FLEX LTD. Q4 2026 earnings call

Good morning, thank you for joining us today for Flex's fourth quarter and fiscal year 2026 earnings conference call. With me today is our Chief Executive Officer, Revathi Advaithi, our Chief Financial Officer, Kevin Krumm, and our Chief Commercial Officer, Michael Hartung. We'll 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. These statements reflect expected results for the full fiscal year and do not give effect to the planned spin-off of the Cloud and Power Infrastructure segment.

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 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. In addition to our earnings presentation, we also published a separate presentation regarding the proposed transaction which will be discussed on today's call. Please refer to the earnings presentation to follow along.

Before we begin, I want to share a brief update on our Investor Day. In light of yesterday's announcement, we are postponing the event until the fall, when we expect to have more information to share. We will provide more details as the year progresses. Now I'd like to turn the call over to our CEO. Revathi.

Thank you, Michelle. Good morning, and thank you for joining us today. We have a lot to cover this morning, so let me begin with an important milestone that reflects how our business has evolved and where we are headed. Seven years ago, we set out to transform Flex. The strategy was simple. Focus on the right end markets, divest non-core assets, invest in the technologies that matter, and execute with discipline. Since then, we have exited consumer-focused markets, spun off Nextracker into a leading solar business, and created tremendous value for our shareholders, and invested ahead of the curve in electrical products, recognizing early that compute would become power-hungry and that data centers would need an integrated architecture. We have built a productivity machine in our factories, and most importantly, we have invested in our teams, creating one of the best high-performing values-based culture.

Yesterday brought the next milestone in that journey. We announced our intent to spin off our Cloud and Power Infrastructure business into a new publicly traded company, with the spin expected to complete in the first quarter of calendar 2027. This decision reflects our conviction that the business has achieved the scale, growth profile, and strategic importance to stand on its own. It also positions Flex to sharpen its identity and invest more aggressively in its highest growth, highest technology opportunities. Turning to slide five. SpinCo, historically our data center business, now captured in our CPI segment, will be a global critical digital infrastructure company delivering end-to-end power and thermal management from grid to chip for AI data centers and mission-critical applications like utilities. What differentiates SpinCo is its depth across power, thermal, and compute integration.

That depth lets us replace the fragmented multi-vendor approach market-leading customers are actively moving away from and gives us the opportunity to build one of the largest electrical companies purpose-built to deliver from utility to chip with cooling and compute integration designed in from day one. The timing is clear for two reasons. First, AI is driving compute density to levels that require power and thermal to be engineered as a unified system, not bolted on after the fact. Customers no longer want individual subsystems. They want a single partner who can deliver from grid to chip. SpinCo is purpose-built for this moment. Secondly, electrical infrastructure is entering a generational transformation. The shift to solid-state transformers and 800 volt DC distribution will reshape how power moves from grid to chip, unlocking the density and efficiency AI demands.

SpinCo is the only company with embedded power, distributed power, thermal, and systems depth to lead it. Following the spin, Flex will continue to execute its proven playbook as a leading advanced manufacturing company, designing and building highly complex products at global scale for premier brands across diversified end markets. Global supply chains undergo structural changes, shorter technology cycles, rising system complexity, and persistent constraints, customers are rethinking how products are designed, manufactured, and scaled. These shifts are expanding opportunities for Flex to deepen customer relationships and capture greater system-level engagement. Post-spin, as Flex allocates capital towards higher growth industries such as healthcare, robotics, warehouse automation, and networking, we believe the company is entering its next phase of transformation.

With a simplified portfolio and a sharpened strategic focus, Flex is positioned to expand margins and continue to actively optimizing its portfolio towards higher growth opportunities that will drive strong cash flows and shareholder returns. Turning to slide six. We believe spinning Flex into two distinct companies positions both to sharpen strategic focus, improve operating discipline, and align capital allocation with their respective growth and margin priorities. This is not about changing our strategy. It is about unlocking value through simplification and clarity for customers, for employees, and for shareholders. From a financial perspective, both businesses have demonstrated strong fundamentals, and we expect the spin to enhance transparency while allowing each management team to pursue tailored investment priorities. We plan to provide additional details over the upcoming quarters, including standalone financials at the appropriate time. Turning to slide seven. To a recently announced acquisition.

Over the past several years, we have deliberately evolved our portfolio across thermal technologies, around integrated structure, and power. Earlier this week, we closed our acquisition of Electrical Power Products or EP², strengthening our power portfolio with utility-grade specification-driven solutions for grid modernization and electrification. These capabilities are becoming critical as data center growth places greater demands on power availability and reliability. Combined with our existing power distribution, switchgear, thermal management, and integrated rack scale capabilities, EP² enhances our ability to deliver end-to-end solutions for utility and infrastructure customers, and it increases our exposure to long cycle margin accretive programs that support grid resiliency. To put a point on that momentum, we've recently secured substantial incremental business with several hyperscaler and data center customers, including Google. These are not single product manufacturing engagements.

They span power infrastructure, thermal systems, and complex hardware manufacturing deployed at scale across our global footprint. Capital deployment for these projects is already underway, it will remain elevated through FY 2027 as this growth, alongside broader CPI growth, requires expanded investment. We expect this level of investment to be unique to fiscal year 2027. We have line of sight into fiscal year 2028 and 29 requirements and expect CapEx to normalize in fiscal year 2028. Awards of this scope are exactly why we believe the spin is the right move. These deployments require the integrated end-to-end capability that SpinCo will deliver as a focus company. Turning to slide eight. Let me put some numbers around the growth opportunity. For SpinCo, we're targeting revenue growth of 65%-75% in fiscal year 2027, a significant step up from fiscal year 2026.

For FY 2028, we expect further acceleration with growth of over 80%. Going to slide nine. Flex, post-spin, is targeting low to mid-single-digit revenue growth in that same timeframe and will invest in areas where growth is accelerating, including regulated and technology-driven markets such as healthcare, warehouse automation, and networking tied to data center infrastructure growth. When you put all this together, it is clear that this is the right moment for this milestone. It is also clear that this leadership team has the credibility to deliver this milestone, having already executed and delivered spins like Nextracker. Talking about leadership, I want to briefly address leadership as we take our next step. Turning to slide 10. I'm excited to share that I will serve as CEO of SpinCo as we build a focused, purpose-driven platform designed to lead the future of compute infrastructure.

I'm equally confident in the future of Flex, and I'm pleased to leave it in Michael Hartung's very capable hands as CEO. Michael joined Flex in 2007 through the acquisition of Solectron and has since held a range of senior leadership roles, most recently as our Chief Commercial Officer. Over the past seven years, Michael and I have worked closely to transform this company, driving disciplined portfolio optimization, margin expansion, targeted acquisition, and building a stronger and a more resilient Flex. This playbook has delivered stronger customer relationships and meaningful returns for shareholders. Michael, thank you for your trusted partnership over the years and for stepping into this role. I look forward to supporting you and the entire leadership team as we embark on this next chapter.

Thank you, Revathi. I'm honored to step into the role of CEO of Flex and to build on the strong foundation this team has created. As we sharpen our focus, I'm confident Flex is well-positioned to build on its legacy of global manufacturing and supply chain excellence while serving customers across diversified end markets. I'm excited about the opportunities ahead and what this team can accomplish together. With that, I'll turn the call over to Kevin Krumm, who will walk through the financials in more detail.

Thank you, Michael, and good morning, everyone. I'd like to add that I too am excited about yesterday's announcement of the spin, and I'm looking forward to working with Revathi and Michael throughout this transition. Before I discuss our financial results, I'd like to take a moment to explain our new segmentation outlined on slide 12. From this quarter moving forward, we will be reporting in three new segments: Regulated Manufacturing Solutions, Integrated Technology Solutions, and Cloud and Power Infrastructure. This new segmentation will provide clearer visibility into our business units as our portfolio evolves. Upfront, I will make a few comments about our new segments. Regulated Manufacturing Solutions, or RMS, like Reliability Solutions before it, will house our industrial, automotive, and healthcare business units. RMS is focused on specialized products with longer life cycles that demand a greater level of precision and consistency.

Our critical and embedded power businesses have been removed from Industrial and are now reported in a new segment. Integrated Technology Solutions, or ITS, consists of our Communications and Lifestyle business units. Similar to our previous Agility Solutions segments, ITS serves customers in fast-moving industries with shorter product life cycles, with a focus on adaptability and time to market to meet the ever-changing needs of evolving industries. Communications includes what was previously our non-cloud CEC businesses, and Lifestyle now includes our former consumer device businesses. Finally, we have consolidated our data center power and cloud businesses, once housed within Industrial and CEC, into a new segment, Cloud and Power Infrastructure, or CPI. This new segment represents the business previously included in our data center disclosures and will now be reported via our Cloud and cooling and power business units.

As Revathi previously announced, we intend to spin this segment into a new publicly traded company and will provide segment-level disclosures until the transaction closes next year. I will now discuss our financial results for the fourth quarter of fiscal 2026. Starting with our key financials on slide 13. Fourth quarter revenue came in at $7.5 billion, up 17% year-over-year. Adjusted gross profit totaled $737 million, and adjusted gross margin improved to a record level 9.9%, up 50 basis points from the prior year. Adjusted operating profit was $500 million, with adjusted operating margins at 6.7%, up 50 basis points from the prior year, and another company record due to improved operational efficiency and product mix.

Finally, adjusted earnings per share for the quarter increased 27% year-over-year to $0.93 per share. Turning to our quarterly segment results on the next slide. RMS revenue was $2.7 billion, up 13% from the prior year, driven by strong growth in industrial and healthcare. Adjusted operating income totaled $180 million, and adjusted operating margin was 6.6%, up 80 basis points year-over-year, driven by strong improvements in industrial and automotive. ITS revenue totaled $2.9 billion, an increase of 13% year-over-year. The increase in revenue was primarily driven by strength in communications. Adjusted operating income was $147 million, and adjusted operating margin was 5%, unchanged from the prior year.

Finally, CPI revenue totaled $1.8 billion, up 31% versus the prior year, driven by growth in both business units, with Power's growth rate exceeding Cloud's. Adjusted operating income was $182 million, and adjusted operating margin was 9.9%, largely in line with the prior year, with favorable mix impacts from Power offset by infrastructure investment in critical Power and ramp costs in Cloud. Looking at our full-year results on slide 15. Revenue was $27.9 billion, up 8% on continued strong growth in Cloud, Power, and Industrial, offset by persistent softness in our consumer-related end markets. Adjusted gross profit totaled $2.7 billion, and adjusted gross margin improved to 9.5%, up 70 basis points from the prior year.

Adjusted operating income totaled $1.8 billion, up 21%, and adjusted operating margin was 6.3%, up 70 basis points year-over-year, primarily driven by favorable product mix and continued improvements in operational efficiency. For the full year, Flex achieved adjusted EPS of $3.30 per share, up 25%, driven by increased adjusted operating income and strong share repurchases. Turning to our segment results for the year on slide 16. Similar to fiscal 2025, fiscal 2026 was a dynamic year, characterized by macroeconomic uncertainties and rapidly accelerating AI deployment. I'm proud to say that once again, we delivered on our expectations for growth, exceeding our revenue expectations for all segments. We have also maintained our focus on operational efficiency and execution, which led to another record year for adjusted growth and adjusted operating margins.

RMS revenue was $10.2 billion for the year, a year-over-year increase of 5%, driven by Industrial and Healthcare, and delivered an adjusted operating margin of 6%, up 80 basis points, primarily driven by improvements in Industrial. ITS revenue totaled $11.1 billion, down 2% from the prior year due to persistent softness in Lifestyle, offset by growth in Communications. Adjusted operating margin was 5.4%, an increase of 60 basis points, driven by improvements in Communications. CPI revenue was $6.6 billion, up 38% year-over-year, exceeding our target of 35%. Adjusted operating margin was 9.2%, down 100 basis points year-over-year, reflecting incremental infrastructure investments in critical power and ramp costs in cloud.

While these investments temporarily weighed on our margins, we expect to recoup the full 100 basis points in FY 2027 and see further expansion of 50-100 basis points in FY 2028 as we grow into these investments. Moving to cash on slide 18. Free cash flow in the quarter was $212 million, and for the full fiscal year, we delivered approximately $1.1 billion in free cash flow. Q4 inventory was up 5% sequentially and 15% year-over-year, mostly supporting our CPI and RMS segment growth year-over-year. Inventory net of working capital advances was 55 days, a reduction of one day versus the prior year. Fourth quarter net CapEx totaled $201 million, bringing full year CapEx to $625 million, or approximately 2.2% of revenue.

In the fourth quarter, we repurchased $200 million of stock, or approximately 3 million shares. For the full year, we repurchased $944 million of stock, or approximately 19 million shares. Moving on to our fiscal 2027 outlook on slide 19. For fiscal 2027, our expectations are the following: revenue to be between $32.3 billion and $33.8 billion, up 18% at the midpoint. Adjusted operating margin to be between 7% and 7.1%, an increase of approximately 80 basis points, driven in large part by recouped FY 2026 investments in CPI. We expect an adjusted tax rate of 21%. We expect adjusted EPS to be between $4.21 and $4.51, up 32% at the midpoint.

Finally, we expect CapEx to be in the range of $1.4 billion-$1.6 billion, and free cash flow conversion of approximately 60%, excluding costs associated with the spin transaction. As Revathi mentioned, we secured significant business with multiple customers, including a multi-year contract with Google, underpinning our strong CPI growth expectations of 65%-75% in FY 2027 and 80%+ for FY 2028. What we're putting in place today is foundational. Power and cooling infrastructure to manufacture for the data center market to support a broad set of hyperscaler and AI programs, products, and partnerships through FY 2028 and FY 2029. As we scale these investments, we expect incremental investments, but at levels materially lower than the upfront investment required to establish the core infrastructure and capabilities for this next phase of robust growth.

To put a finer point on it, we expect CapEx to return to historical levels in FY 2028, with CPI returning to approximately 2.5%-3% of revenue, and ITS and RMS below 2% of revenues. Post-spin, both companies will be well-positioned to capture growth from this generational AI-driven build-out. Moving on to our fiscal 2027 segment outlook. For RMS, we expect revenue to be up low to mid-single digits, driven by strength in industrial and healthcare as automotive continues to stabilize. For ITS, we expect revenue to be flat to up low single digits as strength in communications is offset by softness and our continued de-emphasis of low-value markets and lifestyle. For CPI, we expect revenue to be up 65%-75%, driven by continued accelerating demand in both cloud and power, with power growth again outpacing cloud growth.

Finishing off with our guidance for the first quarter on slide 21, we expect RMS to be up high single digits to low double digits, driven by industrial and healthcare. We expect ITS to be up high single digits to low double digits based on strength in communications offset by weakness in lifestyle. We expect CPI revenue to be up 20%-30%, driven by continued growth in power and cloud. We expect CPI growth to ramp in the second half of FY 2027 as investments made in FY 2026 allow us to deliver against robust demand from recent program wins. For total Flex, we expect revenue in the range of $7.35 billion-$7.65 billion, up 14% at the midpoint, with adjusted operating income between $469 million and $499 million.