Q2 2025 Flex Ltd Earnings Call
Recess warming data center.
Speaker Change: As I mentioned, our EMAS-plus product-less services strategy is about finding higher value opportunities in diverse and markets. And every team at Flex has a role to play in this strategy.
Speaker Change: Along those lines, we recently announced the acquisition of Crown Technical Systems.
Speaker Change: There is a strong synergistic effect here. First, Crown has a significant position in the North American power distribution market, which is being driven by grid modernization and data-centre power trends.
Speaker Change: their expertise in medium-voltage switch care, also enhances our data center power portfolio and we believe it will support growth in our modular power part business, particularly in the US market.
Speaker Change: This acquisition is another great example of our strategy to grow in higher value markets, tied to our core competencies, and ultimately create long-term shareholder value to margin expansion, EPS growth and cash generation.
Speaker Change: with that I'll pass the call over to Jaime Martinez to take you through our financial update. Jaime?
Jaime Martinez: Thank you, Revathi.
Jaime Martinez: Starting with our second quarter performance on slide 7.
Jaime Martinez: It was another solid core.
Jaime Martinez: 2.4 revenue was 6.5 billion in line with our expectations.
Jaime Martinez: Ross Prophet Torong, a record quarterly level of 554 million and Ross margin increase to 8.5%. Pop 90 Vases Points.
Jaime Martinez: Operating income was 358 million with operating margins at 5.5%.
Jaime Martinez: A substantial 0-0-0 improvement. Up, A-DV points, and a Revathi mentioned, both were record quarterly levels for flex.
Jaime Martinez: An earnings per share increased to 12% year over year to 64% for the quarter, also a record level.
Jaime Martinez: Turning to quarryly segment results on the next line.
Jaime Martinez: Reliability revenue was 2.9 billion in the expected range, with continued strength in power and medical devices.
Jaime Martinez: Operating in comb was 159 million, an operating margin for the segment improved both sequentially and 0-5.4% on mix and solid execution.
Jaime Martinez: In Agility, Revenue was flat, a 3.6 billion, with strong clouds of setting softer known clouds of the world.
Jaime Martinez: Operating income came in at 218 million with a record 6.1% operating margin.
Jaime Martinez: Based on continued mix improvement in each of the three business units along with strong execution and expected cost management.
Jaime Martinez: Moving to cash flow on slide 9.
Jaime Martinez: Pue to NetCapx, Toral, 100 million and we expect to maintain our target of 2% of revenue for the full year.
Jaime Martinez: Narym Mentori was down again this quarter similar to Q1.
Jaime Martinez: Down 6% sequentially and 21% 0%
Jaime Martinez: Inventory days, net of working capital advances has finally reached a more normalized level in the high 50s. So we feel much better about where we are.
Jaime Martinez: Rika Shvlo in the quarter was strong again at 219 million. That puts us at 451 million years to wait, on track to reach our full year target of 800 million plus.
Jaime Martinez: In the second quarter, we'll report you 300 million worth of stock, totalling approximately 10 million shares. Fiscal year to date, we have report you over 750 million.
Jaime Martinez: We exit Q2 with cash balances of 2.6 billion. Some of that will form the Crown Acquisition expected to close by December.
Jaime Martinez: Please turn to slide 10 for our segment outlook for the fiscal third quarter.
Jaime Martinez: or Q3, reliability solutions, with respect to revenue will be flat to down mid-single digits.
Jaime Martinez: As we recently mentioned at the Goldman Sachs Conference, we have seen some macro related slowing in auto that is muting growth in the second half. Although we still expect to outperform our industry unit expectations in fiscal 2025.
Jaime Martinez: based on new wins and content gains.
Jaime Martinez: Core industrial demand is a little softer than previously expected. However, strength in power and medical devices is expected to continue.
Jaime Martinez: Agility solutions revenue is expected to be down low to high single digits with continued strong growth in clouds
Jaime Martinez: Other end markets remaining as expected.
Jaime Martinez: On to slide 11 for our quarterly guidance.
Jaime Martinez: For total FLEX, we expect Q3 in the range of $6 to $6.4 billion, with operating income between $335 and $365 million.
Jaime Martinez: Interest and other expense is estimated to be around $50 million.
Jaime Martinez: We expect the tax rate to be around 17% for the quarter.
Jaime Martinez: based on approximately 400 million weighted average shares outstanding.
Jaime Martinez: Looking at our full year guidance on the following slide.
Jaime Martinez: Given some macro pressures, we now expect full-year revenue between $24.9 and $25.5 billion.
Jaime Martinez: However, adjusted operating margin is expected to be between 5.4 and 5.5 percent.
Jaime Martinez: which at the midpoint will be up about 70 basis points year-on-year.
Jaime Martinez: An adjusted EPS is now expected to be between $2.39 and $2.51.
Jaime Martinez: You can see in our results and guidance how much Flex has changed over the last several years.
Jaime Martinez: Shifting to higher value business and improving operations through the cycles.
Jaime Martinez: And this is resulting in continued margin improvement and double-digit EPS growth.
Jaime Martinez: We believe our EMS plus products plus services long-term strategy represents the best opportunities in the history of Flex.
Jaime Martinez: So we're very excited about our future.
Jaime Martinez: With that, I will now turn the call back over to the operator to begin our Q&A.
Speaker Change: Thank you. Now begin the question and answer session portion of today's call. If you'd like to ask a question, please press star 1 on your telephone keypad.
Speaker Change: As a reminder, we ask that you please limit yourselves to one question and one follow-up.
Speaker Change: One moment, please, while we poll for questions.
Speaker Change: Our first question today is coming from Rupul Bhattacharya from Bank of America. Your line is now live.
Rupul Bhattacharya: Hi, thank you for taking my questions. Revathi, I wanted to ask you about the power business. Strong growth this quarter of 40% year-on-year. Is that sustainable and how do you plan to grow this business? Is it going to be through more M&A or is there organic growth possible and who is the target customer? And just on that, you know, I think you said you wanted to create long-term shareholder value. So should investors think that this power business is integral to Flex or can this be thought of as a standalone business that over time could be a candidate for spinoff like Nextracker?
Speaker Change: Rupu, thanks for the call. First is I just I want to make sure I clarify that the 40% growth is for our overall data center business, which includes both our CEC business, which is IT solutions, the MS integration, and our power business that includes kind of end-to-end power, embedded power, and infrastructure power. So that makes up the 40% growth.
Speaker Change: In terms of the question of is that growth sustainable, I would say the first thing we would do is step back and say you just have to listen to everybody talking about data center growth.
Speaker Change: and how significant that's going to be from all the capital investments announced over the next decade. So we feel pretty good about that macro.
Speaker Change: I'd say the second thing is that it's not just about data center growth, it's about how critical power is going to be as part of that data center growth overall. And that I think is really, really important because we're the only company that can truly go from embedded power that directly impacts power to the chip to the infrastructure power that goes around the grid. So that's important. So that's a unique capability. And as power needs get more complex, this will be more and more important for the overall capability that customers are looking for.
Speaker Change: That puts us in a very unique position to get good long-term growth.
Speaker Change: We have said long-term growth of 20% CAGR. We obviously are beating that hands down quarter after quarter because not only do we think that our unique position gives us a share advantage, but we also think that we have technology advantage that puts us in a unique position. So I feel quite good about the
Speaker Change: kind of long-term growth characteristics of the data center segment. In terms of organic or M&A, we just announced the M&A deal of Crown Technical, which adds new power capability for us in North America, both in the medium voltage segment and overall power pods integration. This is really, really important because
Speaker Change: Remember, the ease of use of creating this gigantic power pod
Speaker Change: you know putting them full of equipment and then sticking them next to a data center so you can start them up quickly is really important. So we'll continue to do smart M&A like we have done before to help our overall data center portfolio. So I'll say it'll be a combination of both but our we feel very good about the 40% that we've had this quarter, 60% last quarter and then our long term of 20%.
Speaker Change: And just on the issue of whether this is an integral part of Flex and or can we think of this as a business that is a standalone unit and that could potentially be spun off?
Speaker Change: See, I would think, Rupalu, I would step back and think about Flex as a portfolio of products, right? So...
Speaker Change: In our 25-26 billion dollars of revenue we have, we have many different segments that are growing in different rates, right? Automotive is growing at a different rate with different characteristics, health solutions the same way.
Speaker Change: data center the same way. We have created a unique position for ourselves in data center. And what we are doing, planning to do in almost every segment, is create these modes of products.
Speaker Change: services, EMS capability that makes us unique in that portfolio. So I would think of it as overall synergistic to Flex across the board. This is what we're doing in every segment within Flex.
Speaker Change: This just so happens to be at a growth rate that is pretty significant and then an end market that makes it in the news a lot. But I would say overall, it's very synergistic to the Flex portfolio.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: Got it. And just for my follow up, if I can ask a question on margins. So even though revenues are challenged in the near term, you seem to be pretty confident on fully or operating margin, which is the range is kept at 5.4 to 5.5%. So Jaime, can I ask what is giving you that confidence? For example, you said, you know, you have ramps happening in automotive, but if the volumes are lower, I mean, how, you know, are you concerned about under absorption of cost or, and what is basically what is giving you that confidence? Giving you confidence on margins. Thank you so much.
Speaker Change: Yeah, thank you for the question.
Speaker Change: You know, I would say that for the second half
Jaime Martinez: As you mentioned, ramps continue to progress well, you know, and that supports our margin, you know, despite even there may be some revenue erosion on some of the projects, the fact that the ramps are going well, that helps to raise the margins, given that it's in an automotive portfolio or data center. And that's the beauty of portfolio, right? The mix of portfolio continues to be better and continues to be strong, whether it's in data center or...
Jaime Martinez: cloud power and also health solutions you know medical devices is mixing up better for us
Jaime Martinez: So, that's a key strength in our performance. And we continue to manage our costs very well, right, through operational execution and efficiencies. And that supports our margin expansions and makes you feel very comfortable with that double digit DPS growth that we're putting out there.
Speaker Change: Thank you for all the details. Appreciate it.
Speaker Change: Your next question is coming from Simi Chatterjee from J.P. Morgan, your line is now live.
Speaker Change: Hi, this is MP on for Samik Chatterjee. Thanks for taking my question. So my question firstly is around the order trends that you're seeing relative to your data center exposure like in compute and power business. So like, are you seeing any acceleration in terms of order trends or you're seeing the same order trends relative to 90 days ago?
Speaker Change: Yeah, I would say in terms of you know, we don't talk much about forward-looking orders, but I would say that we are
Speaker Change: very comfortable with kind of what we have shared as revenue growth, right? Last quarter was 60%.
Speaker Change: This quarter is 40% obviously in very difficult comps, right?
Speaker Change: and kind of much higher than what the market overall sees.
Speaker Change: So, I feel very good about kind of a pipeline of projects that we have and what we are executing to, and I have no concerns about that. I think it fits very well with our longer-term thesis that this is a very robust business. So we don't specifically give order trends, but I think our 40% growth rate should give you a pretty good indication that we have very strong backlog and orders to execute to.
Speaker Change: Okay, I have another follow-up on...
Speaker Change: your margin performance so like we were able to
Speaker Change: offset the decline in the outlook for full year in terms of revenue by better margins. So I was just wondering like if the outlook were to deteriorate further in terms of automotive or industrial like how much leverage do we have in terms of increasing operating margins to still maintain the EPS guidance or like when we will start to see a hit on EPS for if the you know revenues for full year outlook start to deteriorate more.
Speaker Change: and many more. Thank you. Thank you.
Speaker Change: I will tell you that we are very comfortable with our EPS outlook and you know the real thing that you see happening here is the evolution of our transformation that is playing through where we can perform through our cycles and it happens due to two reasons. One is our mix.
Speaker Change: We're really growing in high-value segments at a really fast rate. So that's fantastic, and you see that flow through our P&L. And the second is we're great at managing volumes ups and downs in terms of cost efficiency and productivity.
Speaker Change: So you put those two together, I would say we are very comfortable with our forward-looking EPS guidance.
Speaker Change: And we feel like we're always very conservative in terms of our revenue and EPS guidance, and we feel like we have pegged it right in terms of where the end markets are. So I would say, you know, I have no issue with what we are guiding so far, and we expect no erosion from where we are.
Speaker Change: Okay, thank you.
Speaker Change: Thank you. As a reminder, if you'd like to be placed into the question queue, please press star 1 on your telephone keypad. Our next question is coming from George Wang from Barclays. Your line is now live.
George Wang: Hey, thanks for taking my question. Hey, Ravathi, just double-click on this CloudRamp. Obviously, very impressive, 40%.
George Wang: on double-digit versus long-term 20% growth. And just high-level, obviously, you guys don't guide a quarter-to-quarter kind of full run rate. Just how to think about the cadence for the double-digit growth for the next couple of quarters, especially kind of, as you think about opportunity, whether it's a new logos, within the hyperscale rack integration, or whether that's co-location. And then maybe you can address some of the potential new logos you guys could be working on, or still kind of a bigger-sized opportunity and the world share within existing kind of top-two hyperscale.
Speaker Change: Yeah, thanks George for the question. I'll start by saying you know I'll step back and remind everyone of the portfolio that we have in data centers, right? So in the IT solution EMS space we do IT integration of racks
Speaker Change: server storage products, networking products, all of that.
Speaker Change: for hyperscalers, and we participate across the spectrum there.
Speaker Change: And I think what's really important to remember is we are very well vertically integrated in that portfolio, not just in terms of building the racks, making them ourselves and having all the services associated with that. So it's a very well vertically integrated IT solution portfolio that the Hyperscale just has to hand it over to us and we hand it back to them. And then on the power product side, we touch everything from what's on the chip itself, the power that actually drives the chip, to the infrastructure around it. So we build all of that. So again, a very unique portfolio that really nobody in the industry has puts us in a very unique position. So that takes us to growth, right?
Speaker Change: What is helping us grow at this clip, I would say is the fact that we have this portfolio that is unique, right? The IT solutions is growing across the board and so is the power products. And we participate across Colos and Hyperscalers. So George, I wouldn't think about it in terms of new logos because the universe of
Speaker Change: You know, Colos and data centers is a pretty holistic universe that we know most of them and all of them by now. So it's all about expansion of wallet share, not just through new technologies and new products, better schedule, better services.
Speaker Change: So just increasing wallet share across the board is the way to really grow this business. So I feel really good about the organic growth rate here that we are delivering. And then of course, George, we just announced a new acquisition in this space, adding to our power products. We're also adding through acquisitions.
Speaker Change: and that's how I would think about the overall kind of growth rate there.
George Wang: Great. Yeah, just a quick follow-up, if I can. I just want to kind of double-click on the on the IP product, kind of, you know, much higher margin, could be double-digit margin. And especially, kind of, liquid cooling side, you know, at OCP you guys unveiled this reference design with the liquid cooling, kind of, you know, partnership with Jekyll. Maybe putting some of your design as well in the data center side, aside from, obviously, the power you guys talk about. So maybe you can talk high-level a little bit more just on the outlook in terms of embedding some of your own design into the, you know, data center, traditional data center rack integration, and the, kind of, how to think about the margin profile in terms of the creation versus corporate average. Thank you.
Speaker Change: Yes, I'd start with the kind of the partnership with Jet Cool itself and and how I think about the
Speaker Change: kind of the reference design we talked about. See, for us, this is a natural progression, right? Because we make the power that actually works with the chip itself. So now it's all about cooling the chip and the power products that go together in it.
Speaker Change: So that makes it very appropriate that we think about cold plates.
Speaker Change: and CDU's associated with the product, right? Which really leads us to the JetCool partnership. JetCool has a very unique cold plate design that we feel really fits well with what we are trying to do to solve the toughest problems around cooling.
Speaker Change: and that really drove our partnership with them. And that really gives us our own IP in terms of the reference design that we're using and really solving for both the power needs in the chip itself and the integrated rack solution which we can make all of it end-to-end. So that's what really drove that partnership and it really makes it very appropriate for Flex considering we are the only ones who have the power needs. We make the rack integration fully end-to-end and then now we have the cooling reference design. In terms of margin, I would say these are all accretive to Flex overall. Obviously you see that in our mix, right? And what we are delivering margin growth through these cycles, the 40% growth in data center.
Speaker Change: Okay, great. Congrats again on the strong growth in the AI side. I will go back to the queue.
Speaker Change: Thanks, George.
Speaker Change: Thank you. Our final question today is coming from Steve Barger from Key Bank Capital Markets. Your line is now live.
Speaker Change: Good morning, this is Christian Dylon for Steve Barger. Thank you for taking the questions.
Christian Dylon: First question, you guys have differentiated yourself from your EMS peers with M&A. Thanks for the earlier comments on the data center portfolio, but as you think about other sub-segments outside of data center, are there capabilities that you would be interested in adding, specifically thinking about maybe the next-gen mobility portfolio, but others as well?
Speaker Change: Yeah, Christian, I would say that, you know, we've been very clear in terms of our acquisition targets will always be things that help from a technology perspective.
Speaker Change: and that will help in terms of completing a portfolio that we're really interested in. So the other area we have talked about a lot is automotive in general, right, that it has to be fit with what we are looking to achieve in our automotive portfolio, but so far we've not needed any acquisitions in that space. We have a fairly comprehensive portfolio that provides a complete EV platform, EV hybrid platform to our automotive customers, so we feel very comfortable to that.
Speaker Change: And then we continue to look for acquisitions around services capability that'll help any particular portfolio of ours deliver more vertically integrated services. But we're very thoughtful about acquisitions because financially, as you have seen us, whenever we have announced a deal, it has been financially a good deal for us.
Speaker Change: and that is also an important part of the overall capital allocation strategy. So that's how I think about M&A.
Speaker Change: Great and then I guess going on the the margin side so operating margin expansion has been pretty steady on its upward trend for you guys.
Speaker Change: and you know some peers in the industry have hinted at goals of 6% plus. If your reliability sub-segments begin to recover do you think that target is reasonable and what are the puts and takes that you think about that could get you there? Thank you so much.
Speaker Change: Yeah, Christian, I'll quickly comment and give it to Jaime. I mean, we've already given our long-term target at 6 plus percent.
Speaker Change: so we're obviously well in that range as you can see from where we are today and we had given that in our last investor day and we said that comes to improve mix, improve portfolio, services expansion, all of that but Jaime anything you'd add to it? No I think Revathi you said you know most of it I think it's important for us that we're seeing our performance certainly in reliability coming much better
Speaker Change: Mixing power and medical devices I mentioned earlier is helping us and
Jaime Martinez: As an example, this quarter we saw a revenue reduction of 11%, but we still grew 20 basis points on a year-over-year basis, so that gives us confidence that we are managing much better through the cycle there.
Jaime Martinez: and Agility continues to perform well through our portfolio of opportunities that we're driving there with higher value and the addition of value-added services. All in all, we feel very comfortable with a long-term range of
Jaime Martinez: achieving that 6% plus.
Speaker Change: Great, thank you.
Speaker Change: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to the CEO for closing remarks.
Speaker Change: Thank you. So we look forward to speaking to you again next quarter. Before I close I just want to thank all our customers and then also all our shareholders for your support and of course to the Flex team across the world for all their hard work, their dedications and their contributions. Thank you all.
Speaker Change: Thank you. That does conclude today's conference call. Thank you for joining. You may now disconnect.
Speaker Change: and many more. Thank you for watching. I hope you enjoyed this video. If you did, please like and subscribe. I'll see you in the next video.