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Flex Ltd. (FLEX) Q3 2024 Earnings Call Transcript

Flex Ltd. (FLEX)

Q3 2024 Earnings Conference Call

Company Participants

Revathi Advaithi - CEO

Paul Lundstrom - CFO

David Rubin - VP, IR

Conference Call Participants

Mark Delaney - Goldman Sachs

Matt Sheerin - Stifel

Ruplu Bhattacharya - Bank of America

Steven Fox - Fox Advisors

George Wang - Barclays

Presentation

Operator

Good afternoon, and thank you for standing by. Welcome to Flex's Third Quarter Fiscal 2024 Earnings Conference Call. Presently all participants are in a listen-only mode. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded.

I will now turn the call over to Mr. David Rubin. You may begin.

David Rubin

Thank you, Diego. Good afternoon, and welcome to Flex's third quarter of fiscal 2024 earnings conference call. With me today is our Chief Executive Officer, Revathi Advaithi; and our Chief Financial Officer, Paul Lundstrom. Both will give brief remarks followed by a Q&A.

Slides for today's call as well as a copy of the earnings press release and summary financials are available on the Investor Relations section at flex.com. This call is being recorded and will be available for replay on our corporate website.

As a reminder, today's call contains forward-looking statements which are based on our current expectations and assumptions. These statements involve risks and uncertainties that could cause actual results to differ materially. For a full discussion of these risks and uncertainties, please see the cautionary 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, unless otherwise stated, our results provided will be non-GAAP measures and all growth metrics will be on a year-over-year basis. The full non-GAAP to GAAP reconciliations can be found in the appendix slides of today's presentation as well as in the summary financials posted on the Investor Relations website.

As previously announced on January 2nd, 2024, Flex completed the spin-off of all of its remaining interest in Nextracker to Flex shareholders. As a result of the completion of the spin-off, Nextracker became a fully independent public company. Flex no longer directly or indirectly holds any shares of Nextracker common stock and Flex will no longer consolidate Nextracker into its financial results. Please note, our guidance for fourth quarter of fiscal 2024 excludes any economic interest in Nextracker, and for fiscal year 2024, full-year guidance includes Flex economic interest in Nextracker for Q1 through Q3. However, it also excludes it from Q4 fiscal 2024.

Lastly, the historical results of Nextracker and certain assets and liabilities included in the spin-off will be reported in Flex's consolidated financial statements as discontinued operations beginning in Flex's fourth quarter ending in March 31st, 2024.

With all that, now I'd like to turn the call over to our CEO, Revathi.

Revathi Advaithi

[Technical Difficulty] the tax-free spin that occurred in early January, making Nextracker a fully independent company. We wish them great success in the future and look forward to watching their continued growth. Through this process, we unlock tremendous value and the approach reflects in our continued focus on creating long-term shareholder value.

Of course, Flex remains committed to enabling the transition to renewable energy in our core business. We serve a wide variety of customers and applications, generating over $1 billion in revenue for this market. I should also mention that we continue to expand the use of renewable energy in our own factories as part of our net zero journey.

Now moving to our results on Slide 4. Overall fiscal Q3 was another quarter of strong execution. For total Flex, revenue was $7.1 billion. Adjusted operating margin came in at 6.7%, and we delivered $0.71 of adjusted EPS. Looking at results for Core Flex, which exclude Nextracker, we continue to execute very well with this dynamic environment. Revenue was $6.4 billion. Core Flex operating margin came in at a record 4.9%, up both sequentially and year-over-year, and we delivered $0.54 of EPS. Again this was solid execution in the quarter.

Now, the takeaway should be clear. Our results continue to show the resiliency of the Flex model and fundamental changes to the industry. Despite significant macro-driven volume fluctuations, we have continued to deliver on our margin and EPS commitments. We remain very well positioned across the markets we serve, and this comes from our deep relationships with our customers and our ability to provide world-class quality and value in the products we manufacture.

I want to share a couple of highlights from the quarter that demonstrate our strong market position. AI is driving changes in data movement, both through the data center and across the network. Our strength in hyperscale data center and networking infrastructure are key enablers of our customer success in delivering these products at scale. We've talked before about our strong positioning with multiple hyperscale customers.

We're the only EMS provider with a comprehensive offering including bespoke fully-integrated rack systems and power solutions ranging from embedded, discrete and all the way up to data center critical power. In addition, we offer value-added services in design, metal, components, supply chain management integration, and aftermarket services, including circular economy. As a result of our comprehensive offerings, we continue to see very strong growth in our cloud business.

On the networking side, a good example is our partnership with Cisco. Recently, we were honored to receive their 2023 Electronic Manufacturing Services Partner of the Year Award. We're also building on our 20-year partnership with Ciena, another world-class networking company to provide US-based manufacturing capabilities and supply chain services, enabling Ciena to ramp high volume production of its innovative pluggable optical technologies in support of the BEAD, the Broadband Equity, Access, and Deployment programs, and the Build America Buy America requirements.

Now looking at automotive. Next-gen mobility, including EV onboard electronics, charging infrastructure, advanced compute systems for the software-defined vehicle remain very important long-term growth drivers. And Flex plays a key role across these ecosystems to support the OEMs, including designing our co-designing content, while bringing world-class manufacturing and supply chain leadership. We have built a well-diversified portfolio of solutions for ICE, hybrid, full EV, and across the spectrum of driver assistance and safety.

For example, our advanced compute platform technology that powers software-defined vehicles is agnostic across ICE, hybrid and EVs. We also have established relationships with many of the upstream semiconductor providers as evidenced by our previously announced partnership with Nvidia for ADAS and autonomous applications, and we recently showcased our next-gen EV power electronics full design capability with STMicroelectronics, utilizing the latest in silicon carbide MOSFET technology.

So you can see, Flex is well-positioned for every stage of this long-term technology transition. It is also very important to remember as a platform we are experts in complex computing power, which gives us a competitive advantage across the multiple markets. Our technology and vertical integration capabilities serve many applications, including hyperscale data centers, renewables and next-generation mobility. Our customers look to us to help them navigate the complexity and implement these integrated capabilities to give them a competitive advantage.

Now the current environment remains highly dynamic and we're already seeing the impact from elevated interest rates in some markets and excess inventory in others. We have made it through the supply chain crisis. However, we carefully watch the situation in the Red Sea and how that could impact supply lines. We continue to execute through the cycle and we are very well-positioned in markets with strong long-term secular drivers. The greater stability in margins and EPS validates the change we made to our business and the evolution of the top-tier EMS industry. We are very optimistic about our future.

With that, I'll pass the call over to Paul to take you through our financials. Paul?

Paul Lundstrom

Okay. Thank you, Revathi. I would also like to start by wishing Nextracker great success on the new path and reiterate something that Revathi said. This separation is a great example of our commitment to create strong shareholder value. As you may recall, we executed on multiple value-creating transactions over this whole process with the private equity investment, the IPO, the follow-on, and finally the investor-friendly and tax-efficient spin of the remaining Nextracker shares.

Jumping to our third quarter performance on Slide 7. It was another solid quarter. Third quarter revenue was $7.1 billion. Gross profit improved to $712 million and gross margin increased 10%, an increase of over 200 basis points. Operating income was $477 million with operating margin at 6.7%, up from 4.8% in the prior year period. And earnings per share came in at $0.71 for the quarter, increasing 15%, which includes $0.10 of Nextracker non-controlling interest.

Looking at Core Flex results, which excludes Nextracker, results were stronger than initially expected with Core Flex revenue down -- excuse me Core Flex revenue up $6.4 billion, down 11%, but against a tough year-over-year compare. Core Flex operating margin came in at a record 4.9%, up 60 basis points with another quarter of sequential margin expansion, up 20 basis points from Q2. This is reflective of our strong execution, including cost actions and continued mix improvements. The Flex Core business delivered $0.54 of EPS, up 10%....

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