Plexus Earnings Call Highlights Strong Growth Pipeline

Plexus ((PLXS)) has held its Q1 earnings call. Read on for the main highlights of the call.

Plexus Signals Strong Growth Momentum Despite Near-Term Cash Headwinds

Plexus’ latest earnings call struck an upbeat tone, with management emphasizing broad-based operational strength and growing demand that more than offsets some temporary financial and supply-chain headwinds. Revenue and earnings landed at or above guidance, high-value program wins—especially in Aerospace & Defense—expanded the company’s future revenue base, and a sizeable opportunity funnel supports confidence in achieving, and potentially exceeding, long-term growth targets. At the same time, Plexus acknowledged pressure on working capital, higher inventory, and some sector and supply-chain softness, but framed these as deliberate investments to support accelerating growth and scalable margin improvement into fiscal 2026.

Revenue Growth and Sequential Momentum

Plexus delivered Q1 revenue of $1.07 billion, hitting the midpoint of guidance and marking its fourth straight quarter of sequential growth. That top line was up 10% year over year, underscoring accelerating demand across key end markets despite pockets of industrial weakness. Management highlighted this trend as evidence that recent program ramps and sector diversification are now translating into more consistent growth, providing a stronger base from which to pursue its multiyear targets.

Strong Earnings Performance

Profitability remained solid alongside the revenue gains. Non-GAAP diluted EPS came in at $1.78, matching the high end of guidance, while non-GAAP operating margin held at 5.8%, in line with expectations even as the company increased spending on growth and automation initiatives. This performance suggests Plexus is managing costs effectively and expanding output without sacrificing margin quality, supporting its goal of delivering scalable earnings as revenue advances.

Material New Program Wins

Growth visibility was bolstered by significant new business. Plexus secured 22 new manufacturing programs in the quarter, representing $283 million in annualized revenue once fully ramped. The standout was Aerospace & Defense, which contributed $220 million in wins—described as a record quarterly performance for that segment. These awards deepen Plexus’ presence in high-mix, high-reliability applications and position the company for structurally higher revenue as these programs move through ramp and into steady-state production.

Robust Opportunity Funnel

Beyond booked wins, Plexus’ pipeline remains substantial. The company reported a $3.6 billion funnel of qualified manufacturing opportunities, signaling a large pool of potential future programs across its end markets. Within this, the engineering solutions funnel for Aerospace & Defense reached an all-time high, reinforcing that design and engineering engagements are feeding future manufacturing opportunities. Management cited this robust funnel as a key reason for its confidence in sustaining double-digit growth.

Upgraded Near-Term Guidance and Fiscal 2026 Upside

Building on Q1 strength, Plexus raised its near-term outlook. For Q2, the company guided revenue to a range of $1.11 billion to $1.15 billion, implying about 6% sequential and 15% year-over-year growth at the midpoint. Management also said it now sees potential to meet or exceed the high end of its 9%–12% fiscal 2026 revenue growth target, driven by the current win momentum, sector mix, and expanding opportunity funnel. This signals a more optimistic long-term growth profile than previously communicated.

Sector Highlights: Healthcare and Aerospace & Defense

Sector performance was led by Healthcare/Life Sciences and Aerospace & Defense, which management expects to be the primary growth engines over the next few years. Healthcare/Life Sciences revenue rose 10% sequentially in Q1, supported by $40 million in new program wins. Combined with the record $220 million of Aerospace & Defense wins, Plexus now anticipates both sectors will outpace the company’s overall 9%–12% fiscal 2026 growth target. This tilt toward regulated, higher-complexity markets should support both revenue durability and margin quality.

Strong Capital Efficiency and Returns

Despite higher investment, Plexus maintained attractive capital efficiency. Return on invested capital reached 13.2%, about 420 basis points above the company’s weighted average cost of capital, indicating value-accretive growth. The company ended Q1 in a net cash position and retained $440 million of available capacity on its revolving credit facility, giving it ample financial flexibility to fund ongoing program ramps, automation projects, and selective shareholder returns.

Reaffirmed Free Cash Flow and Strategic CapEx

Management reaffirmed its fiscal 2026 free cash flow target of approximately $100 million while simultaneously lifting its capital expenditure plans. Capex for the year is now projected at $100 million to $120 million, up from prior expectations, as Plexus invests in capacity, automation, and productivity-enhancing technologies. The company emphasized that these spending plans are strategic—intended to enable growth and margin expansion—while still aligning with its medium-term free cash flow commitments.

Operational and Automation Initiatives

Plexus is leaning heavily into automation and digital initiatives to support scalable margins. The company reported ongoing deployment of solutions such as AutoStore systems, robotics, and AI tools across its manufacturing network. Some robotic deployments are achieving payback periods of under 12 months, underscoring attractive returns on these investments. Additionally, Plexus redeployed seven surface-mount technology (SMT) lines to sites with greater demand, improving asset utilization and limiting the need for incremental footprint expansion.

Site-Level Margin Tailwinds

Specific site actions are expected to provide incremental margin benefit in the current year. A new facility in Thailand is projected to contribute approximately 25–30 basis points of margin improvement for the full year as it ramps efficiently and benefits from scale. Meanwhile, operational issues at a Malaysia site—described as relatively small in the context of the overall network—are being addressed, with management expecting that location to approach breakeven by Q2. Together, these site-level dynamics should support modest but tangible margin tailwinds.

Industrial Sector Weakness

The main soft spot in the portfolio remains the Industrial segment. Industrial revenue declined 8% sequentially in Q1, reflecting ongoing weakness in certain subsectors. While semiconductor capital equipment and industrial equipment are beginning to ramp, other end markets within the segment remain sluggish. Management indicated that a more broad-based recovery in Industrial is needed to restore stronger growth, and near-term expectations for this sector remain cautious relative to Healthcare and Aerospace & Defense.

Working Capital and Cash Consumption

The company’s growth strategy is currently weighing on cash flow, as Plexus invests in working capital to support anticipated revenue ramps. Cash from operations consumed about $16 million in Q1, and together with approximately $35 million in capex, the quarter saw a net cash outflow of around $51 million. Management framed this as a deliberate decision to prebuild inventory and support customer programs, with the expectation that cash conversion will improve as these ramps mature and revenue flows through.

Longer Cash Cycle and Higher Inventory Days

These working capital investments are visible in Plexus’ cash cycle metrics. The cash conversion cycle increased to 69 days in Q1, up six days from the prior quarter. The move was driven largely by a six-day increase in inventory days, as the company stocked components and materials to meet expected demand. While this ties up near-term cash, management sees it as necessary to secure supply and support customer schedules as new wins transition into production.

Higher CapEx and Near-Term Cash Use

Reflecting its growth investments, Plexus raised its fiscal 2026 capital spending guidance to $100 million–$120 million, above prior estimates. This elevated capex, alongside inventory builds, means the company expects cash usage to remain modest in the near term. For Q2 specifically, management anticipates cash to be roughly breakeven to slightly negative, with first-half cash outflows viewed as the cost of supporting stronger revenue later in the cycle. The company continues to manage this within a strong liquidity and net cash position.

Seasonal and Compensation Headwinds

Operating margin in the near term will also feel some seasonal and compensation-related pressure. For Q2, Plexus expects a 50–60 basis point headwind to operating margin from seasonal compensation and variable incentive expenses. Selling, general and administrative expenses are set to rise to $54 million–$55 million, including increased stock-based compensation. Management indicated these costs are manageable and consistent with rewarding performance and retaining talent in a competitive labor market.

Supply-Chain Lead Time Pressure

Supply chain dynamics remain a watch point. Plexus noted rising lead times in certain semiconductor and printed circuit board components in Asia-Pacific. In response, the company is prepositioning inventory and extending purchase order coverage with suppliers, actions that support delivery reliability but put further pressure on working capital. Management does not view the situation as a broad-based shortage at this stage, but is taking proactive steps to prevent disruptions as demand ramps.

Higher Near-Term Non-Operating Expense

Below the operating line, Plexus expects a near-term rise in non-operating expenses, mainly due to interest costs. After recording $3.4 million of non-operating expense in Q1—helped by favorable items—the company forecasts this to increase to about $5.3 million in Q2. While not a major swing factor for the investment case, the higher interest expense will modestly temper EPS growth relative to operating performance.

Aerospace Pull-Through Uncertainty

Although Aerospace & Defense bookings were robust, management acknowledged some uncertainty around the timing of commercial aerospace production pull-through, particularly tied to major OEMs. Production-rate increases at large aircraft manufacturers have not yet fully translated into higher volumes for Plexus, creating upside potential but also some timing risk. The company remains optimistic that these programs will eventually contribute more meaningfully, but is not yet embedding full upside into its near-term forecasts.

Forward-Looking Guidance and Growth Outlook

Looking ahead, Plexus’ guidance underscores confidence in sustained growth and steady margins. For Q2, the company projects revenue of $1.11 billion–$1.15 billion, non-GAAP operating margin of 5.6%–6.0%, and non-GAAP EPS of $1.80–$1.95, supported by a gross margin range of 9.9%–10.2%. SG&A is expected to rise modestly, non-operating expense is forecast at about $5.3 million, and the effective tax rate should land between 16% and 18%, assuming around 27.2 million diluted shares. Looking to fiscal 2026, Plexus now sees potential to reach or surpass the high end of its 9%–12% revenue growth target, while reiterating its ambition for approximately $100 million of free cash flow and managing a cash cycle targeted in the mid-60-to-high-60-day range. Elevated capex in the $100 million–$120 million band is positioned as a strategic enabler of this growth and margin profile.

In summary, Plexus’ earnings call painted a picture of a company leaning into a strengthening demand environment with disciplined execution and targeted investment. Revenue and earnings are tracking ahead of the broader market recovery, high-quality program wins in Healthcare and Aerospace & Defense are expanding future revenue visibility, and automation initiatives are positioning the business for scalable margin gains. While higher working capital, industrial softness, and supply-chain lead-time pressures will weigh on near-term cash flow and margins, management’s reaffirmed free cash flow and growth targets suggest these are temporary trade-offs in pursuit of a larger, more profitable revenue base by fiscal 2026.