Jabil Inc. (JBL) Q2 2026 Earnings Call Transcript

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Overview

The earnings call indicates strong growth in AI-related revenue and Intelligent Infrastructure, with positive guidance on FY 2026 revenue and earnings. Despite challenges in the China EV market, other regions show recovery. The Q&A section reveals confidence in achieving higher margins and sustainable demand in renewables. The focus on AI and automation, alongside strategic shifts, supports a positive outlook. However, management's reluctance to detail geopolitical impacts introduces some uncertainty, tempering the overall sentiment to 'Positive' rather than 'Strong positive.'

Key Financial Performance

Net Revenue for Q2 $8.3 billion, exceeding the outlook for the period. The increase was driven by favorable revenue mix and ongoing cost discipline.

Core Operating Income for Q2 $436 million with a core operating margin of 5.3%. This was supported by favorable revenue mix and cost discipline.

GAAP Operating Income for Q2 $374 million. No specific reasons for change were mentioned.

GAAP Diluted Earnings Per Share for Q2 $2.08. No specific reasons for change were mentioned.

Core Diluted Earnings Per Share for Q2 $2.69, reflecting results above expectations for the quarter. This was driven by strong performance across segments.

Regulated Industries Revenue for Q2 $3 billion, up 10% year-over-year. The increase was driven by all three end markets within the segment.

Intelligent Infrastructure Revenue for Q2 $4 billion, up 52% year-over-year. Growth was broad-based across capital equipment, cloud and DCI, and networking and communications. Core operating margin for the segment was 5.7%, up 40 basis points year-over-year, supported by favorable mix and disciplined execution.

Connected Living & Digital Commerce Revenue for Q2 $1.2 billion, down 8% year-over-year. The decline was due to planned program attrition and customer pruning, partially offset by growth in robotics, advanced warehouse, and retail automation. Core operating margin for this segment was 4.9%, up 40 basis points year-over-year.

Cash Flow from Operations for Q2 $411 million. No specific reasons for change were mentioned.

Net Capital Expenditures for Q2 $51 million. No specific reasons for change were mentioned.

Adjusted Free Cash Flow for Q2 $360 million. No specific reasons for change were mentioned.

Inventory Days for Q2 75 days, net of inventory deposits from customers, inventory days were 60, consistent with the targeted range of 55 to 60 days.

Share Repurchase for Q2 $300 million of shares repurchased under the existing share repurchase authorization.

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Operating Highlights

AI-related revenue: Increased fiscal 2026 AI-related revenue outlook by approximately $1 billion compared to December, bringing the total to roughly $13.1 billion, representing a 46% year-over-year increase.

Cloud and Data Center Infrastructure: Revenue forecast increased by $600 million to $10.4 billion for fiscal 2026 due to retrofitting U.S.-based facilities for liquid-cooled racks and strong execution with a second hyperscale customer in Mexico.

Networking and Communications: Revenue forecast increased by $400 million to $3.1 billion for fiscal 2026, driven by advanced AI networking programs in India and signs of recovery in 5G spending.

Capital Equipment: Revenue forecast increased by $100 million to $3 billion for fiscal 2026, reflecting strong demand and execution in automated test equipment and improving conditions in wafer fab equipment.

Regulated Industries: Revenue forecast increased by $500 million to $12.5 billion for fiscal 2026, driven by recovery in automotive and transport, health care, and renewables.

Connected Living & Digital Commerce: Segment remains stable with growth in automation, robotics, and advanced retail and warehouse programs, which are expected to be long-term growth drivers.

Core Operating Margin: Achieved 5.3% in Q2, with fiscal 2026 expected to maintain approximately 5.7%.

Free Cash Flow: Generated $360 million in Q2 and expects over $1.3 billion for fiscal 2026.

Share Repurchases: Repurchased $300 million of shares in Q2 as part of capital allocation strategy.

AI and Data Center Strategy: Focused on integrating compute, networking, power distribution, and advanced cooling to meet customer needs, leveraging U.S.-based manufacturing.

Portfolio Diversification: Continued focus on diversified model across multiple end markets to drive growth and resilience.

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Risk or Challenges

Market Demand and Supply Constraints: Demand for AI-related infrastructure and data centers is outstripping supply, which could lead to challenges in meeting customer expectations and potential delays in project execution.

Economic and Market Volatility: The company is seeing signs of recovery in automotive and renewables markets, but these sectors are just beginning to bounce back from lows, indicating potential instability and slow recovery.

Regulatory and Compliance Risks: The company operates in regulated industries such as healthcare and automotive, which are subject to stringent compliance requirements that could impact operations and costs.

Portfolio Optimization and Program Transitions: The Connected Living & Digital Commerce segment is experiencing a 10% year-over-year revenue decline due to planned program transitions and portfolio optimization, which could impact short-term financial performance.

Capital Efficiency and Working Capital Management: Higher revenue outlooks bring increased working capital requirements, which could strain cash flow management and operational efficiency.

Geopolitical and Global Uncertainty: The company acknowledges global uncertainty as a factor influencing customer demand and operational strategies, particularly in AI and data center infrastructure.

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Guidance & Outlook

Revenue Expectations: For Q3 FY '26, total company revenue is expected to be in the range of $8.1 billion to $8.9 billion. For fiscal 2026, the full-year revenue outlook has been raised to approximately $34 billion, an increase of $1.6 billion from the prior outlook of $32.4 billion.

Segment Revenue Projections: Regulated Industries revenue for Q3 FY '26 is anticipated to be $3.1 billion, reflecting growth in renewables, steady health care demand, and stabilizing trends in automotive and transport. Intelligent Infrastructure revenue is expected to be $4.2 billion, up 22% year-over-year, supported by demand across cloud and data center infrastructure, advanced networking, and capital equipment. Connected Living & Digital Commerce revenue is projected at $1.2 billion, down 10% year-over-year, reflecting program transitions and portfolio optimization.

AI-Related Revenue: AI-related revenue for fiscal 2026 is expected to grow approximately 46% year-over-year to $13.1 billion, driven by strong demand in AI data centers and advanced AI networking programs.

Core Operating Income and Margins: For Q3 FY '26, core operating income is expected to range from $452 million to $512 million, with core operating margins for fiscal 2026 expected to remain at approximately 5.7%.

Capital Expenditures and Free Cash Flow: Adjusted free cash flow for fiscal 2026 is expected to exceed $1.3 billion, even with higher revenue and associated working capital requirements.

Market Trends and Recovery: Automotive and renewables markets are showing signs of recovery, with momentum in EVs outside the U.S. and a shift in solar business mix towards residential and commercial installations. 5G spending is also showing signs of recovery.

Strategic Plans and Investments: The company has completed modifications to its U.S.-based facility to support liquid-cooled racks, increasing capacity ahead of schedule. Investments in AI-related infrastructure and capabilities, including advanced cooling and high-speed interconnect capacity, are expected to drive growth.

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Shareholder Return Plan

Share Repurchase: During Q2, we repurchased $300 million of shares under our existing share repurchase authorization.

Capital Allocation Strategy: The company remains focused on returning capital through share repurchases and other prudent capital allocation strategies. This approach reinforces confidence in the business and demonstrates dedication to enhancing shareholder returns over the long term.

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Key Q&A

Q:Mike, you raised Intelligent Infrastructure revenue by $1.1 billion. Can you help us rank order where you see the most opportunity? Is it in compute, networking or semi-cap? And this year, AI revenues are now growing almost 50% year-on-year. Is it reasonable to think that, that strong growth can sustain beyond fiscal '26?

A:The $1.1 billion increase in Intelligent Infrastructure revenue is broad-based across compute, networking, and semi-cap. Cloud and DCI contributed $600 million, networking and communications $400 million, and capital equipment $100 million. AI revenues are growing strongly, and the CEO is optimistic about sustained growth beyond fiscal '26.

Q:It looks like it's a broad-based strength and you've raised total company revenue guidance by $1.6 billion. But op margin is still 5.7%. Can you talk about the factors that are going into that? Are Intelligent Infrastructure margins where you would like them at? How much is mix a factor? And what are the factors that help drive op margin to greater than 6% going forward maybe in fiscal '27?

A:The operating margin of 5.7% for FY '26 is conservative due to global uncertainties. The CEO is confident about achieving 6% in FY '27, driven by a favorable business mix, higher-margin capabilities like liquid cooling and silicon photonics, better capacity utilization (up from 75% to 80%), and accretive acquisitions like Hanley.

Q:Can you remind us on uses of cash? How are you thinking about CapEx spend for this year? Where are you investing for growth? And also, if you can talk about capital structure, how are you thinking about lowering leverage and also taking on leverage for M&A?

A:Free cash flow guidance is $1.3 billion-plus for the year. CapEx will be around 1% of revenue, with a focus on growth investments. 80% of free cash flow is allocated to share buybacks, and 20% for M&A. The company is open to leveraging up for the right M&A opportunities.

Q:On the data center and AI market, Jabil discussed in prior quarter as being close to winning a new customer or potentially multiple new customers and perhaps another large hyperscaler. Can you give us an update on where you stand with those efforts? And if you could also talk about what sorts of products and applications you think are most likely where you could see some share gains?

A:Jabil has made progress with a second hyperscaler and is in discussions with a third, expecting closure soon. Expansion plans in Memphis and North Carolina are on track. The company is focusing on system-level integration across compute, networking, power, and liquid cooling, which is driving broad-based growth in Intelligent Infrastructure.

Q:Could you speak more on what you're seeing in some of these various areas of supply chain constraints?

A:Supply chain constraints exist, particularly in memory (DDR4 and lower) and PCBs. However, hyperscalers are less impacted due to their priority in allocations and use of DDR5. Jabil has factored these constraints into its guidance and is managing well despite challenges.

Q:Can you talk about the outlook for Intelligent Infrastructure margins going forward, especially now that you're ramping other capacity?

A:Intelligent Infrastructure margins are expected to improve over time, driven by higher-margin capabilities like liquid cooling and power management. The retrofitting for liquid cooling is complete, and the company is well-prepared for future demand shifts.

Q:It seems like physical AI is not just a buzzword anymore. Do you have any programs that you could sort of highlight or opportunity sets that you're looking at, as that becomes more of a real use case on the factory floor or in warehouses?

A:Physical AI is in its early commercialization stage, with high costs and complexity. Jabil is well-positioned in areas like retail warehouse robots, autonomous vehicles, drones, and industrial automation. The company has expertise in sensors, vision systems, connectivity, and other enabling technologies.

Q:Maybe if you can just expand that a bit further in terms of if you're seeing any opportunities with the neocloud, any way to intersect that market, particularly as you maybe look at opportunities both across compute or networking?

A:Jabil is seeing positive momentum with neocloud customers, focusing on system-level integration across compute, networking, power, and liquid cooling. The Intelligent Infrastructure business is well-diversified across customers, products, and capabilities.

Q:How do you think we should sort of overall think about the trajectory here in terms of you mentioned demand is continuing to outstrip supply. Is there a lot of pressure to sort of maybe add new facilities in the U.S. from your side?

A:The Intelligent Infrastructure business is asset-light, requiring less complex equipment. Expansion plans are ongoing, but the asset-light nature supports strong returns on invested capital. CapEx is expected to remain at 1.5%-2% of revenue.

Q:In auto and transport, we have actually seen better-than-expected results and guide this year. We've heard some negative anecdotes coming out of China EV market, which I know, historically, has been where you've been exposed. Just wondering what kind of details you're seeing within auto, if this is programs that are ramping in the back half of the year that you won a while ago and have been delayed or if you're still seeing better sell-through even in China?

A:Jabil has shifted its strategy to focus on powertrain-agnostic platforms (ICE, hybrids, EVs). While China EV demand is slow, other regions are showing signs of recovery. The company remains conservative but sees positive momentum in Asia outside China.

Q:In renewables and energy infrastructure, how much of the strength that you're seeing in the near term is driven by the upcoming expiration of the tax incentives? Or if you believe this is really true sustainable demand improvement?

A:The growth in renewables is driven more by commercial installations than residential, making it less dependent on tax incentives. The demand appears sustainable, but the company remains cautious.

Q:In health care and packaging, it's great to see that you're finally seeing a little bit of inflection point higher on the equipment side with the minimally invasive equipment and imaging systems. Just wondering how the margin profile differs on that side of the business versus a lot of the injectables and disposables?

A:Minimally invasive technologies and imaging systems have accretive margins compared to injectables and disposables. These are capability-based and contribute positively to the health care and packaging segment.

Q:On the AI front, hoping we could just double-click on your silicon photonics trends in the quarter and maybe more importantly, your high-level outlook there?

A:Jabil is expanding its silicon photonics capabilities, including co-packaged optics and next-gen optics (800G to 1.6T). The company is showcasing its system integration capabilities and expects strong growth in this area.

Q:Can you give us a sense for how you're thinking about sort of that, at least it feels like a positive trajectory in the consumer Digital Commerce business relative to expectations a couple of months or even a couple of quarters ago?

A:Digital Commerce is expected to grow at double digits, driven by warehouse automation and early-stage robotics/humanoids. The company is well-positioned in retail automation and complex automated storage systems.

Q:Does that support your kind of confidence and Mike's confidence in '27 margins getting on an upward trajectory towards 6% sort of that mix shift also within CLDC?

A:Yes, the diversified mix, including Digital Commerce, regulated markets, and Intelligent Infrastructure, supports confidence in achieving and exceeding 6% margins by FY '27.

Q:Hoping you could just speak to AI and automation. I know you've outlined it as one of your strategic pillars in terms of internal uses of AI, especially I'm just hoping we could get an update on the internal cadence of using AI in your operations, especially, maybe any focus areas as we're moving through fiscal '26?

A:Jabil has been using AI in operations for inspections, quality, and corrective actions. The company leverages its extensive operational database to address manufacturing challenges and is expanding AI use at the corporate level.

Q:Review of Unclear Management Responses

A:Management avoided providing specific details on the potential impact of Middle East geopolitical issues on supply chain constraints, stating only that they have factored in potential impacts into their guidance. Additionally, while discussing physical AI, management acknowledged its early commercialization stage but did not provide concrete timelines or specific program details.

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The earnings call highlights positive financial guidance, including strong AI-related revenue growth and optimistic guidance for the Intelligent Infrastructure segment. The Q&A section reveals confidence in margin expansion and strategic investments in healthcare and cloud businesses. Despite some uncertainties, such as unchanged free cash flow projections and conservative automotive outlook, the overall sentiment is positive. The company's strategy to focus on higher-margin opportunities and the potential for new partnerships with hyperscalers further support a positive stock price reaction over the next two weeks.

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Jabil Inc. (JBL) Q2 2026 Earnings Call Transcript