Revathi Advaithi: Yes, Samik, thanks for the question. I will say that we’re excited to share the information with you today in terms of the scale that our Cloud and our Automotive business are going to be in our overall portfolio. I think the significance of that is important for two reasons. One is, the margin rate, as you asked in your question, right? So the margin rate is much better than the Flex average margin rates in both of these data center and automotive. But I think it’s even more important to talk about what drives that. What drives that, the margin rate, is the fact that the most intense problem we are solving today is the availability of power and the requirement of power in – whether it’s a data center or how a car operates, right?
And being in the middle of that, having products that actually solve for that is really, really important. So that gives us an important IP, an important technology vertical that we have that gives us much better margin rates. In terms of the scale that Michael talked about, very few people can integrate that scale end-to-end like he said in the previous answer, and that gives us a margin rate in terms of delivering that complexity that is much better than the Flex average rate. But I think the important thing to walk away here for all of you is that, power is the future, and we’re in the middle of solving the compute power equation for both cloud and automotive. And very few companies can do that. So we’ll definitely demand value for it and get value for it, and which I think puts Flex in a very unique position.
Kyra Whitten: Thank you, Revathi. Our next question comes from Mark Delaney with Goldman Sachs. Cloud is roughly a $3 billion business. Can you speak to how margins compare in that business to the corporate average? And how margins can trend longer term in cloud?
Revathi Advaithi: I answered that a little bit, Mark, just now from Samik’s question, but I also want Michael, for you to add in more to this. One is, I’d say, overall margins are very favorable to the Flex average. So I just talked about that, but it’s driven by technology and vertical integration that we provide. We believe that these margin rates are sustainable and only get better as we integrate more and more complexity into it. More importantly, as we solve for these challenging power problems, the margin rates get better. But overall, I would say it’s the complexity of the portfolio that drives the margin. But Michael, what would you add to it?
Michael Hartung: Yes. So Mark, you got it right. The Cloud business inside of Flex is operating at just over $3 billion. It’s probably helpful to understand which markets are included in that $3 billion to better understand the margin profile going forward. So that $3 billion is roughly split between about $2 billion in our Cloud business within CEC and about $1 billion in our power business within industrial. And as Revathi mentioned, that business operates at a margin structure that’s above the corporate average. But the reasons for that, I think, are pretty important. So when you think about the Cloud business, in particular, we talked about in our previous discussion, the role of value-added services. Well, our penetration rate in our cloud business tends to be much higher in our value-added services, which props up our margin profile in the Cloud business within CEC.
And when you think about the Industrial business, we’re talking about two different product businesses that operate at product margins, the embedded power products and the critical power products. So given the split of business between products and services, we’re pretty confident we can continue to deliver that sort of margin performance for the next few years.
Paul Lundstrom: Yes, maybe I’ll just add, Mark. First of all, appreciate the question. As you think about the building blocks for our margin expansion plan over the next few years, a 20% topline growth rate at least from the Cloud business, as Michael said, with better than average corporate margins is going to help us mix up as we move closer to that 6% op margin rate out 2027.
Kyra Whitten: Thank you all. Our next question comes from Ruplu Bhattacharya with Bank of America. Revathi, can you talk about how you are thinking about risk management in this environment? What are the areas that give you the most concern? And how are you mitigating risk, whether that be in focusing on specific areas of investment or pricing or cost control? Are there areas of the platform which you are deemphasizing?
Revathi Advaithi: Yes, Ruplu, I’ll start and Paul jump in. First, I’d say is from an overall portfolio standpoint, we’re comfortable where the portfolio is today. That being said, I think I’ve said this a few times before, is that we are constantly improving our mix within our business units, that is our day-to-day job. And so there’s always emphasis and deemphasis of the portfolio that continues to happen as a regular rhythm of the business. So I would say nothing more to add on top of that. In terms of risk management, Ruplu, what we have shown over the last four to five years is the fact that we have a very thoughtful, proactive approach as we see the ups and downs that happen in the market. So whether it is going through COVID or after that as supply chain crisis or now a slower growth environment, right?
All of that requires us to constantly think ahead and make sure we have the right attributes in place that starts with our culture and that also ends with our planning processes of how we think of our plans. So in general, Ruplu, we’re always conservative in terms of how we look forward. I would say our plans today for FY2025 have built the same way, but that’s all attributed to risk management, right? Because it is kind of murky in terms of the environment out there. And if you look at the revenue profile and things like that, you’re hearing that from all our customers. So we have built a conservative plan, and we feel like the risk mitigation around contracts and inventory planning and thinking about our customers’ outlook are all built into this forecast that we have given you.
It’s how we work every single day. And you’ve seen that in the results, right? And we’ve got the same kind of cadence built into our forward-looking forecast.
Paul Lundstrom: I think the key point there is, you’ve seen it in the demonstrated results over the last several years. There have been lots of risks, the supply chain shocks, COVID, the ups and downs of markets, and I think that we’ve demonstrated our ability to be resilient through the cycle.
Kyra Whitten: Thank you. So we have a follow-on from Ruplu. Paul, with respect to inorganic growth, how do you see opportunities for M&A? And are there any focus areas?
Revathi Advaithi: Can I start with that, Paul?
Paul Lundstrom: Sure. Absolutely.
Revathi Advaithi: I would say that the first is the areas that we’re clearly interested in fall into the areas that you had, both Michael and Becky talk about today. So power, we definitely think that there are areas of power that we’re interested in, in terms of technology that we’d like to add more to our portfolio. We really like where we are in terms of embedded power and critical power, but we always feel that the things that we could add to it as the future of power becomes more critical. I would say, in terms of value-added services, we’re very interested in looking at more for our portfolio and value-added services, similar around automotive, right? As you heard from Becky, we’re competing across geographies, across OEMs in terms of winning more Automotive business, and we really feel good about our product position within automotive, but there’s always things we could add on.
So very, very targeted in terms of our view of where we could add M&A. But what Paul is going to tell you is that we’re very focused on capital allocation.
Paul Lundstrom: Our posture on M&A really hasn’t changed. Revathi pointed out a few of the focus areas. I think in my prepared remarks a couple of minutes ago, I talked about the same. But if we go out and have some sort of – do some sort of M&A, you should be confident that it’s a good fit. The team has high confidence in the financial model, and investors will be happy. I would say our top priority right now probably is in M&A. It’s more stock buyback given our current valuation. But as I told you over the last few years, the aperture is open. We have an active pipeline, but we’re going to be very, very selective and make sure that the financial model would close. A good example of that would be Anord Mardix, which I think was an absolute home run, thrilled with that. And if we can sprinkle in a couple of other things over the next couple of years in a value-creating way, then of course, we’ll do that.
Kyra Whitten: Thank you, Paul. Our next question comes from George Wang with Barclays. Can you talk more about cloud customers, including diversification and concentration? And how should we look at cloud revenue literally through the fiscal year 2025?
Revathi Advaithi: Yes. So I’ll start off, and Michael, hand it over to you. I’d say, Michael, definitely should talk about what we don’t include in cloud because as usual, we are very prudent and conservative in how we think about things. And so that’s one thing. I would say in terms of diversification and concentration, I would say, we have one of the best portfolio in terms of products and customers in terms of cloud. In linearity, I’d say, we showed you the 20% growth that we have set through the next three to five years. We really feel good about kind of the next few years. We have seen the growth that – and we can see that in terms of our bookings and our ramps. But if anything, we’d say that it will be fairly linear. And – so I don’t think that it’s going to be front-end loaded or back-end loaded. I would say, at the growth rates that we have shared with you, we feel pretty good about kind of the five-year run rate of it. But Michael, over to you.
Michael Hartung: Yes. I’ll build on those comments and maybe start where I left off with the last answer. So first, reiterating what’s in the business. And so first to Revathi’s point, we’ve included our Cloud business in CEC and our power business in Industrial. Now we probably could have made a case that there’s large amounts of our portfolio that also have exposure to AI. But we decided not to include our 5G business, our communications business or our enterprise business. Now what’s also important to think about is that we’re bringing both products and services to the marketplace, which really gets us into a wide variety of customer conversations. And it helps point out a distinction in our offering, which is, we actually have a lot of diversity in our customer base.
We already have multiple engagements with multiple hyperscalers, and we also have engagements with multiple silicon providers. So we think this diversity, we think this combination of products and services really does bode well for our future. And in terms of the second part of the question, how we’re set up. So last time we spoke, we said we’d grow the business by, I’ll call it, 20% per year for the next few years. We shared with you earlier today that we’ve actually grown by almost twice that expected rate. We think we’re in a great position to continue that for the next few years. And so for those reasons, we’re really optimistic about where we think this cloud market can go. Maybe some things about how strong the Cloud business is today.
First, the demand is holding up much better than some of our other markets, which is encouraging. But it hasn’t really stopped there. We’ve had significant share gains with our existing customers. We’ve had a lot of new wins with new logos. And so that also bodes well to this in continuing appreciation of the work that we’ve done over the prior months. So really excited about where we’re heading this business.
Revathi Advaithi: And the only thing I’d add to that, Michael, I would say, in terms of diversification, so we are with multiple hyperscalers, right? That’s important. We are with multiple colo customers because that is also important because if you think about our power portfolio, that touches the value chain end to end also. So in terms of diversification, it’s very diversified. And then importantly, they’re with multiple silicon providers, right? And if you think about also the future of kind of power and compute that we talked about, the integration of cooling products, power products into vertical integration of the racks really drives that diversification. So it’s not just in hyperscalers, but it’s also in colos, it’s with silicon providers. So highly diversified. And I’d say we’ve given you a prediction in terms of where it goes. I feel very good about kind of the linearity of it. But as usual, we’re always thoughtful in terms of prudent guidance.
Kyra Whitten: Thank you all. Our next question comes from Mark Delaney with Goldman Sachs. Margins have been resilient despite macro headwinds. Has there been anything that is more temporary in nature, helping keep margins stronger? And if macro headwinds persist, do you think the improved margins can be sustained? Similarly, can you talk on price cost and how that is trending in FY2025 versus FY2024?
Paul Lundstrom: I will just start on that one. And if you need to clean it up a little bit, you can do that. So a fair amount to unpack there, Mark. So maybe just talk about the first part of your question, which was – has there been anything sort of unusual keeping margins up? I would say over the last couple of years, it’s probably been the opposite. If you think about all of the inflation pass-through, which has really boosted the topline without any drop through, that has sort of pushed margins down. And I think as we move forward, and we saw a little bit of this last year, those inflation pass-throughs start to come down. That means the bottom line doesn’t change, but the topline does come down a little bit. That actually helps the margin rate.
If I think about the fourth quarter, fantastic margins in the fourth quarter, 5.4%. I’ll just remind you that couple of years ago, we talked about Flex and broadly the industry at some point getting to 5% operating margins. Very pleased to see the 5.4%. I would say we blew right through that 5% goal here in the fourth quarter. What drove that? There were a couple of things in there that were quite good. One, was mix. Two, we had a number of cost actions. There was some restructuring benefit that we had in the fourth quarter that helped with margin rates. We also had one – this is a little nuanced, but if you look at our CapEx spending over the last several quarters, it stepped down fairly significantly in the fourth quarter just based on the ebb and flow of ramps.
