FLEX LTD. Q2 2026 earnings call

Thank you, Kevin.

Good morning and thank you for joining us today for Flex's second quarter fiscal 2026 earnings conference call. With me today is our Chief Executive Officer Revathi Advaithi and Chief Financial Officer Kevin Krum. We'll give brief remarks followed by Q and 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 of 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 result. 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 the Investor Relations website. Now I'd like to turn the call over to our CEO Revathi.

Thanks, Michelle. Good morning and thank you for joining us today. Before we get into the results, I want to start by thanking our Flex team around the world for their disciplined execution and commitment to delivering for our customers. In particular, I want to acknowledge our colleagues in Ukraine. As we shared in August, our Mukachevo facility was damaged during a missile strike, but thanks to our emergency protocols, all team members were safely evacuated. Their strength and resilience in the face of unthinkable circumstances reflect the best of our team in Ukraine and our company as a whole. We remain committed to our colleagues in Ukraine as we focus on rebuilding our operations. Starting on slide four, we had an exceptional quarter, delivering great results on all metrics. Revenue came in at $6.8 billion, growing 4% over last year.

Operating margin was an impressive 6%, the fourth quarter in a row that we remained at or about this level, and we delivered adjusted EPS of $0.79, up 23% over last year, another record for Flex. This performance reflects the strength of our model anchored in disciplined execution and a continued shift towards higher value technology-driven businesses. Now turning to slide five, our data center business continued to deliver outstanding results across both cloud and power. With proprietary products, deep systems expertise, and global manufacturing scale, we provide fully integrated power and IT solutions that help hyperscale, colocation, and silicon customers deploy faster and operate more efficiently while strengthening our margin profile. We remain bullish in our outlook and continue to expect our data center revenue to grow at least 35% this year.

Sustaining this level of growth at our scale validates the value we're delivering to the world's leading technology companies and the strength of our execution in a dynamic market. We are outperforming industry growth rates and continuing to strategically shift our portfolio towards higher margin, critical technology-driven businesses shaping today's market evolution. As we all know, AI is driving one of the largest infrastructure buildouts in modern history, and Flex is at the forefront of this transformation. We are partnering directly with the world's leading technology companies to design, build, and deliver the power, cooling, and systems infrastructure that enables faster, more reliable data center deployments at scale. Our data center offerings span from the grid to chip, combining our product portfolio with advanced manufacturing capabilities and global scale to meet unprecedented demand for performance and efficiency.

Some of this activity is already reflected in our current results, while other programs will ramp over the coming quarters and years. The broader trend is clear. AI is shaping industries for the long term and Flex is positioned to be a driving force in its continuing infrastructure build out. A couple of weeks ago at the OCP Global Summit, we unveiled Flex's new AI infrastructure platform, a unified approach that brings together power, cooling, and compute in pre-engineered scalable design. The platform helps data center operators deploy up to 30% faster, reduce execution risk, and scale reliably. To meet the pace of AI demand, we partnered with Nvidia as part of their ecosystem on next gen 800V DC AI factories. These systems improve energy efficiency, lower cooling costs, and eliminate points of failure as data centers grow in size and complexity. Looking ahead, I could not be more excited.

The data center opportunity continues to expand and we're executing remarkably well as we support our customers through this next wave of growth. Beyond our strength in cloud and power, the rest of our diversified portfolio is performing well. In health solutions, we see steady medical device demand and anticipate improvement in medical equipment later this year. In communications and enterprise, we see strength in optical switches and satcom devices supporting next generation connectivity requirements. In automotive, we see the market stabilizing compared to prior quarters. In the first half of FY2026, we added compute deals with new logos, validating our continued investment and focus on software defined vehicles. As we look back over the first half, we are proud of our teams for their execution and persistence. We started the year with volatility from tariffs and the uncertainty that continues to this day.

Despite this backdrop, we've been able to exceed our expectations and raise our guidance. Our customers depend on us for our scale, our technical depth, and our global footprint. That foundation positions us to keep delivering for our customers in any market environment. Now I'll turn the call over to Kevin to walk through the details of our financials.

Kevin, thank you Revathi, and good morning everyone. I'll start with our key financials on slide 8. Second quarter revenue came in at $6.8 billion, up 4% driven by strong data center growth across both power and cloud. Gross profit totaled $632 million, and gross margin improved to 9.3%, up 80 basis points. Operating profit was $409 million with operating margins at 6%, up 55 basis points. Finally, earnings per share for the quarter increased 23% to $0.79 per share. Turning to our quarterly segment results on the next slide, in Reliability, revenue was $3 billion, up 3% year over year as strong growth in power and moderate growth in health solutions and core industrial was slightly offset by continued pressure in auto.

Operating income improved to $197 million, and segment margin expanded by 105 basis points to 6.5%, driven by favorable mix impacts from power and strong execution and cost management across the entire segment. Agility revenue totaled $3.8 billion, an increase of 4% year over year driven by robust cloud demand that more than offset softness in communications and consumer end markets. Operating income was $227 million with operating margin down 5 basis points to 6%. This is comparing against a very strong quarter last year. Moving to cash flow on slide 10, free cash flow in the quarter increased to $305 million despite sequential investments in CapEx to support Organ. Net inventory was up 1% sequentially and down 4% year over year. Inventory net of working capital advances was 55 days, a reduction of three days versus the prior year.

Net CapEx totaled $148 million or approximately 2% of revenue, and we repurchased $297 million of stock, which was approximately 5.6 million shares. Our capital allocation priorities remain unchanged. We're committed to maintaining our investment-grade balance sheet, funding strategic investments to support organic growth, and pursuing accretive M&A opportunities while returning capital to shareholders through opportunistic share repurchases. Looking at full year guidance on slide 11, as our customers navigate a dynamic tariff landscape, our teams are partnering closely with them to deliver resilient, forward-looking solutions. Our global scale and capacity enables their regionalization strategies, bringing manufacturing closer to end markets to improve agility, reduce risk, and meet the evolving trade requirements. As of last quarter, we incorporated the direct impact of tariffs into our revenue guidance and are doing the same this quarter. The situation remains fluid, but as a reminder, tariffs are largely a pass through for us.

We will continue to monitor and adjust as needed as we conclude our first half of the year with 4% revenue growth. We are confident in our ability to continue our strong top line momentum in the second half of FY2026 with an acceleration in Q4 driven by demand in power and cloud. This confidence in revenue, coupled with our favorable mix and disciplined cost execution, has allowed us to improve our full year expectations across all key metrics while overcoming headwinds in lifestyle due to our facility shutdown in Ukraine and unfavorable FX impacts across the business versus our Q1 guidelines. Despite these challenges, we are raising our FY2026 expectations to revenue between $26.7 and $27.3 billion, a $500 million improvement from the midpoint of our prior guide. Adjusted operating margin between 6.2% and 6.3%, demonstrating consistency above 6%.

Adjusted EPS between $3.09 and $3.17 per share, increasing our midpoint by $0.17 per share, and we continue to expect strong cash generation and maintain our 80%+ free cash flow conversion target for FY2026. Moving on to our segment outlook for the year, for Reliability Solutions, we expect revenue to be up 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. For Agility Solutions, we expect revenue to be up mid to high single digits driven by continued strength in cloud, offset by a weakening trend in consumer devices and lifestyle and a temporary loss of operations at our Mukachevo facility in Ukraine.

Finishing off with our guidance for the third quarter, we expect Reliability Solutions revenue to be up mid to high single digits driven by continued robust power demand and increased growth in medical devices. We expect Agility Solutions revenue to be down to up low single digits as cloud growth is offset by weakening trends in consumer devices and reduced expectations in lifestyle for the reasons previously mentioned. For Total Flex, we expect revenue in the range of $6.65 billion-$6.95 billion with adjusted operating income between $405 and $435 million. We expect an adjusted tax rate of 21%. Lastly, we anticipate adjusted EPS to be between $0.74 and $0.80 per share based on approximately 377 million weighted average shares outstanding. As Revathi mentioned, we remain a partner of choice for our customers as they navigate a rapidly evolving business environment shaped by AI acceleration and dynamic supply chains.

We're constantly exploring new ways to collaborate with our partners to meet their evolving needs and see strong opportunities to support their growth as we exit FY2026 and move towards FY2027. With that, I'll now turn the call back over to the operator to begin Q&A.