Earnings Call Transcript - JBL Q1 2026

Operator, Operator

Greetings. Welcome to Jabil's First Quarter Fiscal Year 2026 Financial Results Conference Call. Please note, this conference is being recorded. I will now turn the conference over to Adam Berry, SVP, IR and Communications. Thank you. You may begin.

Adam Berry, SVP, IR and Communications

Good morning, and welcome to Jabil's First Quarter Fiscal 2026 Conference Call. Joining me on today's call are Chief Executive Officer, Mike Dastoor; and Chief Financial Officer, Greg Hebard. Please note that today's presentation is being live-streamed. During our prepared remarks, we will be referencing slides. To view these slides, please visit the Investor Relations section of jabil.com. After today's presentation concludes, a complete recording will be available on our website for playback. In addition, we will be making forward-looking statements during this presentation, including, among other things, those regarding the anticipated outlook for our business, such as our currently expected second quarter and full fiscal year 2026 net revenue and earnings. These statements are based on current expectations, forecasts and assumptions involving risks and uncertainties that could cause actual outcomes and results to differ materially. An extensive list of these risks and uncertainties is identified in our annual report on Form 10-K for the fiscal year ended August 31, 2025, and other filings with the SEC. Jabil disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. With that, I'd now like to hand the call over to Greg.

Gregory Hebard, CFO

Thanks, Adam, and good morning, everyone. Thanks for joining our call today. This quarter, we exceeded expectations across the board: revenue, core operating income, core margins, and core earnings per share all came in strong. Our performance underscores the value of our diversified portfolio and our consistent execution. Intelligent Infrastructure led the way with impressive growth while Regulated Industries and Connected Living and Digital Commerce delivered steady results in line with or above our outlook. Let's now walk through our numbers. Net revenue for Q1 was $8.3 billion, at the high end of our guidance range. The mix in revenue and ongoing cost discipline helped us achieve core operating income of $454 million and a core operating margin of 5.5%. On a GAAP basis, operating income was $283 million, and GAAP diluted earnings per share was $1.35. Core diluted earnings per share for Q1 was $2.85, coming in at the upper end of our guidance range. Turning now to performance by segment in the quarter. Regulated Industries generated $3.1 billion in revenue, in line with expectations and up 4% year-over-year. Automotive and renewables came in largely as expected, and health care continued to deliver steady, reliable revenue performance. Core operating margin was 5.8%, up 110 basis points year-over-year, reflecting solid and disciplined execution across the segment and ongoing strength in health care. Intelligent Infrastructure revenue was $3.9 billion, ahead of expectations. The upside was primarily driven by strength in our cloud and data center infrastructure as well as our networking end markets. In cloud and DCI, we saw higher revenue due to strong execution as we ramp our second hyperscale customer in Mexico, along with robust results from our data center power operations in Memphis. The upside in networking was primarily driven by stronger demand for next-generation liquid-cooled platforms, which we currently support in India. Core operating margin for the segment was 5.2%, up 40 basis points year-over-year, supported by mix and strong execution. Connected Living and digital commerce revenue was $1.4 billion, ahead of expectations with broad-based strength in automation, robotics, and retail warehouse programs. Core operating margin for the segment was 5.5%. Next, I'll provide an update on our cash flow and balance sheet metrics. Inventory days for the quarter came in at 70 days. Net of inventory deposits from customers, inventory days were 57 days, consistent with our targeted range of 55 to 60 days. Cash flow from operations in Q1 was $323 million, and net capital expenditures were $51 million, resulting in adjusted free cash flow of $272 million for the quarter. We remain on track to deliver $1.3 billion in adjusted free cash flow for the full year. We ended the quarter with a healthy balance sheet, including net debt to core EBITDA of 1.2x and cash balances of $1.6 billion. During Q1, we repurchased $300 million of shares under our existing share repurchase authorization. With that, let's turn to our guidance for Q2 FY '26. Beginning with revenue by segment, we anticipate Regulated Industries revenue of $2.78 billion, up 2% year-on-year, reflecting an appropriately disciplined outlook for automotive and renewables with continued growth in health care. Intelligent Infrastructure revenue of $3.76 billion, up 42% year-on-year, supported by sustained strong demand across cloud, data center infrastructure, data center power, networking, liquid cooling, and capital equipment. This also includes a modest contribution from the previously announced Hanley Energy acquisition, which our guidance assumes will close sometime in January. Connected Living and Digital Commerce revenue of $1.21 billion, down 10% reflecting planned program attrition and customer pruning, partially offset by continued growth in warehouse and retail automation. Putting it all together to enterprise level, total company revenue for Q2 is expected to be in the range of $7.5 billion to $8 billion. Core operating income is expected to be in the range of $375 million to $435 million. GAAP operating income is expected to be in the range of $312 million to $382 million. Core diluted earnings per share is expected to be in the range of $2.27 to $2.67. GAAP diluted earnings per share is expected to be in the range of $1.70 to $2.19. We expect second quarter net interest expense to be approximately $69 million and full year interest expense to be approximately $270 million. The increase in interest expense next quarter reflects two key factors: first, additional debt associated with the anticipated acquisition of Hanley Energy Group, which we intend to fund through a combination of cash and new borrowings. Second, the anticipated refinancing of our existing senior notes maturing in April. Our core tax rate for Q2 and the full year is 21%. In closing, Q1 was a strong start to the year, and we carried good momentum into Q2. Our results reflect the strength of our diversified portfolio and the consistency of our execution. As we move through the balance of the year, we remain focused on margin expansion, capital efficiency, and sustained cash generation. With that, I'll turn the call back to Mike, who will offer additional color on fiscal 2026 and our updated guidance.

Michael Meheryar Dastoor, CEO

Thanks, Greg, and good morning, everyone. I'd like to begin by personally recognizing and thanking our global team for their extraordinary efforts they continue to deliver. I'm extremely pleased with the strong start to fiscal 2026, which could not be accomplished without your focus, discipline, and commitment to our customers. I see that dedication every day across our operations, and I am sincerely grateful for everything the Jabil team continues to deliver. As Greg outlined, the first quarter was better than expected in both revenue and core margin, which ultimately drove core EPS to the high end of our guidance range. And while AI continues to be the primary driver of growth, it was great to see all of our three segments contribute to our better-than-expected performance. In summary, our Q1 results, I believe, reinforced the strength of the strategy we laid out in September and the value of our diversified model. More importantly, we now expect this momentum to continue throughout fiscal 2026 and beyond into fiscal 2027. With that momentum as a backdrop, I'd now like to take a few minutes to walk through each of our segments for FY '26. Beginning with Intelligent Infrastructure. We're raising our fiscal 2027 outlook by approximately $900 million, driven by higher revenue in both cloud and DCI as well as networking. Cloud and DCI is now expected to be up an incremental $600 million for the year to $9.8 billion. The stronger-than-expected outlook is primarily driven by the recent program wins with our second hyperscale customer in Mexico and upside in our data center power business in Memphis. This also includes approximately $200 million associated with the Hanley Energy acquisition, which we expect to close in January. Hanley strengthens our capabilities in modular power distribution and energy systems for next-generation data centers. This will diversify our racks and server business. We now expect our networking and comms end market to be up approximately $300 million for fiscal 2026 to $2.7 billion. This is supported by stronger demand for next-gen liquid-cooled platforms with meaningful demand increases in India as customers expand high-speed interconnects, including both Ethernet and InfiniBand capacity to support the rapid growth in AI workloads. Altogether, we now expect AI-related revenue of approximately $12.1 billion in fiscal 2026, which represents approximately 35% year-over-year growth, up from 25% originally expected in September. The strength we're seeing here clearly validates our strategy. By designing and delivering fully integrated systems that combine compute, networking, power distribution, and advanced cooling, we materially shorten deployment timelines and reduce total costs for customers, precisely what is required as AI capacity scales. On a separate note, and as we discussed in September, we're in the process of retrofitting our East Coast rack and silver factories to accommodate liquid cooling. These efforts remain slightly ahead of schedule, positioning Jabil very well for the second half of fiscal 2026 and into fiscal 2027. In Regulated Industries, fiscal 2026 is tracking above our September expectations by roughly $100 million, driven by better-than-expected results in renewables, although we remain cautious with our outlook for the year. Automotive continues to perform as expected, and we continue to focus on powertrain agnostic solutions in next-gen vehicles. Importantly, over the longer term, we remain well positioned in both renewables and automotive markets as the team has consolidated share with existing customers. In health care, our business remains solid and aligned with our expectations for growth, supported by continued strength in drug delivery platforms, including GLP-1, and continuous glucose monitors, as well as ongoing demand across diagnostics and minimally invasive technologies. Our pipeline remains healthy with good visibility into program ramps across drug delivery, chronic disease management, and other regulated device categories. Overall, we expect health care will be a durable multiyear growth engine for Jabil. Putting it all together, we now expect our regulated segment to return to growth this year, representing nearly 40% of our revenue in fiscal 2026. And finally, in Connected Living and Digital Commerce, our outlook is also ahead of our expectations at the beginning of the year as we now anticipate approximately $100 million in incremental revenue for the year driven primarily by broad-based strength in automation, robotics, and advanced retail warehouse programs. Altogether, we now expect CLDC to be down by roughly 11% year-over-year due to previously announced customer pruning in Connected Living, offset slightly by growth in digital commerce. Given the strength of Q1 and the visibility we have across the business, we're raising our full-year guidance for revenue, core margins, and core EPS. For fiscal 2026, we now expect revenue of approximately $32.4 billion, an increase of $1.1 billion from our prior outlook. Importantly, we are also raising our margin expectations for the year. We now anticipate core operating margins of roughly 5.7%, a meaningful improvement of 10 basis points versus our earlier view. This improvement reflects strong mix, continued execution, and the underlying leverage in our model. As a result of both higher revenue and higher margins, we now expect core diluted earnings per share of $11.55 for the year, an increase of $0.55 from our previous estimate. We continue to expect adjusted free cash flow of more than $1.3 billion, consistent with the framework we outlined in September, which will allow us to continue to invest in future growth while continuing to return capital to shareholders. Across the company, our priorities remain the same: profitable growth, diversified mix, margin expansion, consistent cash generation, and strong commitment to buybacks, which was evident in Q1. This focus is driving momentum across the business, allowing us to navigate changing market conditions, deliver consistent results, and steadily build long-term earnings power. To summarize, our first quarter results were better than expected and fiscal 2026 is now tracking well above our initial expectations. What's notable to me about a higher FY '26 outlook is that it's broad-based. All three segments are contributing with intelligent infrastructure leading the way. As we move forward, we remain focused on driving long-term value for our shareholders. Before closing, I want to again thank our teams, customers, and suppliers for their commitment and partnership. The consistency in our results is a direct reflection of their efforts, and I am grateful for the trust they continue to place in Jabil. I also want to wish everyone a safe and healthy holiday season and a happy New Year. With that, I'll turn the call over to Adam.

Ruplu Bhattacharya, Analyst

Mike, you raised the full-year revenue guide by over $1 billion. There's lots of things that are happening in the intelligent infrastructure space. The slides mentioned some new wins, can you give us some more color on those? There are a lot of new projects coming up as well, like the OpenAI, AMD, Anthropic, AWS. I mean do you think Jabil has the intent or the opportunity to benefit from some of those projects? And then there are other things you mentioned like retrofitting factories for liquid cooling and acquiring Hanley Energy Group. So maybe just lay out for us the impact of all of these factors. And overall, would you say the guidance for the fiscal year is still conservative?

Michael Meheryar Dastoor, CEO

I believe our intelligent infrastructure is performing exceptionally well. The success of our AI strategy is largely due to our comprehensive approach to data centers. We are not solely focused on selling products; we are also heavily involved in design and engineering, which facilitates cross-pollination and cross-selling. This approach enables us to utilize our liquid cooling capabilities with components like Silver X and other aspects of our Intelligent Infrastructure business. In terms of performance, Intelligent Infrastructure is thriving. For instance, in '25, our revenue stood at $9 billion, and by September, we increased it to $11.2 billion, reflecting a 25% growth. We've now further elevated it to $12.1 billion, representing a 35% growth, which accounts for a $900 million boost in revenue. If we break down the $900 million, around $600 million comes from the cloud and DCI segment, including $200 million from Hanley, which I'll discuss shortly. The remaining increase is attributed to recent successes with our second hyperscaler in Mexico, for which we are manufacturing AI storage racks. Additionally, there is potential for growth in the DCI business in Memphis, along with a strong performance in our switch gear and inroad heat exchanges. The networking and communications segment has also seen a rise of approximately $300 million, primarily driven by our operations in India with air and liquid-cooled switches and network adapters within our Infiniband and Ethernet portfolios. Achieving a $900 million increase in such a brief timeframe is significant for us. Regarding Hanley, I mentioned in my prepared remarks that we anticipate revenues of about $200 million for FY '26, with the completion expected in January. I view Hanley as being modestly accretive in '26, with greater accretion anticipated in '27. It's important to note that Hanley, which we acquired, is a power and energy management solutions firm focused more on services than manufacturing. This provides us with a strong platform not only for deployments but also for ongoing maintenance revenue. Overall, I am pleased with Hanley. As for our guidance, I believe it is conservatively set, which is justified given the solid opportunities we are seeing across the board.

Ruplu Bhattacharya, Analyst

For my follow-up, if I can ask about operating margins, Jabil is going to be at 5.7% operating margin this fiscal year. Is it reasonable for investors to assume that operating margin can get above 6% in fiscal '27, what are the puts and takes there? And longer term, how high can operating margin go? Like with the current mix of business, do you see Jabil getting to 7% operating margin at some point? So just your thoughts on next or what should we keep in mind in terms of operating margin progression and how high that can go over time?

Michael Meheryar Dastoor, CEO

So Ruplu, we put out three quarters left in FY '26. We're just going to focus on that. We'll provide guidance nearer the time for FY '27. As you know, we increased our margin from 5.6% to 5.7%, which is about 30 bps up from the '25 number and that's for FY '26 due to two or three reasons, which is mainly better mix. I think the mix is coming in stronger or better utilization of capacity. Our capacity utilization has gone up from that 75% range, closer to the 80% range. And then SG&A leverage as well. So I think overall, the incremental revenue, what we're seeing, the $1.1 billion that you referenced earlier, that's giving us some nice leverage. In FY '27, we will be seeing a full year impact of Hanley. So there will be some level of accretion on the margin there. We'll see continued leverage from the incremental revenues. The pipeline that I'm seeing, Ruplu, is extremely strong. It's been a long time since I've seen such a healthy pipeline. I feel better about 6% than I ever have. I think if you're asking beyond 6% and getting to 7%, of course, we're not going to stop getting leverage, you're not going to stop getting efficiencies as soon as we hit 6%. So 6% is just a point in time on a march to a much higher number. Is it '27, '28, '29, I don't know. 6%, though, I feel really good about at this stage for future.

Ruplu Bhattacharya, Analyst

Got it. If I can sneak one more in. Looking at health care and packaging, for the last three, four years, it's been mostly flat. This year, it's growing low single digits to $5.6 billion. Any thoughts like you had talked about some further J&J type of deals and you've got this impact from Croatia. So just can you give us some more color on how you think that business can evolve? Is it still a low single-digit business going forward? Or do you think it can accelerate?

Michael Meheryar Dastoor, CEO

Croatia is performing very well. We've mentioned that we expect it to start delivering good returns in the second half of 2027. It's important to note that the margin in the GLP-1 area is higher. Croatia is progressing well. Meanwhile, the team is actively working on deal opportunities. They are involved in B2B discussions and exploring capability-driven M&A deals. This is an active process, and we will provide updates throughout fiscal year 2026 regarding our insights on potential deals. Primarily, we are looking at deals that would enhance our capabilities to move vertically in the healthcare sector, similar to the GLP-1 OSD transaction we completed last year, which added a capability in pharmaceutical filling for oral doses of GLP-1. We anticipate pursuing more capability-driven opportunities across our operations.

Unknown Analyst, Analyst

This is Samik Chatterjee. Firstly, congratulations on the great results. My question is about the second hyperscaler. You mentioned that strong performance from the second hyperscaler is boosting your intelligent infrastructure outlook for the year. How much of that increase is due to your improved execution in response to customer demand versus customers actually accelerating their deployment plans? In the past, you've indicated a revenue target of $750 million for this business for FY '26. How should we assess that target now? Can you provide any insights into broader potential hyperscaler customers? How are those discussions progressing? I also have a follow-up.

Michael Meheryar Dastoor, CEO

Yes, the upside on the second hyperscaler, as I mentioned earlier, is on the AI storage piece, we continue to get some upside on that business. I'm not sure if that's predeployment or if the demand has always been there. It's a matter of fulfilling it. We feel really good about upside even from there on some of these hyperscalers that we're in discussion with. So I think if you're looking at the revenue piece for the second hyperscaler, roughly in that $1 billion range. I think earlier we said $750 million, so taking that up by some amount as well. So really good interest levels coming through. And we're not just stopping at the second hyperscaler; we're in discussions with even more hyperscalers. So the pipeline, again, is looking very strong.

Unknown Analyst, Analyst

Yes. And then my next question is around gross margins for this quarter. I think despite the revenues being higher quarter-over-quarter from F 4Q, gross margins were lower. Can you please help us understand the drivers for that?

Gregory Hebard, CFO

Yes. So Q1, our gross margins were at 8.9%. Year-over-year, it is up 10 basis points. Typically, we do have slightly lower gross margins on the year. So really, nothing there other than just mix in Q1 for the gross margin piece.

Michael Meheryar Dastoor, CEO

And Samik, we've always sort of mentioned 9% to 9.5% is the range for our gross margin. That's still the FY '26 estimate.

Steven Fox, Analyst

I had two questions, if I could. I guess, first of all, just switching gears. On the health care business, like you mentioned, Mike, it's been very steady. My understanding is providing pretty good margins for you guys as well. I guess off of all the growth you're seeing in cloud, what's the prospects for maybe us more aggressively to accelerate that growth since it's such a good contributor to profitability? And then I had a follow-up.

Michael Meheryar Dastoor, CEO

Yes. So Steve, we're constantly evaluating M&A activity in that space. We're constantly in discussions on B2Bs. It's highly likely that we'll do something. We're obviously a conservative company from an M&A perspective, so we'll do all the right groundwork for that. I feel like health care is such a steady business with higher margins, long product life cycles, and steady cash flows that it's a great sort of upset from a diversification standpoint for us, and that is an area that I'm most excited about from a deal perspective.

Steven Fox, Analyst

Great. That's helpful. And then just on the cloud business. A quarter ago, you were warning us about facing some bottlenecks later in the year. Now you're ahead of schedule a little bit, which is great, and you're talking about what sounds like a bigger pipeline. So I'm just wondering how we sort of equate your ability to meet demand or meet the growth expectations of adding a new customer or existing customers with all the capacity you have or may need? How are you planning out beyond this year for capacity in order to continue to grow that cloud business?

Michael Meheryar Dastoor, CEO

When we talked about the retrofitting piece on the September call, it was mainly associated with our hyperscaler factory on the East Coast of the U.S. A lot of the upside when we talked about the upside that $900 million, some of it is in Mexico where we had some surplus capacity, and some of it is in India where it's a combination of existing capacity and new capacity. As you know, North Carolina is coming up relatively soon in the next 6, 7, 8 months, and that we're prefitting, if you want to use that phrase for liquid cooling. We've got some decent upsides. We're planning our capacity in that way, Memphis is another area I talked about that is seeing some really good growth as well. We might expand there as well. These current expansion plans that we're looking at, those might be even sooner than the North Carolina facility. Again, it doesn't change CapEx outlook. The CapEx outlook has been 1.5% to 2% of revenue, and that's going to remain consistent for FY '26.

Ruben Roy, Analyst

Mike, I wonder if you could spend a minute on just kind of longer-term thinking around Hanley. There's been a lot of discussion, obviously, around power and power distribution as the industry is trying to figure out how to get to 800 volts current. If you think about this acquisition longer term, one of your competitors has been talking a lot about modularized power. Does this help you, do you think, in terms of content per rack and gaining more server rack business by having this? Or is the strategy maybe a little bit different as you think about adding that into the mix? And also one follow-up on that is, would they own the design of the power distribution? I imagine that's the answer would be yes, given the EBIT margins that you get, but any color on that would be helpful.

Michael Meheryar Dastoor, CEO

I'd like to call out a couple of transactions as it relates to that whole thermal management piece. Obviously, Hanley is a service provider. I'll talk about that in a minute. But the liquid cooling acquisition we made with Mikros in '24 has also been a big game changer. I think thermal management, thermal participation is not new to hyperscalers, whether it's cooling at the chip level or a switch level or a component level, or even at an infrastructure level with liquid heat exchanges. That's one of the reasons we invested in Mikros; we acquired a technology, we didn't acquire a product. We acquired a design and engineering team which is constantly pushing the boundaries for forward-looking liquid cooling activities. To me, that old Mikros acquisition is a game changer. I think particularly as the thermal management piece becomes more critical, the ability to design, engineer liquid cooling at chip level, at the network switch level at different parts, and integrate it into a pooled system, that's the big differentiator where Jabil will last steps in. As it relates to Hanley, it's more of a services organization. It's the provider of power and energy management solutions. I think the engineering expertise that we have in there is across power distribution, switchgear, energy monitoring, and digital power management platforms. It allows us to go vertical as well. I'll give you an example. Today, we build low-voltage, medium voltage switchgear in Memphis. Hanley will allow us to deploy, install and then maintain those in data centers, which previously was done by other parties. If you combine the whole silver ad business with the ability to install and maintain, that is a highly accretive type of business for us. Hanley, I think, is a really good transaction. We welcome the team; it hasn't closed yet. We expect it to close in that first week of Jan. As soon as that takes place, just like the Mikros transaction has created so much opportunity for us, so does Hanley. Again, it's exactly the area that you talked about and it's all around thermal management. It's not a surprise to any hyperscaler. It's not a surprise to anyone who has a data center that that's something they need to address, and they are addressing that. I do think the two transactions will be well received.

Ruben Roy, Analyst

It's a lot of detail. I hope this is a quicker follow-up. Just on the capital equipment, I think you said that was in line with your expectations, maybe a little bit better. Is there any change to I guess, on your sort of thinking around overall spend in the capital equipment market relative to 90 days ago as you think about this year?

Michael Meheryar Dastoor, CEO

The automated testing equipment segment of the business has been performing well, exceeding last year's results and continuing to do so this year. It is expected to outperform the WFE segment as well. There is increased demand driven by the multiple DRAM stacking for high-bandwidth memory. We anticipate some levels of WFE improvements tied to the AI compute expansion and NAND factory upgrades, although we have not factored this into our forecast yet. We now see WFE as more of an opportunity than we previously believed, shifting from the notion that it would be steady and unchanging. There are early signs of improvements, but until those materialize, expectations may vary, and therefore we have not included them in our guidance. Nonetheless, the WFE segment could present potential upside for us.

Melissa Dailey Fairbanks, Analyst

I wanted to start off by asking about automotive and transport. You see that you maintained the outlook for the full year, down a little bit from last year. Just wondering if the mix of that business or any of the geographical trends have changed. We have heard from some suppliers, European suppliers are being a little bit more cautious going into next year? Just wondering what the complexion of that business looks like in the near term?

Michael Meheryar Dastoor, CEO

So let me start by saying automotive is an area that we continue to be appropriately conservative on. I think we're seeing relatively good performance. Has it hit a bottom? I do feel like it has, and there will be upside going forward on automotive. Is it a '26 event or a '27, '28 event? We just don't know the exact timing. So we're being appropriately conservative from an automotive standpoint. One of the things the team has done really well is invest in powertrain agnostic technologies. What do we mean by that is software-defined vehicles. ADAS, those programs go into any platform, whether it's hybrid, EVs, or combustion engines. We're talking to all sorts of companies. If you factor in the whole Tier 1 OEMs still want to design and the IP as they want to do with the EV platforms, that's a good opportunity for us EMS companies as well. Those program wins, we expect, will come in the future. We're doing really well because there's a shift in the way the automotive space is working, not just for EVs. It's extended to hybrids and ICE as well or at least the concept is. We'll continue to add some capabilities, and I do think 2026 is a conservative year. In 2027, we could see some upside. I don't forget a program in automotive takes 12 to 18 months to win. Programs we're winning today will only show up in '27-'28.

Melissa Dailey Fairbanks, Analyst

Okay, great. Keep up the good work. Maybe just a quick follow-up. Everyone has to ask about at least one question on data centers. As you're ramping your second hyperscale customer, I know your lead hyperscale customer; a lot of that business goes through consignment. Just wondering how much, if any, of some of these new programs that you're ramping are on consignment, and the gross revenue is actually coming in a little bit better than even what we're seeing on the net revenue side?

Michael Meheryar Dastoor, CEO

I think it's a bit of a mix. The consignment model is primarily perspective from our largest customer. Some of the other customers are still having discussions about gross versus consignment. Right now, we are focusing on gross levels, and I believe that is more likely than consignment models becoming widespread. That situation was specific to the first hyperscaler, and I'm not certain if it will apply to every hyperscaler. I think we need to take a wait-and-see approach.

Mark Delaney, Analyst

Do you able to look up its view for AI growth this year to 35%. I realize you already spoke on your own capacity planning. Can you speak to any constraints your data center customers may face from the supply side, including having enough power supply to their data center sites? To what extent have you factored any constraints they may be seeing into your guidance?

Michael Meheryar Dastoor, CEO

Look, our power sort of constraints in the data center is not a new thing. I think it's always been around. We've grown, I think, I can't remember the exact numbers from '24 to '25, we grew exponentially '25 to '26, again, we're growing at 35%. This is all while data center power issues continue to perforate. I think overall, like I said, the offering that we have, the solutions that we have, the design, engineering, and including some level of liquid cooling across our offerings, be it on the chip, rack service, networking switches, or data center infrastructure itself, we're actually engaged with customers to address a lot of those heat questions. I'm not seeing any major impact of slowdown. Like I said earlier, I've never seen such a healthy pipeline. We're seeing very strong demand.

Mark Delaney, Analyst

Very helpful. Mike, last quarter, you mentioned the possibility of winning that third hyperscaler customer, and you spoke to that possibility again on the call today. Can you give more color on that, including what types of products you're hoping to sell to that CSP and when you think you may know if you've converted on that opportunity?

Michael Meheryar Dastoor, CEO

We continue to have discussions, Mark. It's a bit too early to discuss the products and revenue in detail. The previous call was primarily about our overall strategy. We're not focusing solely on one or two hyperscalers; there are definitely more out there that require our offerings. It's our design and engineering architecture capability that is attracting several hyperscalers to us. Interestingly, discussions may start with a server in a rack but quickly evolve into topics like liquid cooling and silicon photonics. This also extends to other aspects of our data center infrastructure, including heat exchanges and various liquid cooling solutions we provide. Our current offerings are driving these conversations, and while we haven't incorporated any potential revenue from our third hyperscaler into our forecasts yet, we are still actively engaged in discussions.

Timothy Long, Analyst

Two, if I could, as well. First, I was hoping you could touch a little bit on that the larger hyperscale customer wasn't really excited as a part of the strength here. So curious what kind of trends are going on there. I do think there's some product transitions in some of their compute platform. So curious if impacting or if there's anything else going on there? Secondly, just more broadly, a lot of movement around custom ASICs and XPUs. Curious how you see Jabil participating. Obviously, PPU gaining a lot of traction and announcements at least over the last few months, how you see Jabil playing in the toll XPU directly and related type of equipment?

Michael Meheryar Dastoor, CEO

When we talked about the whole retrofitting piece on the September call, we were specific on one site only. The rest of the new business is coming in all different sites. The retrofitting is ahead of schedule. I do feel our second half will be stronger in terms of getting it ready. I think originally, we'd anticipated retrofit out to be a combination of Q2 and Q3; that might come in earlier in Q3, which would give us some level of upside there. The demand is there. It's crazy what we're seeing in terms of demand. So I have no concerns about the demand side. Regarding chips, I think we're relatively agnostic in terms of chips, in terms of what we're doing and who we're doing it with, the custom chips, or even multiple individual companies on those chips. I don't think one replaces another. It's all complementary in my view. So I see it more as an upside than a replacement.

David Vogt, Analyst

So Mike, maybe one for you and one for Greg. So you talked about strength in data center infrastructure powered networking. We're folding Hanley into the numbers. We're seeing strength in the second hyperscaler above expectations. I guess what I'm trying to think through is how do you think about the second half of your fiscal year, particularly given what the growth implies is a fairly meaningful deceleration where the underlying demand probably doesn't support that view. Is that just a rev rec issue? Is it a capacity issue? How should investors think about sort of the second half of the year, which kind of implies a 10% growth dynamic? Is there enough capacity? Then maybe I'll give you my question as well. Obviously, you took up the full year numbers for revenue margin in EPS; and less, kind of the free cash flow outlook unchanged. I recognize that CapEx is probably going to go up, I don't know, $50 million to $100 million year-over-year. Anything else from a working capital perspective or a timing perspective that impacts free cash flow this year versus your original expectations?

Michael Meheryar Dastoor, CEO

In the second half of the year, I believe that we have added approximately $900 million, with a significant portion contributing to Q3 and Q4. For Q2, we have increased our expectations by $300 million to $400 million from what we previously indicated. The retrofitting had some impact on Q2. We are continuing to capture market share. Comparing to last year presents some challenges. We experienced rapid growth from Q1 to Q2 with solid performance in Q3 and Q4 as we took on additional facilities from a competitor. I advise caution when comparing Q3 and Q4, as those quarters showed significant growth, transitioning from a baseline of zero to multiple buildings in that facility. There aren't any revenue recognition issues or concerns here; we're adopting a conservative approach. The outlook for the second half now appears significantly more promising than it did three months ago, and I expect this trend to continue as the year progresses. We typically adopt a conservative stance, but I see potential for positive growth in the second half.

Gregory Hebard, CFO

David, it's Greg. Regarding your question about free cash flow, we are still affirming our guidance of over $1.3 billion for the year. We had a strong first quarter with $272 million. You’re right that we anticipate a slight increase in CapEx, but it will remain within our expected range. We also expect working capital to rise moderately due to the growth we expect in the latter half of the year. I believe our guidance is cautious at this point, and we will keep you updated as the year progresses.

Adam Berry, SVP, IR and Communications

Thank you. Thank you for your interest in Jabil. This now concludes our call.

Operator, Operator

Thank you. This now concludes today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.