Earnings Call Transcript - JBL Q2 2026

Operator, Operator

Greetings. Welcome to Jabil's Second Quarter Fiscal 2026 Earnings Conference Call. Please note this conference is being recorded. I'll now turn the conference over to Adam Berry, Senior Vice President of Investor Relations and Corporate Affairs. Thank you, Adam. You may now begin.

Adam Berry, Senior Vice President, Investor Relations and Corporate Affairs

Hello, and welcome to Jabil's Second Quarter Fiscal 2026 Earnings 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. And 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 third 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, Chief Financial Officer

Thank you, Adam. Good morning, everyone, and thank you for joining our call today. Our second quarter exceeded expectations on both revenue and core operating margin, driving another step-up in core EPS. And while Intelligent Infrastructure continues to be the primary driver of growth, we were encouraged to see solid performance across other areas of the portfolio as well. In Regulated Industries, revenue came in about $200 million above our Q2 guide, driven mainly by automotive with renewables also performing better than expected. In Intelligent Infrastructure, we were up nearly $300 million above our Q2 guide, driven mainly by cloud and data center infrastructure and networking and communications. And in Connected Living & Digital Commerce, performance was largely in line with expectations. Overall, Q2 was a strong quarter, and it provides us with greater confidence in our outlook for the back half of our fiscal year. With that, let's walk through the numbers for the quarter. Net revenue for Q2 was $8.3 billion, exceeding our outlook for the period. Favorable revenue mix and ongoing cost discipline enabled us to achieve core operating income of $436 million and a core operating margin of 5.3%. On a GAAP basis, operating income was $374 million, and GAAP diluted earnings per share was $2.08. Core diluted earnings per share for Q2 was $2.69, reflecting results that were above our expectations for the quarter. Now turning to performance by segment in the quarter. Regulated Industries generated $3 billion in revenue, up 10% year-over-year and well above our outlook in December. The higher year-over-year revenue was driven by all 3 end markets. Core operating margin for the segment was 4.8%. Intelligent Infrastructure revenue was $4 billion, up 52% year-over-year and also ahead of expectations. 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 was $1.2 billion, down 8% as expected, reflecting planned program attrition and customer pruning. This was partially offset by continued growth in robotics, advanced warehouse and retail automation. Core operating margin for this segment was 4.9%, up 40 basis points year-over-year. Turning now to cash flow and balance sheet metrics. Inventory days for the quarter were 75. Net of inventory deposits from customers, inventory days were 60, consistent with our targeted range of 55 to 60 days. Cash flow from operations in Q2 was $411 million, and net capital expenditures were $51 million, resulting in adjusted free cash flow of $360 million for the quarter. This keeps us well-positioned to deliver over $1.3 billion in adjusted free cash flow for the full fiscal year. Our balance sheet remains in excellent shape. We ended Q2 with $1.8 billion in cash and remain fully committed to maintaining our investment-grade credit profile. During Q2, we repurchased $300 million of shares under our existing share repurchase authorization. With that, I'll walk through our guidance for Q3 FY '26. Beginning with revenue by segment, we anticipate Regulated Industries revenue of $3.1 billion, reflecting some growth in renewables, steady health care demand and stabilizing trends in automotive and transport. For Intelligent Infrastructure, we expect revenue of $4.2 billion, up 22% year-over-year, supported by ongoing demand across cloud and data center infrastructure, advanced networking and communications and capital equipment. And for Connected Living & Digital Commerce, we expect revenue of $1.2 billion, down 10% year-over-year, reflecting continued program transitions and portfolio optimization, partially offset by growth in automation, robotics and advanced retail and warehouse programs. At the enterprise level, total company revenue for Q3 is expected to be in the range of $8.1 billion to $8.9 billion. Core operating income is expected to be in the range of $452 million to $512 million. GAAP operating income is expected to be in the range of $398 million to $458 million. Core diluted earnings per share is expected to be in the range of $2.83 to $3.23. GAAP diluted earnings per share is expected to be in the range of $2.36 to $2.76. We expect third quarter net interest expense to be approximately $73 million and full year interest expense to be approximately $280 million. Our core tax rate for Q3 and the full year remained at 21%. Let me close by saying Q2 delivered strong results and we are entering Q3 with solid momentum. Our performance this quarter demonstrates the strength of our diversified portfolio and disciplined execution. As we move through the year, our priorities remain consistent. We remain focused on margin expansion, capital efficiency and sustained cash generation. With that, I will turn the call over to Mike, who will share more on fiscal 2026 and our updated guidance.

Michael Meheryar Dastoor, Chief Executive Officer

Thanks, Greg, and good morning, everyone. Before I get in the quarter, I want to recognize and thank our teams around the world for the focus and execution they continue to show. Jabil's strong performance in the first half has required a great deal of coordination across customers, sites and the supply chain, and I'm sincerely grateful for what the Jabil team continues to do every day. As Greg outlined, the second quarter came in stronger than we had anticipated in December, with revenue approximately $500 million above the midpoint of our guidance, which also drove better-than-expected performances in both core operating margin and core EPS. For me, what was great to see, the revenue upside in the quarter was broad-based as cloud and data center infrastructure, networking and communications, automotive and renewables all outperformed ahead of expectations. When taking a closer look at the outperformance, clearly, our Intelligent Infrastructure segment, driven by the AI data center build-out, continues to be our growth driver in the near term, while the outperformance in areas where we've recently seen headwinds such as automotive and transportation and renewables and energy infrastructure suggest to me that those markets have bottomed and are now slowly recovering. And just as importantly, our teams across the organization did an outstanding job by delivering for our customers and converting the stronger demand into higher-than-expected margins and strong core EPS growth and high free cash flow generation. In summary, Q2 was a strong quarter and is yet another example of our strategy in action. The diversified model continues to matter and the momentum we're seeing gives us confidence as we move through the balance of the year. Let me now walk through our updated outlook for fiscal 2026 by segment, starting with Intelligent Infrastructure. We now believe our Intelligent Infrastructure segment will be approximately $16.5 billion, an increase of $1.1 billion over our previous expectations and 34% growth over fiscal 2025, driven by incremental growth in all 3 of our end markets in that segment. We now believe our cloud and data center infrastructure end market will be $10.4 billion, up approximately $600 million for the year relative to our forecast from 90 days ago, driven primarily by 2 factors. As a reminder, in September, we discussed our intention to retrofit our U.S.-based facility on the East Coast to support liquid-cooled racks which gives us the flexibility to support both liquid and air-cooled configurations. I'm proud to say that those modifications are largely behind us, which means we now have incremental capacity available a bit ahead of schedule. And all of this comes at a good time for us as demand continues to outstrip supply for the integration of highly complex racks and servers. And secondly, also within cloud and DCI, we're seeing strong execution regarding the ramp with our second hyperscale customer in Mexico, which is also contributing meaningfully to stronger outlook along with continued strength in data center power in Memphis. Also, our Hanley acquisition integration is going very well and according to plan. Next, in networking and communications, we now anticipate revenue will be approximately $400 million higher for the year coming in at $3.1 billion, reflecting stronger demand and exceptional execution across our advanced AI networking programs in India. This momentum is fueled by customers investing in greater high-speed interconnect capacity to keep pace with rapidly expanding AI workloads. It's also worth noting that our outlook for 5G spending is showing signs of recovery. In capital equipment, we're seeing positive momentum in this segment as well with our outlook for the year now expected to be $100 million higher for the year coming in at $3 billion. This reflects a combination of strong demand and execution in automated test equipment and more encouraging signs in wafer fab equipment, where the demand environment is improving beyond our earlier assumptions. Building on the strong results and positive momentum across segment, we're further increasing our fiscal 2026 AI-related revenue outlook by approximately $1 billion compared to December bringing the total to roughly $13.1 billion. This now represents a strong increase of 46% year-over-year. I'm really proud of our Intelligent Infrastructure team and their ability to stay ahead of the curve and diversify across data center stack with multiple products, customers and capabilities, which I believe is a key factor in our strong results and outlook for fiscal 2026. Simply put, our approach is delivering real value and is a key differentiator for Jabil. Our holistic strategy here centers in capabilities our customers need versus a product focus. We now have the capability to design and deliver integrated systems at the system level, combining compute, networking, power distribution and advanced cooling, all aligned to our customers' specific requirements. This seamless integration of capabilities accelerates deployment times and reduces total cost for our customers while leveraging our position as a U.S. domicile manufacturer, which is exactly what customers want, as demand for AI capacity continues to expand and global uncertainty continues to grow. Moving to Regulated Industries. We're seeing some momentum behind the bounce off the bottom for the end markets we play in. For fiscal 2026, we are increasing our Regulated outlook by approximately $500 million versus our December view to $12.5 billion. In automotive and transport, our strategy to focus on powertrain agnostic capabilities is working, as we continue to win programs on ICE platforms. On a positive note, and as I mentioned previously, we're also beginning to see momentum for EVs, mainly outside the U.S. We're encouraged by what we're seeing, but we're going to stay extremely disciplined in both our outlook and investments regarding EVs. In health care and packaging, our business remains both solid and aligned with our expectations for growth as we move in the back half of the fiscal year, 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. In terms of pipeline for health care, our outlook remains solid for this end market with good visibility in the program ramps across drug delivery, chronic disease management and other regulated devices in fiscal 2026 and beyond. We're also seeing improving conditions in renewables relative to what we assumed earlier in the year. Again, we'll stay measured here, but it's worth highlighting that the mix of solar business has shifted to accommodate both residential and commercial installations, which we believe will create a more sustainable level moving ahead. And finally, in Connected Living & Digital Commerce, our full year outlook here is largely in line with what we laid out in December, but the story within the segment continues to move in the right direction. While Connected Living remains more stable, Digital Commerce continues to grow, driven by a broad-based trend in automation, robotics and advanced retail and warehouse programs. I believe robotics and physical AI represent meaningful long-term growth opportunities for Jabil and should become increasingly important contributors to the segment's performance over the next several years. Given the strength of Q2 and the strong outlook for the back half of the year, we're increasing our full year outlook for revenue and core EPS. For fiscal 2026, we now expect revenues of approximately $34 billion, an increase of approximately $1.6 billion from a prior outlook of $32.4 billion. We're also raising our full year diluted earnings per share outlook to $12.25, up from $11.55. For the full year, we continue to expect core operating margins of approximately 5.7%. And importantly, we still expect adjusted free cash flow of more than $1.3 billion. Even with the higher revenue outlook and the working capital that naturally comes with that growth, we expect to maintain strong cash generation and stay disciplined on capital efficiency. As we move ahead, the focus from here does not change for us, profitable growth, disciplined mix, margin expansion and strong cash generation, that focus continues to create momentum across the business and allows us to navigate changing market conditions while steadily building long-term earnings power. Additionally, as part of our ongoing commitment to delivering value to shareholders, we remain focused on returning capital through share repurchases and other prudent capital allocation strategies. This approach not only reinforces the high level of confidence in our business but also demonstrates our dedication to enhancing shareholder returns over the long term. 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'm grateful for the trust they continue to place in Jabil. As we mark Jabil's 60th anniversary, it's also worth taking a moment to reflect on the strong foundation built over decades and the shared commitment that continues to move us forward. We are proud of our history, grateful to everyone who has shaped it and excited about what lies ahead. With that, I'll turn the call over to Adam.

Adam Berry, Senior Vice President, Investor Relations and Corporate Affairs

Thanks, Mike. Before we move into Q&A, allow me to close out with 5 quick key takeaways. First, we're exiting the first half with strong momentum. Q2 came in better than expected, and the strength was broad-based across multiple end markets. Second, Intelligent Infrastructure continues to perform at a very high level with solid segment margins reflecting strong execution and continued growth. Against that backdrop, demand tied to AI and data centers remain strong, and we now expect AI-related revenue to grow approximately 46% year-over-year to $13.1 billion in fiscal 2026. Third, we're encouraged by what we're seeing in Regulated Industries. While health care has remained solid, automotive and renewables are starting to improve off their lows. Moving ahead, we'll stay disciplined in our approach for these end markets as the recovery continues. Fourth, Connected Living & Digital Commerce is moving in the right direction, as our mix within the segment shifts towards automation, robotics and physical AI, which we believe will be a growth driver over time. And finally, all of this supports a stronger outlook for fiscal '26. We're raising our fiscal '26 revenue outlook and core EPS expectations year-over-year, while we also continue to expect healthy margins and strong free cash flows as we approach fiscal '27. One last shout-out to Jabil, happy 60th birthday. And operator, we're now ready for Q&A.

Operator, Operator

Our first question is from Ruplu Bhattacharya with Bank of America.

Ruplu Bhattacharya, Analyst

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?

Michael Meheryar Dastoor, Chief Executive Officer

Sure. Thank you, Ruplu. I know this is a crucial aspect of our story, so I'll provide detailed information. The growth in Intelligent Infrastructure was broad-based across all three end markets. I previously mentioned that cloud and DCI increased by approximately $600 million, networking and communications grew by about $400 million, and capital equipment rose by around $100 million. Therefore, the $1.1 billion increase in Intelligent Infrastructure is quite widespread. In the cloud and DCI area, the increase of $600 million in September included the retrofitting of our East Coast site to support liquid-cooled racks. This allows us the flexibility to use both liquid-cooled and air-cooled servers, ensuring backward compatibility and future readiness. I'm pleased to report that this retrofit was completed ahead of schedule by about two to three months, which has opened up additional capacity on the East Coast, positively impacting our cloud and DCI performance. Additionally, our second hyperscaler in Mexico is performing well, particularly regarding AI compute storage. Our power business in Memphis, including LV MV switchgear and in-row heat exchangers, is also doing exceptionally well, with expansion plans underway as previously mentioned. In networking and communications, which saw a $400 million increase, $300 million of that came from networking, while $100 million was related to 5G. It's great to finally see some positive momentum in the 5G sector. On the networking front, demand for high-speed interconnects continues to grow, driven by both Ethernet and InfiniBand requirements, alongside strong execution in our networking initiatives. Our sites in India are thriving, and we also have expansion plans there. Overall, the growth in networking and communications is widespread. Lastly, in capital equipment, we see strong demand driven by the rapid evolution in chip technologies and high-performance computing. AI applications are fueling the demand for testing, particularly automated test equipment, which is performing well. We are also observing signs of improvement in wafer fab equipment, although we are taking a cautious approach due to its inconsistent patterns. As we gain clearer visibility, we will adjust our estimates for wafer fab equipment. Thus, the $1.1 billion increase in Intelligent Infrastructure is thoroughly diversified. The AI segment has shown a year-on-year growth of $1 billion since December, and I am very excited about the current status of Intelligent Infrastructure.

Ruplu Bhattacharya, Analyst

Okay. I really appreciate it. As a follow-up, can I ask, so 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%. So 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?

Michael Meheryar Dastoor, Chief Executive Officer

As a reminder, we increased margins in December by 10 basis points. I feel positive about the current 5% and the projected 5.7% for FY '26. It could potentially be higher, but I want to be cautious given the current geopolitical climate and uncertainties. We'll provide an update on margin guidance in our next quarterly call, but I would be surprised if it doesn't exceed 5.7% at this point; we are just being more conservative. Regarding 6% and beyond, I have strong confidence in achieving that 6% for FY '27. I've stated before that I feel more optimistic about reaching 6% than ever. If you look at the main drivers for 6%, we have a solid mix of business, particularly at the enterprise level where our legacy businesses are rebounding. Additionally, within Intelligent Infrastructure, we're seeing encouraging signs of margin improvements as we introduce new capabilities like power and liquid cooling, which offer higher margins. Silicon photonics will also contribute to this. Overall, the 6% mix looks promising. With the operating leverage from a higher revenue base, we've increased revenues by $4 billion this year, which will yield benefits moving forward. We're experiencing better capacity utilization as well, up from 75% last year to 80% currently, which will also support higher margins. Furthermore, the acquisition of Hanley will enhance our Intelligent Infrastructure business and positively impact our margins. Therefore, achieving 6% and beyond is certainly attainable.

Ruplu Bhattacharya, Analyst

Could you provide an update on how you are using cash? You have growth in several areas, so how are you approaching capital expenditure for this year? Where are you focusing your investments for growth? Additionally, can you share your thoughts on capital structure, particularly regarding reducing leverage or potentially increasing it for mergers and acquisitions? How should we consider these aspects?

Gregory Hebard, Chief Financial Officer

Yes. So on cash, really strong free cash flow quarter in Q2 of $360 million. We feel really good about the full year guide of $1.3 billion-plus. What I would say is with the revenue increase and working capital is slightly expanding, so we are holding our guide to $1.3 billion-plus. But similar to Mike's comments on margins, we'll see as the back half progresses, if there's opportunities to increase. On CapEx, the back half, we'll see CapEx in the 1.5% to 2% range. So that will be slightly higher than what we saw in the first half. And overall for the year, it will be around 1% of revenue. So we feel really good about where we're allocating our CapEx and continuing to grow. On use of cash as well, we're still very much committed to our capital allocation framework. 80% of our free cash flow go into share buybacks. We still feel buybacks remain an excellent use of cash for Jabil as we feel our shares are undervalued, and we'll continue to be opportunistic in that area. So again, feeling really good on our leverage where we are today. To your question on M&A, yes, today, 20% of our use of cash is for kind of nip-and-tuck capabilities, and we've been really, I think, successful with that in the last couple of years. But we are at a point in leverage where we could lever up if the right type of M&A deal was available to us. So we're always monitoring that, and we'll be ready and positioned if those opportunities come about.

Operator, Operator

Our next question is from the line of Mark Delaney with Goldman Sachs.

Mark Delaney, Analyst

First, on the data center and AI market. Jabil discussed in prior quarters being close to winning a new customer or potentially multiple new customers and perhaps another large hyperscaler. I was hoping you could 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?

Michael Meheryar Dastoor, Chief Executive Officer

Sure, Mark. We've had some wins recently, particularly with the Intelligent Infrastructure segment, including a second hyperscaler where we are seeing positive progress. We're also in close discussions with a third hyperscaler and expect to finalize something soon, which would significantly contribute to our fiscal year '27. Our expansion in Memphis is on track, adding 1.5 million square feet, and our plans for North Carolina are also looking good. We anticipate that North Carolina will be ready by July or August, and we have many interested customers for that site. Overall, we're experiencing strong growth in Intelligent Infrastructure, along with our expansion efforts. Our approach here is very broad-based, spanning our entire portfolio, and I want to highlight the team for their holistic strategy. We're focusing on integration at a system level, addressing various customer needs across compute, networking, power, and cooling rather than just taking a siloed approach. Everything is progressing exceptionally well in Intelligent Infrastructure, and I am genuinely excited about the momentum we're gaining, especially with the design and engineering capabilities we've developed.

Mark Delaney, Analyst

Very helpful, Mike. My other question was on supply chain. I think even prior to the upside in demand that Jabil has been seeing, there was some tightness in certain components. Could you speak more on what you're seeing in some of these various areas? I think semiconductors and memory was one. I think maybe some other components have been tight as well. But now that demand is stronger as well as given what's going on with the Middle East, can you speak to your ability to get supply and just kind of cost elements that may be associated with getting that supply in light of everything that's happening?

Michael Meheryar Dastoor, Chief Executive Officer

So supply chain constraints, they are definitely there. They're getting a little bit tighter. I think if you look at memory, anything with DDR4 and lower is being impacted. One good thing about our growth, which is mainly in the Intelligent Infrastructure piece is with hyperscalers. Hyperscalers will get their fair share of the allocation and they're on DDR5 as well. So a different sort of perspective from that angle is some level of PCB constraints that we're seeing. All in all, though, I think the shortages that are out there, our supply chain team, and we've demonstrated this in the past. I think they do such a good job in getting components and especially in a constrained market, they're actually in their elements. I will say we have sort of factored in any supply chain constraints into our guide already. There might be some level of consumer sort of impact. Again, that's all factored in to our guide. At this stage, I don't see anything major coming out of the Middle East equation. Of course, that continues to go on for months and years. It could have an impact on the consumer, again. But overall, the summarized version is, yes, there's constraints, but I think Jabil is doing really well with those constraints.

Operator, Operator

Our next question is from the line of Steven Fox with Fox Advisors.

Steven Fox, Analyst

My first question was on the Intelligent Infrastructure operating margins. It seems like, Mike, you were coming off a peak capacity constraints in the quarter, and yet you still produced 40 basis points year-over-year improvements in margins and the margins were better than I thought they were going to be. So can you talk about the outlook for II margins going forward, especially now that you're ramping other capacity? And then I had a follow-up?

Michael Meheryar Dastoor, Chief Executive Officer

Sure. So if you look at Intelligent Infrastructure, you've got to think of it as a portfolio. It's across multiple capabilities. We have the DCI piece, the servers and rack piece, which will be at enterprise level margins. But if you look beyond that where the networking piece, the silicon photonics piece, some of the newer things that we're playing in, if you look at the power management piece with our LV MV gear and the in-row exchange heaters, if you think of the liquid cooling piece, those are at accretive margins. So overall, the trend in margins for Intelligent Infrastructure I feel will continue to evolve over time. And I'm expecting margin accretion for sure in Intelligent Infrastructure going forward, but of course, it will take some time to get all of this at scale, but the margins are absolutely moving in the right direction.

Steven Fox, Analyst

But are we past the peak drag in like all the manufacturing reconfigurations and capacity coming online? Like does that ease in the next couple of quarters or is there things I don't understand about that?

Michael Meheryar Dastoor, Chief Executive Officer

No, I just want to remind everyone that the retrofitting was primarily done to allow us the option to implement liquid-cooled racks alongside air-cooled ones. We believe that in the future there will be a mix of both. We are fully prepared for this transition, and all retrofitting has now been completed. This work was not carried out in several locations but was concentrated at our U.S. East Coast site, and we are approximately 2 to 3 months ahead of schedule. This progress gives us the confidence to slightly increase our projections. The retrofitting process is now behind us, and I believe it will be beneficial for our business moving forward, as liquid cooling power will become more important and will increasingly integrate into the Intelligent Infrastructure sector, particularly within the data center infrastructure market.

Steven Fox, Analyst

Great, that's helpful. As a follow-up, it seems that physical AI is no longer just a buzzword; there's significant investment happening. Can you highlight any programs or opportunities you are exploring as physical AI becomes a more practical application on factory floors or in warehouses?

Michael Meheryar Dastoor, Chief Executive Officer

Sure. Let me provide a broader perspective on physical AI and Jabil's role rather than focusing on specific program successes. First, physical AI is still in the early stages of commercialization, with limited real-world deployment. The costs are still high, and the complexity is considerable. One advantage for Jabil is that we engage at a very early stage. There's a synergy between the hardware we produce and the experience we gain. When considering the devices and machines that require AI in real-world applications, such as retail warehouse robots, autonomous vehicles, drones, industrial automation systems, and humanoid robots, Jabil is already involved from a hardware perspective. To enable what we refer to as physical AI, various capabilities are necessary, including sensors and vision systems, onboard computing and control hardware, connectivity, power systems, liquid cooling, turbo solutions, and motion actuation subsystems. We have significant experience in all these areas and have been working on them for the past few years. Currently, physical AI is indeed in a nascent stage of commercialization, but I believe it will become increasingly significant in the coming years as the sector evolves. The main challenges today are high costs and complexity, which will decrease over time. I believe Jabil is well-positioned to excel in this space.

Operator, Operator

Our next question is coming from the line of Samik Chatterjee with JPMorgan.

Samik Chatterjee, Analyst

Mike, maybe just going back to your earlier comments about the broader opportunities and engagements with hyperscalers. 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? What are you seeing in terms of your opportunity to intersect the capital spend we are seeing from the neocloud market as well? Any thoughts there? And I have a follow-up.

Michael Meheryar Dastoor, Chief Executive Officer

We're experiencing strong positive momentum with hyperscalers, and on the neocloud side, we're also securing business, particularly in high-frequency trade requirements. Our approach is broad; we aren't focused on individual products or silos. Instead, we're providing system integration at the system level across various aspects such as server racks, power, liquid cooling, networking, switching, and silicon photonics. Our capabilities are extensive. Looking at the Intelligent Infrastructure space now compared to three or four years ago, it has become much more diversified. It's diversified across customer bases, products, and our capabilities, as well as in design and large-scale manufacturing. This gives us a very positive outlook for Intelligent Infrastructure.

Samik Chatterjee, Analyst

Got it. And just maybe a follow-up relative to your capital needs or CapEx needs going forward. I mean we've seen some of your peers sort of announce pretty significant increases in CapEx. 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? And then as you think about sort of capital needs, is there also a need to sort of maybe retrofit more facilities towards liquid cooling relative to air-cooled racks like how are you thinking about that mix? And does that continue to evolve and drive some capital needs on that front as well?

Michael Meheryar Dastoor, Chief Executive Officer

I'll let Greg answer the capital expenditure part. However, regarding the Intelligent Infrastructure, what's great about this business is that it is very asset-light. We're not dealing with complicated equipment or special flooring, and the capital expenditures we see on the EMS side aren't as necessary in the Intelligent Infrastructure sector. Our plans for expansion will certainly proceed, and there is a significant demand for it. The asset-light nature of our investments gives me a lot of reassurance and is highly beneficial for our return on invested capital as well. Greg, would you like to add anything?

Gregory Hebard, Chief Financial Officer

Yes, Samik, just on CapEx, we feel comfortable on how we're modeling 1.5% to 2% going forward on CapEx to revenue. So even with all the capacity expansions and the growth we're seeing, we feel that's a good run rate.

Operator, Operator

Our next questions are from the line of Melissa Fairbanks with Raymond James.

Melissa Dailey Fairbanks, Analyst

Congrats on another fantastic quarter, and happy birthday. I want to give you a chance to talk about Regulated Industries, for a change. So 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?

Michael Meheryar Dastoor, Chief Executive Officer

Let me begin by discussing our automotive sector. A few years ago, we made significant investments in electric vehicles. Since then, we have shifted our strategy to emphasize capabilities on powertrain-agnostic platforms. This means our focus extends to internal combustion engines, hybrids, and electric vehicles. We have observed that original equipment manufacturers want to integrate across these platforms rather than manage separate programs in isolation. They are seeking modular solutions that can apply to all three categories. This approach is proving beneficial for us, and I believe we will continue to secure program wins in the internal combustion engine sector. I previously mentioned that we are experiencing positive momentum in the electric vehicle space for the second quarter. While the market in China is somewhat sluggish, we are seeing signs of recovery in other regions. As I noted in my earlier comments, we will maintain a conservative and cautious stance until we perceive stronger indicators of growth. Overall, we are definitely seeing improvements in various parts of Asia, excluding China.

Melissa Dailey Fairbanks, Analyst

Okay. Great. Great. And then in renewables and energy infrastructure, we toured the site in St. Pete, where you're doing some of the commercial and resi solar stuff. I'm wondering 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?

Michael Meheryar Dastoor, Chief Executive Officer

One reason for the increase in demand is largely due to installations. Previously, there was significant emphasis on residential projects, but we are now entering a phase where commercial installations play a much larger role. This trend appears to be less influenced by tax incentives compared to residential projects, making it more sustainable. We will continue to approach this with caution since we have seen renewables fluctuate in the past. However, overall, this situation is proving to be more sustainable than one might expect, even with the tax credits set to expire.

Melissa Dailey Fairbanks, Analyst

Okay. Great. And then one last final one on 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?

Michael Meheryar Dastoor, Chief Executive Officer

It's definitely accretive. It's accretive to enterprise, for sure, but it's accretive to the health care and packaging end market or the way we break it out as well. I think some of the GLP-1s and the CGMs have the scale. The minimally invasive technologies are more capability based and have the margins to go with it.

Operator, Operator

Our next question is from the line of Luke Junk with Baird.

Luke Junk, Analyst

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, certainly hearing more about higher speed, CPO-type things and scaled applications. So just curious on your updated perspective.

Michael Meheryar Dastoor, Chief Executive Officer

Sure. So just as history, yes, we acquired the photonics business from Intel a few years ago. And that business has done really well for us from a capability standpoint. I think you mentioned CPO. We're actually developing our capabilities across co-packaged optics, across near-pack optics, co-packaged copper. So we're going beyond just the co-packaged optics and silicon photonics piece. We're actually at OFC right now this week, and we're demonstrating our system integration capabilities. We're looking at next-gen optics from 800G to 1.6T. We're looking at the integrated advanced packaging solutions. And if you look at the cooling technologies that have to accompany some of these capabilities, we're well positioned to benefit from that. So all in all, I think if you look at some of the newer technologies that we're now developing and starting to talk about and showcase at OFC, I feel really good about whole silicon photonics piece all the time.

Operator, Operator

The next question is from the line of David Vogt with UBS.

David Vogt, Analyst

Just 2 for me. I know you get asked a lot about sort of the consumer Digital Commerce business, but given sort of the what appears to be kind of stability in that business relative to where you thought it would be 3 months ago and even 6 months ago. Can you give us a sense for how you're thinking about sort of that, at least it feels like a positive trajectory in that business relative to expectations a couple of months or even a couple of quarters ago? And then I'll give you my second question at the same time, Greg. So when we think about that business holistically, is there anything in that business that is inflecting higher that's going to drive better profitability, whether it's in sort of warehouse automation, Digital Commerce? Just trying to get a sense for how we should think about the margin trajectory of that business relative to the strength that you've seen in like Intelligent Infrastructure and Regulated.

Michael Meheryar Dastoor, Chief Executive Officer

Digital Commerce will continue to experience variability. In areas like retail automation, particularly with digital shelf labels, shelf data, analytics, checkout systems, and handheld scanners, we may see fluctuations. However, I am very optimistic about warehouse automation. Initially, this involved automated guided vehicles and autonomous mobile robots, but we have now progressed to complex automated storage and retrieval systems, which I expect to see grow at double-digit rates. Additionally, I mentioned earlier the development of humanoid robotics. We are in the early stages of this, but as we combine our advancements, it will shape the future. I believe that once costs decrease, we will see a shift from basic robots to intelligent humanoids. We are well-positioned for this transition. Overall, I expect Digital Commerce to continue to grow at double digits moving forward.

Gregory Hebard, Chief Financial Officer

Yes, David, this is Greg. Just on the margins and just to complement what Mike was saying, Digital Commerce is one of our highest margin end markets when you look at that succinctly. So it's absolutely accretive to Jabil. And with the growth rates we're seeing, we're really excited about that space from a margin perspective as well.

David Vogt, Analyst

Great. Can I just follow up? So 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?

Michael Meheryar Dastoor, Chief Executive Officer

Yes. So I think the whole 6% is a diversified mix. So it's much bigger than Digital Commerce. Obviously, we're seeing some of the regulated markets making a comeback. We're seeing our capacity utilization go up. We're seeing Intelligent Infrastructure pure scale and volume that's coming through, which will create some leverage as well. So it's one of the points that will drive us to 6% and beyond. By the way, we're not happy with just looking at 6%. That's not the area of focus anymore. It's how do we go beyond 6% is where the management team is focused on right now.

Operator, Operator

The next questions are from the line of Luke Junk with Baird.

Luke Junk, Analyst

Just in terms of launching off of the 6%-plus margin thought, Mike, 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. And 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.

Michael Meheryar Dastoor, Chief Executive Officer

Sure. So we've been using AI in our operations for a while now, even before AI was actually a thing. I think that that usage is just getting deeper and deeper in terms of inspections, in terms of quality, in terms of corrective actions. If you think about the breadth of operational experience that we have in our manufacturing sites, I think we have coverage for most problems in the world in manufacturing, and we have a solution for each of those problems. And the whole database, the actual corrective actions that we can take in one place based on learning from another site and the way AI facilitates that is actually a big thing as well. And then if you add AI at a corporate level within the functions, et cetera, that's going reasonably well. So AI will continue to be something that we focus on. It's AI for internal consumption is the best way I describe that to the team here. And it's going really well is what I can say.

Operator, Operator

At this time, I'll now turn the floor back to Adam Berry for closing remarks.

Adam Berry, Senior Vice President, Investor Relations and Corporate Affairs

Thank you for your interest in Jabil. That's all we have today. Thank you.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.