Executive Summary / Key Takeaways

• Transformative Strategy Yields Record Margins: Flex's multi-year "Flex Forward" and "EMS + Products + Services" strategies have successfully repositioned the company towards higher-value markets, driving record adjusted operating margins of 6% in Q1 Fiscal Year 2026, a full year ahead of its fiscal 2027 target.
• AI and Data Center Growth Engine: The company is uniquely positioned as the only provider offering both end-to-end cloud IT integration and a comprehensive "grid-to-chip" power and cooling portfolio, fueling robust data center revenue growth of 35% year-over-year for Fiscal Year 2026, reaching an anticipated $6.5 billion.
• Global Footprint and Technological Edge: Flex's extensive global manufacturing footprint, particularly in North America, combined with its investments in AI-enabled systems, advanced automation, and liquid cooling technologies, provides a significant competitive moat and enables efficient regionalization for customers.
• Strong Financial Health and Capital Returns: Despite macroeconomic headwinds in some segments, Flex maintains strong free cash flow generation, exceeding 80% conversion targets, and actively returns capital to shareholders through opportunistic share repurchases, while preserving an investment-grade balance sheet.
• Resilience Amidst Macro Uncertainty: The company has demonstrated consistent adaptability in navigating complex global challenges like tariffs and geopolitical conflicts, leveraging its diversified portfolio and operational efficiencies to sustain profitable growth.

The Architect of Tomorrow's Infrastructure

Flex Ltd., founded in 1969 as Flextronics International, has evolved from a traditional electronics manufacturing services (EMS) provider into an advanced, end-to-end manufacturing partner. Its journey, marked by a rebranding in 2016 and the launch of its "Flex Forward" strategy in 2020, has fundamentally reshaped its business. This strategic pivot involved aggressive portfolio management and operational innovations, specifically targeting higher-value businesses and fostering a more resilient enterprise. The culmination of this transformation was the unveiling of the "EMS + Products + Services" strategy in May 2024, designed to integrate proprietary products and expanded value-added services with its world-class manufacturing capabilities.

This strategic evolution is particularly evident in Flex's approach to the burgeoning data center market. The company has carved out a unique competitive position by offering a comprehensive portfolio that spans from "grid to chip" power solutions. This includes vertically integrated IT hardware and infrastructure solutions, such as metal fabrication, custom rack assembly, and direct-to-chip liquid cooling technology. Flex is the only provider offering both end-to-end cloud IT integration and a full power and cooling portfolio at scale. This integrated capability is critical for customers in the "arms race to scale," as they require not just custom rack solutions but also power for their chips, efficient cooling, and rapid deployment.

Flex's technological differentiation is a cornerstone of its competitive advantage. The company's power solutions span the entire stack, from board-level modules managing power to the chip (embedded power) to facility-level modular power pods (critical power). This "grid-to-chip" capability is enhanced by strategic acquisitions like Crown Technical Systems, which bolsters critical power capabilities and expands Flex into grid modernization, particularly in the U.S. market. Furthermore, the acquisition of JetCool has expanded Flex's direct-to-chip liquid cooling capabilities, a crucial technology as the industry shifts from air to liquid cooling due to the increasing power needs and heat generated by advanced chips. JetCool's SmartPlate System, for instance, offers self-contained liquid cooling solutions that can deliver immediate performance and efficiency improvements without requiring facility upgrades. Flex is also collaborating with NVIDIA (NVDA), introducing a new power shelf for the NVIDIA GB300 NVL72 platform, paving the way for 800 VDC data center power infrastructure to enable megawatt-scale racks. This deep expertise allows Flex to work with customers earlier in their technology roadmap, driving leading-edge innovation and solving critical power issues in the evolving data center landscape.

The company's global operational scale further reinforces its competitive standing. Flex operates over 49 million square feet globally, including a substantial 7 million square feet in the U.S. and 9 million square feet in Mexico, establishing one of the largest advanced manufacturing footprints in North America. This extensive presence has enabled Flex to lead the regionalization trend, with Americas revenue rising from 38% in fiscal year 2020 to 49% in fiscal year 2025, while Asia's contribution declined from 41% to 30%. This shift positions Flex as a key facilitator and beneficiary of customers moving manufacturing closer to end markets to enhance agility, reduce risk, and meet evolving trade requirements.

Performance and Strategic Execution

Flex's strategic transformation has translated into compelling financial performance. For the first quarter of fiscal year 2026, the company reported net sales of $6.6 billion, a 4% increase year-over-year. This growth was primarily driven by robust demand in its data center business. Adjusted operating income reached $395 million, resulting in a record Q1 adjusted operating margin of 6.0%, a significant 120 basis point improvement year-over-year. Adjusted earnings per share (EPS) also hit a record Q1 high of $0.72. This strong start follows a stellar fiscal year 2025, where Flex achieved a record annual adjusted operating margin of 5.7% and its fifth consecutive year of double-digit adjusted EPS growth, reaching $2.65 per share.

The company's two operating segments, Flex Agility Solutions (FAS) and Flex Reliability Solutions (FRS), both contributed to this margin expansion. In Q1 FY26, FAS net sales increased by 10% year-over-year to $3.69 billion, driven by strong cloud and AI demand, partially offset by softness in traditional telecom and consumer devices. FAS segment margin expanded by 120 basis points to 6.5%, reflecting effective cost management and a favorable mix shift towards value-added services. FRS net sales decreased by 2% year-over-year to $2.88 billion, as strength in power and medical devices partially offset macro-related pressures in automotive and renewables. Despite the revenue decline, FRS segment margin improved by 100 basis points to 6.0%, demonstrating disciplined cost management and mix focus.

A notable operational detail impacting reported revenue is the increasing adoption of customer-sourced inventory models, particularly within the cloud business. While these arrangements exclude the value of the inventory from reported revenue, thereby muting top-line growth, they are explicitly stated to drive operating profit dollar growth and are margin-accretive. This activity increased by $1.5 billion in FY25, representing 17% of revenue, and is projected to increase by an additional $1 billion+ in FY26, reaching 20% of revenue. This highlights Flex's focus on profitability over pure revenue volume.

Flex's financial health is further underscored by its robust cash flow generation. The company delivered $268 million in free cash flow in Q1 FY26, achieving a 98% conversion rate. This builds on a record $1.1 billion in free cash flow for the full fiscal year 2025, exceeding its 80%-plus adjusted free cash flow conversion target for the second consecutive year. This strong performance is driven by disciplined capital expenditures, which were approximately 2% of revenue in Q1 FY26, aligning with historical targets, and a continued focus on working capital management, with inventory days (net of working capital advances) reaching a normalized level of 55 days. The company actively returns capital to shareholders, repurchasing approximately 7 million shares for $247 million in Q1 FY26, and nearly $1.3 billion in FY25. Flex also proactively manages its debt, having drawn down $500 million from its Delayed Draw Term Loan and repaid $531 million of 4.75% Senior Notes due June 2025, while entering a new $2.75 billion revolving credit facility in July 2025.

Competitive Dynamics and Outlook

Flex operates in a highly competitive EMS industry, facing direct rivals such as Jabil Inc. (JBL), Sanmina Corporation (SANM), Celestica Inc. (CLS), and Benchmark Electronics (BHE). While these competitors offer similar manufacturing and supply chain solutions, Flex differentiates itself through its unique, integrated "EMS + Products + Services" model, particularly in the data center space. Flex's leadership in providing both end-to-end cloud IT integration and a comprehensive "grid-to-chip" power and cooling portfolio sets it apart. This integrated offering is a critical advantage as customers increasingly seek fewer, more capable partners to manage complex, high-density AI infrastructure deployments.

Comparing key financial metrics, Flex's TTM Gross Profit Margin of 8.67% is competitive with Jabil (9%) and Sanmina (8%), though it trails Celestica (11%) and Benchmark (10%). Flex's TTM Operating Profit Margin of 4.78% is lower than Jabil (7%) and Celestica (6%), but comparable to Sanmina (4%) and Benchmark (4%). This indicates that while Flex has made significant strides in margin expansion through mix improvement and operational efficiency, there remains room for further optimization relative to some peers. Flex's Debt/Equity ratio of 0.84 is lower than Jabil's 1.88, suggesting a more conservative leverage profile compared to some larger peers.

Flex's ability to navigate the complex global trade environment, including tariffs, also serves as a competitive advantage. The company leverages its proprietary Pulse simulation platform and supply chain expertise to help customers develop mitigation strategies, positioning itself as a "first call" partner. While tariffs are largely pass-through costs, they can introduce "low-calorie revenue" that slightly pressures margins. However, Flex does not expect them to materially impact full-year operating profit or EPS dollars.

Looking ahead to fiscal year 2026, Flex has raised its revenue guidance to a range of $25.9 billion to $27.1 billion, increasing the midpoint by approximately $600 million. This guidance incorporates the current view on tariffs, which is not expected to materially impact growth rates. The company anticipates adjusted operating margin to be between 6% and 6.1%, effectively achieving its fiscal 2027 target a full year ahead of schedule. Adjusted EPS is projected to be between $2.86 and $3.06 per share, with free cash flow conversion expected to remain above 80%.

The data center business remains the primary growth driver, expected to deliver approximately $6.5 billion in revenue for FY26, growing at least 35% year-over-year and representing 25% of total revenue. Management anticipates the power portfolio within data centers to grow even stronger than cloud due to domestic capacity ramps. While some segments like automotive, core industrial, renewables, traditional telecom, and consumer devices face ongoing macroeconomic softness, the diversified portfolio and strategic focus on higher-value areas are expected to offset these headwinds. Flex continues to invest in its capabilities, as evidenced by the recent acquisition of a manufacturing site in Poland to double its European power capacity.

Conclusion

Flex Ltd. has undergone a profound transformation, strategically repositioning itself as a high-value, end-to-end manufacturing partner uniquely equipped for the demands of the modern technology landscape. Its "EMS + Products + Services" strategy, underpinned by significant investments in proprietary power and liquid cooling technologies, has created a formidable competitive moat, particularly in the rapidly expanding AI-driven data center market. This technological leadership, combined with a vast global footprint and a proven ability to manage complex supply chains and regionalization trends, provides a compelling foundation for sustained profitable growth.

While macroeconomic uncertainties and specific segment headwinds persist, Flex's consistent margin expansion, robust free cash flow generation, and proactive capital allocation demonstrate its operational resilience and financial discipline. The company's ability to hit its 6% adjusted operating margin target a year ahead of schedule underscores the effectiveness of its strategic execution. For investors, Flex represents an opportunity to participate in the critical infrastructure build-out for AI and other advanced technologies, supported by a company that has not only adapted to but thrived amidst global disruptions, positioning itself for continued value creation.