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Hi, everybody. Thanks for joining. Tim Long here, Barclays' IT hardware, communications equipment analyst, and now EMS slash ODM and whatever else they throw at me.
Welcome.
Welcome to the story.
Yeah.
Good to have you.
Yeah. Thanks. I appreciate it. So very happy to have Kevin and Mike from Flex here to go over, you know, some of the trends in the business. Obviously it's been a pretty hot space for these guys. We really appreciate you taking the time given that there's so much going on both with investors and with your customers, I'm sure. So maybe if we just start out with obviously a lot of people very focused on the cloud area. So I know you're not fully addressing that number all the time, but the 35% growth you know, for this year. Maybe just Kevin, if you wanna touch on that number and you know, how do we think about like moving parts around it. Obviously it's a pretty broad business as well.
So maybe if you could just kinda benchmark for us what we should be thinking about and what are the, you know, potential positive drivers beyond that level?
Yeah. Sure. So last year, so our last fiscal year, we said that we concluded the year with that business at around approximately $4.8 billion, of which we said $1.3 billion was power, which was our products business, and the remainder was cloud. So your question was really I think on the data center business that we've said last year grew at 50%, which includes both those. So the cloud and the power. And we said last year that business grew at about 50%. And as we were moving through this year, we said it was gonna grow at about 35% plus. Inside of that, we've said that the power business we expect this year to grow above 35%. And the cloud portion of that business we expect to grow, you know, slightly below 35%. And the cloud business, as we said, is much larger.
The impact of that is obviously we continue to scale and grow that business. Inside of that, that's some of our higher margin businesses, so cloud we've said accrues at margins above Flex average, and we said the products side of the business accrues at, you know, sort of products level margins, which would be in the mid-teens, so that growth obviously has had a significant impact on margins too.
Yeah. Maybe if you could just touch on you touched on the major buckets, but like from a customer standpoint, what kind of breadth you're seeing in that business. I don't think you report any 10% customers.
We don't.
Yet. But, you know, others in the space do. So maybe just talk about how you're a little bit more broad in that area.
Yeah. For sure. And I think that's a good part of the story that sometimes gets missed is that that growth is being driven by a great diversity of customers and products and services, and so when we think about the customer base, it's sometimes helpful to think about it through three different buckets. The first bucket is hyperscalers, and so one unique thing about our business is we have multiple hyperscaler engagements, not just one or two, but multiple, and in each one of those engagements, we do multiple products and services, so we critical power, embedded power, rack integration, very well diversified across the customer base and the product and service portfolio in that segment of our customers. A second segment is co-los, and we uniquely have access to that segment through our critical power business.
As you know, most of the co-los don't have a strong say in what the compute rack looks like inside of the real estate, but they do specify the real estate. And part of that is the power infrastructure that goes with that. So our critical power business provides all the switchgear, the busways, the bus ducts. Things about the power infrastructure that's above and around the rack is our exposure into the co-lo space. And then the third category of customers is around silicon providers. And in that space, we have access through our EMS business where we manufacture a lot of the accelerator hardware itself, but also through our embedded power space where we do module level, board level power, right?
Think vertical power applications as an example where there's a lot of co-design that goes along with making sure that power is being optimized as compute densities increase, so really broad in terms of those three categories. Within each category, multiple customers, and with each customer, multiple products or services.
Great. Yeah. It's a good starting point. Maybe touching on power, I think, you know, when investors are looking at the space, Flex probably has a little bit more power exposure than some of the peer companies. I was just through Asia a month ago, and it was painfully clear how important power is becoming. It's obviously not just getting the power, but managing it. So maybe talk about your outlook for that power business. Kevin, you mentioned grow faster than overall. You got the 400-volt racks going at 800-volt. Maybe talk about like what kind of technology drivers and you know, what is causing, you know, the power envelope and the power management systems to be much more important over time.
Yeah. It's a great question. And you know, it's sometimes easy to overlook the challenges given we're growing the business at a rate that we aren't other businesses, 50%, 35%. So this is a massively expanding industry. But as we're seeing this growth, we're also seeing challenges emerge. And the three challenges that we've chosen to focus on are actually around power, heat, and scale. And you're talking about one or two of those three. So we'll get into that a little bit. But the relationship is really because compute densities continue to increase. And this compute density is drawing more and more power. And so solving for that power is becoming increasingly important. But also, as you consume more power, you're generating more heat.
So you need to make sure that your compute innovation is keeping pace with your power innovation and with your cooling innovation. I'd say the innovations to pay attention to from our perspective. First in the critical power space, it's really around modularity. More and more our customers, especially hyperscalers, are asking us to go faster, right? Forget about how we're deploying data centers today. How can you help us reimagine the deployment of data centers in the future? Speed, speed, and speed. An underlying theme in going faster is to create modular type of solutions. Fortunately, we already have a great capability in that area around our power business. We're already landing power pods, which are essentially a critical power solution in a box that helps you fire up a data center probably 30% faster than traditional construction timelines.
So modularity in our critical power business, a really key driver. In our embedded power business, you alluded to one of those, and that is how do we help enable this one megawatt rack on an 800-volt architecture? And so we've made some announcements about some partnerships that we've had with, say, NVIDIA. We've talked about the deployment of our AI infrastructure platform that also drives that advancement in technology. So one megawatt rack, 800-volt architecture is one area. But we also have a wide variety of products, a pretty comprehensive portfolio addressing these increasing compute densities that are taking place. Think power trays, power shelves, BBUs, those types of applications. So we've refreshed our entire product line to keep pace with that rate of innovation.
And then I'd say on the cooling standpoint, air cooling technologies are not adequate for the current power consumption and heat generation that's taking place in the data center. So we've acquired a technology through JetCool where we have a proprietary technology through a cold plate to apply cooling to these chips in a customized way. Most technologies use rigid channels and cool the whole chip. We have an ability through our microchannel and microconvective technologies to apply the cooling to only the hotspots in the chip. So those are some of the highlights of the innovations that are taking place in the power and cooling space.
Okay. Great. Maybe if we go back to the cloud piece of the data center business, you mentioned rack integration. It seems everyone is focused, everyone across the ecosystem, whether it's a chip company or an OEM or an EMS ODM, everyone is focused on kind of full rack integration. So maybe talk a little bit about how that transition is evolving and what sets Flex apart to better participate when it seems like, you know, a lot of these new customers just, "I want the whole rack. Like, I don't wanna deal with the pieces." So maybe just walk us through how that works on your end.
Yeah. And I'd say that first, the market for those rack integration services continues to expand at an accelerated rate and with more complexity. And I say that because in our mind, the more complex this requirement gets, the better position we are to provide that value. And so when you think about hyperscalers, these are companies that are operating at scale. They wanna work with companies that are operating at scale, and they wanna work with fewer. So the more you can provide in that relationship, the better, which is why when you think about our EMS products and services capability, that tends to play well in this environment. So we're winning firstly because we operate this portfolio at scale in multiple geographies. So wherever our customer wants to deploy that capacity, we're operating at scale with that portfolio.
I'd say secondarily, we vertically integrate our racks. So we fabricate our own sheet metal, right? We can integrate our own embedded power technology. We can embed our own CoreWorks brand, which is electronic components that we manufacture. So a more vertically integrated solution enables us to scale more quickly, but also enables us to simplify the conversation with those hyperscaler type customers.
Right. Right. I'm sure it helps with margin stacking as well.
For sure, it helps our margins. We talk about portfolio shift a lot, but also we talk about service differentiation as well because you have a baseline of EMS margins, which frankly, even in the data center for us, our EMS business and rack integration is already operating at higher than company average. But then you put on top of that the power business that's operating at product level margins, call it mid-teens, and then you add on these value-added services, whether it be vertical integration or fulfillment or circular economy, those are also operating at higher than company average. So the net of that is, and I think some people miss this, is our fastest growing business is also our highest margin business. And it's because of this EMS products and services strategy that we have.
Right. Great. Obviously another hot topic in the cloud area lately is custom ASICs. There's just, you know, new announcements almost every day.
Yeah.
Could you talk a little bit about, you know, Flex's participation in custom ASICs and, you know, if we do see this explosion over the next few years in TPUs and Trainiums and maybe MAIA and maybe MTIA? You know, I'm assuming that's all pretty good opportunities for Flex, but can you just walk us through your positioning there?
Yeah. For sure. So we, we today already manufacture a wide variety of accelerator hardware. We're really excited about the increasing requirements. So these are getting more complex. Like I said earlier, compute densities continue to increase. To deploy that technology though, more and more, not only do you need this baseline capability to manufacture what are some of the most complex boards that we've seen in our industry, you're gonna have to pair that with power solutions, which is where our module business comes in, cooling solutions, which is where our JetCool technology plays. And so the, the more complex this get, the more scale that's required, the better position we are. So we're really thrilled with where we're at from that perspective.
Okay. And I did wanna touch on, I think at OCP you guys announced the AI infrastructure platform. So maybe can you just outline, you know, what that is and, you know, when you think that'll start impacting and if there's any early customer feedback on it?
Yeah. Yeah. I'd say that the nice thing about the platform from my perspective is it's the physical representation of our data center strategy, right? So we've talked already about the foundation of our company strategy is around EMS products and services. I mentioned earlier that we're using that platform in the data center to solve for power, heat, and scale challenges. And that's where this AI infrastructure platform comes in. We envision a future that as these requirements continue to go up and to the right, more and more customers are gonna want a solution that is modular and addresses all of these applications in one. So a standalone power rack, a standalone compute rack, a standalone cooling rack that's wrapped with a services offering that it can deploy and also repair. And that's really what the AI infrastructure platform is all about.
Again, it's the physical representation of our strategy. And we decided to deploy it because more and more customers, as I alluded to earlier, are asking us to reimagine how they deploy data centers. It's all about speed. Modularity plays a role, and this platform is very consistent with that. So our customer conversations are continuing to increase in that regard, and we're really excited about where we stand.
Okay. Great. Kevin, maybe we'll throw a financial one at you to get going. A lot, a lot of comments in here about operating margin and, you know, the mix improving. You guys have delivered very well on operating margin the last several quarters. So kind of walk us through the calculus of, you know, mix shift over time, with your higher growth or better margins and scale. I mean, obviously revenue growth is pretty healthy. And if everything's gonna be built, that said it's gonna be built, we'll have a lot of scale benefits as well. So talk to us about the kind of mid-long term, how you see the evolution of the margin structure.
Happy to. I think one of the ways I like to answer this question is to actually look back as well. So if you look coming out of COVID, the business had, you know, margins at or around 3%. And the team has done a really great job since then of bringing margins up. And I'll talk about the mix impact from the data center business in a second. But if you look back at each one of our business units, they have all improved margins, okay? And some of the drivers of that have really been mixing up, doing the right work for the right customers in the right markets or segments. There's an element of productivity that we drive year in and year out.
And recently, really over the last few years, we've embraced automation that has really helped us to drive margins. So each one of our business units, leaving data center aside for a minute, have improved their margins over that period of time. And when you look back over the last four quarters now, where we've operated at or around 6%, which is really getting to that 6% number that we put out in May of 2024, we got there a year early. Over the last couple of years, the data center growth has certainly helped. And as we go forward, we expect that to be a big part of our margin story. So, while we're not gonna guide to margins for next year or anything right now, what we have said is that 6% is not the ceiling for this business.
And one of the big drivers of that is gonna be growth in the data center. Michael talked about it earlier. That, that business has products in it that are in the mid-teens. The cloud business, as it sits today, accrues to us at higher margins than average. And then on top of it, services, as he talked about, rack integration, some other things or other opportunities we have. So as that business continues to grow, we're gonna see margin expansion. And, and really that's what you've seen this year as we move sequentially through the years. But I say all that to say the, the other businesses are not gonna take the next two or three years off either. The levers that they've been pulling over the last three plus years are levers they're gonna continue to pull too.
There's still opportunity in their portfolios to mix up from a customer or offering standpoint. There's still opportunity from a productivity standpoint, and there's still opportunity in automation.
Okay. Great, and Michael, maybe back, you mentioned the NVIDIA partnership on the 800-volt. Talk to us a little bit about kind of timing and what you think the impact of that, you know, partnership could be for Flex?
Yeah. You know, it's interesting because we're already talking about 800-volt architectures, and we're just starting to manufacture 400-volt architectures, and primarily, the industry is still wrapped around 48 volts. So we're way out ahead on this. There isn't even a safety standard yet defined for an 800-volt architecture.
Right.
And if you know anything about that, that becomes a pretty dangerous environment if we don't manage that. I'd say that there's some important implications about that announcement, right? One is that we're working towards this one-megawatt rack on an 800-volt architecture as part of that future innovation curve. It also is important because you wanna be on the reference platform, right? You don't wanna miss a three-to-five-year cycle. So with that NVIDIA announcement, being part of that platform was a critical move and a critical opportunity for us to capitalize on. As important as it is for that relationship, it's important to demonstrate our capability to our other customers as well because all of these infrastructures, all of these architectures are gonna be prevalent, whether it's driven from the silicon provider or driven from the hyperscaler.
These are really important architectures. In terms of win, I still think we're a few years out from 800-volt architectures, but we are today working on one megawatt racks on that architecture and also 400-volt. I think it'll be a step function as we go through, but there are some fundamental infrastructure elements that have to be figured out to deploy that technology safely.
Right. Okay. Great. Maybe Kevin, back to you. You know, we get a lot of questions across the space. There's just so much growth about capacity, and you guys obviously had the Ukraine disruption in the facility, so how are you viewing, you know, your ability to meet demand and build capacity over the next multiple years? I'm sure it's hard to do a multi-year plan when you see crazy gigawatt numbers from people that you don't know if they're gonna get the power or the financing for it, but maybe just from a Flextronics standpoint, where do you, you know, how do you plan for it, and what are you seeing on the manufacturing capability side?
Yeah. So from a capacity standpoint, we have over the last year plus invested in our footprint. You've seen it, whether it be in Eastern Europe or North America, where we see growth and where we see opportunity for great returns. We've continued to invest. It is obviously a robust environment from a demand standpoint. So we're investing, not getting too far out in front of it, but trying and doing it, keeping up with the demand that we have. But we've also, when you learn from the sins of our past, we are not gonna get overinvested. So we're trying to stay really close. I would say the business today, especially where we're growing, has views forward that they traditionally have not had.
Whether it be in the cloud side or the power side, and through the work we're doing with our customers early on the design side, we get better views than we ever otherwise had. That certainly helps us plan and be thoughtful. Our, you know, organic investment is gonna stay focused on sort of capital and footprint. It's had great returns for us, and we're gonna continue to deploy capital in that way. We're gonna do it in the areas that we've seen the growth, which again, you've seen us invest in Europe, Eastern Europe, as well as North America.
Okay. Great. Maybe stepping away from data center a little, it feels like that's probably all you guys talk about. That's all we hear about as well. But maybe walk us through some of the other business lines where you're seeing positive momentum. I think there's certainly headwinds in auto, which we can get into, but maybe walk us through the other, you know, growth opportunities that you're seeing.
Yeah. I thank you for the question.
Yeah.
We don't often get to talk about the non-data center business, so when you think about where we're focused, we're really aligned to what I would say are really four different macro trends out there. We talk about digital, which, I mean, we talk about data center and AI, so we won't talk much about that any longer. I'd say something that's closely related is around digital infrastructure, and for us, that means things like high-speed networking and satellite communications. Those are two areas that we don't include in our data center business that we see as being opportunities for growth. I'd say the next area is around automation. Think about our industrial business. Think about warehouse automation as an opportunity. Anything that is driving productivity in an industrial environment, a warehouse, a manufacturing environment, so automation applications in our industrial business is an opportunity for us as well.
I'd say also, although probably bad news for the population, the good news for the business is this increasing prevalence of health issues like diabetes. So we're a large manufacturer of continuous glucose monitors. We announced a recent win of a GLP-1 opportunity. So our med device business and our drug delivery business, very strong and tied to those sorts of trends in the general population. I'd say the fourth one is sort of the corollary to what you said about the challenges we see in automotive. And certainly hard to overlook the near-term challenges and the volatility that we're experiencing. But long-term, we think we're positioned really well for growth in a couple of different areas. One is around our centralized compute platform. And this is a hardware-enabled platform that supports the software-defined vehicle and autonomous driving.
In automotive, software-defined vehicle is becoming sort of the secret sauce in the automotive industry. It's not about horsepower of your engine anymore. It's about your user experience defined by software in the car itself. The OEMs wanna control the software, and we provide them with a hardware platform to actually combine with that. It's also around power platforms. Think DC-to-DC converters, think onboard chargers, agnostic to hybrid or EV. Those are probably the big four areas that we're focused on in the next few years.
Okay. And you mentioned kind of networking and satellite. What, you know, what type of services and what kind of, you know, product and use cases would you be addressing there? Some of them have pretty entrenched, you know, competitors. So just curious how you can evolve into some other parts of the stack?
Yeah. So in that space today, it's primarily an EMS and value-added services play. We don't sell products per se into high-speed networking or into satellite communications. What we do provide is everything from board-level assembly to full system assembly. When it comes to value-added services, we can vertically integrate those offerings with metal. We can also fulfill those products either B2B or B2C, depending on the application. And then we can bring those same products back to our circular economy business for repair, refurbishment, or recycling. And all those things enable us to continue to improve margin profile over time as we expand into more products and services as we go.
Okay, yeah, and to the point about racks and just having, you know, your foot in a lot of different technologies, it's probably gonna, you know, help, you know, that trend as well, I would assume. Right. Yeah.
For sure. I mean, I think a big part of the story is realizing the vision of this EMS plus products plus services intention, right? And we're seeing more and more of our ability to add more than one product or service into any one opportunity. And because of that, we can continue to improve our margin profile over time as we not only shift the portfolio, but as we go up the stack, so to speak, in the services that we provide.
Okay.
Yeah. And I would just add to that to say the services that we've provided, we've built over time based on what the customers need, and we'll continue to look at further opportunities to identify services to bring into the portfolio to continue to drive margins.
Right. Okay. Yeah, I should have probably started with this, but both of you are relatively new to your current seats, like year-ish, so maybe both of you take a minute or two and just talk a little bit about, you know, what you've been surprised by with the, with the new role, and I mean, you've been at Flex a long time, Kevin. You're more new, but just curious what, you know, what you've kind of, your take has been as you've, you know, seen the company from a different angle, and then Kevin would love your, your sense of kind of your lessons learned in the first almost year and, and how you position it going forward.
Yeah. So, you know, fortunately, I've been with Flex for over 20 years now, so I like to think that I've seen it all. The last two years have proven that I haven't.
Yeah.
So that's been really fun. I'd say I've been in this role for almost two years now. Actually, time is flying. Before that, I ran the Agility Solutions business, which was really half the company. So, in terms of what I've seen that's different, you know, over that 20-year horizon, I'd say I've never seen as much transformation in the company as I've seen in the last five to seven years. And that does correlate with our new CEO as well. And where we are now was by design. It hasn't been by accident. And so if you think back five to seven years ago, we charted a path to get us exactly where we are today. It started with really reintroducing a level of rigor in the EMS business that we had lost in maybe previous iterations.
And so we've continued to improve our execution in that base business. We've continued to improve the portfolio and mix up, as Kevin alluded to earlier. And that really provided us with a really solid foundation from which to do the other two legs of the stool of our strategy, which are to develop products and to develop services. And so now, by design, we add, we offer our customers in the EMS business with products and services that we think is a really unique offering and will also serve as the impetus for growth here in the future.
Yeah.
Yeah. I'd probably point to two things in the first year that I've been here. I would say one, having traveled around the world and gone to our factories, I'm amazed at the capability that we bring in our sites to work with our customers from a technology standpoint, from an automation standpoint. You know, obviously, I did my diligence on the company, and you look back and you see the margins and you think that, you know, especially sort of coming out of COVID when they're in the three to four, and then you go to a plant and you're just amazed at the things we do on a plant, the speed we do it at, and the opportunities that we have to continue to automate. It's just been amazing.
The other thing I would say is I've spent most of my career in products and services businesses. Generally, they continue to move, you know, good organic growth, but the opportunities weren't as, you know, there wasn't as much volume there as there is here. So being in here as we build this products and services business and see the opportunities in front of us and see what's happening in this space, how dynamic it is right now, it's really been amazing to me. But what's also amazing is how well-positioned we are to capitalize and leverage some of those opportunities as we go forward here. So it's about making the right decisions and what fits with our portfolio. But it's been a pretty exciting first year.
Okay. Great. Not to hear like annoying sell-sider questions and buy-sider questions, but you could keep that to yourself. All right. I think we're up on time here. So Michael, Kevin, really appreciate the time.
Thank you very much.
Thank you so much.
Appreciate it. Thanks a lot.
Thank you, everybody.
Great.