FLEX Q1 Earnings Call: Data Center Momentum and Tariff Uncertainty Shape Outlook

Global manufacturing solutions provider Flex (NASDAQ:FLEX) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 3.7% year on year to $6.4 billion. On the other hand, next quarter’s revenue guidance of $6.25 billion was less impressive, coming in 1.7% below analysts’ estimates. Its non-GAAP profit of $0.73 per share was 5.2% above analysts’ consensus estimates.

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StockStory’s Take

Flex’s first quarter results were driven by continued expansion in its data center and power businesses, as well as ongoing improvements in operational efficiency. CEO Revathi Advaithi highlighted that Flex’s strategy to shift toward higher-value segments and expand its North American and European manufacturing footprint helped offset headwinds in traditional industrial and renewables segments. Advaithi also pointed to the company’s ability to win new, more profitable business—particularly through vertical integration in the data center market—as a major contributor to margin expansion. CFO Kevin Krumm added that disciplined inventory management and capital expenditures further supported strong free cash flow performance. Management acknowledged challenging macroeconomic conditions but credited portfolio diversification and margin-focused execution as key reasons Flex delivered improved operating margins and profitability.

Looking ahead, management cited ongoing demand for cloud and power solutions, as well as the company’s expanding presence in North America, as central to its forward guidance. Advaithi noted that Flex’s “EMS + Products + Services” strategy is expected to drive additional value through proprietary product offerings and increased vertical integration. However, she cautioned that trade tariffs and potential disruptions in the automotive sector could temper growth, especially in the near term. Krumm stated that while tariffs are expected to be passed through to customers, they could impact reported margins, and that operating profit growth remains a focus. Management also indicated that a shift to customer-sourced inventory models, especially in the cloud segment, will affect reported revenue growth but should not hinder underlying profit expansion. In summary, Flex’s outlook reflects both confidence in its core growth engines and recognition of industry-wide uncertainties.

Key Insights from Management’s Remarks

Management attributed first quarter growth primarily to rapid expansion of the data center segment, increased contribution from value-added services, and operational improvements across manufacturing sites.

• Data center acceleration: Flex’s data center segment, encompassing both cloud and power solutions, grew approximately 50% year-over-year. Management credited this to successful execution on multiple customer ramps and proprietary product development, such as direct-to-chip liquid cooling technologies. These solutions address the growing needs of hyperscale customers and position Flex as a key supplier in the evolving AI-driven data center ecosystem.
• Margin expansion from mix shift: Operating margin improvement was largely driven by a continued portfolio shift toward higher-margin businesses, including advanced power products and value-added services. These areas benefit from greater vertical integration and customization, supporting sustained profitability even amid softness in legacy industrial and renewables markets.
• Operational efficiency gains: CFO Kevin Krumm highlighted disciplined inventory management, with net inventory days reduced by 14 days year-over-year. This working capital discipline, combined with below-average capital expenditure, contributed to record free cash flow generation and supported ongoing share repurchases.
• Regionalization and supply chain readiness: Flex’s early investments in North American and European manufacturing capacity enabled the company to respond quickly to customer needs arising from tariffs and shifting trade policies. Management emphasized that over 90% of Mexican production is compliant with USMCA (United States-Mexico-Canada Agreement) rules, minimizing direct exposure to China tariffs.
• Tariff mitigation and customer partnerships: While tariffs on some raw materials remain a risk, management stated these are typically passed through to customers. Flex’s proprietary supply chain simulation tools and experience with “Tariff 1.0” have made it a go-to partner for clients seeking to regionalize and de-risk their supply chains, resulting in increased end-to-end outsourcing conversations and new program wins.

Drivers of Future Performance

Management expects ongoing data center demand, regionalization trends, and tariff-related uncertainties to shape revenue and margins in the coming quarters.

• Sustained data center and cloud growth: Flex anticipates mid-30% growth in data center revenue, with power products potentially outpacing this due to expanded domestic capacity. The diversification of customers across hyperscalers and regional cloud providers is seen as critical for maintaining momentum, though management cautioned that year-over-year comparisons may be challenging as the business scales.
• Tariff and trade dynamics: Management views tariffs as a pass-through cost, but acknowledged potential impacts on cash flow timing and reported operating margins. The company’s footprint in North America and Europe, along with advanced supply chain tools, is expected to help mitigate longer-term risks. However, tariff-driven disruptions—especially in automotive—could cause short-term volatility in some segments.
• Shift to customer-sourced inventory models: An increasing number of cloud customers are adopting customer-sourced inventory arrangements, which result in lower reported revenue but higher margins for Flex. This shift is expected to continue, improving profit growth even if headline revenue growth appears muted. Management believes this contracting model supports operating profit and EPS expansion, but will require ongoing communication to ensure investors understand the underlying business health.

Catalysts in Upcoming Quarters

Over the next few quarters, the StockStory team will track (1) sustained growth and profitability in the data center and power businesses, (2) the impact of tariff changes and related shifts in customer manufacturing footprints, and (3) the ongoing adoption of customer-sourced inventory models and their effect on reported revenue and margins. Execution on capacity expansions and the pace of regionalization efforts will also be key indicators to watch.

Flex currently trades at a forward P/E ratio of 15.5×. Is the company at an inflection point that warrants a buy or sell? The answer lies in our full research report (it’s free).

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