Celestica, Inc. Q3 FY2026 earnings call

• Strategic Positioning: Celestica is positioned as a critical launch partner for next-generation AI infrastructure, leveraging four pillars: differentiation through co-design, growth in secular tailwinds, visibility via multi-generational customer engagements, and disciplined investment frameworks.
• Design-Led Model: The company utilizes a Joint Design Manufacturing (JDM) model that integrates design and manufacturing from early R&D through commercialization, eliminating friction and de-risking ramp delays. This vertically integrated approach creates a competitive moat challenging for competitors to replicate.
• Capacity Expansion: Significant investments are being made to expand global capacity across North America (Texas), Mexico (Monterey), Asia (Thailand, Japan, Malaysia), and Europe. Investments focus on adding hundreds of megawatts of power and automating L11 rack assembly lines to address bottlenecks in high-sensitivity environments.
• Technological Leadership: Management highlighted leadership in 800G and higher bandwidth Ethernet networking, with a projected shift toward 1.6T dominance in 2027. Key innovations include the DS6000 series switches, co-package optics (CPO) designs, and full-rack scale solutions for custom ASICs like OpenAI’s Jalapeno and AMD’s Helios architectures.
• Operational Excellence: The company emphasizes rigorous quality standards through the Celestica Operating System, ensuring high yields and reliability. Engineering talent is expanding, with plans to grow HPS engineers from over 1,600 to over 2,000 by next year, supporting a broad portfolio of active programs.

• Connectivity and Cloud Solutions (CCS): Revenue was $4.9 billion, up 102% year-over-year, accounting for 84% of total company revenue. The segment margin improved to 8.9%, an increase of 60 basis points. Sub-segments include Networking (up 68%) and Compute and Storage (up 242%). High-Performance Systems (HPS) within CCS generated $2.3 billion in revenue, representing 40% of total company revenue.
• Advanced Technology Solutions (ATS): Revenue was $957 million, up 23% year-over-year, accounting for 16% of total company revenue. The segment margin increased to 6.6%, an improvement of 110 basis points, driven by better mix and operating leverage.

• Fourth Quarter 2026 Guidance:
  • Revenue: Projected between $6.275 billion and $6.575 billion (midpoint implies ~76% YoY growth).
  • Adjusted EPS: Expected between $3.37 and $3.57 (midpoint implies ~84% YoY growth).
  • Adjusted Operating Margin: Anticipated at 8.7% (an increase of 100 basis points).
  • Effective Tax Rate: Approximately 20%.
• Full Year 2026 Outlook (Revised Upward):
  • Revenue: Raised from $20.5 billion to $21 billion (implying ~69% YoY growth).
  • Adjusted EPS: Raised from $11.30 to $11.55 (implying ~91% YoY growth).
  • Adjusted Operating Margin: Maintained at 8.4%.
  • Free Cash Flow: Reduced from $600 million to $460 million due to working capital investments required to support accelerating 2027 growth.
• Full Year 2027 Outlook:
  • Revenue: Projected at $40 billion (implying ~90% YoY growth).
  • Non-GAAP Operating Margin: Expected to expand to 9%.
  • Adjusted EPS: Anticipated at $21.50.
  • Capital Expenditures: Expected to range between $1.5 billion and $2 billion.
  • Cash Flow: Net cash usage anticipated in 2027 due to massive working capital and capex needs; positive free cash flow expected to return in 2028.

• Working Capital Intensity: The aggressive growth trajectory requires significant working capital investments, leading to negative free cash flow in 2027 despite strong earnings.
• Supply Chain Constraints: Dependency on component availability (silicon, optics, substrates) and manufacturing capacity ramps poses execution risks. However, management expresses high confidence in navigating these hurdles based on long-term customer commitments.
• Customer Concentration: Three customers accounted for 35%, 17%, and 14% of total revenue in Q3, respectively, indicating significant reliance on a small number of hyperscale clients.
• Execution Risk in Complex Ramps: Transitioning to more complex systems (e.g., liquid cooling, integrated optics, full-rack integration) increases technical and operational complexity, requiring precise engineering and manufacturing execution to maintain margins and yields.

Q: David Vogt (UBS) asked about the confidence behind the $40B 2027 revenue guide given supply chain dynamics (silicon, optics, capacity).

A: CFO Todd Ankeman stated the guide factors in ramp risks, component availability, and operational execution, expressing high confidence in the number. He noted opportunities to exceed it but emphasized fundamental drivers support the 90% growth target.

Q: Joseph Cardoso (JP Morgan) inquired about the magnitude of net cash use in 2027 and when free cash flow conversion would turn positive again.

A: Ankeman explained that 2027 will be a year of investment to support $20B incremental revenue, resulting in net cash usage. He confirmed the $3.5B equity raise plus existing liquidity ($4B cash + revolver) is sufficient. Confidence exists that positive cash flow will return in 2028.

Q: Kevin Cassidy (Analyst) asked about R&D investment philosophy, talent acquisition, and program timelines (2027 vs 2028+).

A: Gavin Cato (SVP Engineering) detailed hiring ~500-600 engineers annually, focusing on US sites (Austin, Silicon Valley) while maintaining global presence. The team is wrapping up 2027 programs and heavily engaged in 60-70 programs moving into 2028 and beyond, including diversification into compute racks and memory/storage.

Q: Carl Ackerman (BNP Paribas) asked if rising complexity in switch designs (liquid cooling, integrated optics) influences margin outlook and server business margins.

A: Steven Dorwart (President CCS) noted they are selective, pursuing deals with best margins. Todd Ankeman added that gross margins are expected to remain in the low 11s in 2027, dependent on mix, with networking remaining accretive. Operating leverage is expected to drive operating margins to 9%.

Q: Ruben Roy (Stifel) asked about the visibility and nature of demand extending into 2028 and 2029.

A: Mandeep Chawla (Group President Global Markets) expressed high confidence, noting demand visibility is lengthening due to material lead times and capacity build-outs. They are engaging in conversations for 2029/2030 programs and winning awards for silicon not yet developed, indicating intertwined design cycles and a meaningful upside funnel beyond committed programs.