Executive Summary / Key Takeaways

• Flex's strategic transformation into a high-value, technology-driven manufacturing partner, particularly in AI infrastructure, is accelerating profitability and has enabled the company to achieve its 6% adjusted operating margin target a full year ahead of schedule.
• The data center business, encompassing cloud and power solutions, is a primary growth engine, with revenue expected to grow "at least 35%" in fiscal year 2026, driven by Flex's unique "grid to chip" integrated solutions.
• Proprietary technologies in direct-to-chip liquid cooling and advanced power management, coupled with an extensive global footprint, provide Flex with a significant competitive advantage in the rapidly evolving AI and regionalization landscape.
• Despite geopolitical risks, including a missile strike on its Ukraine facility, and tariff complexities, Flex has raised its fiscal year 2026 revenue and EPS guidance, projecting continued strong cash generation.
• Flex's disciplined capital allocation, focusing on organic growth investments, accretive M&A, and opportunistic share repurchases, underpins its commitment to long-term shareholder value.

The Architect of Tomorrow's Infrastructure: Flex's Strategic Evolution

Flex Ltd., founded in 1969, has evolved from its origins as Flextronics International into a pivotal end-to-end manufacturing partner, designing, building, delivering, and managing innovative products across diverse global industries. The company's journey has been marked by a strategic pivot, notably with the "Flex Forward" strategy initiated around 2020, which aggressively shifted its portfolio towards higher-value businesses. This evolution culminated in May 2025 with the unveiling of the "EMS + Products + Services" strategy, a comprehensive approach that leverages Flex's world-class manufacturing and supply chain capabilities by integrating proprietary products and expanded value-added services for enhanced vertical integration and customization.

This strategic transformation aligns with profound industry trends, most notably the unprecedented build-out of AI infrastructure and a broader shift towards regionalized manufacturing. The demand for integrated, high-performance solutions is escalating, and Flex has positioned itself at the forefront of this transformation. The company's unique competitive advantage stems from its ability to offer a comprehensive "grid to chip" solution for data centers, integrating compute, power, and cooling capabilities. This holistic approach differentiates Flex from competitors who often specialize in only one aspect of the complex data center ecosystem.

In the competitive landscape of electronics manufacturing services (EMS), Flex stands among industry giants such as Jabil Inc. (JBL), Sanmina Corporation (SANM), Celestica Inc. (CLS), and Foxconn (Hon Hai Precision Industry, TICKER:HNHPF). While competitors like Foxconn boast unparalleled production capacity and cost leadership, Flex distinguishes itself through its integrated ecosystem, which fosters deeper customer relationships and offers greater strategic adaptability. Flex's gross profit margin of 8.90% and operating profit margin of 4.73% for the trailing twelve months (TTM) demonstrate a stronger profitability profile compared to Foxconn's 2024 gross profit margin of 6.0% and operating profit margin of 3.0%, underscoring the success of Flex's high-value strategy.

Technological Edge: Powering the AI Revolution

Flex's core differentiated technology is central to its competitive moat, particularly in the data center sector. The company's "grid to chip" offering provides a fully integrated solution for the escalating demands of AI and high-performance computing (HPC). This includes:

• Direct-to-Chip Liquid Cooling: Enhanced through the acquisition of JetCool, Flex offers advanced liquid cooling systems. The JetCool SmartPlate™ System, a self-contained solution, delivers immediate performance and efficiency improvements, including 15% IT power savings without requiring facility upgrades. Furthermore, Flex's Modular Rack-Level Cooling Distribution Unit (CDU) provides scalable capacity up to 1.8 megawatts (MW), allowing operators to incrementally add cooling capacity while preserving rack space and efficiency. This technology is critical as the industry transitions from air to liquid cooling to manage the intense heat generated by high-density compute.
• Advanced Power Management: Flex's power solutions span from board-level power modules, managing power to GPUs or custom ASICs, to facility-level modular power pods. The acquisition of Crown Technical enhanced Flex's critical power capabilities for data centers and expanded its addressable market into grid modernization. Flex has partnered with NVIDIA (NVDA) to develop next-generation 800-volt DC AI factories and introduced a new power shelf system for the NVIDIA GB300 NVL72 platform, supporting the deployment of 1-megawatt IT racks with industry-leading efficiency. This collaboration aims to accelerate the deployment of giga-scale AI factories.
• AI Infrastructure Platform: At the OCP Global Summit in October 2025, Flex unveiled a new AI infrastructure platform, a unified approach that integrates power, cooling, and compute in pre-engineered scalable designs. This platform helps data center operators deploy infrastructure up to 30% faster, reduce execution risk, and scale reliably to meet AI demand. Flex is also co-developing prefabricated, modular data center solutions for advanced thermal management with LG Electronics (LGEIY).

For investors, these technological differentiators are paramount. They enable Flex to capture a larger share of the rapidly expanding AI infrastructure market by offering solutions that are more efficient, faster to deploy, and highly customized. This integrated approach drives higher average selling prices (ASPs), lower costs for customers, and ultimately, superior margins for Flex, solidifying its market leadership and long-term growth strategy. The company's collaboration with MIT's Initiative for New Manufacturing Consortium, leveraging AI and automation, further underscores its commitment to future innovation in supply chain resiliency and manufacturing efficiency.

Financial Performance: A Testament to Strategic Execution

Flex's financial performance in the most recent periods vividly illustrates the success of its strategic transformation. For the second quarter of fiscal year 2026 (ended September 26, 2025), Flex reported net sales of $6.8 billion, representing a 4% year-over-year increase. Gross profit reached $614 million (GAAP) or $632 million (non-GAAP), with a gross margin of 9.0% (GAAP) or 9.3% (non-GAAP), reflecting a 90 basis point improvement year-over-year due to favorable mix and operational execution. Operating income stood at $296 million (GAAP) or $409 million (non-GAAP), yielding a robust 6.0% adjusted operating margin, marking the fourth consecutive quarter at or above this level. Adjusted earnings per share (EPS) for the quarter increased 23% year-over-year to $0.79.

The Flex Agility Solutions (FAS) segment reported net sales of $3.766 billion, up 4% year-over-year, driven by robust cloud demand. Its operating margin was 6.0%. The Flex Reliability Solutions (FRS) segment saw net sales of $3.038 billion, a 3% increase year-over-year, propelled by strong growth in power and moderate growth in health solutions. FRS achieved an impressive 6.5% operating margin, expanding by 105 basis points year-over-year due to favorable mix and strong execution.

For the first half of fiscal year 2026, total net sales were $13.379 billion, up 4% from the prior year. Gross profit increased to $1.186 billion (GAAP), with a gross margin of 8.9% (GAAP), an improvement of 110 basis points year-over-year. Net income for the six-month period was $391 million (GAAP), with adjusted diluted EPS of $1.03. This consistent margin improvement is a direct result of management's focus on mix and efficiency across every business unit.

Flex's liquidity and capital allocation strategy remain sound. As of September 26, 2025, the company held approximately $2.20 billion in cash and cash equivalents. Cash provided by operating activities for the six-month period was $0.90 billion, contributing to a free cash flow of $573 million.

Net capital expenditures totaled $148 million in Q2 FY26, representing approximately 2% of revenue, aligning with the company's target for strategic investments to support organic growth. Flex also actively returns capital to shareholders, repurchasing $297 million of stock (approximately 5.6 million shares) in Q2 FY26, and $544 million (12.9 million shares) in the first half of FY26.

The acquisition of a manufacturing business in Bielsko Biała, Poland, for $35 million in Q1 FY26, doubling Flex's power capacity in Europe, exemplifies its commitment to accretive M&A.

Outlook and Guidance: Accelerating into the Future

Flex's management has expressed strong confidence in its ability to sustain momentum, raising its fiscal year 2026 guidance. The company now expects full-year revenue between $26.7 billion and $27.3 billion, a $500 million improvement at the midpoint from its prior guidance. Adjusted operating margin is projected to be between 6.2% and 6.3%, demonstrating consistency above the 6% threshold and achieving its fiscal year 2027 target a full year early. Adjusted EPS is anticipated to be between $3.09 and $3.17 per share, an increase of $0.17 at the midpoint. Flex also maintains its target of 80%+ free cash flow conversion for FY26.

The underlying assumptions for this optimistic outlook are rooted in the continued robust demand for its data center business, which is expected to grow "at least 35%" this year. The power business within the data center segment is anticipated to grow above the overall data center average, contributing significantly to both top-line expansion and margin accretion. Additionally, steady demand in medical devices and stabilizing trends in the automotive market are expected to support growth. Management foresees an accelerating growth rate into the fourth quarter of fiscal year 2026, with this momentum carrying into the first half of fiscal year 2027, driven by its high-margin products and services businesses.

For the third quarter of fiscal year 2026, Flex expects revenue in the range of $6.65 billion to $6.95 billion, with adjusted operating income between $405 million and $435 million, and adjusted EPS between $0.74 and $0.80. This guidance reflects continued strength in data center power and medical devices for Reliability Solutions, and cloud growth for Agility Solutions, partially offset by weakening trends in consumer devices and the temporary loss of operations at the Mukachevo facility in Ukraine.

Risks and Challenges: Prudent Growth in a Dynamic World

While Flex's outlook is strong, it operates within a dynamic global environment that presents several risks and challenges. Geopolitical instability, including the ongoing conflict in Ukraine and the Israel-Hamas conflict, continues to create uncertainty and disruption in global markets. A notable event was the missile strike on Flex's Mukachevo, Ukraine facility on August 21, 2025, which resulted in $41 million in long-lived asset impairments, inventory write-downs, and other charges. This facility represented approximately 1% of Flex's revenue, implying a revenue headwind of slightly over $100 million in the second half of fiscal year 2026.

Tariffs also remain a factor. While Flex expects tariffs to be largely a pass-through cost with strong contractual protections, there can be a lag in recovery timing, potentially affecting cash flow. Tariffs can also introduce "low-calorie revenue" that may exert slight pressure on operating margins, though management does not anticipate a material impact on operating profit dollars or EPS. The evolving global tariff landscape also has the potential to impact end customer demand if costs cannot be fully passed through. Macroeconomic conditions, including inflationary pressures, currency volatility, and the potential for slower economic growth, could also influence demand and operational costs. Additionally, changes in tax legislation, such as the OECD Pillar Two GloBE rules and the U.S. One Big Beautiful Bill Act (OBBBA), could impact the company's effective tax rate.

Conclusion

Flex's journey from a traditional electronics manufacturer to a strategic, technology-driven partner has culminated in a compelling investment thesis. The company's "EMS + Products + Services" strategy, underpinned by its unique "grid to chip" data center solutions and advanced manufacturing capabilities, is driving superior financial performance and market leadership in the burgeoning AI infrastructure market. Achieving a 6% adjusted operating margin a year ahead of schedule, coupled with robust revenue and EPS guidance for fiscal year 2026, underscores the effectiveness of its strategic execution and operational efficiencies. While geopolitical tensions and tariff complexities present ongoing challenges, Flex's diversified global footprint, technological differentiation, and disciplined capital allocation position it for sustained growth and value creation. The company's ability to adapt and innovate in a complex global environment, particularly through its leadership in AI infrastructure, makes it a compelling consideration for discerning investors.