Flex (FLEX) Q4 2025: Data Center Revenue Climbs 50%, Margin Target Pulled Forward
Flex’s data center business delivered 50% revenue growth, driving record operating margins and accelerating the company’s margin target by a year. The shift to higher-value cloud and power programs, coupled with disciplined portfolio management, is reshaping Flex’s earnings profile and positioning the company to benefit from regionalization and supply chain complexity. With a conservative outlook and tariff pass-through strategy, management signals confidence in margin durability despite macro and policy headwinds.
Summary
- Data Center Acceleration: 50% growth in data center revenue is reshaping Flex’s margin structure and long-term mix.
- Margin Expansion Outpaces Plan: Record profitability and mix shift led Flex to achieve its 6% operating margin target a year early.
- Regionalization Opportunity: Tariff-driven supply chain shifts are boosting Flex’s North American footprint and customer pipeline.
Performance Analysis
Flex reported a strong Q4 finish with revenue of $6.4 billion, up nearly 4% year over year, and delivered record operating and gross margins. The quarter capped a year of strategic transformation, as the company’s data center segment—encompassing both cloud integration and power products—grew approximately 50% for both the quarter and full year, reaching $4.8 billion in fiscal 2025. This segment now accounts for a material portion of the portfolio and is the driving force behind Flex’s margin expansion.
Segment performance was mixed beneath the surface. The Agility segment, which includes cloud and networking, grew 8.2% on robust cloud demand and networking share gains, offsetting continued softness in enterprise IT and consumer markets. The Reliability segment was down 1.3% as strength in power was more than offset by declines in core industrial and renewables. Despite these headwinds, both segments posted record operating margins, reflecting a purposeful mix shift to higher-value offerings. Free cash flow reached a record $1.1 billion for the year, driven by inventory reductions and capital discipline.
- Data Center Drives Margin Upside: The 50% growth in data center revenue, with accretive margins, was the primary driver of overall margin improvement.
- Portfolio Mix Shields Against Macro Drag: Continued weakness in industrial and renewables was offset by targeted growth in cloud, power, and networking.
- Cash Flow Leverage: Inventory reductions and prudent CapEx fueled record free cash flow despite top-line volatility.
Flex’s ability to shift its business mix toward higher-margin, resilient end markets is delivering tangible results in both profitability and cash generation, even as legacy markets remain pressured.
Executive Commentary
"From the beginning, I have emphasized our focus on winning the right kind of growth that would ultimately transform this company. Since 2020, we have executed our flex-forward strategy. We've made aggressive portfolio management decisions that positioned us to shift towards higher value businesses. And by integrating thoughtful organizational changes and operational innovations, we have built a more efficient and resilient company."
Revathy Advaiti, Chief Executive Officer
"Operating income totaled $1.5 billion, up 15%, leading to a 5.7% operating margin, up 90 basis points, driven by favorable mix impacts and operational efficiency. I'll point out we hit record levels for both annual gross and operating margins this year."
Kevin Crum, Chief Financial Officer
Strategic Positioning
1. Data Center Ecosystem: Grid-to-Chip Integration
Flex’s data center business now spans the full value chain from power infrastructure to cloud IT integration, distinguishing itself as the only provider with a “grid to chip” portfolio. The company’s acquisitions in liquid cooling and critical power, combined with proprietary embedded power solutions, enable vertical integration and customization for hyperscale and enterprise customers. This scope is increasingly valuable as AI and cloud workloads demand both compute and power innovation.
2. Regionalization and Tariff Navigation
Flex’s early investments in North American and EMEA manufacturing are paying off as customers accelerate regionalization in response to tariffs and supply chain uncertainty. With 7 million square feet in the U.S. and 9 million in Mexico, Flex commands one of the largest advanced manufacturing footprints in North America. Management notes that “phones are ringing off the hook” as customers seek to mitigate tariff risk and reconfigure their supply chains, positioning Flex as a preferred partner for relocation and end-to-end outsourcing.
3. Portfolio Discipline and Value-Added Services
Active portfolio management and the expansion of value-added services are structurally raising Flex’s margin profile. The company continues to de-emphasize lower-margin end markets while growing its services and proprietary products business. Value-added services, while still a small share of revenue, are critical for vertical integration and customer stickiness, and are expected to grow further in fiscal 2026.
4. Customer-Sourced Inventory and Revenue Recognition
The shift to customer-sourced inventory models, particularly in cloud, is muting reported revenue growth but boosting operating profit and margins. These consignment-like arrangements exclude customer-provided inventory from revenue, though the underlying business is growing rapidly. In FY25, this model represented 17% of revenue and is expected to rise to 20% in FY26, with the majority in cloud but also present in other end markets.
5. Capital Allocation and M&A
Flex’s capital allocation remains balanced between organic investment, strategic M&A, and share repurchases. FY25 saw $400 million deployed to accretive M&A and $1.3 billion in buybacks, reducing share count by 9%. CapEx discipline and working capital management free up resources for continued investment in growth and shareholder returns.
Key Considerations
This quarter demonstrates Flex’s ability to leverage its operational scale, portfolio discipline, and regional manufacturing presence to capture structural shifts in cloud, power, and supply chain localization. The following considerations frame the evolving investment thesis:
Key Considerations:
- Data Center as Margin Engine: The data center business is now the primary driver of both growth and profitability, with further acceleration expected as AI and cloud demand persist.
- Tariff Pass-Through and Regionalization: Flex’s tariff mitigation is largely contractual and pass-through, but the real upside is in capturing new business as customers regionalize supply chains.
- Customer-Sourced Inventory Model: Revenue growth is understated due to accounting for consignment inventory, but this model enhances margin and profit dollar growth.
- Segment Divergence: Industrial, renewables, and automotive remain pressured, but management expects these headwinds to be temporary, with future growth as macro conditions stabilize.
- Capital Allocation Discipline: Continued focus on CapEx, M&A, and buybacks supports both organic and inorganic growth while maintaining an investment-grade balance sheet.
Risks
Flex faces near-term risks from macroeconomic uncertainty, potential demand slowdowns in automotive and industrial, and evolving tariff policies that could impact both customer behavior and cost structure. While tariffs are largely pass-through, there is some risk of margin drag and cash flow timing mismatches if tariff recoveries lag. The company’s guidance does not incorporate direct tariff impacts, reflecting the fluidity of the policy environment. Any sustained downturn in key end markets or further escalation of trade barriers could weigh on revenue and utilization.
Forward Outlook
For Q1 2026, Flex guided to:
- Revenue of $6.0 to $6.5 billion
- Adjusted operating income of $330 to $370 million
- Adjusted EPS of $0.58 to $0.66
For full-year 2026, management maintained guidance:
- Revenue of $25 to $26.8 billion
- Adjusted operating margin of 6% to 6.1%
- Adjusted EPS of $2.81 to $3.01
Management highlighted several factors that shape the outlook:
- Mid-30% data center revenue growth expected, with power outpacing cloud
- Tariff impacts excluded from guidance, with pass-through mechanisms in place
- Customer-sourced inventory model to further increase, muting reported revenue growth but supporting margin
Takeaways
Flex’s structural transformation is yielding results, with high-value data center and power programs driving record profitability and cash flow. The company’s operational footprint and supply chain expertise position it to capitalize on regionalization and supply chain complexity, while disciplined portfolio management and value-added services underpin margin durability.
- Data Center and Power Are Now Core Engines: These businesses are driving both reported and underlying margin expansion, with further growth expected as cloud and AI adoption accelerate.
- Regionalization Is a Multi-Year Tailwind: Flex’s North American and EMEA footprint gives it a first-mover advantage as customers reconfigure global supply chains, creating new business opportunities.
- Watch for Execution in Legacy Segments: Industrial, renewables, and automotive remain headwinds, but management expects eventual recovery as macro conditions improve.
Conclusion
Flex’s Q4 and FY25 results confirm the success of its portfolio shift and operational transformation, with data center and power now anchoring the company’s growth and margin profile. The roadmap for margin expansion is ahead of schedule, and Flex’s positioning in regionalization and supply chain complexity offers a durable competitive moat. Investors should monitor execution in legacy segments and the evolving tariff landscape, but Flex’s multi-year transformation appears firmly on track.
Industry Read-Through
Flex’s results signal a decisive shift in the electronics manufacturing services (EMS) industry toward higher-value, vertically integrated solutions in data center, cloud, and power infrastructure. The acceleration of regionalization and the complexity of tariff navigation are creating new opportunities for scaled, global operators with deep supply chain expertise. Competitors lacking Flex’s North American and EMEA footprint may struggle to capture incremental demand as customers prioritize geographic diversification and end-to-end outsourcing. The move to customer-sourced inventory models may become more common across the EMS and cloud supply chain, impacting how investors interpret reported revenue versus underlying business momentum.