Flex's Q2 2026 Earnings Call: Contradictions Emerge on Data Center Growth, Margins, and Automotive Outlook

Date of Call: October 29, 2025

Financials Results

• Revenue: $6.8 billion, up 4% year-over-year
• EPS: $0.79 per share (adjusted), up 23% year-over-year
• Gross Margin: 9.3%, up 80 basis points year-over-year
• Operating Margin: 6.0%, up 55 basis points year-over-year (fourth quarter at or above 6%)

Guidance:

• Full-year revenue $26.7B–$27.3B (up $500M vs prior midpoint)
• Adjusted operating margin 6.2%–6.3%
• Adjusted EPS $3.09–$3.17; FY'26 free cash flow conversion target >80%
• Q3 revenue $6.65B–$6.95B; adjusted operating income $405M–$435M; adjusted EPS $0.74–$0.80; adjusted tax rate 21%
• Segment outlook: Reliability up low–mid single digits; Agility up mid–high single digits; data center growth at least 35% this year

Business Commentary:

* Revenue and Earnings Growth: - Flex Ltd. reported revenue of $6.8 billion for Q2 FY 2026, up 4% year-over-year. - The earnings call highlighted an impressive operating margin of 6%, with adjusted EPS increasing by 23% to $0.79 per share, marking the fourth consecutive quarter above 6%. - Growth was driven by strong performance in the data center business and disciplined execution across all segments.

• Data Center Business Expansion:
• Flex's data center revenue is expected to grow at least 35% for the full year, driven by proprietary products and advanced manufacturing capabilities.

• The strong growth is attributed to partnerships with leading technology companies, including the development of a new AI infrastructure platform to enhance deployment speed and efficiency.

• Impact of Tariffs and Geopolitical Events:

• The company incorporated direct tariff impacts into its revenue guidance, acknowledging the challenges in the global trade environment.

• Despite these headwinds, Flex maintained strong top-line momentum and raised its full-year guidance by $500 million, reflecting resilience in the face of tariff pressures.

• Impact of Ukrainian Operations:

• The missile strike at the Mukachevo facility in Ukraine led to a temporary shutdown, impacting revenue with an approximate $100 million revenue headwind in the back half of the year.
• Despite this setback, Flex raised its full-year guidance, showcasing the company's ability to manage and overcome operational challenges.

Sentiment Analysis:

Overall Tone: Positive

• Management called it an "exceptional quarter": revenue $6.8B (up 4%) and adjusted EPS $0.79 (up 23%). They raised FY'26 guidance to $26.7B–$27.3B and forecast sustained margin improvement (adjusted operating margin 6.2%–6.3%), citing strong data center, power and medical trends.

Q&A:

• Question from Ruplu Bhattacharya (BofA Securities, Research Division): You beat 2Q and raised full-year revenue, but why no upside to the data center revenue guide this quarter?
  Response: Management will not update quarterly data center guidance now; they reaffirm data center growth is at least 35% this year and will provide a full update at year-end/Investor Day.

• Question from Ruplu Bhattacharya (BofA Securities, Research Division): For cloud, how does the mix look between custom silicon and merchant silicon and would Flex bid on new AMD GPU rack programs?
  Response: Flex participates in both custom and merchant silicon but tends to win more on custom/specialized designs; they will reflect new project participation in updated cloud guidance at Investor Day.

• Question from Timothy Long (Barclays Bank PLC, Research Division): What is driving the second-half operating margin improvement versus the first half?
  Response: Margin improvement is driven primarily by mix shift toward higher-margin products and services, which are growing and will comprise a larger share of revenue into Q3/Q4.

• Question from Timothy Long (Barclays Bank PLC, Research Division): How do you see the economics of the cloud/data center business evolving—are new programs becoming more margin accretive?
  Response: Economics are increasingly accretive: integrated compute, power and cooling plus proprietary power/cooling products and a mix shift toward power/products will drive meaningful margin progression.

• Question from Samik Chatterjee (JPMorgan Chase & Co, Research Division): Is the $500M guide raise driven mainly by data center or other end markets, and what's the Ukraine facility shutdown headwind?
  Response: The guide raise is driven by data center and health solutions strength (and stabilizing auto); the Mukachevo Ukraine shutdown is about a 1% revenue headwind (~slightly north of $100M) in the back half.

• Question from Samik Chatterjee (JPMorgan Chase & Co, Research Division): Is the Amazon partnership part of the optimism behind your cloud/data center outlook?
  Response: Yes—the Amazon partnership, alongside continued hyperscaler and colo demand, contributes to long-term data center opportunity that will be reflected in the May Investor Day guidance.

• Question from Steven Fox (Fox Advisors LLC): The guide implies accelerating growth into Q4—can that momentum continue into next fiscal year and what's driving it?
  Response: Yes—Q4 acceleration is driven by data center power growth and strength in medical devices/capital equipment; management expects that momentum to carry into early FY2027.

• Question from Steven Fox (Fox Advisors LLC): Do you see a path for automotive to return to growth and any color on new compute wins?
  Response: Automotive is stabilizing; Flex is platform-agnostic and wins compute across ICE, hybrid and EV, but will scale the business only where returns meet their targets.

• Question from Jacob Moore (KeyBanc Capital Markets Inc., Research Division): What is the revenue size and margin impact of engineering and services (value-added) programs and opportunity size?
  Response: Value-added services historically were in the roughly $1B range, they materially improve margins and remain a strategic focus, but no updated specific breakdown was provided.

• Question from Jacob Moore (KeyBanc Capital Markets Inc., Research Division): What are the puts and takes for the Q3→Q4 margin step-up and is mid‑to‑high 6% sustainable beyond Q4?
  Response: The step-up is driven by greater contribution from higher-margin products and services; management expects that growth momentum and margin profile to persist into FY27.

• Question from Mark Delaney (Goldman Sachs Group, Inc., Research Division): Do you have capacity to support data center growth and will you need meaningful increases in CapEx?
  Response: Capacity is strong in EMEA and expanding in North America (investments in Guadalajara, US, JetCool acquisition, new facilities); they expect meaningful additional CapEx over the next 2–5 years to support growth while cash flow and margins improve.

• Question from Mark Delaney (Goldman Sachs Group, Inc., Research Division): What should we expect from your NVIDIA pilot/AI and robotics initiatives for Flex's own operations?
  Response: The NVIDIA partnership provides modular customer-facing data center infrastructure; internally Flex will deploy AI and robotics across factories and back-office functions to materially boost productivity and efficiency.

Contradiction Point 1

Data Center Revenue Growth and Margin Expectations

It involves the growth rate and margin expectations for the data center segment, which is a key area of focus for the company, impacting strategic planning and investor expectations.

Why wasn't data center revenue guidance raised despite strong cloud and power demand? - Ruplu Bhattacharya(BofA Securities)

2026Q2: We are confident that we will deliver at least 35% data center growth for the year. - Revathi Advaithi(CEO)

Why hasn’t the margin outlook improved alongside the revenue guidance? Can you provide more details on data center revenue trends and expectations for power and cloud growth? - Samik Chatterjee(JPMorgan Chase & Co)

2026Q1: Confident in fiscal year revenue growth for data center of 35% in fiscal year '26. We feel good about the growth rate as we see power growth stronger than cloud. - Revathi Advaithi(CEO)

Contradiction Point 2

Automotive Segment Growth Prospects

It involves the expectations for growth in the automotive segment, which is a significant part of the company's business, impacting investor decisions and market confidence.

Can the automotive segment return to growth? - Steven Fox

2026Q2: We're seeing stabilization in automotive. We're platform-agnostic and continue to win new compute deals. Growth in automotive would require healthy returns and long-term commitments. - Revathi Advaithi(CEO)

What end markets and segments are expected to grow stronger or weaker? Where will Flex focus its investments for growth? - Ruplu Bhattacharya(BofA Securities)

2026Q1: We continue to see the impacts of the weak automotive and consumer markets on our top line. We expect these markets to remain weak for the remainder of the year. - Revathi Advaithi(CEO)

Contradiction Point 3

Data Center Revenue Growth Rates

It involves discrepancies in reported data center revenue growth rates, which are crucial for understanding the company's financial health and performance in a key market segment.

Why was the data center revenue guidance not increased despite the full-year revenue midpoint raising $500 million, Q2 outperformance of $150 million implying a $350 million second-half upside, and commentary indicating continued strength in cloud and power segments? - Ruplu Bhattacharya (BofA Securities)

2026Q2: We are not updating our data center growth rates in the quarterly guide as it's not a reporting segment, but we've given guidance that it's at least 35% for the year. - Revathi Advaithi(CEO)

Can you elaborate on your data center scale advantages and the impact of inventory and working capital on fiscal 2026 cash flows? - Steven Fox (Fox Advisors)

2025Q4: We continue to expect data center revenue to grow at or above the market rate for the remainder of the fiscal year. - Kevin Krumm(CFO)

Contradiction Point 4

Automotive Segment Growth

It involves differing perspectives on the growth and outlook for the automotive segment, which is important for assessing the company's overall performance and strategic focus.

Do you see a path for the automotive segment to return to growth? - Steven Fox (Fox Advisors LLC)

2026Q2: We're seeing stabilization in automotive. We're platform-agnostic and continue to win new compute deals. Growth in automotive would require healthy returns and long-term commitments. - Revathi Advaithi(CEO)

What are the key drivers for fiscal '26 margin guidance excluding cloud business mix effects? What is the demand outlook for US footprint in Mexico, and does it offer margin opportunities? - Samik Chatterjee (JPMorgan Chase & Co)

2025Q4: We believe automotive will nevertheless remain soft throughout the first half of calendar 2023 as demand uncertainty in China continues. - Kevin Krumm(CFO)

Contradiction Point 5

Data Center Revenue Growth Expectations

It involves differing expectations for data center revenue growth, which is a critical area for Flex's business, impacting investor expectations and strategic focus.

Why didn’t you raise data center revenue guidance despite $350 million upside in H2 and continued strength in cloud/power? - Ruplu Bhattacharya (BofA Securities)

2026Q2: We are growing at least 35% year-over-year, indicating significant benefit from both hyperscale growth and new cloud players. - Revathi Advaithi(CEO)

Can you outline the cloud growth trajectory? Have customer AI infrastructure build timelines or scales changed due to AI supply chain readiness or lower-cost training methods? - Mark Delaney (Goldman Sachs)

2025Q3: We expect the 40-plus percent growth in cloud to continue in the next quarter. Long-term, the data center growth is expected to be around 20%. - Revathi Advaithi(CEO)