- Q1 Revenue Performance: Achieved $8.3 billion, core operating income of $454 million (5.5% margin), and $2.85 core EPS, all at or above guidance.
- Data Center Growth Momentum: Hyperscaler segment revenue to hit $1 billion (up from $750 million) driven by AI storage and services, with $900 million in new business secured for 2026.
- Full-Year Guidance Raised: Revenue up to $32.4 billion, core operating margin of 5.7%, and $11.55 core EPS, with adjusted free cash flow maintained at $1.3 billion.
- Hanley Acquisition Impact: Adds $500 million in annual revenue, boosting margins and enabling power/energy management solutions for infrastructure growth.
- Capital Efficiency: $323 million cash flow from operations and $272 million adjusted free cash flow in Q1, with CapEx outlook at 1.5%-2% of revenue.
Segment Performance and Outlook
The company has seen a strong pipeline, particularly with its second hyperscaler customer, with revenue expected to reach around $1 billion, up from the previously mentioned $750 million. The growth is driven by AI storage and demand for hyperscaler services. The healthcare business has grown to $5.6 billion, with low single-digit growth expected going forward. The company is actively working on deals to add capabilities, similar to its previous GLP-1 OSD transaction. The acquisition of Hanley will provide accretion on margins and leverage from incremental revenues.
Growth Drivers and Opportunities
The data center business is seeing significant growth, with a strong pipeline driven by demand for AI and hyperscaler services. The company is engaged with customers to address power and heat constraints in data centers, offering design, engineering, and liquid cooling solutions. The company expects its gross margin to remain in the range of 9% to 9.5% for the fiscal year. The growth in data center infrastructure is driven by liquid cooling solutions, with the company feeling that demand is strong and having no concerns on that front.
Valuation and Estimates
With a P/E Ratio of 34.49 and an EV/EBITDA of 14.84, the market is pricing in significant growth expectations. Analysts estimate next year's revenue growth at 11.3%. The company's ROIC of 17.21% and ROE of 51.13% indicate strong profitability. The Free Cash Flow Yield of 5.29% is also attractive. Given the raised full-year revenue guidance and the strong pipeline, the company's valuation multiples may be justified, but investors should closely monitor the execution and growth prospects.
Guidance and Future Expectations
For Q2 FY '26, revenue is expected to be $7.5 billion to $8 billion, with core operating income of $375 million to $435 million and core diluted earnings per share of $2.27 to $2.67. The full-year revenue guidance was raised to $32.4 billion, with core operating margin expected to be 5.7% and core diluted earnings per share of $11.55. The company expects to deliver over $1.3 billion in adjusted free cash flow for the full year, maintaining its previous guidance.