Thank you for standing by. Welcome to Flex's Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. Presently, all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded. I'll now turn the call over to Mr. David Rubin. You may begin.

Thank you, Melissa. Good morning, and welcome to Flex's fourth quarter and fiscal 2025 earnings conference call. With me today is our Chief Executive Officer, Revathi Advaithi; and Chief Financial Officer, Kevin Krumm. We'll give brief remarks followed by Q&A. Slides for today's call as well as a copy of the earnings press release and summary financials 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. As a reminder, 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 statement 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, unless otherwise stated, all results provided will be non-GAAP measures, and all growth metrics will be on a year-over-year basis. The full non-GAAP to GAAP reconciliations can be found in the appendix slides of today's presentation as well as in the summary of financials posted on the Investor Relations website. Now I'd like to turn the call over to our CEO, Revathi?

Thank you, David. Good morning, and thank you for joining us today. Starting with our fiscal Q4 results on slide four, we had a very strong finish to the year. Revenue came in at $6.4 billion, growing almost 4% year-over-year. Adjusted operating margin came in at 6.2% which is another quarterly record. And the second quarter in a row with adjusted operating margin above 6%. We delivered adjusted EPS of $0.73 up 28% over last year. Now looking at the full year results. We achieved another year of record annual adjusted operating margins coming in at 5.7% despite continued macroeconomic headwinds. And this is our fifth consecutive year of double-digit adjusted EPS growth, reaching a record level of $2.65 per share. Also, we generated our over $1 billion in free cash flow, another record high and for the second consecutive year, we exceeded our 80%-plus adjusted free cash flow conversion target. This year we drove strong growth in key markets such as the data center as we continue to shift the portfolio towards more profitable business. We executed on multiple program ramps, completed several key acquisitions and we won two PACE awards in the automotive space with our NVIDIA Drive AGX powered Jupyter compute platform and our backup DC/DC converter. Throughout all of this, we maintained our relentless focus on operational efficiency. Another year of strong results once again demonstrates our ability to effectively navigate a challengingly macroeconomic environment and deliver value to our shareholders. These achievements also speak to the extraordinary dedication of our team who delivered these results under challenging market conditions. This has been the theme for the last several years and it's important to understand how we got here. Now turning to the next slide. From the beginning, I have emphasized our focus on winning the…

Thank you, Revathi. Good morning, everyone. Starting with our Q4 results on slide nine. Fourth quarter revenue came in at $6.4 billion, up nearly 4% versus prior year. Gross profit totaled $602 million, and gross margin improved to a record level 9.4%, up 80 basis points. Operating profit was $396 million with operating margins at 6.2%, up 80 basis points. And as Revathi mentioned, this was a new record for Flex. Finally, earnings per share for the quarter increased 28% year-over-year to $0.73 per share. Turning to our quarterly segment results on the next slide. In reliability, revenue was $2.9 billion, down 1.3%, largely driven by strength in power offset by continued softness in core industrial and renewables. Operating income was $180 million with segment operating margin up 40 basis points, finishing at 6.2%. Agility revenue totaled $3.5 billion, growing a very strong 8.2%, driven by cloud demand and networking share gains offsetting weak enterprise IT and consumer end markets. Operating income was $230 million with operating margins up 100 basis points and improving to a new quarterly record of 6.6% on continued mix improvements. Looking at our full year FY '25 results on slide 11, revenue was $28.5 billion, down 2% driven by strength in cloud and power, primarily offset by continued softness in core industrials and renewables. Gross profit totaled $2.3 billion and gross margin improved to 8.8%, up 100 basis points driven by strong mix. Operating income totaled $1.5 billion, up 15%, leading to a 5.7% operating margin up 90 basis points, driven by favorable mix impacts and operational efficiency. I'll point out we hit record levels for both annual gross and operating margins this year. For the full year, Flex achieved EPS of $2.65, up 23% driven by record operating profit and strong free cash flow…

Thank you. We'll now begin the question-and-answer portion of today's call. [Operator Instructions] Our first question comes from the line of Samik Chatterjee with JP Morgan. Please proceed with your question.

Hi. Thank you. Good morning and thank you for taking my questions and congratulations on the strong margin guide here. Maybe if I can start off with that. As we look at the margin guide for fiscal '26 which is for 6%, a bit more than 6%, how should we think about the drivers related to fiscal '25 outside of maybe mix on the cloud business, as that grows rapidly outside of mix on increasing contribution from cloud, what are the other drivers you're sort of penciling in there in relation to the strong margin guide for fiscal '26? And I will follow up.

Hi, Samik. This is Kevin. I'll start on that. Yeah. You nailed it. A big driver of the mix year-on-year is going to be our continued growth in the cloud, also data center product business. As we earn our power business, we should continue to see favorable mix impacts from that as well. I will point out, our service business, we expect continued growth there year-on-year which should have some favorable mix impacts. And then lastly, what I'll say is the drivers of mix that you've seen benefit our business in FY '25, we expect to continue in FY '26, which is in each one of our segments, we expect them to continue to drive mix improvement in those segments through operational efficiency and continued productivity and leverage.

Okay. Got it. And for my follow up, given the -- I think you referenced this in your prepared remarks as well that customers are now looking for capacity, which you have in Mexico as well as US. Can you give us a bit of sort of the lay of the land what you're hearing from customers in relation to demand for either US footprint in Mexico? How much sort of capacity, flexible capacity do you have on that front, and does that present at all a margin opportunity as well in relation to picking some high margin business as you go through fiscal '26? Thank you.

Yeah. Samik, I would say first is definitely for our teams, the phones are ringing off the hook as customers are trying to figure out, one is what's the impact of tariffs and then longer term what this means to their footprint. The good part is that we have worked through this in the whole Tariff 1.0 scenario and we've done a lot of work already in terms of moving footprint around for our customers over the last five years. So, it's not new to us. The good news for us is that our footprint is so strong in Europe and in North America that we have some available capacity. And we have also announced new capacity expansions over the last year, as you have seen and heard from us in these regions, that we're able to really be thoughtful about what is the right kind of mix we want as we look at these capacity expansions. But at the end of the day, we want to help our customers, right, and that is our big focus. So, a lot of conversations with customers on open capacity, increasing utilizations in terms of our existing equipment to drive productivity so we can drive more volume for them from these factories. All of those things are continuing conversations, and we expect the continued shift that has happened in our footprint, that has happened in our PPE and then as a result, continued improved margin as a result of these changes. So, while tariffs create a lot of noise and are not helpful in many ways, the changes that are happening to regionalization and to customer locations as a result of this are really, really important to us. And so only the last thing I'd say in closing is as customers look at things from a longer term perspective, regionalization will continue. We will need open capacity in North America. Could be Mexico or the US and I believe they're very well equipped to deal with that and support them through that transition.

Thank you. Thanks for all the color.

Thank you. Our next question comes from the line of Steven Fox with Fox Advisors. Please proceed with your question.

Hi, good morning and thanks for taking my questions. I had two. First off, Revathi, I was curious if you could expand on your comments. You highlighted around data centers, your scale advantages. How does that play out in the new fiscal year? What are you seeing in the marketplace that is sort of playing into those advantages? And then Kevin, just from an inventory standpoint, obviously a lot of improvement there. How do we think about sort of inventories and working capital impacting the cash flows in fiscal '26? Thanks.

Okay. Steven, I'll start off. I'd say in data centers, as I think about our overall kind of footprint and capability, right, is one is in the IT integration side that comes under our CEC business. First is having the ability to have a fully vertically integrated capability. That is where you're cutting the sheet metal, putting all the equipment together with server storage, switching devices, having the power available to do it. Then also today having liquid cooling capability to scale these customer orders up, are all important. And so, we have the ability not only have the footprint, but have the power availability for these IT integration and the equipment and the utilization capability for rack integration, I would say unlike almost any other competitors in this region in this area. So, scale is really, really important in the IT integration side. On the power side, the engineering and design capability in terms of not only designing what is happening today, which is we're talking about kind of 100-kilowatt power in rack or higher in some cases, being able to design that with kind of the silicon providers is really significantly important. So, there this of engineering capability in designing that and deploying that I think is very important for us. So, on the power side, the scale comes not only from footprint, but from the engineering scale and the depth of experience that exists there. The thing I said in my prepared remarks that I've said a few times before is what is coming together is compute and power, and there's really no supplier who can put the two together other than Flex. Right? And so that is a very unique capability we have that totally differentiates us. And more and more customers are asking for that today, not only in terms of the programs they're working on today, but what they're designing for the future. And that's a very unique differentiation that we have. Kevin, I'll turn it over to you for the inventory question.

All right. Steven, thanks for the question. On inventory, as you asked on FY '26, I'll point to sort of inventory trends over the last couple of years. As you know, coming out of COVID, we invested heavily in inventory and we've been harvesting that investment over the last couple years, and certainly did so again in FY '25, which was a big driver in our record level free cash flow, which was about $1.1 billion. As we end the year, our team has done a great job, and we see inventories really ending FY '25 at more normal levels. All that said, we do expect some improvement in our inventory rate and in our working capital rate in FY '26, but not at the levels we've seen over the last couple years. And that's really what's informing our 80%-plus free cash flow conversion target. The other thing I'll point out with respect to FY '25 as we move into FY '26 is in FY '25 CapEx as a percent of revenue was about 1.6%. That's a little below our target rate, historical target rate of about 2%. So, as we go back into or as we go into FY '26, I expect our CapEx as a percent of revenue to normalize closer to that historical rate. Again, that's a contributor to our full year guide of 80%-plus free cash flow conversion.

Great. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Ruplu Bhattacharya with Bank of America. Please proceed with your question.

Hi. Thanks for taking my questions. Revathi, you talked about strong growth in power and cloud and I think you guided to 30% year-on-year growth. Can you delve a little bit deeper into who the customer said that you're targeting now for both cloud and power? In cloud, I mean, can you maintain that growth with just the top customer that you had, or are you planning to expand beyond that customer? Is hyperscale the customer set, or is it enterprise? In power, can you give some details on what the customer set is and which region do you see power products growing? Any kind of details to help us get comfortable with the 30% year-on-year growth rate? And I have a follow up. Thank you.

Yeah. I'd say, Ruplu, I'd start with saying one is you should be very comfortable with the 30%, because you have just seen what we have executed in the last few years. Right? So that is one thing. The second is, as you all point out to me all the time, is that they're always conservative in kind of what we say long-term, right, in terms of our guidance. So, I would say the 30% is you should absolutely feel comfortable with. Now where is it coming from? I would say on our IT integration side, I think one of the things that is really important to know what's different about us is we have multiple hyperscaler customers, right? So, almost all large hyperscaler customers are part of our customer mix. So, we're not really geared towards or targeted towards one large hyperscaler. And they're all growing fairly significantly and have very big long-term programs that are up and coming. And we're also growing with the smaller cloud customers who -- now you're seeing a lot of offsets to also hyperscalers where there are smaller cloud customers that are coming up in various regions and we are also supporting them. So that is also very significantly important. So very diversified end customers in our IT integration side. In the power side, on the embedded power business, where we design power that goes on the chip, we mainly work with the silicon providers because they're the ones who are driving actually -- what the significant compute requirements that's required. So, we start by working with the silicon providers, which in some cases are also hyperscalers who are making their own silicon. And there -- also there is pretty significant diversification in terms of end customers. And in our critical power, we work with almost every large colo and almost every large hyperscaler, mainly in Europe and North America. I'd say we do less in terms of Asia in critical power, but very diversified from a geography and an end customer standpoint. So that's what really makes our data center business very unique, is a diversification in all these three businesses, which is really important. And then the critical thing is as technology puts growth compute and power together, we're the only ones who can really work on that technology in terms of putting that together. So that's also a very important thing.

Okay. Thanks for all the details there. I appreciate that. Can I ask about the customer sourced inventory and the impact of that on both revenues and margins? I think you talked about a $1 billion impact in fiscal '26. Is that all in hyperscale, or is it in other end markets as well? Including -- are you seeing that in both the power business as well as in the cloud business? And what is the impact on margins of customers going to a customer sourced inventory model? Is it positive for margins or negative? Any details would be appreciated. Thank you.

Yeah. Kevin?

Yeah. Hi, Ruplu. I'll take that. Just answering your question. So, your first question on hyperscale, I would say no, it is not isolated. Those contracting arrangements are not isolated to our cloud business. Although, I would say a majority of the contracts are in the cloud business. Your question on margins, the short answer is yes. Margins get a bump when you look year-on-year. But it's important to note that FY '25 and as we think about margins as we go into FY '26, our margins -- we do expect our margins to grow without this bump.

Great. Thank you for all the details. Really appreciate it.

You're welcome.

Thank you. Our next question comes from the line of George Wang with Barclays. Please proceed with your question.

Hey, guys. Thanks for taking my question and congrats on the quarter. I have two quick ones. Firstly, maybe for Kevin, I noticed implied OPM percentage for 1Q '26 is a bit lower sequentially. Kind of drive with first quarter a year ago as well, kind of will step down from 4Q to 1Q. Is this just due to typical seasonality or kind of startup cost with the program ramping. Can you kind of call out the drivers, kind of pointing to implied OP percentage maybe kind of 5.6% for the 1Q.

Yeah. Hi, George. So, the question on why are margins implied margins stepping down 4Q '25 to Q1 '26, I'd say there's really two drivers in there. One is just sequentially our revenue. We expect our revenue to step down, and in some of our business we're going to have lower fixed cost absorption. The other thing I would say is as we go into the first quarter, our automotive business, we're expecting a step down there sequentially Q4 to Q1. And with that -- and due to the nature of the cost structure in that business, there's going to be a little more margin drag in the first quarter than we would expect as we move through the year there as well. So, those are really your two primary drivers of the step down in operating margin Q4 to Q1.

And I'd say George, the only thing I'd add to that is you seen this in the last year also, right? Our Q1 was somewhat soft and had a fairly strong year in terms of our margin performance. And we -- you can see our FY '26 guide is really strong, 6% operating margin that we're going to hit a year ahead of schedule. So, I'm not worried about kind of the sequentials. I feel very good about kind of how we have laid this out. It's going to be a strong year.

Yeah, I agree. Also, quick follow up for Revathi. You guys called out networking share gains which caught my eye. I just curious if you can double click on the networking share gains, can you talk about which specific customer set, or is mostly broad based. And in terms of share gain, are these gains from Asia competitors, or could be just a share gain from US based EMS guys as well. So, just if you can give any color on that. Thanks.

Yeah. The only thing I would say is George, is that it's -- we mainly grow with kind of large players in the networking space and they're all fairly well known to you and to everyone. So, we've continued to grow with them in the last few years. And I would say in terms of geography it is across the world with these share gains and these customers. So, I think that's all I can add to it. Right? I'm not going to share names and all that, but it's a pretty significant part of where we have grown and it's a very good business for us.

Okay. Just a quick one if I can squeeze in. Just in terms of value-added services. Last year you guys talked about $1 billion. In the prepared remark you talked about year-over-year growth. Just curious any color beyond that. Just how to quantify growth rate for FY '26 for the value-added services which is margin accretive.

Yeah. I don't think we are sharing growth rates for FY '26 in terms of the services business. I think we give you enough as we look back usually on the services business. All I'll say is we expect to grow again in fiscal '26 in almost all aspects of that business. As you know very well, it really drives vertical integration for us across multiple end markets. And it is important in terms of how we improve margins because that is a key part of our strategy. Revenue wise, it's not big numbers compared to our overall kind of $25 billion, $26 billion revenue that we have, but really important in terms of building customer affinity and driving margins. But really no numbers to share for you in terms of exact growth rates and things like that. But we expect it to grow in FY '26.

Great. Thank you. Congrats again on the quarter and guide. I will go back to the queue.

Thanks, George.

Thank you. Our next question comes in line of Mark Delaney with Goldman Sachs. Please proceed with your question.

Yes, good morning. Thank you very much for taking my questions. Nice to see the margin strength and recognizing you're guiding to reach the 6% a year earlier than you'd previously targeted. I do want to better understand how tariffs may affect the margin guidance though. I believe you said your guidance excludes tariffs both with respect to revenue and cost, and you'd expect tariff costs to be passed through at a low margin. So, if tariff levels are sustained, and I realize tariffs are quite dynamic, but in a scenario where tariff levels are sustained around levels they are today, do you still think you'd be at 6% margins for this coming year?

Hey, Mark. This is Kevin. Thanks for the question. I would say -- so you're thinking about it the right way. Our guide excludes any impacts from direct impacts from tariffs which would impact both revenue and costs, really coming through at flat to zero margins. So, we would expect a drag versus our current guide at margins, if tariffs were applied at sort of the current guidance that's out there. We wouldn't expect it to be significant, but there would be some basis points dragged versus our current guide.

Okay. Thanks for clarifying, Kevin. My other question also related to tariffs and more trying to better understand what kind of knock-on effects tariffs are having to end demand. You said you're factoring some weakness into the auto market, but as you think about some of the other end markets, are you seeing any weakness in customer schedules? Perhaps if prices are going higher, you're expecting some negative elasticity of demand, or if you're not seeing that, is that something you tried to factor into the revenue guidance? Thanks.

Yeah. I'd say, Mark, we're really not seeing anything in terms of outside of what we have talked about in automotive, in any kind of significant weakness in terms of customers itself. And I'll just remind you that if you think about our current business mix, right, even in our lifestyle and consumer end market businesses, we are with kind of really high-end consumers and complex products. And so, we're not seeing any significant impact there. Of course, our data center business is very strong. We don't see any significant impact there. Industrial businesses are still holding, as you have seen in terms of CapEx for industrials are still pretty strong, driven by investments that they're making. So, we're not really seeing any significant impact in terms of end market demand outside of automotive. So, if you think about our guide today, it really reflects that. And you can see that from a lot of the results that are coming out. Also, that demand's holding pretty well in all the major end markets we're in. So, highly dynamic, of course. Things could change. But I would say both dealing with tariffs passed through and demand, we feel like we have kind of included what we see today in our guide.

Hey, Mark. The only thing I want to add, because you asked your question based on OP margin, which I understand why you positioned it that way. But when we think about tariffs, while there will be a drag on OP margin. As we've thought about our guide, we do not expect there to be an impact on OP profit dollars this year, or EPS dollars for that matter. So, I just wanted to clarify that because that was a critical element of our guide as we thought about it for FY '26.

Yeah. No, that makes sense. Kevin and Revathi, thanks for all your thoughts on what you're seeing by end market.

Thanks, Mark.

Thank you. [Operator Instructions] Our next question comes from the line of Steve Barger with KeyBanc Capital Markets. Please proceed with your question.

Good morning. This is Christian Zyla on for Steve Barger. Thanks for taking the questions. First question, just going back to the Husqvarna facility acquisition. Could you just give us some additional color on how that deal came about? Was that opportunistic timing, or is that business that you were vying for? And then just more broadly, is the current operating environment across the globe getting more potential customers to the table to consider and pursue your entire suite of outsourcing capabilities?

Yeah. I would say, Christian, on the deal with Husqvarna, we constantly talk to customers and engage with them about kind of how we can help them with their supply chain, right? So that's a constant conversation with them. As this whole regionalization conversation has become stronger and stronger, and we're looking to build our footprint in North America, this was a really good opportunistic deal for us and for the customer. Where we're able to take on their capability and then add to our footprint and our capability in a region that we are very interested in growing more aggressively. So, it was really a win-win for us. And more and more conversations like that with customers are happening where not only can we help them with their footprint, existing footprint, but we can expand our capability with that too. So, it was a perfect deal, perfect timing, and really excited to welcome that group into our fold and looking to expand that capability pretty well. What was the second question? Christian, can you repeat your second question?

Yes, absolutely. Just is it getting more customers to the table to consider outsourcing or your entire suite of outsourcing capabilities?

I would say we are getting a lot of customer conversations with our teams in terms of regionalization, but also as you're doing regionalization, taking on more end-to-end capability. Because the hardest part about regionalization is going to be where is your raw material coming from? Who's going to be making that? Everything that's vertically down, not just the final test in assembly. So, it's better for customers if they hand over things to us more end-to-end. Everything from a planning perspective, managing their supply chain to then vertically integrating it into all the aspects that go into the final product does make it easier for them. So, we are seeing more of those conversations. It is pushing us to develop our own capability even further in markets like Mexico and in the US, but also develop our supply chain even more aggressively. So, Christian, you're right. It is driving more end-to-end conversations at a faster speed today than it's ever been before.

That's great. And then if I could just sneak in my second question. It's a follow up on the earlier inventory question. I know the last few years you guys have been working down to bring -- working to bring down the inventory levels, but if we were to see inflection sooner in say core agility or auto markets, should we expect to see an equal uptick in inventories, or anything on the working capital side? Just help us think about the inflection and kind of the future. Thank you.

Hi. This is Kevin. I'll take that. I mean -- sure, when you think about our inventory to the extent that we see a significant pivot in growth, you would see some investment in our working capital rate as we need that -- or sorry, working capital, not working capital rate, but we would need that investment to support growth in our model. All that said, there will continue to be opportunity in working capital rate that would offset that investment. So, yes, as we pivot to growth. You asked on automotive, but I would say this across all of our SBUs [ph], you would see some working capital investment. But we have rate opportunity we're going to continue to work on and that's going to help offset some of that investment as we go forward here.

Yeah. The only thing I would add, Kevin, to that is one thing we learned through the supply chain crisis is getting really good in terms of managing inventory end-to-end. Right? So not just for us, but for our customers and then through the supply chain. So, all of those learnings and systems and processes we have developed will all come into play as overall. At the end of the day, we want to make sure our days are well in control for us and our customers. So, yes, we'll need more inventory to support growth, but the important part is we will manage our days of inventory really well across the supply chain.

Thank you, guys.

Thank you. End of Q&A:

Thank you. Ladies and gentlemen, this concludes our question-and-answer session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.