Flex Ltd. (FLEX) Q2 2027 Earnings Report, Transcript and Summary

Greetings, and welcome to Flex's Second Quarter Fiscal Year 27 Earnings Conference Call. At this time, all participants are in a listen only mode. A Q&A session will follow the formal presentation. As a reminder, this conference is being recorded. it is now my pleasure to turn the call over to Michelle Simmons, Senior Vice President, Global Investor Relations and Public Relations. Michelle, please go ahead.

Good morning. Thank you for joining us today for Flex's second quarter fiscal 27 earnings conference call. With me today is Revathi Advaithi, our Chief Executive Officer Kevin Crum, our Chief Financial Officer Michael Hartung, our Chief Commercial Officer and Samik Schweitz, who we previously announced as the expected CFO of Flex post spin. We will give brief remarks followed by Q and A. Slides for today's call as well as a copy of the earnings press release 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. 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. These statements reflect expected results for the full fiscal year and did not give effect to the planned spin off of the Cloud and Power Infrastructure segment. Any references to the planned spin off, including its timing, Form 10 status, the leadership of each company following the separation, are forward looking and remain subject to applicable approvals and completion of the spin off. For a full discussion of these risks and uncertainties, please see the cautionary statements 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 all growth metrics will be on a year over year basis unless stated otherwise. Additionally, all results will be on a non GAAP basis unless we specifically state it is a GAAP result. The full non GAAP to GAAP reconciliations can be found in the appendix slides of today's presentation as well as in the summary financials posted on the Investor Relations website. Now, I would like to turn the call over to our CEO.

Revathi, Thank you, Michelle. Good morning and thank you for joining us to discuss Flex's second quarter fiscal 27 results. Before I begin, I would like to start by welcoming Amy Schweitz to the team who will become the Chief Financial Officer of Flex after the spin off. I look forward to working with both her and Michael Hartung, who will lead Flex as CEO through this transition and to seeing Flex continue to excel under their leadership. Now I will start with our performance for the quarter. We delivered another fantastic quarter in Q2. Revenue growth accelerated, we expanded margins across all 3 segments and earnings reached a new record of $1.18 per share. Our results reflect continued execution across the portfolio and demonstrate the strength of our strategy, our diversified end markets, and our ability to help customers navigate an increasingly dynamic environment. At the same time, we continue to make significant progress on 1 of the most important milestones in our company history, the planned spin off of our cloud and power infrastructure segment now known as Axiom. Since our last earnings call, we have reached several important milestones as we have moved from announcing the transaction to building 2 focused industry leading companies. Last month, Axiom filed a Form 10 registration statement providing a more detailed view of Axiom's strategy, financial profile, leadership team, and growth opportunities. That filing marked an important step to forward and reflects the tireless work of our teams have been doing behind the scenes to prepare for the separation. We also announced the expected leadership teams for both Flex and Axiom. 1 of the things that gives me great confidence in this next chapter is the strength of our leadership bench. Across both organizations, we have experienced leaders with deep expertise in technology, in manufacturing, operations, customer engagement and innovation who are ready to lead from day 1. And perhaps most exciting for me, we officially unveiled the name and brand. Building a new company is a rare opportunity. Over the past several months, we spent a great deal of time defining not only what Axiom will do, but what it will stand for. For me personally, the name Reveal was a meaningful milestone because it made something we have been building become more tangible. Axiom is no longer just an idea. it is taking shape as a company with its own identity leadership team, culture, and purpose. It has been incredibly rewarding to share that vision with employees, customers, partners, and our investors. As we have discussed before, we believe Axiom is uniquely positioned to lead the next generation of critical digital and electrical infrastructure. By bringing together power, thermal management, and compute expertise, Axiom helps customers deploy increasingly complex infrastructure with greater speed and scale, as AI demands more of the physical infrastructure behind it. The future of AI infrastructure goes beyond the chip itself. It depends on power, cooling, compute, and the ability to deploy and operate infrastructure at scale. Those are the capabilities we have spent years building and honing. And they are the reason we believe the company is uniquely positioned for the opportunities ahead. We have outlined our strategy for and we are working diligently through the spin off to position the company for further success. Earlier this month, we announced the closing of our acquisition of EPC Power which further strengthens Axiom's portfolio of end to end and EPC's engineering expertise complements our existing research and development into 800-volt architecture and solid state transformers. Technologies that will define the next generation data center. The success of the strategy is evident, and the results it is producing even before the spin. Our CPI segment grew 54% year-over-year in Q2 and delivered margin expansion of over 200-basis points. At OCP earlier this month, we introduced prefabricated AI modules, which help accelerate AI factory deployment by up to 50%. The work we are doing leading up to the spin is building upon the strength of what is already an incredibly successful business. The spin is about creating 2 stronger companies with the distinct identities. Focus strategies, and ability to pursue their respective opportunities. While Axiom will be purpose built to help power the AI infrastructure revolution, Flex will emerge as a more focused industrial technology manufacturing and supply chain leader. I am extremely excited about what Flex will become after the spin. Flex enters this next chapter from a position of strength, with leadership position in attractive end markets and a proven track record of profitable growth and cash generation. In Q2, our RMS and ITS segments together grew 16%, representing the fourth consecutive quarter of year over year growth. Over the last several years, we have transformed Flex into a stronger, more focused company with higher margins, returns and a more attractive portfolio. Under Michael's leadership, Flex will build on that transformation. The company will be focused on markets where its engineering, vertically integrated manufacturing, and supply chain capabilities create meaningful competitive advantage, and long term value for customers. As a standalone company, Flex will have greater ability to continue evolving its portfolio and allocating capital towards its highest return opportunities. Many of the markets where Flex has been investing and building leadership position over time sit at the intersection of a long term technology and industrial trends, including health care, energy infrastructure, and communication. We believe these are attractive markets where complexity, reliability, and speed matter and where our capabilities can continue to drive differentiated growth and returns over time. These businesses are supported by durables, secular growth drivers, strong customer relationships, and capabilities that are difficult to replicate. Combined with our financial discipline, our cash generation ability, productivity culture and commitment to shareholder returns we believe Flex is exceptionally well positioned for its next chapter. At innovation day, you will directly hear from the Flex leadership team about where they will take Flex from here. What excites me most is that we are not creating 2 companies searching for their future. We are creating 2 industry leaders each with clear purpose, differentiated capabilities, and substantial opportunities to create value. As we look ahead, I believe both companies are entering some of the most exciting periods in their history. And we are looking forward to sharing much more on November 10 at our innovation day, where investors will hear directly from the expected leadership teams of both Flex and Acxiom and will provide a deeper look at the strategies, the market opportunities and long term plans that will guide both companies going forward including how each intends to strengthen its competitive position and create long term shareholder value. Most importantly, we will show why we believe both companies are built to win. Built with clear purpose, built with the right capabilities and leadership. And built to create long term value for customers employees and shareholders. With that, I will turn the call over to Kevin who will walk through the financials in more detail.

Thank you, Revathi. Good morning, everyone. Before I go through the quarter, I would also like to welcome Amy Schweitz to the team. I am confident in her leadership and her impact, and I am excited to be working with her through the remainder of the spin off process. I will now review our results for the second quarter of fiscal year 27. We are continuing to execute well. We have got a great group of businesses and a great team. And all are performing at a high level as we approach the spin off in early 27. I will start with our key financials on Slide 8. Second quarter revenue came in at $8.5 billion, up 25% versus the prior year. Adjusted gross profit totaled $842 million and adjusted gross margin improved to 9.9% up 60 basis points year over year. Adjusted operating profit was $607 million, up 48% from the prior year with adjusted operating margins at 7.1%. Up 110 basis points year over year driven by continued productivity improvements as well as business mix. Finally, adjusted earnings per share for the quarter increased to $1.18 per share, up 49% versus the prior year. Turning to our quarterly segment results on the next slide. Our Regulated Manufacturing Solutions revenue was $2.7 billion, an increase of 9% versus the prior year driven by industrial Adjusted operating income was $172 million and adjusted operating margin was 6.4%. Up 50 basis points year over year. Primarily driven by industrial. Revenue from our integrated technology solutions segment totaled $3.3 billion, up 22% versus the prior year driven by continued strong growth in communications. Adjusted operating income was $181 million and adjusted operating margin was 5.5%. An increase of 20 basis points year-over-year. Driven by communications and offset by weakness in consumer related end markets. Finally, cloud and power infrastructure revenue totaled $2.5 billion, up 54% versus the prior year, driven by continued strength in both power and cloud and cooling. Adjusted operating income was $268 million and adjusted operating margin was 10.7%, up 240-basis points year over year driven by margin expansion in both power and cloud and cooling as well as favorable mix impacts from Power growth. Power segment operating margin increased to approximately 16%, up roughly 550-basis points year over year driven by strong volume growth and the benefits of scaling the investments we made last year. Moving to cash flow on slide 10. Free cash flow in the quarter was $261 million and was negatively impacted by 1-time cash costs of $61 million driven by activity related to the announced spin off. Q2 inventory was up 13% sequentially and 39% year over year driven by revenue growth. Inventory net of working capital days was 60 days, an increase of 5 days from the prior year. The increase in inventory is primarily mix related reflecting the inventory required to support our higher growth higher value programs. Second quarter net CapEx totaled $240 million or approximately 3% of revenue. Turning to our updated outlook on Slide 11. For fiscal year 27, our expectations are the following. Revenue to be between $34.9 and $35.9 billion, up 27% of the midpoint. Specifically, we expect CPI revenue to increase between 75-85% while we expect combined RMS and ITS revenue to increase between 8-11%. Adjusted operating margin is expected to be between 7.6-7.8%, an increase of approximately 140-basis points year-over-year at the midpoint. For CPI, we expect adjusted operating margin to be between 11.5-11.7% and for combined RMS and ITS we expect adjusted operating margins to be between 5.9-6.1%. We expect an adjusted tax rate of approximately 21%. We expect adjusted EPS to be between $4.84 and $5.16 per share. Up 52% at the midpoint. Finally, we expect CapEx to be in the range of $1.5 billion to $1.6 billion and we expect free cash flow conversion of approximately 40%. As previously announced, we completed our acquisition of EPC Power on October 14. We also announced on October 5 an agreement to sell $2 billion of Axiom convertible preferred stock. The net proceeds of which will repay approximately $2 billion of the $4.4 billion in debt incurred as part of the EPC Power acquisition. As such, we expect elevated interest expense associated with debt from the EPC Power acquisition in the short term. Which will be reduced upon completion of the convertible preferred equity transaction. Despite the increased interest expense, we expect the EPC Power acquisition to be accretive in fiscal 27. Moving to our updated FY 27 segment outlook. For RMS, we expect revenue to be up mid single digits to high single digits driven by strength in industrial. Including energy infrastructure, warehouse automation and robotics. For ITS, we expect revenue to be up low double digits to low teens on continued strong growth in communications. As previously referenced for CPI, we expect revenue to be up 75% to 85%. Driven by both power and cloud and cooling, with power growing faster than cloud. This guidance now includes our acquisition of EPC Power. Which closed on October 14. We now expect CPI operating margins to expand approximately 240 points year over year assuming the midpoint of our guidance up from our prior expectation of approximately 100-basis points. Looking ahead, we expect continued margin improvement supported by volume growth, productivity gains and the contribution from EPC Power. Finishing off with our guidance for the third quarter on Slide 13. We expect RMS to be up low single digits to mid single digits driven primarily by industrial and healthcare. We expect ITS revenue to be up mid single digits to high single digits as strong growth in communications is offset by weakness in consumer related end markets. We expect CPI revenue to be up 105-115% as recent investments in both cloud and cooling and power contribute to strong growth. For total Flex, we expect revenue in the range of $8.87 to $9.17 billion up 28% at the midpoint. With adjusted operating income between $685 million and $715 million Interest and other expense, which now includes debt associated with the EPC acquisition is estimated to be around $120 million and the adjusted tax rate to be around 21%. Lastly, we anticipate adjusted EPS to be between $1.19 and $1.25 per share up 40% at the midpoint based on approximately 370 million weighted average shares outstanding. In summary, we delivered a strong first half of fiscal year 27 and we are carrying that momentum forward into the second half of the year. With that, I will now turn the call back over to the operator to begin Q and A.

Thank you. We will now conducting a Q&A session. Our first question today is coming from Ruben Roy from Stifel. Your line is now live.

Yes, great. Good morning and thank you very much for the question. Kevin, maybe we could start with some of the guidance commentary and fiscal 27 guide, you have got a $950 million increase from the prior guide can you help us out with organic growth embedded in that increase versus the acquisitions, EPC and others, etcetera? Thank you.

Yeah. Hi, Ruben. So for the full year, we increased I will talk first with CPI because that is where the line all the acquisitions this year have happened. So we guided to an increased range of 75% to 85% for the year. And inside of that I would say about 10 percentage points of that is going to be growth related to acquisitions we have completed during the year. So you can the 2 that we have completed are the EP2 acquisition, which we announced in the first quarter and then EPC recently.

Right. But I was wondering if you could kinda split that. So I guess what you are saying is that there is not a lot of Only a piece.

I think, Ruben, your question is only EPC power.

Right? Yes. I guess, is there any way to think about the contribution from EPC? Okay. So, we have talked about EPC next year in our announcement and the growth that we were going to have, which was approximately $800 million this year growing next year inside of our guide increase guide to guide if that is your question. We increased about $950 million of which I would say approximately half of that is underlying improvement in flex, and the other half would. Approximately would be the EPC acquisition we brought in. Perfect. Thank you, Kevin.

And, Revathi, for a follow-up, let me ask a sort of bigger picture question here. You have done a few acquisitions now. You know, you are you are spanning the embedded to critical power. You now have got power conversion. And a lot of investors asked us about the, you know, power strategy longer term. But there is a lot of other things going on, cooling, compute, etcetera. How are you thinking about sort of having a broader set of technologies combined with power is that showing up in your win rates and customer economics from a margin perspective? Or should we still focus mostly on power as sort of, the key area of the strategy going forward? Thank you.

Yeah. Ruben, so we will talk a lot more about this on November 10 in our innovation day. But when I think about, CPI or Acxiom moving forward, I would say all 3 compute cooling, and power, all 3 are important in terms of how we are building up the overall systems capability. Today, our areas of strength where we are market share leaders and our technology leaders are both in compute and in power. I would say cooling, our presence is nascent. It is something that we are growing into with new product launches that are planned, over the next 6 months. So that I believe will accelerate in our overall capability. But both compute and power are pretty integral to our overall strategy. Both from where we stand today as market share leaders and where we move forward with in terms of our overall capability.

Our next question is coming from Mark Delaney from Goldman Sachs. Your line is now live.

Yes, good morning. Thank you for taking the questions. I was hoping to start on the Power business and putting in the EPC deal aside for the moment. Can you share more on the competitive positioning of Flex within the power portfolio? And has there been any meaningful change in the company's market share for either fiscal 27 or beyond? And then more broadly on CPI, how is that segment tracking relative to the prior 80%-plus revenue growth outlook for fiscal 28? '8?

Yes. I will start off Mark. I would say, if you think about power overall, both our embedded power and our critical power business are both fantastically positioned from a technology perspective and a growth perspective. If you think about our power segment, growth this year, and even what we will share, you know, later in innovation day I would say well above its peers in our existing segments. And it is it is a good indication of where our technology stands, and kind of how the teams are performing with our capacity we talked about that happened last year. So feel really good about our position both in embedded power and in critical power. As you know well, embedded is all about technology and where we are in the technology. So right now, Embedded is all about continuing to add on capacity and additions to drive the growth. CPI, I would say, is performing extremely well. So both businesses, feel really good about overall in terms of the position. I would say for second part of your question on CPI for next year. Kevin, you wanna handle that in terms of the 80%?

Yeah. Sure. So as we move through, we started the year, Mark, at 65% to 75%. We increased that. So underlying there, there is even excluding the EPC acquisition we have been performing well and our momentum this year has been north of our original expectations in CPI. While we are not going to offer a new guide for FY 2028 right now, I would just say that momentum we expect it to carry through. And, of course, as time has passed, we have better line of sight into next year, and we will update you on that at Investor Day.

Understood. Thank you both. My other question was also on CPI. I mean, the incremental EBIT margins in the just completed quarter were very strong and accelerated. I do not know if you could double click a bit more on what was driving the strong incremental margins and just how you see the potential for CPI organic EBIT margins going forward? Thanks.

So, in the quarter we talked about strong quarter We finished with Power margins in the mid teens. The Power growth is a big piece of the incremental margins we are seeing there. Although our cloud business continues to perform within expectations with good incrementals as well, Across the board, we saw mix favorability pricing and volume leverage we talked about and the investments we made last year We are scaling through those and we are seeing that volume leverage pull through from an incremental perspective as well. So those are the really the big drivers. As we go forward here, again, expectations on the power side of the business continue to drive margins up Cloud and cooling, we talked about it, we have expectations there. We just do not expect them to move sequentially at the same rate as power as we continue to climb towards industry averages. You.

Next question is coming from Ruplu Bhattacharya from Bank of America. Your line is now live.

Hi, thanks for taking my questions. I have 2. Revathi, it was interesting to hear Chris and Rob at OCP I think their presentation was stressing that you can achieve 97% power efficiency to the rack even without SSTs. So as you start off as a new company, where do you see Acxiom focusing on in terms of R&D and development? Is 800 volt and SSD development a priority for you? And just as you look at your competitors, which are larger companies, how do you see yourself attacking this market? And how do you see yourself focusing on R&D versus acquisitions?

Yeah. I would say Ruplu first is, you know, we are very, very committed to and focused on both the 800 volt technology We are the market leaders in that as we have talked about before. There are a couple of players who are very strong in this space. And, you know, Flex or Acxiom is definitely 1 of them. Solid state transformers, we have talked about we had our own organic program that was going on, which will now get added on to with the EPC power acquisition with their own organic technology development program that was going on. But the way I think about this, having done this for a very long time, Ruplu, is that it is important to drive incremental in the overall power chain value without waiting for the SST transition to happen. And I think that is important to really have the focus on that because as most of you know, electrical transitions take a long time because of the regulatory and safety environment. Associated with it. So our view is, in the meantime, you can get the 97% power efficiency with digital rectifiers that exist in the marketplace today which is a huge part of the reason why we bought the EPC acquisition because it provides a transition solution that is very strong and can get deployed today. While we wait for things like SSDs and all of that to show up. So I feel very good about both, but feel even more strongly about the fact that we can deploy that power of efficiency today. which a lot of customers are very excited about, Ruplu. Okay. Thanks for the details there, Revathi.

My follow-up is for Kevin or Michael. RMS revenues were flat sequentially, but margins declined 20 basis points sequentially Can you maybe just talk about the puts and takes? And which segments and which end markets are coming back, Michael? And what levers do you have for margin improvement going forward? Thank you.

Thanks for the question, Ruplu. Good morning. Probably the easiest place to start is to really look at the business overall when you think about RMS and ITS combined. So as Revathi mentioned in her prepared remarks, Q2 actually represents the fourth consecutive quarter where both RMS and ITS delivered year on year growth Because that growth was driven by our higher value markets we are also able to expand margins at a higher rate than we were growing revenue. So the business is in very good shape and positioned from strength When you think about Q2, very strong result, high value markets driving that growth across both RMS and ITS As Kevin mentioned, on the ITS side communications continues to be strong. On the RMS side, industrial continues to be strong. And so when you think about where we were at the beginning of the year, a couple of things are important to note. In the first half, we performed better than we expected. Across both ITS and RMS. Again, in ITS communications driving that strength, but primarily from our advanced networking business, which is 1 of our high value markets and are tied to those AI-related trends for data center build out. RMS also, overdelivered in the first half. Automotive performed as expected in a stable environment. Healthcare grew as expected, which should be no surprise. These are longer product life cycle businesses to perform on a consistent steady basis. And then as mentioned, industrial over delivered primarily on the strength in our energy infrastructure business where those businesses are tied to the AI and data center build out, but also our robotics business, was strong. And those things are tied to the deployment of physical AI and regionalization of the supply chain. Now as you look forward into the second half, keep in mind, we also highlighted that we are going to be lapping stronger comparables given that the second half of last year is really where that momentum started to build. And so in the second half, we are still delivering growth on top of growth. Now there is some nuance to that. And underlying that, we are seeing incremental weakness in lifestyle, but that is being offset by communication in the in the ITS business. And in RMS, we are continuing to see consistent performance. And although it might not be linear in every single quarter, you can rest assured that when we think about the guide for the year, we expect both revenue growth and margin expansion. Thank you.

Next question today is coming from Timothy Long from Barclays. Your line is now live.

Thank you. 2 questions, if I could as well. First, maybe a little bit more generic thinking about the strong growth in CPI specifically for fiscal 27 and 2028, I guess both you know, 80% at this point. Could you just touch a little bit on kind of, capacity, components, CapEx needed, power availability, things like that. That give you confidence that we can meet those numbers in what still could be a tight supply area? And then secondly, I was hoping you could just touch on the cloud related business. Maybe you could just give us a little sense on some of the you know, the sub parts there that might be more driving growth, whether it is you know, rack assembly or custom ASIC programs or you know, the growth in liquid cooling that you mentioned as a nascent business. So could just give us a little color there, that would be helpful. Thank you.

Yeah. Timothy, I will start off. I would say in CPI, you know, for the guide we gave for f y 2020, 7, which is the 65 to 75, midpoint of 70, And then the 1 for next year, which is 80% that we will update here in investor Day. The capacity plans were already, you know, in place starting last year. And for the 80% guide, obviously, capacity plans have been in place this year. So that we have been putting in place for a bit. The power requirements required for that also have been ongoing You know, in some cases, you have to connect utilities and sub stations into these factories for the power requirements. So these have been very, very stringent project planning by our teams to get the capacity in place for the CPI ramps that we have been talking about. So it will be. It will. it is a couple year journey for this kind of growth Right? So I feel good about the things we control that is kept power availability, and our teams are very good at standing up, you know, these types of facilities and ramping them up. So that is going really well. I would say on the components side, I mean, the shortage issue, I think you all know extremely well, We are going into. We have been in the last 12 months, which will continue over the next, I think, few years in terms of component shortage and availability. The supply demand equation is definitely tilted. But, again, Flex is very good at being able to chase suppliers, look at open market availability. that is why customers come to us. And we take some of that into account, Timothy, as we give our guidance, we estimate what kind of shortages we think we will have and we plan for that very well. Our guiding process works, and you guys give me a lot of pushback about being conservative. So I would say component shortage you know, is definitely plays into how we think about the guide, and we have included that in how we. All the forecast that we have. On the cloud related business, I would say, Timothy, you know, our focus always in the cloud related business has been more in the custom configuration. We have been very clear before that our focus is around where there is specialty work, where there is complicated work, highly technical, in terms of testing capability. So while it is around rack integration and things like that, it is in the custom space. We do not do standard configurations at in general. The places we are I would say, pushing further into this spaces more in terms of vertical integration I have talked before about we like to be able to be the ones who are cutting metal and doing all of that. So doing most of the rack work is really important to us, so we can take that from industrial players who tend to do it today. So I would say vertical integration into that. The other big place, the service side, which is fairly nascent in some cases. We have a big ramp going on in Memphis as a result of that. So really doubling down into the aftermarket service because, you know, a lot of these racks are gonna get pulled out over the next couple of years and need to get reconfigured and put back in. And then I would say on the cooling side, like I said, for us, but we have big product lines coming out that is really gonna position us extremely well. It will take a few months to get all the testing done and to deploy them. But feel really good of. About being able to ramp into the cooling So cloud overall, strong growth. And like Kevin said, we feel good about the incrementals in that business and how we are delivering and it. For us, it is never been about just go get volume; We want the volume to come with great operating margins that are incremental to what we do, and we wanted to have good working capital metrics. Only those are the kinds of business we go pursue in cloud, which is a very high ROIC business as all of you know. Okay. Thank you. Very helpful.

Thank you. Next question is coming from Steven Fox from Fox Advisors. Your line is now live.

Hi, good afternoon. Good morning. First question I had was, you guys mentioned in the prepared remarks focus on the legacy business with health, energy and comms. on difficult-to-replicate capabilities. I was wondering if you could just sort of dig into that a little bit, give us an idea of what you are thinking about when you make that statement. And then I had a follow-up.

Yes. Michael? Good morning, Steven. Thanks for the question. I would say, when you think about the high value markets and where we intend to emphasize, they are really based on 2 underlying principles. 1, the end market growth enables us to grow at double digits. And also those markets tend to require complex solutions that enable us to earn margins above the company average. And those types of things include everything from, call it, the regulatory environment. So in our health care business, we have an extensive footprint that is FDA certified. That can not just ramp new programs, but sustain those over the long term. And that provides us with a certain amount of protection over the long term because the switching costs tend to be so high in the investments. Tend to be more considerable when you start up those businesses. So regulatory is 1 aspect. When you think about automotive, I think was also part of your question, similar things. Highly regulated environments, long product life cycles, and those things create a moat for our competitive advantage over the long term. When you think about communications, what we think about is this really unique offering that we now have when you consider both our communications business that we have built over years our recently talked about advanced networking business and our satellite communications business. So we now have a portfolio of solutions that scales from space to earth to end user, and those combined capabilities are truly differentiated in the marketplace when you consider that they operate at scale in multiple regions across the globe. So those are the types of things whether they be regulatory, technology or scale related items that provide us with that with that protection, that long term competitive advantage. Great.

that is helpful. And then, as a follow-up, Revathi, I think 1 of the things people have been sort of dialing in on is just going to be the customer concentration of Axiom post spin. And I was just curious, maybe you can give us a little bit more color on how diversified you are with your top 2 customers? How maybe that you know, business flow gives you sort of confidence in the visibility, things like that. To get comfortable with the, you know, the idea that you have 2 customers that could be, like, 60-70% of sales. Thanks.

Yeah. Steven, I think I have talked about, diversity and concentration in the light of first is who is investing in this build out that is happening. So if you start with that, it is clear, obviously, that of the $1 trillion expansion that is going on, you know, a significant portion of that comes from a few hyperscalers. And within those hyperscalers, you know, it is very clear in terms of, you know, who do custom configuration where we can win and where the spend is coming from. So our focus around hyperscalers is we want to be very diversified in these hyperscalers. We just--we do not want to do only cloud compute integration. We wanna be able to do everything from designing your power modules to designing your custom embedded power to your 800 volt rack to your entire distributed power now all the way to beyond the meter with our solutions around Crown, our EP2, and our EPC power. Capability. So we wanna start all the way from utility substation to be able to take it to the chip. And we want to be fully diversified inside each hyperscaler. So I think about customer concentration, you cannot walk away from the fact that hyperscalers are spending the most amount of money. If you want to be able to grow your market share, you have to grow with these hyperscalers. So that is important, but we wanna be diversified in our full portfolio across all of them. And each of the business units have to have multiple programs for each of these hyperscalers, not just individually 1 program. You know, that they are working on. I would say, you know, it is interesting. I have been in the electro space for a very, very long time, Steven, as you know. Even the very traditional electrical players are now ending up with more concentration around hyperscalers because that is where the spend is. Even power spend is more concentrated towards hyperscalers. So I think if this is a good story because if you are not concentrated towards them, you are going to be losing market share in this space. So And our focus is across multiple products, programs with these hyperscalers.

Our next question is coming from Luke Junk from Baird. Your line is now live.

Thanks for taking the question. Kevin, I want to circle back to supply chain. it is been topical recently, especially in CPI. Just hoping you can walk us through some of the levers that you are pulling there in terms of inventory investment, getting support from some of your larger customers or similar dynamics? And just maybe speak to your level of confidence as well or maybe some specific buffers that you have included in guidance for supply chain. Thank you.

Yeah. Hi, Luke for the question. As we looked towards our guide in Q1 when we gave our full year guide, we had understood it was gonna be a difficult year from a supply chain sourcing standpoint. So that is been reflected in our guide through the year and is of course reflected in our current guide as Rayvithi talked about it, we have a unique capability here in this organization to manage through those elements in a year like this year. And our team is doing a fantastic job. Our customers as you know, we think about inventory and the ramps that we have in place, so course, inventory build is not going to be linear As we move through the year, we have seen some inventory increases. Generally, our model requires our customers to participate in that. So we have, we generally talk about inventory net of working capital advances. But we have been working our know, when you look at working capital across the board, our teams have been doing a good job to stay really well balanced from a working capital investment standpoint. Standpoint. Rate specifically, our teams have managed well too. So it is a rocky environment. it is been in our guide. We are going to see it in inventory especially as we ramp these programs but we do not expect it longer term to have any negative impact from a rate standpoint.

Got it. And then for my follow-up, Revathi, just be great to get your perspective on the power portfolio margins and CPI now that the Form 10 is out. Just how you think about the embedded portfolio today relative to Critical and some of the major chunks moving towards industry averages. I am sure we will get into that more in Investor Day as well. Thank you.

Yeah. Look. We will share a lot more on the Investor Day. Day, but I would say that you know, if you think about embedded power and critical power, they both play. And then now with EPC, they all have different roles to play in the power chain. But why it makes more sense to build this out end to end is when you think about all the step ups step down that happens in power conversion starting all the way from utilities to the chip, it is Having an end to end kind of 800-volt transition seamlessly is what will drive maximum power efficiency someday. Right? And so when we are working with the semiconductor and the chip providers 2 to 3 years ahead, when they are developing their chip and developing the right kind of future power technology for the chip itself, then we can start getting ready with our critical power business and now with our EPC power business to be way ahead of the game compared to where everyone else is at in terms of driving the right technology. So that is why building this out end-to-end has been very important because if you do it piece meal, you are still gonna lose out on power efficiency because you will have all the step up steps step down that will happen, you know, through the power chain. And that is why EPC power is a good addition because we add more to the end of the line where we were--we did not have as much product And then having all the digital rectifier, we can get to that power today. So, Luke, we will show this in great detail in terms of innovation day. You will be able to see this end to end and why it makes sense as a complete portfolio. Thank you.

Our next question is coming from Steve Barger from KeyBanc Capital Markets. Your line is now live.

Thanks. Good morning. Revathi, I think your prior question mentioned CapEx and maybe I missed the answer. Can you talk about capital intensity to support growth over the next year or 2 for Acxiom? And then same question for Michael, any change to CapEx to revenue for Flex from here?

Okay. I will. Kevin, you will talk CapEx? Sure. I am happy to. So Steve thanks for the question. From a CapEx standpoint we talked about this year being a year of outsized investment. We have guided to a number about $1.5 to $1.6 billion. The work we have done with respect to CapEx the first half of the year was largely to secure the capacity we needed, to perform at the levels we are this year. So that is the work that is largely been done. As we go into the back half of the year, Revathi mentioned it earlier, that CapEx is largely focused on building out the capacity and the requirements we need, power included, to deliver the results that we are guiding towards or looking towards, I will say, in FY 2028. So that is really how it stacked up. We also have talked about the outsized investment this year being largely for CPI. So I would say you know, rough numbers, about a third of the investment this year is related to ITS and RMS and about 2 thirds of that is related to CPI. And you can see in the first half of the year, we have done about a third of it. So about a third of it this year was related to FY 2027 and about 2 thirds is related to current capacity for FY 2020 And then on the flex side post spin you should see RMS and ITS revert back to historical levels which should mean we should be at that 2% or below level, for the foreseeable future. Got it.

Thanks.

And then, Michael, you mentioned the robotics business has been a growth driver for industrial this year. Does that feel like the beginning of a multiyear production ramp? And can you talk about trends across robot, robot, AMR, and maybe humanoids if you are seeing any inquiry or prototype activity there?

Yes, great question and thanks for it. So when you think about robotics, we have named robotics as 1 of the 6 high value markets that we are emphasizing. And that is because we do believe that industry is tied to these longer term secular trends that our capabilities are well aligned against. When you think about robotics think about it on a spectrum of opportunities. And they range from, call it, warehouse automation and fixed automation all the way through humanoids. And when we think about that range of possible, we also think about the unique role that we play in the industry as a consumer, as a supplier, and as an innovator. So let me build on what we are seeing there. So inside of Flex, we have already deployed our own manufacturing automation platform which is standard automation that we can deploy across our network to make sure that we have got not only standardized platform, but also that we are automating what were previously manual processes to set the stage not just for automation, but also for physical AI deployment. In the industry, we are starting with warehouse automation that tends to be more fixed in nature, but still provides the benefit of automation lays the groundwork for physical AI. We are also not just a consumer of, but a supplier of cobots. These cobots we have talked about in our relationship with Teradyne as an example where we utilize their equipment on our production floor and where we build elements of cobot for them that they, in turn, bring to the market. And then when you think about humanoids, although I do not envision that we will deploy humanoid type technologies in the next year or 2, we are on road maps developing that technology and we are in a position where we can leverage both the capability that we have developed in automotive with our centralized compute capability with our actuation capability, combine that with our mechanical aptitude, to actually help customers bring those solutions to market quicker than they could otherwise do on their own. So short answer, yes. We believe this the beginning of a long-term trend, and we are looking forward to participate in that over the next years. Great detail. Appreciate it. Thank you.

We reached the end of our Q&A session. I would like to turn the floor back over for any further or closing comments.

Thank you, everyone. We had a strong first half for the fiscal year and we are carrying that momentum forward to the second half and the spin off. I want to thank our customers and our shareholders and then a big shout out to the GlobalFlex team for executing so well in this environment as they work through kind of the spin and everything else that is going on. I also wanna encourage all of you to join us for innovation day where you can take all this from seeing it in PowerPoints and slides to touching and feeling and seeing how the products really work. So I would like to see all of you innovation day, November 10. Thank you.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today. Goodbye.