Celestica Inc. (CLS) Earnings

Management highlights

- Core Financial Results * Q2 2026 total revenue hit $4.7 billion, and adjusted EPS reached $2.54, both exceeding the high end of prior guidance ranges * Adjusted operating margin hit 8.2%, a new record high for the company, driven by strong operational execution across both segments * Adjusted return on invested capital (ROIC) reached approximately 55%, up 20 percentage points year-over-year * Generated $147 million in free cash flow in Q2, and $285 million year-to-date; full year 2026 capital expenditure guidance remains unchanged at $1 billion * Ended Q2 with $536 million in cash, $740 million in gross debt, and a gross debt to trailing 12-month adjusted EBITDA leverage ratio of 0.5 turns, with approximately $2.3 billion in total available liquidity - Strategic Business Developments * Record demand from CCS customers, with multi-year capacity alignment with leading hyperscale customers for AI infrastructure and networking programs * Multiple large new programs are ramping for launch in H2 2026 and through 2027, including custom accelerator rack deployments for OpenAI (with mass production planned for 2027) and the AMD Helios scale-up platform * Capital allocation prioritizes reinvestment in the business to support anticipated high growth, with share repurchases only pursued on an opportunistic basis * Global capacity expansion is underway, with investments in Thailand, Japan, and multiple locations in the United States (Texas) to meet customer regional manufacturing requests * Gaining market share across end markets driven by reliable large-scale execution, integrated design and manufacturing capabilities, and secured supply chains

Guidance

- Q3 2026 Guidance: * Total revenue projected between $5.25 billion and $5.55 billion, representing 69% year-over-year growth at the midpoint * Adjusted EPS projected between $2.88 and $3.08, representing 89% year-over-year growth at the midpoint * Adjusted operating margin expected to hit 8.4% at the midpoint, an increase of 80 basis points year-over-year * CCS communications end market expected to grow ~60% (driven by 800G growth and initial 1.6T mass production ramps), CCS enterprise end market expected to grow ~190% (driven by ongoing AI ML compute ramps), and ATS revenue expected to grow mid-teens percentage (driven by capital equipment demand) - Full Year 2026 Guidance (Upward Revision): * Total revenue outlook raised from $19 billion to $20.5 billion, representing 65% year-over-year growth * Adjusted EPS outlook raised from $10.15 to $11.30, representing 87% year-over-year growth * Full year adjusted operating margin outlook raised to 8.4%, up from the prior 8.1% outlook * Free cash flow outlook raised from $500 million to $600 million * CCS full year revenue growth expected to hit ~85%, ATS full year revenue growth expected to hit ~10% - 2027 Forward Outlook: * Revenue growth rate is expected to accelerate compared to 2026's 65% growth, driven by exceptionally strong customer demand and new program wins * Adjusted EPS growth is expected to outpace revenue growth as operating margins continue to expand * Growth will be driven by scaling 800G programs, accelerating 1.6T ramps, continued resilient 400G demand, and ramping new multi-billion dollar custom rack programs for OpenAI and AMD

Segment performance

1. Cloud and Communications Solutions (CCS): Revenue of $3.81 billion, up 84% year-over-year, accounting for 81% of total company revenue. Segment margin was 8.7%, an improvement of 40 basis points year-over-year, driven by strong operating leverage from higher volumes. Within CCS, communications end market revenue grew 62%, driven by 800G and 400G networking switch programs, while enterprise end market revenue grew 167%, driven by accelerated ramping of AI ML compute programs with hyperscaler customers and stronger-than-expected storage demand. The HPS business within CCS generated $1.9 billion in revenue (up 58% year-over-year), representing 41% of total company revenue. 2. Advanced Technology Solutions (ATS): Revenue of $888 million, up 8% year-over-year, accounting for 19% of total company revenue. Segment margin was 6.3%, up 100 basis points year-over-year, driven by operating leverage and higher-margin engineering-driven product mix.

Risks & headwinds

- Global component supply constraints remain the primary near- and medium-term risk, as industry-wide component supply continues to lag demand for AI and networking infrastructure * Extended component lead times (over 52 weeks for some products) require advanced long-term planning, and any supply disruptions could impact the ability to meet customer demand * While management has secured supply agreements for key components and customer orders for long-lead silicon are non-cancelable and non-refundable, unexpected supply chain disruptions could still delay program ramps - Geopolitical uncertainty creates demand for regionalized manufacturing, requiring incremental capital expenditure to expand capacity across multiple global regions - While demand currently outpaces available supply, any sustained slowdown in AI infrastructure investment from hyperscaler customers would negatively impact growth outlooks

Analyst Q&A

• Q: What is the split of 2027 growth between existing programs and new wins like the OpenAI and AMD programs? /

  A: 2027 growth will be led by scaling of existing 800G and 1.6T switch programs, plus continued resilient demand for 400G. New programs including OpenAI custom racks and the AMD Helios scale-up platform are each multi-billion dollar opportunities in 2027. ATS growth driven by capital equipment demand will also contribute to 2027 revenue expansion.

• Q: What changed over the last 90 days to give management confidence to signal accelerating 2027 growth? /

  A: AI ML compute demand increased significantly for both 2026 and 2027, and demand for 800G networking programs also grew dramatically. Extended component lead times require securing materials far in advance, and now that binding material orders for 2027 are in place, management gained enough visibility to raise the growth outlook. Multi-year customer demand conversations now extend out to 2028 and 2029, with demand continuing to strengthen.

• Q: Where is the incremental 2026 margin expansion coming from, and what would incremental margin look like if more supply becomes available? /

  A: Margin expansion is driven by two core factors: 1) CCS (which carries higher margins than ATS) is growing much faster than ATS, so it has a natural positive mix effect on overall company margins, and 2) strong operating leverage from high factory utilization, driven by disciplined OpEx spending and productivity gains. If more supply unlocks additional revenue, incremental margins will remain strong due to limited incremental SG&A required, with final outcomes dependent on product mix.

• Q: What is driving Celestica's recent market share gains, and how is competitive intensity evolving? /

  A: Customers prioritize reliable supply at scale amid current industry constraints. In many dual-sourced programs, Celestica is gaining share from other providers because it already has pipelined materials and proven manufacturing processes to ramp quickly. The company's integrated design and manufacturing capability (with ~2,000 design engineers by end 2026) that enables smooth transitions from product development to volume ramp is a key competitive differentiator driving share gains.

• Q: What is the expected revenue recognition structure for new 2027 programs like OpenAI? /

  A: The OpenAI program is expected to be structured as a consigned program, meaning material costs will not flow through Celestica's revenue. This is consistent with existing dynamics: most networking programs include silicon in Celestica's revenue, while most compute programs do not, and there is no major change to this accounting approach going into 2027.