Celestica Inc. Q2 FY2025 earnings call

• Second quarter revenues of $2.89 billion and adjusted EPS of $1.39 exceeded high end of guidance ranges. Adjusted operating margin of 7.4% was highest in company history. • CCS segment grew strongly due to demand for networking products from hyperscale customers. • ATS segment had higher-than-expected revenues driven by capital equipment and industrial businesses, with segment margins improving. • Tariffs had minimal impact on financial results. • Inventory balance at end of second quarter was $1.92 billion. Cash deposits were $397 million. Cash cycle days were 66. • Capital expenditures for second quarter were $33 million. Year-to-date capital expenditures were below anticipated range but expected to increase in second half. • Generated $120 million of free cash flow in second quarter, $54 million higher than prior year. • Cash balance at end of second quarter was $314 million, combined with $660 million borrowing capacity, total liquidity was approximately $1 billion. • Repurchased approximately 600,000 shares for cancellation at a cost of $40 million under normal course issuer bid.

ATS segment revenue totaled $819 million, up 7% and accounted for 28% of total company revenue in the second quarter. CCS segment revenue was $2.07 billion, up 28% and accounted for 72% of total company revenue. HPS revenues of $1.2 billion in the second quarter were higher by 82% and accounted for 43% of total company revenue. ATS segment margin in the second quarter rose to 5.3%, up 70 basis points. CCS segment margin in the second quarter was 8.3%, an improvement of 130 basis points.

• Third quarter revenue projected to be between $2.875 billion and $3.125 billion, representing growth of 20% at midpoint. Adjusted earnings per share anticipated to be between $1.37 and $1.53. Non-GAAP operating margin would be 7.4% at midpoint of revenue and adjusted EPS guidance ranges. Adjusted effective tax rate for third quarter expected to be approximately 19%. • 2025 annual revenue outlook increased from $10.85 billion to $11.55 billion. Non-GAAP adjusted EPS outlook increased from $5 per share to $5.50 per share. Free cash flow outlook increased from $350 million to $400 million. • In ATS segment, anticipate revenue to be down in low single-digit percentage rate in third quarter. In CCS segment, project communication end market revenue to grow in low 60s percentage range. In enterprise end market, expect mid-20s percentage decrease in revenue in third quarter.

• Changes to tariffs or trade restrictions could impact results as their potential impact cannot be reliably predicted. • Material availability uncertainties. • Customers may choose to temporarily pause orders due to continuing turmoil in tariff environment.

Q: Could you speak to the breadth of customers as well as a number of platforms that you have on 800-gig switch ports that are helping drive your upward revised outlook for CCS?

A: Yes. On 800G, every 400G customer we had has turned into an 800G customer. Our market share for 800G is larger than for 400G based on early wins. The 400 demand has been strong, and 800G is ramping and on parity with 400G volumes in second quarter and continuing to accelerate. We've won 800G programs with top 3 hyperscaler customers, with one showing acceleration in second quarter and others catching up in back half.

Q: Congrats on the continued momentum. Mandeep, I wanted to zoom out maybe and given the Q3 guidance and the full year guidance. The implications for Q4, maybe a little decel coming in CCS and with enterprise coming back a little bit into year-end. Just wondering if you can walk through some of the puts and takes on how to think about sort of the momentum into year-end.

A: Yes. We're pleased with the full year outlook. The $11.55 billion is 20% growth. It implies Q4 would maybe grow at 18%. We're taking into consideration uncertainties such as material availability or customers temporarily pausing due to tariff environment turmoil. The $11.55 billion is our high confidence view at this point.

Q: So maybe, Rob, can you dig in a little bit on the 800G ramp that you referenced, or Mandeep referenced? It looks like Google, if I strip out sort of what's going on with TPU, was probably incredibly strong from an 800G ramp. And can you maybe talk to what you're seeing from the other 2 800G customers in terms of how they're ramping in 2Q into 3Q? Because it looks like maybe one of them might be a little bit more muted to start this 800G ramp. I wonder if that's just more timing. And then I'll give you my follow-up is when I think about the capital equipment business that had a little bit of a pull forward into H1, can you may be shed some light on -- was that more on the lithography side, memory, logic? Kind of what are you seeing by end vertical within capital equipment H1 versus H2.

A: On capital equipment, Q2 was very strong growth, 20-plus percent, driven by normalization of inventory levels started in second quarter of 2024. Going into third quarter, seeing some incremental demand from a couple of customers but offset by decrease in demand by others, hence flattish. For capital equipment, it will have a growth year in line with market rates but more front-end focused than back-end. On 400G versus 800G, in second quarter, saw about 50-50 split between 400G and 800G networking volumes. As we get into back half of year, 800G ramping up in excess of that, but 400G has long tail through this year and into next year based on visibility. There are ebbs and flows, with couple of customers ramping harder and faster on 800G.

Q: On the cash cycle, is it reasonable to expect some ongoing improvement in cash cycle days just simply as CCS is becoming a bigger part of the mix relative to ATS?

A: It's certainly an area that we continue to work to improve. We've generated positive free cash flow every quarter for over 5 years and are raising the outlook this year. We continue to have confidence in our cash generation ability while growing revenues at 20% clip. We think we'll continue to have strong inventory turns, lead times on materials are steady at around 16 weeks, and expect to continue to turn inventory quickly. 400 is the right number for this year, targeting higher number next year.

Q: Strong print here and maybe if I can start with your CCS guide for the full year. You've raised that substantially for the full year. I'm just wondering, when you call out strengthening demand for the second half, you're just calling that out more for the Enterprise segment itself. Maybe if you can sort of dive into, is that the area that you're seeing more visibility from your customers? Or does that extend over to 800 gig in terms of volume expectations for the second half? Or is there really sort of the upside surprise on communication more from 400 gig demand being more resilient than you expected earlier? And I have a follow-up.

A: On the enterprise, as we've talked about, we're going through a technology transition and that program is ramping nicely. We're seeing good contribution in third quarter and more in fourth quarter, with expectation to start resuming growth in fourth quarter. On communications, acceleration of growth is in 800G programs. Saw strong growth in second quarter with largest customer and now seeing pick up with other large hyperscaler customers. 400G is moderating but still strong demand, replaced by 800G. If we saw demand strength across all areas, we could do more than outlined.

Q: Your next question comes from the line of Paul Treiber with RBC Capital Markets. Yes. Just could you speak to the new program pipeline that you're seeing right now and then the opportunity to expand further with existing hyperscalers, but then also additional hyperscalers beyond the top 3 that you have. And can you speak to it in terms of -- on the communications side, but then also the enterprise side?

A: Sure. In terms of new programs, we're continuing to build breadth of offering with existing hyperscalers. Having conversations or proof of concepts to provide AI compute products. Focus on increasing share of wallet with hyperscalers, and having interesting conversations on penetrating new hyperscalers, new regions, and digital natives. Recent digital native win includes design manufacturing for full orchestrated AI rack, broadening solutions for additional customers.

Q: Nice results. My first question is on your 10% of sales and more customers. You had 3 in Q1, it dropped to 2. How many are you expecting in the September quarter?

A: It's Mandeep here, and really nice to see Citibank back in the coverage universe for us. Welcome. We saw strong growth across our top 3 customers. One just fell under but rounds to 10% still. We still saw quarter-to-quarter growth with that customer. Expecting 3 customers above 10% going into third and fourth quarter.

Q: Can you hear me, okay? Yes. I wanted you to bridge what we hear from hyperscalers. Recently, we heard a big CapEx increase last week from a large hyperscaler, we're getting 3 other updates this week. And just bridge how we should think about those increases relative to your change in guidance?

A: Why don't I start, Todd. Look, there's always a little bit of a lag between the announcements of the hyperscalers are making and the forecast that we're receiving from them. And so when we see these increases come through in prepared remarks from our customers, often it's an affirmation of what we've already been seeing from a demand perspective. And so to the comment that I had made earlier, we're seeing very strong demand right now in the back half of this year. That demand outlook with our customers looking at their forecast is continuing into the first half. And so really, we look at the announcements that have just been made and we expect will be made as an affirmation of the forecast that we've already received.

Q: There's been a number of questions on switch market share. I wanted to turn to server market share. It seemed like you had lost a little bit at the end of last year. Now it's coming back. Could you just frame up what your server market share trends are at the moment?

A: Yes, thanks. So I would say that we are gaining share with our largest customers with respect to AI server market share. Frankly, a lot of that is just due to strong execution and ability to build these very complex products at scale. And as Mandeep mentioned, we just went through a technology transition. We see these programs starting to ramp in the third quarter and gaining some significant momentum as we exit the year, and also into next year. And we also expect this product line to produce probably even more revenues based on that increased share as we get into late '26 and into '27 and beyond based on next-generation programs.

Q: Can' you hear me now?

A: Yes, we can hear you.

Q: All right. Okay. I think you had -- okay, so you've had some very strong momentum on 1.6 terabyte, and I'd love to get some context on whether that has continued. I think earlier in the call, you said that the full rack proof point was opening up new opportunities. And so if you can just talk about the halo, that the relationship with the hyperscalers, this 1.6 terabyte win rate and the full rack proof point. So what is that doing around the opportunity to grow white label opportunities along the ODM path?

A: Yes. Thanks, Rob. So on the 1.6, we continue to win 1.6T variant. We're continuing to grow our market share on these variants with those customers. In terms of the digital native win and doing that fully orchestrated rack, that is certainly opening up new doors and new conversations with people, even the hyperscalers. But the entry point on that might be next-generation systems in terms of what more can we do. So those conversations are still, I'll call it, in the early stages, but producing a lot of interesting conversations.

Q: Okay. And then my second question, just on the full rack solution as you add maintenance and service into the mix of services. I know that you acquired NCS Global, but do you need to acquire? Or are you well positioned for that shift? And then what's the potential timing? If you give any context around margin impact and timing, that would be helpful. I'll pass on.

A: Yes, I'll start. I'll let Mandeep finish on the M&A front. Services is certainly a major focus area for us at NCS Global was a fantastic acquisition and is certainly supporting us in order to really support the demand that we have from our customers on services, we will need and are planning to expand our services footprint and offering. And with that, I'll turn it over to Mandeep. Mandeep Chawla: Yes. Rob, so services is an area of focus for us. And the acquisition for NCS was able to bring in some good capabilities and a good foundation. We do have a very extensive partner network. And so we don't see any gaps in being able to support the customer wins that we've already received. But there are going to be opportunities along the way to vertically integrate. And so we do continue to look at various targets. And if we can see the synergies come to bear, then we will be comfortable to go ahead and act. But our funnel does continue to include service target. Robert Andrew Mionis: And obviously, services margins would be north of the company margins as well and be accretive.

Q: Mandeep, this is a question for you. You mentioned that you have enough capacity or maybe Rob mentioned you had enough capacity for calendar year '26 growth in CCS, and you have -- basically a visibility for the next 12 months. Can you help us understand when you would need to make adjustments to your capacity as we move through '25 into '26 for the back half of '26 and '27? How should we think about that flowing through your capital priorities as demand strengthens or your visibility improves as we move forward?

A: Yes. Why don't I start off on the number side, and Rob can jump in as needed. So we -- if you look at one of those large buildings that we were able to add on in Thailand, we were able to do in about 12 months. And so expansions in areas like Mexico and Southeast Asia, about 12-month lead time is required. Just as a reminder on the approach that we take is, we have a campus strategy, the way our network is set up. And so we do have the ability to add on additional buildings within the campuses typically, and then we can quickly fill them with equipment. We have already made decisions to expand capacity to support programs that we've won in areas such as Thailand, such as Richardson, Texas, such as in Mexico. You'll see the CapEx spend in the first half of this year being a little bit on the lighter side, and that's just reflective of expenditures that we've actually incurred so far. But the back half of this year is going to be a little bit more weighted. Just taking a step back from an overall CapEx intensity perspective, 1.5% to 2% is still the right number for us. This year, we'll be tracking towards $200 million, just a bit under 2%. But 1.5% to 2% of our revenues continues to be around the same amount that we would expect to spend. And I'll just highlight that only about 40 basis points of our CapEx spend is for maintenance. And so the rest of it is to support growth programs, which gives us a lot of discretion on where we point those dollars. But right now, we think that we can meet the demand for the programs we've already won with that amount spend.