Flex (FLEX) Q1 2027 earnings call transcript

I will now turn the call over to Mrs. Michelle Simmons. Mrs. Simmons, you may begin. Good morning, and thank you for joining us today for FLEX's first quarter fiscal 2027 earnings conference call. With me today is Ravithi Advaiti, our chief executive officer, Kevin Crum, our chief financial officer, and Michael Hartung, our chief commercial officer. 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 current expectations and assumptions. These statements involve risks and uncertainties that could cause actual results to differ materially.

These statements reflect expected results for the full fiscal year and did not give effect to the planned spin-off of the Cloud Empower Infrastructure segment. For a full discussion of these risks and uncertainties, please see the cautionary statement in our presentation, press release, or in the risk factor Thank you for joining us. Now I'd like to turn the call over to our CEO. Ravithi?

Good morning, and thank you, Michelle. In Q1, our teams delivered another exceptional quarter while continuing to prepare two industry-leading companies for the next phase of growth as standalone businesses. We delivered strong revenue growth, margin expansion across all three segments, and record-adjusted earnings per share of $1. Our cloud and power infrastructure segment grew 35% year-over-year, and as we stated before, our investments in this business are on track to drive accelerated growth and margin expansion in the second half of the fiscal year.

We also saw strong growth in our communications and industrial business units driven by high-value markets such as networking, automation, and energy infrastructure. Now, we're in the midst of a generational build-out driven by AI, and demand is not slowing down. We have built two focused companies to win in the AI era, and these results reflect the strength of our strategy. Our results also reflect our focus on long-term execution. Our addition to the S&P 500 last month reflects our progress over the last several years and the enduring strength of our strategy. We also continue to build momentum in some of our fastest-growing markets, expanding our partnership with Cerebris to scale manufacturing of the CS3, one of the world's most advanced AI accelerator systems right here in the United States.

We also launched a new liquid cooling solution through JetCool and showcased our next generation power and infrastructure technologies at Computex. As we continue executing our long-term strategy for both Flex and SpinCo, I want to reiterate our vision for both companies. We have built two great businesses that are entering different phases of growth. The spin allows each company to sharpen its strategic focus, align capital allocation with its growth priorities, and create greater value for customers and shareholders.

Finco requires a capital allocation framework designed for rapid growth as demand for AI infrastructure accelerates. Many people still think about AI as a compute story. I think it's increasingly becoming an infrastructure story, and more specifically, a power story. AI may live in the cloud, but the infrastructure behind it is very physical. It must be built, powered, cooled, integrated, and deployed at scale. As AI scales, the constraint is no longer just the chip. It's everything around the chip, power, cooling, electrical systems, and ultimately the grid capacity.

That's the challenge customers are trying to solve today. We saw this coming years ago, and that's why we invested in power, compute, and thermal management technologies long before AI became front-page news. What started inside Flex as a set of businesses supporting the next generation of data centers has evolved into a leading solutions provider. I want to be very clear. Spinco is not a data center components company. It's a digital and electrical infrastructure company built to help customers solve the power cooling and scaling challenges that come with AI. That's where we believe SPINCO is uniquely positioned to excel. We see our ability to bring together power, thermal management, and compute technologies, combined with the ability to deploy these capabilities at global scale as a true differentiator in this space.

We have spent years working alongside the world's leading technology companies as a design, built, and expanded critical infrastructure. That combination of power expertise, systems integration, and execution is difficult to replicate.

And I would say we're still early. We believe we're at the beginning of one of the largest electrical transformations happening today. What's happening in the data centers is just a starting point. As AI scales, demand will extend far beyond compute, driving investment across power systems, cooling technologies, electrical infrastructure, and ultimately the grid itself. That's why we don't view this as a short-term investment cycle. The work required to power the next generation of AI will take years, creating ongoing opportunity across the broader electrical ecosystem with a very long tail. We are building SPINCO to lead that transformation. At the same time, FLEX is exceptionally well-positioned to drive long-term value creation as a leading global manufacturing platform.

Following the separation, Flex will remain a global manufacturing leader with a proven playbook and strategy, with deep customer relationships across diversified end markets, and exposure to attractive long-term secular growth trends. These include healthcare, where an aging population and increasing prevalence of chronic disease are driving demand for medical devices and drug delivery solutions, And robotics and warehouse automation, where regionalization and labor shortages support meaningful opportunities for continued growth.

While SPINCO will focus on digital and electrical infrastructure, FLEX will continue to benefit from pull-through demand in data centers, providing contract manufacturing services in the advanced networking and energy infrastructure markets. What remains underappreciated is the strength of the Flex portfolio and the related opportunity ahead. The same discipline playbook that has driven our transformation over the last seven years will continue to guide Flex as it enters this next phase of growth.

Ultimately, we are creating two distinct and focused leaders, each with the scale, strategy, and opportunity to succeed on its own. Now turning to our transaction update on slide 6, our dedicated separation management office and cross-functional teams continue to make tremendous progress towards the separation, and we are on track for tax-free spinoff in the first quarter of calendar 2027.

Today, we are also pleased to announce additional leadership appointments for both Spinco and Flex, effective upon completion of the separation. Thanks to the strong bench and depth of expertise we have built at Flex in recent years, we have strong leadership teams in place for both companies, ready to execute from day one, providing confidence, clarity, and continuity for our customers, employees, and shareholders.

For more details on the extended leadership teams of each company, please refer to the press release we issued this morning. While it's certainly an exciting and dynamic time at Flex, we're executing from a position of strength. Our teams are winning by delivering incredibly well for our customers, and at the same time executing with discipline to deliver exceptional results. We are excited about what's ahead, and we look forward to sharing more in the months to come, including at our investor day on November 10th, where we will provide additional details on the path forward for both companies.

With that, I'll turn the call over to Kevin, who will walk through the financials in more detail.

Thank you, Ravethi, and good morning, everyone. I'm honored to be a part of this exciting journey and to work alongside both teams during this transformative period. It has been an incredible journey so far, and I'm energized about the opportunities in front of these businesses. I will now review our results for the first quarter fiscal year 27, which reflects strong execution as we continue preparing for the upcoming spinoff of our cloud and power infrastructure segment. I will start with our key financials on slide 8. First quarter revenue came in at $7.9 billion, up 21% year over year. The Flex Ltd. earnings conference call.

Turning to our quarterly segment results on the next slide Regulated manufacturing solutions revenue were billion up 12 year driven by strength in industrial Adjusted operating income was million and adjusted operating margin was 6 up 130 basis points year driven by the aforementioned strong performance in industrial Revenue from integrated technology solutions segment totaled billion an increase of 20 year driven by exceptional growth in communications Adjusted operating income was million and adjusted operating margin was 5 up 10 basis points year driven by the strong performance in communications and offset by weakness in consumer end markets Finally, cloud and power infrastructure revenue totaled $2.2 billion, up 35% from the prior year, driven by strong growth in power as cloud and cooling continues to ramp new programs.

Adjusted operating income was $214 million, and adjusted operating margin was 9.7%, up 20 basis points year-over-year, driven by growth and margin expansion in power. Moving to cash flow on slide 10, free cash flow in the quarter was $41 million. Free cash flow was negatively impacted by one-time cash costs of $24 million, driven by activity related to the announced spinoff. 2-1 inventory was up 10% sequentially and 24% year-over-year, largely driven by revenue growth. Inventory, net of working capital advances was 56 days, an increase of one day from the prior year. First quarter net capex totaled $235 million, or approximately 3% of revenue.

Turning to our updated outlook on slide 11, for fiscal year 27, our expectations are the following. Revenue to be between $33.7 and $35.2 billion, up 23% at the midpoint. Adjusted operating margin to be between 7% and 7.2%, an increase of approximately 80 basis points year over year at the midpoint. We expect an adjusted tax rate of approximately 21%. We expect adjusted EPS to be between $4.42 and $4.74 a share, up 39% at the midpoint.

Finally, we expect CapEx to be in the range of $1.5 to $1.6 billion. As a reminder, our prior guidance for free cash flow conversion of 60% excluded costs associated with the spinoff of our CPI segment. Incorporating costs associated with the spinoff, we now expect free cash flow conversion to be approximately 40%.

Moving to our updated fiscal year 27 segment outlook, for RMS, we expect revenue to be up mid-single digits to high single digits due to continued strength in high-value end markets within industrial, including warehouse automation, robotics, and energy infrastructure. For ITS, we expect revenue to be up high single digits to low double digits, driven by continued strong performance and communications. And for CPI, we expect revenue to be up 65 to 75 percent, driven by both cloud and power, with power's growth rate exceeding clouds.

Finishing off with our guidance for the second quarter on slide 13, we expect RMS revenue to be up mid-single digits to high-single digits on continued strength in industrial. We expect ITS revenue to be up high single digits to low double digits on continued strength in communications, offset by weakness in consumer-related end markets. We expect CPI revenue to be up 45% to 55% as new programs continue to ramp in both cloud and power. For total flex, we expect revenue in the range of $7.95 to $8.25 billion, up 19% at the midpoint, with adjusted operating income between $535 and $565 million.

Interest and other expense is estimated to be around $58 million, and the adjusted tax rate to be around 21%. Lastly, we anticipate adjusted EPS to be between $1 and $1.07 per share, up 32% at the midpoint, based on approximately 375 million weighted average shares outstanding.

In summary, we are off to a strong start for fiscal year 27, and we are well positioned to deliver upon the commitments we made at the beginning of the year.

With that, I will now turn the call back over to the operator to begin Q&A. Thank you.

Yeah, Rupu, thanks for that question. I would say that margins in CPI is pretty much in track with the guidance we gave for the quarter and the year. We said that in the CPI segment that the revenue is kind of back half loaded. We have been making investments in that. And then we also said that we expect to have at least 100 basis points improvement and margin in the CPI segment for the year from a year-over-year perspective. And they're on track with that. So feel very good about that. I would say what guides margins for this segment, obviously on the compute side, we have been executing on that strategy for a while, and we're fairly mature in these.

And when there are new programs, which there are always significant new programs, initially there's some investment, but when the program matures, then kind of the margin flow through rate is pretty good. So those ups and downs in the cloud side and the computer integration side is part of the game. But as you have seen in our full year results, typically, that through the year we do pretty well in terms of both revenue and our margin. I'd say on the power side, we've said that, hey, we've built the power business through a whole bunch of acquisitions, which requires investment, particularly when these businesses are growing at 70 plus percent. So we're making those investments, and that drives kind of requirement for the margin to be slightly muted compared to our peers, but we're very comfortable with moving it in the direction of where the peers and the electrical infrastructure are.

So I'd say, Rupu, in summary, CPI is absolutely where we said the quarter would be and where the guide would be for the year, and we're on track to deliver the margin improvement, just as we said, for kind of our current fiscal year.

Yes, good morning, Rupu. Thanks for the question. I'd say we're absolutely happy with where we're starting from in the business. And if you might recall, our strategy going forward will be to continue to emphasize the high-value growth markets that are tied to these longer-term secular trends. And these markets exist in both the RMS business and the ITS business. So up to this point in time, we've been deploying capital, both human and financial, towards the highest returns, and that's been the data center. The strategic clarity as a result of the spin enables us to provide greater focus on those high-value growth markets. In terms of optimization, a regular part of our process here in the business is to always look to optimize the portfolio.

You've seen the benefits of that in our Q4 results, our Q1 results, and our guide. And we expect to continue to optimize the portfolio as we go forward in the theme of emphasizing high-value markets and de-emphasizing low-value markets along the way. So, in short, really pleased with the starting point of where we jump off from on this business.

Mark, good morning. This is Kevin. From a CPI perspective, yeah, directionally, the ramp that you were referring to is what's going to happen as we move through the year. So we started, you know, at 35% in Q1. We're guiding to 45 to 55 in Q2, and then still the 65 to 75 for the full year. So certainly strong growth in the back half of the year, as you referenced. I would say from a visibility standpoint, we've talked about our demand see-through in this business, and it remains strong. We're still at that 90% plus booked business at this point for the next three quarters. So we feel good and remain confident in our visibility around this business.

I would say as we think about next year, while we're not going to guide to next year on a quarterly basis, the framework that we offered earlier in the year still holds, and we expect the investments that we're making this year in CapEx and the ramp we see in the back half of the year to continue strong growth performance next year. And our visibility next year still remains robust.

Thank you. Yeah I say Mark the market itself for cooling liquid cooling as you aware is growing quite well and the market size is increasing as more air cooling is getting replaced with liquid cooling I say our acquisition with Jetco really got us some cold plate capability it's an industry-leading cold plate capability, and then we had to develop and introduce CDUs into the market. So we're in the process of qualifying those products with the right-end customers to scale that business up. It also gave us kind of manufacturing capability and co-design capability with some customers who already have their cooling product that helps us co-design with them.

The way I think about cooling in the CPI portfolio is that it's still nascent, and it will be a pretty important part of our growth strategy overall for CPI within the cloud segment. So we're pretty bullish about it, I would say, but there's work to be done in terms of scaling that business to where we need it to go.

Good morning, Tim. Thanks for the question. Yeah, we've identified within our communications business that our advanced networking business in particular is one of those high-value growth markets that we expect to drive growth over a sustained period in our business. And that's being positively influenced by pull-through demand from the data center. So if you step back and think about this business, communications continues to be one of our largest, healthiest businesses in Romainco going forward. It will continue to really spread across not just high-speed switches, but optical switches, network interface cards. So it's fairly broad based within that advanced networking ecosystem and very much tied to this sustained demand from the data center.

Yeah, I'd say, Tim, that we're seeing it across multiple customers, hyperscalers. Without naming any, I would say that you can see that most customers now are quickly thinking about, hey, we need to, before we deploy the next generation silicon, we need to be thinking about power capability and power requirements. They're already thinking about how does life look like when we go to an SST technology. So we're seeing a lot of conversations at a very high level and strategic level with customers on kind of silicon cooling power, how all that comes together for next generation products, which we didn't see two and three years ago. Because what customers don't want to be is in the situation they are today where, you know, the power requirement becomes an afterthought, and then we are in a struggle to make sure that we have enough power for these data centers.

So I'd say in the last kind of few months, several hyperscaler customers at a very high level, we've had strategic conversations around power cooling and kind of thinking about next generation silicon. And that really puts us in the unique position of one of the few people who are able to do this. So I feel pretty good that three years ago we thought this is where it would go, but now the conversations are actually heading in that direction. I'd say from a platform perspective, what we announced with NVIDIA a few months ago in terms of developing an overall modular platform, which encompasses everything that we do, is a good example of a customer who's thinking about it and moving it in that direction.

Yeah, Joseph, I'll start by saying that our guide for CPI for the year was 70%, so growth year-over-year. So it's a pretty strong and robust number in terms of year-over-year growth, so we feel really good about that. I would say, you know, we beat the midpoint of our guide for Q1. We said 30%, we came in higher than that. So obviously the year is accelerating exactly like we planned, and Q2 is higher than Q1, and we had clearly mentioned that this is back half-loaded, which is mainly driven by the capacity investments we are making. We announced a big capex, which involves pretty significant investment in terms of facilities, cooling infrastructure, manufacturing infrastructure. All of those are going in place, and that combined with the customer's generational shift in platforms is what has driven our kind of the way we've given our guidance for the full year.

So we feel very good about the 70% guide that we've given for this year and the 80% that we've given for next year because those are pretty significant numbers. Don't see any significant constraints per se other than putting the capacity investments in place and making sure those factories are ramped up, which we know how to manage really well. So, Joseph, I feel really good about the guidance we gave, and we're on track to deliver that.

Yeah, I'd say we've talked, we've been quite public about, and Cerebris has been about our engagement with them, and we have, you know, I think there is videos published by us and them in terms of our full engagement. We've been working on this for a while, right, with them, and I would say that it is definitely a manufacturing cooling engagement because those go hand in hand, But we're also working on things like next-generation power, which is things that we'll be thinking about with them in the future. So it's a pretty holistic partnership with Cerebris. It's going extremely well. We're scaling up a lot for them.

So I would say that this is a good example of us diversifying our hyperscaler involvement in our CPI business that we have talked about. It's a great example of scaling up with another customer.

Thanks for the question, Ruben. This is actually Michael. In terms of the communications business and the underlying strength in the advanced networking business itself, First, it was a driver in our Q4 result. It was a big driver in our Q1 result, and that strength is continuing into our Q2 guide and our FY27 guide. So we're seeing continued strength in that business. I'd say it's a combination of two of the things that you mentioned. One is ongoing increased demand from the customers that we have had for a number of years in many cases, and we're actually winning share in some of those product segments as well. So we have good diversity across a number of large OEMs in the advanced networking space, and we also cover a number of product categories as well, from high-speed switching to optical products to interface technologies as well.

So I'd say two things. One, yes, sustained demand in our advanced networking business, good diversity across customers, and good diversity across product segments as well. And we feel good about the durability in the FY28 because it's all related to AI infrastructure spending, right? So as that continues, right, you're going to continue to see this business ramp with that.

Yeah, Ruben, I'd say we feel very good about our full-year plan here for this business. You know, these capacity investments and movements have been going on for a bit. So it just didn't start like, you know, 90 days ago. We've been doing that before that. So feel very good about it. You can see that in the acceleration in Q2, you know, just like we planned. And then we see the back half pretty much going per plan. And most of the you know CapEx that we announced is for this acceleration in FY27 and FY28 So we installing that CapEx I don see any major concerns about how that capacity installing is going It going really well Flex knows how to do this extremely well We run large projects well And this is both in cloud and power right Our power business is also growing in the 70 percent range So feel very good about you know the progress in terms of both cloud and power and feel very good about the guide for the year We are on track for it definitely to do the 70 percent or better than that Thank you.

Thank you. Yeah, I would say first is on 400 volts, which is kind of the immediate programs that we are working on, followed by 800 volts. We feel very good about the progress on those programs. Don't see any major limitations, at least to the guide we have given for 27 and 28. We feel pretty good about that guide. You know, I'm sure there's lots of conversations about, you know, component constraints and all of that, but we have planned all of that in the guide we have given.

And, you know, if anything, there should be some upside to that, I would say, as availability becomes better. But the technology transition itself is going well. We feel good about the pace of customers and how that is being deployed. So I'd say, you know, we've mentioned this before, Flex is kind of the leader in this transition on them, but at PowerSide, and, you know, I'd say that our ability to develop and deploy that 400-volt technology followed by 800-volt is really, really strong. So I feel really good about that we're on track for it, and we'll see kind of as we update our long-term guidance in the investor day, we will give you some more clarity around that.

For my follow-up, Ravithi, hoping you could just double-click on the company's modular capabilities and CPI. Certainly, we're getting more questions about this. You outlined some pretty interesting capabilities in the past. Just wondering how that figures into the expanded infrastructure opportunity overall that you reviewed in the prepared comments this morning.

Yeah, I'd say, Luke, when I think about modular, right, you can think about modular in terms of, like I talked about earlier, the partnership we announced with NVIDIA, which is, you know, putting everything in a modular capability and deploying kind of mini data centers. That's one way to think about modular. The other way to think about modular is, you know, power businesses have been doing modular deployment for power for a long period of time, whether it's in the utility space or the data center space. And for that, we added capacity in Dallas after our crown acquisition. Now with EP2 acquisition, we're adding capacity in Iowa to really continue to drive that modular power business. So we are very mature in that, and if anything, that is growing pretty significantly.

So I think about it in terms of the holistic, like modular deployment, which is what people are doing in terms of IT deployment or power deployment. It should become a bigger and bigger part of kind of, I would say, all customers' requirements. And if anything, I think we're fighting against capacity constraints in that space to do more of it. But it's the direction everyone is heading, Luke, because it's just so much easier to pick it up and deploy it at the customer's side.

I was wondering if you could do a deep dive into some of the industrial strength you mentioned, how much of it is cyclical versus secular, and what you're doing to continue to address that demand. And then I have to follow up.

Yeah, good morning, Stephen. This is Michael. Thanks for the question. I'd say when you think about our industrial business, that's been identified as one of the business units that will be really containing multiple high-value markets that will be our growth focus going forward. Within that group, you have two different markets that I'd like to point out. The first one is around energy infrastructure. Now, as you already know, we're spinning our power product portfolio into Spenco, and we're maintaining our contract manufacturing capability for that industry. And so we will be a contract manufacturer for things ranging from power generation, transmission, distribution, and storage. And that energy infrastructure business has great pull-through demand from not just data center infrastructure, but also utility-scale infrastructure as well.

So we see sustained demand from that segment within industrial. On the other side, we have our robotics and warehouse automation business. And again, tied to the longer-term secular trend, in this case, around regionalization. As we talked about, regionalization is accelerating, and many of those regions are now suffering from things like wage inflation, labor scarcity, and they're on the constant search for productivity improvements. Our warehouse automation business is perfectly aligned to help solve those problems for our OEM partners. So both of those markets we've called out as being high-value growth markets, and both are tied to these longer-term secular trends that we think are sustainable over the long term.

Got it.

I'll answer the – hey, Stephen, this is Kevin. Good morning. I'll answer the last part of that question first, which is the benefit to the Amazon arrangement really is across all of our businesses. So you'll see that both on the CPI business that we're spinning out as well as the existing businesses that we have. And Michael talked about some of the in-markets that we work in there. So I would say from that perspective, it's broad across the FLEX portfolio. From an update standpoint, there's really nothing to update. I would say that we'll continue to assess the arrangement with them as we move through this year and get ready to spin the CPI business in early 2027.

And when we have an update, of course, we'll update everybody.

What percentage of your engagements are contracting for the unified power, cooling, and compute portfolio versus taking a more selective approach to your products and services? Yeah, I'd say, Steve, first is, you know, when we are talking about other EMS companies moving into the same space, I think maybe there's some misconception around it because our power business is based on having true IP and product capability. It is where we do contract manufacturing for and markets there. That will stay with kind of the base energy infrastructure business that Michael talked about. So I think there is some confusion around kind of what the real capability is. So the real requirement in the power business is, you know, not just being able to develop products for what is needed, but then be able to integrate that in, like I talked about, with 400-volt design, 800-volt design, and then the future of solid state that is going to be coming our way.

So integrated design, like I mentioned earlier in the call today, which is thinking about sidecars on tower, cooling racks, and fully integrated modular design is becoming a bigger and bigger conversation at very high levels in the hyperscalers. So to be able to do that, you have to have true product technology. You need to be able to design and develop 400-volt and 800-volt design to be able to have those conversations. So, you know, I would say where I see the differentiation is we're an electrical player with true product capability, cooling player with true product capability, and then an integrated design capability, including all of compute integration. I would say I haven't seen anybody just, you know, have that capability yet.

Can you tell us, are most of your conversations at a high level talking about taking that full suite of integrated products?

I would say it's more about taking the full suite of integrated products, but it's about designing that full suite of integrated products, which is kind of more important than anything else, right? So that is how I see about it. I want us to win in each individual category, Steve, whether it's cooling or sidecar or computer integration or even just building and developing your metal for fabricating all of that. But I want to lead the technology conversation with our customers in terms of what does the future of power look like with your next generation silicon? How can we cool it enough? What kind of cooling makes sense? Those are the conversations we are having, and I think that is the most important part of how we lead this conversation.

Thank you. We delivered another strong quarter, and we're executing our proven strategy as we move towards the spinoff. As always, I want to thank our customers for their trust and partnership, of course our shareholders for their support, and then the Global Flex team for their continued dedication and contributions. We look forward to speaking with you again next quarter.

Thank you, everyone.