power to the chip all the way to the facility level with modular power pods. Flex is the only provider providing both end-to-end cloud IT integration and a full power and cooling portfolio at scale. And that matters because customers today are in an arms race to scale. They don’t just need custom rack solutions, but they also need power for their chips. They need to cool it and they need to deploy it quickly. Delivering integrated scalable solutions from grid to chip is essential, and it’s a key reason why Flex continues to be a strategic partner of choice.

That brings me to our broader geographic footprint and scale on Slide 6. Our global operational scale remains one of Flex’s most significant competitive advantages not just in data center, but across all our end markets. And it’s not just the size of our footprint, but our ability to shift and scale complex production across regions to meet evolving customer needs. We operate more than 49 million square feet globally, including 7 million square feet in the U.S. and $9 million in Mexico, giving us one of the largest advanced manufacturing footprint in North America. But what truly sets us apart is how we operate. Across our sites, we have embedded AI-enabled systems, advanced automation and localized supply chains designed for speed, flexibility and resilience.

These capabilities are critical not only in data center, but also across our other end markets, including automotive, health care, industrials and more, which account for 75% of total Flex revenue. These are highly regulated, complex products that require global design and delivery. Now this scale, paired with deep supply chain expertise enables Flex to help customers navigate challenges like tariffs, regional regulations and supply disruptions. We have led the shift towards regionalization and the impact is clear. Americas revenue for us rose to 49% in fiscal year ’25, up from 38% in fiscal year ’20, while Asia declined to 30%, down from 41% over the same period. These shifts reflect evolving customer needs and Flex’s ability to execute. So looking ahead, we’re especially bullish on our advanced manufacturing capabilities where we see continued productivity gains from deploying AI and intelligence systems across our factories.

You can see by bringing together advanced manufacturing services and Flex IP products, all supported by advanced automation and AI capabilities are powering transformation across industries and geographies. While there is no shortage of news flow around uncertainty in the market, we remain confident in our positioning. The flex you see today is not the same company it was 10 years ago, from the people to the portfolio of businesses. We have positioned ourselves to lead in our markets, focusing on profitability and transformational acquisitions that continue to evolve who we are as a company. We were early to focus on high-growth end markets such as the data center and power, build at scaled and regionalized footprint and integrate services in a way that transforms Flex from a contract manufacturer into a strategic end-to-end partner.

I remain deeply confident in our strategy and the unique value we deliver. The solutions we provide and capabilities we have built have positioned us for one of the most compelling opportunity in Flex’s history. With that, I’ll turn it over to Kevin to walk through the financials. Kevin?

Kevin S. Krumm: Thank you, Revathi, and good morning, everyone. I’ll start with our key financials on Slide 8. First quarter revenue came in at $6.6 billion, up 4%, driven by strong data center growth across both cloud and power end markets. Gross profit totaled $596 million, and gross margin improved to 9.1%, up 130 basis points. Operating profit was $395 million, with operating margins at 6%, up 120 basis points. Finally, earnings per share for the quarter increased more than 40% to $0.72 per share. Turning to our quarterly segment results on the next slide. In Reliability Solutions, revenue was $2.9 billion, down 2% year-over-year, in line with our expectations. Results reflected continued macro-related pressure in automotive and renewables, which was partially offset by strength in power.

While all 3 reporting units saw modest declines, operating income improved to $172 million and segment margin expanded 100 basis points to 6%, demonstrating strong execution, continued focus on mix and disciplined cost management. Agility Solutions revenue totaled $3.7 billion, up a strong 10% year-over-year, driven by robust cloud and AI demand that more than offset continued softness in traditional telecom and consumer-facing end markets. Operating income was $240 million with operating margin expanding 120 basis points to 6.5%, supported by effective cost management and favorable mix shift, including increased penetration of value-added services. Moving to cash flow on Slide 10. Free cash flow in the quarter was $268 million, representing a conversion of 98%.

Net inventory was up 3% sequentially driven by increased volumes and down 11% year-over-year. Inventory, net of working capital advances was 55 days, a reduction of 7 days versus the prior year. Net CapEx totaled $131 million or approximately 2% of revenue, and we purchased around $247 million of stock, which was approximately 7 million shares. Our capital allocation priorities remain unchanged. We are committed to maintaining our investment-grade balance sheet, funding strategic investments to support organic growth, pursuing accretive M&A opportunities and returning capital to our shareholders through opportunistic share repurchases. In the quarter, we acquired a new manufacturing site in Poland, which will produce low- and medium-voltage switchgear power pods and busways.

This doubles our power capacity in Europe, allowing us to meet the rising global demand for reliable data center power. It is also a great example of Flex deploying capital in a margin-accretive way to grow our capabilities and our products portfolio. Looking at our full year guidance on Slide 11. As we head in the second quarter and we look out to the rest of the year, the macro environment remains dynamic. That said, we’re continuing to execute well and the steps we’ve taken to focus Flex on high-growth, strategically important end markets are delivering results. One of the key enablers of our performance is our global scale. It has allowed us to support customers in accelerating their regionalization strategies, bringing manufacturing closer to end markets to improve agility, reduce risk and meet evolving trade requirements.

While the situation continues to evolve, a few key points to keep in mind. We expect tariffs to remain largely pass-through costs with strong contractual protections in place. Importantly, while last quarter, we did not incorporate the direct impact of tariffs into our revenue guidance, this quarter, we’re doing so. With greater clarity around the scope and timing of the tariff impact, we believe this adjustment provides a more accurate view of expected revenue performance. That said, incorporating our current view to tariffs does not have a material impact on our full year guided growth rates. With that context, our updated FY ’26 expectations are revenue between $25.9 million and $27.1 billion, which increases our midpoint by approximately $600 million.

Adjusting operating margin — adjusted operating margin between 6% and 6.1%, adjusted EPS between $2.86 and $3.06 per share, adjusted tax rate of 21%, and we continue to expect strong cash generation and maintain our 80%- plus free cash flow conversion target for FY ’26. We’ll continue to monitor the tariff environment and adjust as needed. But as it stands today, we’re confident in our ability to navigate these shifts while delivering against our financial commitments. Moving to our segment outlook for the year. Our segment outlook remains largely consistent with last quarter’s as end market demand trends continue to track in line with our expectations. For Reliability Solutions, we now expect revenue to be down low single digit to up mid-single digit, a marginal improvement from our prior view.

Continued strength in data center power is helping offset macro- related softness in automotive, core industrial and renewables. For Agility Solutions, we anticipate modest year-over-year growth in the low to mid-single-digit range, reflecting a slight improvement from our prior year outlook. Growth will be driven by sustained demand in cloud, ongoing benefit from previously secured lifestyle wins and strategic share gains in networking. These tailwinds are expected to be partially offset by continued softness in enterprise IT, telco and consumer devices. Finishing off with our guidance for the second quarter on Slide 13. We expect Reliability Solutions revenue to be down low single digit to up low single digit with continued weakness in automotive and parts of health, offset by solid performance in our Power business.

We expect Agility Solutions revenue to be up low single digit to up mid-single digit with strength in cloud and continued momentum in networking, offset ongoing softness in traditional telecom and consumer-facing end markets. For total Flex, we expect revenue in the range of $6.5 billion to $6.8 billion, with adjusted operating income between $375 million and $415 million. Interest and other expense is estimated to be around $38 million, and the adjusted tax rate to be approximately 21%. Lastly, we anticipate adjusted EPS to be between $0.70 and $0.78 per share based on approximately 381 million weighted average shares outstanding. With that, I’ll now turn the call back over to the operator to begin Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Samik Chatterjee with JPMorgan Chase & Company.

Samik Chatterjee: Strong print here, maybe and strong margins as well. Maybe if I can start with the margin outlook for the year. You did a 6% in 1Q. You’re guiding to hold that level. I’m a bit surprised along with the increase in the midpoint of the revenue, you’re not seeing more leverage on the margin side for the full year outlook. Maybe you can clarify that as to why the margin outlook doesn’t — isn’t improving along with the revenue guide? And then I have a quick follow-up.

Kevin S. Krumm: Samik, this is Kevin. What I would say is we held our prior margin guided range of 6% to 6.1%. The math would be, if you were looking at operating profit dollars, we did pass through and therefore, improve our operating profit outlook as well. What I would say on the revenue volume especially in the back half of the year, we remain cautiously optimistic there. We have brought in tariffs, as I said before. That’s largely low-calorie revenue and actually is a headwind to our margin performance. So that’s an element you’re seeing in the back half of the year. And then we are making a few investments in the back half of the year as well.

Revathi Advaithi: Samik, I would say first is its first quarter. It was a very strong set of numbers for Q1. And as you can see, pretty much you’re seeing the 6% kind of flow through. So we feel — we are always conservative about our kind of how we forecast the year, but it’s a really strong set of numbers, both for the current quarter and the full year.

Samik Chatterjee: Okay. Okay. No. Got it. And for my follow-up, I see for the data center revenue, you’re outlining the target of 35% year-over-year. Maybe you can sort of give us a bit more details on what the trends were in 1Q itself? And if you can break it out between cloud and power? And is your — are your expectations still consistent for power to maybe have a stronger year than cloud this year?

Revathi Advaithi: Yes. Samik, I’ll say that first is we feel very good about our 35% growth forecast that we gave for this fiscal year. It’s the first time we’ve given a full year fiscal forecast for our data center business, and that’s because of it’s becoming a large percent of our overall portfolio. We’re in line with that 35%. And I would say from a quarterly perspective, we don’t want to give quarterly guidance and quarterly numbers because they tend to move around, but the 35%, we feel very strong about. We’re still in line with what we had said earlier in the start of the year that power will be stronger. And that’s because they had a little bit softer year last year relative to the cloud business, but they’re both going to be pretty significantly strong in terms of the overall 35%. So on track for that and continued also margin accretion to the overall Flex portfolio. So pretty robust numbers, I would say, data center for both cloud and power.

Operator: Our next question comes from the line of Mark Delaney with Goldman Sachs Asset Management.

Mark Trevor Delaney: Flex’s products assembly and services capabilities has allowed it to do very well in the data center. I’m hoping to better understand how the market for products may be evolving. Amazon recently announced the plans to use some of its own internally designed cooling products going forward. So do you think this may be a trend of hyperscalers doing more power and cooling products in-house more generally long term? And if so, how may Flex fit into those plans?

Revathi Advaithi: Yes. I’d say, Mark, that as we look at our capability around IT rack integration, around cooling and power, we’ve toggled towards having product capability and our own technology capability around both power and on cooling. How I feel about cooling is very bullish. I think Amazon’s announcement really validates the fact that we needed the capability both for manufacturing capability, but also technology capability. So having both is really important. You can’t have one or the other. I would say that hyperscalers is continuing to invest in their capability, we see as a positive thing. So whether it is providing it as an advanced manufacturing solution or bringing our own IP and technology into the manufacturing side of it or into the design side of it, giving a fully integrated solution is the right way to go.

And again, as I’ve said this before, Mark, is having both compute and power with cooling overall, we think, is a good way to go. So we view this announcement as a positive.

Mark Trevor Delaney: That’s helpful. My other question was just to better contextualize the full year guidance compared to 1Q results. The 1Q earnings results were very strong. Earnings were $0.10 above the midpoint of your prior guidance. You only raised the full year outlook for earnings at the midpoint by $0.05. So I’m hoping to better understand is the implied lower level of earnings for the balance of the year compared to your previous guidance. Is that just a question of timing and some conservatism? Or are there any businesses that are weakening more than you had previously expected?

Kevin S. Krumm: Mark, this is Kevin. I’ll take that. So first, First quarter was a great quarter, above expectations. The team navigated really well. As Revathi alluded to earlier, 1 quarter does not necessarily make the entire year. So — but as we look at it, we did raise revenue. And as I said earlier, sort of the midpoint of OP profit dollars. You don’t see that pass all the way through to EPS because we lost a little guide to guide in the interest and other line item. That said, when you look at first half versus back half, which I think was the other part of your question, especially maybe if looking at EPS or OP growth rates, I would say, the first half of this year, we are getting a benefit from a prior year comparison, prior year revenue was down pretty significantly in the first half of the year.

So we had some absorption issues that impacted operating profit pretty significantly. So that is a comparison benefit that the first half of the year is getting. The other thing I would say is we’re seeing growth this year in the data center. We talked about that. So we’re going to continue making investments in programs and capability in the back half of the year to support that.

Revathi Advaithi: Mark, what I would say is none of our end markets have changed in terms of what — how we guided for the year and how we felt the markets were performing. So that’s good news. I think in all this uncertainty, our guide is pretty strong in terms of how we felt the markets were going to perform. So we feel good about that. And then again, first quarter, like I said before, and we are generally conservative in how we guide. And I think that’s — people expect that from us, and that goes into the mix master.

Mark Trevor Delaney: Okay. Congratulations again on the good results.

Operator: Our next question comes from the line of Steven Fox with Fox Advisors.

Steven Bryant Fox: I had a couple of questions as well. First off, I was wondering if you can give us a sense for where you stand on some of the capacity constraints you had 90 days ago. I know you just mentioned you’re making investments in the second half. You bought a plant in Poland. But how constrained are you now versus 90 days ago? When do you think you sort of catch up with demand, if that’s the right terminology? And then I have a follow-up.

Revathi Advaithi: Yes. I would say, Steven, first is I think it’s a good problem to have, where we have so much growth that we have to continue to invest in capacity. And you are well aware of all the supply-demand equation in terms of AI infrastructure, which we see both in cloud and power. I feel good about the investments that we have announced and making. Our Dallas facility is ramping up very well. We just bought this facility in Poland, which is a fully capable facility that really helps us kind of from a European perspective. So we feel really good about the new investments we are making. My hope is that we continue to make investments in growth for AI infrastructure, both in power and cloud. And our goal would always be not to have so much capacity, but just enough capacity where we’re able to bring down lead times and keep up with the demand.

And I feel like we’re in the right place. You see that with our numbers, right? 35% is a very strong number for data center growth. And we’re delivering that because we have new capacity and we’ll continue to add more.

Steven Bryant Fox: That’s helpful. And then I know you just said there wasn’t much change in some of your non-data center markets versus 90 days ago. But I was curious if there’s any green shoots, especially in like automotive, industrial, for example, where maybe some companies are seeing some better cyclical trends.

Revathi Advaithi: Yes. I would say that for automotive, at least our — I know that from the end markets externally, you’re hearing that there are some upsides. I think we gave a fairly conservative guide. And so we’re in line with the guide in terms of numbers itself. So I feel good that we took this view because I think how the year will turn out is pretty much how we thought it’s going to work out. And then our — if you look at our auto portfolio, we’re kind of more geared towards North America. And so that kind of fits into the overall kind of how we compare to global numbers. I’d say industrial is also performing as we’ve expected, right? In kind of end markets that are infrastructure related, there is green shoots on areas like renewables, you know the story there.

And then I’d say the other areas to think about is on the networking side, we have talked about that we’ve had really good strong gain — share gains, and that’s a big plus for us. And then on the health care side, equipment has performed in line, but devices has been extremely strong. So that’s kind of how the overall markets have evolved. And being good at predicting the end markets in this environment, I would say, is quite a plus, and we feel good about kind of how we’ve looked at the year.

Operator: Our next question comes from the line of Ruplu Bhattacharya with Bank of America.

Ruplu Bhattacharya: I have two, one for Kevin, one for Revathi. Maybe I’ll start with Kevin. Can you give us a little bit more detail in terms of what you factored in, in terms of tariff impact to the full year guide on the top line operating margin and EPS? Are you assuming any impact to the USMCA exceptions? What do you think about the 232 tariff impact? And I think you said to an earlier question that there is some impact on the interest and expense line that’s impacting EPS guide or the increase of $0.05. Can you clarify how much that is? And then I have a follow-up for Revathi.

Kevin S. Krumm: Okay. So on tariffs, basically, our view that we’re pushing through is as of the June view, sort of the pause, okay? So that’s what we brought in. We do not see any USMCA impact. And as I said earlier, it’s dynamic. Our customers are making moves to offset impacts of tariffs, et cetera. So we’re not guiding to a tariff number this year. What I said on the release, I’ll repeat, or on the script, I’ll repeat here, which is tariffs are going to have — will not have a material impact on our growth rate when you look at our revenue growth year-on-year. They do have an impact on margin performance. We’ve talked about that in the past because you’re passing it through. They’re largely a pass-through for us. So you see that in this updated guide as well.

You asked on interest expense. I would say there’s really 2 elements of that. One is we are looking at the timing of interest rate. We have variable interest rates that are included in there. We also have timing and refinancing that’s included in our view to the rest of the year. And then we also have costs associated with currency exposures. We brought all those views into this revised guidance, which is why you’re seeing an increase in that line item guide to guide.

Ruplu Bhattacharya: Okay. Thanks for all the details there. Revathi, can I ask when we look at the 2 segments: Reliability and Agility, can you help us rank order for each of those segments? How — like which end markets you expect to grow stronger, which ones grow weaker? And how does that impact your decision to invest in different end markets? So I mean, I’m sure you’re going to be investing in cloud and power. But beyond that, as you think about investing for growth, I mean, which end markets or which segments should we expect more spend from Flex on?

Revathi Advaithi: Yes. So I’d say, Ruplu, our view on kind of what weaker and stronger despite all the noise and the end market hasn’t changed very significantly. So as an example, automotive where we kind of projected the year it was going to be weak and somewhat spotty, and it is going to turn out to be that way. I would say our consumer kind of end markets, both in lifestyle and consumer devices are kind of holding its own. I would say that we were expecting that to be slow for the year, and it is definitely playing out that way. The places that we expected kind of strong growth in, which is in our medical device business in health care and infrastructure-related items for industrial, power and cloud, networking, all those are pretty much in line with what we were expecting it to be.

So I would say how the end markets are playing out are fairly in line with what we were expecting. In terms of investments, it will always be the prioritized towards the higher growth, higher return end markets for us. And so I would say data center is driving a large part of our investment, both in cloud and in power, not just for kind of this year, but we are investing for the future, I mean, 35% growth does require investment. So you heard Kevin talk about continued investment this year for kind of what will drive growth next year. And — but it doesn’t mean that other businesses aren’t getting their share health care is getting its share of investment but we’ll — it’s our job to prioritize towards the higher growth, higher return end markets.

Operator: Our next question comes from the line of Steve Barger with KeyBanc Capital Markets.

Robert Stephen Barger: Revathi, for data centers, what percentage of customers engage with the entire suite of IT integration and power products? And for customers that are partial users, how successful have you been at converting them to more content?

Revathi Advaithi: Yes, Steve, I’d say that’s a great question. First is, as you know very well, the host of customers, whether it’s hyperscalers or kind of these Neoclouds folks who are coming up or colo is a small set of customers at the end of the day, right? So it’s not a large population. So most of them particularly the hyperscalers will be buying a whole suite of products, whether it is IT integration, cooling or power. And so we do see kind of them going across the spectrum. And then on kind of colos, it will tend to be a little bit more spotty. I’d say it will lean more towards kind of the power side, but heading more towards kind of cooling and IT integration when scale presents itself as an opportunity. So I would say — and then our ability to convert the compute and power coming together is becoming more and more reality because as you see technology heading towards this higher power density, the 1-megawatt rack that you hear about, having an integrated cooling solution, power solution and having your compute, all integrated together is going to become part of reality.

So technology is heading in that direction. We were ahead of the game, and now customers want that integrated solution, which puts us in a great sweet spot because there’s nobody else who’s doing that.

Robert Stephen Barger: Yes, I agree. To your earlier comment on hyperscalers making some internal investments, are you seeing customers standardizing on solutions? Or is each DC still more custom even if it’s the same owner?

Revathi Advaithi: Yes. I would say each hyperscalers is kind of their own solution. And each colo kind of tends to gravitate towards kind of whoever is their largest customer base in terms of the standardized solution that they usually implement. So that hasn’t changed in a significant way. I think the biggest places that we get to really influence technology, Steve, for all of them would be like if you need high power density to power your chip, then we’re designing a power for you that really needs to work well with heat and cooling. So there, we will — may use their technology, but most of the time, we’re using our technology, integrating that and providing them an end-to-end solution. So it will be a mix, I would say, to your question.

Operator: Thank you. I will now turn the call back over to the CEO for any closing remarks.

Revathi Advaithi: Okay. Great. Thank you so much. So we look forward to speaking with you again next quarter. And on behalf of my entire leadership team, I do want to thank our customers our shareholders and, of course, the Flex team around the world for all your hard work, dedication and your contributions. Thank you, everyone.

Operator: Thank you. This now concludes today’s conference call. Thank you for joining. You may now disconnect.