Celestica Inc. (CLS) Q2 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call summary and Q&A indicate strong financial performance, with raised revenue and EPS guidance, and significant growth in key segments like CCS. The management's confidence in sustaining growth, despite some uncertainties, and the positive sentiment from analysts support a positive outlook. However, the lack of long-term guidance and uncertainties in material availability slightly temper expectations. Overall, the short-term outlook is positive, likely leading to a stock price increase of 2% to 8% over the next two weeks.
Key Financial Performance
Revenue $2.89 billion, up 21% year-over-year, driven primarily by strong demand in the communications end market from hyperscaler customers.
Adjusted Gross Margin 11.7%, up 110 basis points year-over-year, driven by higher volumes and improving mix in both segments.
Adjusted Operating Margin 7.4%, up 110 basis points year-over-year, driven by higher margin across both CCS and ATS segments.
Adjusted Earnings Per Share (EPS) $1.39, an increase of $0.49 or 54% year-over-year, exceeding the high end of guidance range.
Adjusted Return on Invested Capital (ROIC) 35.5%, compared to 26.6% a year ago, driven by higher operating profit and strong working capital management.
ATS Segment Revenue $819 million, up 7% year-over-year, driven by strong demand in capital equipment and industrial businesses.
CCS Segment Revenue $2.07 billion, up 28% year-over-year, driven by strong growth in the communications end market.
Communications End Market Revenue Increased by 75%, driven by strong demand and ramping programs in HPS networking business and strengthening demand in optical programs.
Enterprise End Market Revenue Decreased by 37%, due to an anticipated technology transition in an AI/ML compute program with a hyperscaler customer.
HPS Revenue $1.2 billion, up 82% year-over-year, driven by ramping of several 800G networking switch programs and strong hyperscaler demand for 400G switches.
ATS Segment Margin 5.3%, up 70 basis points year-over-year, driven by improved profitability in the A&D business.
CCS Segment Margin 8.3%, up 130 basis points year-over-year, driven by a higher mix of HPS revenues and strong productivity.
Inventory Balance $1.92 billion, a sequential increase of $130 million and a year-over-year increase of $74 million.
Cash Deposits $397 million, down $75 million sequentially and down $179 million year-over-year.
Cash Cycle Days 66 days.
Capital Expenditures $33 million or approximately 1.1% of revenue, compared to 1.5% in Q2 2024, due to stronger-than-expected revenue growth and timing of expenditures.
Free Cash Flow $120 million, $54 million higher than the prior year period.
Cash Balance $314 million, combined with $660 million of borrowing capacity under revolver, totaling approximately $1 billion in liquidity.
Gross Debt $823 million, with a net debt position of $509 million.
Gross Debt to Trailing 12-Month Adjusted EBITDA Leverage Ratio 0.9 turns, an improvement of 0.2 turns sequentially and 0.3 turns year-over-year.
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Operating Highlights
800G networking switch programs: Ramping up multiple 800G networking switch programs, complementing strong hyperscaler demand for 400G switches.
AI/ML compute program: Anticipated ramping of next-generation AI/ML compute program with a large hyperscaler customer in Q3 2025.
Hyperscaler demand: Robust demand for networking products as hyperscalers invest in data center infrastructure.
Industrial business: Strength in industrial business expected to continue into the second half of 2025, supported by several ramping programs.
Adjusted operating margin: Achieved 7.4%, marking the highest performance in company history.
Free cash flow: Raised annual free cash flow outlook from $350 million to $400 million.
A&D business: Decision not to renew a margin-dilutive program, leading to improved profitability.
Capital allocation: Repurchased 600,000 shares for $40 million in Q2 2025, with $115 million spent year-to-date on share buybacks.
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Risk or Challenges
Tariffs and Trade Restrictions: The company assumes no material changes to tariffs or trade restrictions, but any changes could impact results as they cannot be reliably predicted.
Enterprise End Market Revenue Decline: Revenue in the enterprise end market decreased by 37% due to an anticipated technology transition in an AI/ML compute program with a hyperscaler customer.
Aerospace and Defense (A&D) Business Revenue Impact: The decision not to renew a margin-dilutive program in the A&D business is expected to result in lower year-over-year revenues for the remainder of the year.
Capital Equipment Business Demand Moderation: Second-half demand in the capital equipment business is expected to moderate after some demand was pulled into the first half of the year.
Inventory and Cash Deposits: Inventory increased by $130 million sequentially and $74 million year-over-year, while cash deposits decreased by $75 million sequentially and $179 million year-over-year, indicating potential working capital challenges.
Customer Concentration Risk: Two customers accounted for 31% and 13% of total revenue, respectively, indicating a high dependency on a few customers.
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Guidance & Outlook
Q3 2025 Revenue: Projected to be between $2.875 billion and $3.125 billion, representing growth of 20% at the midpoint.
Q3 2025 Adjusted EPS: Anticipated to be between $1.37 and $1.53, representing an increase of $0.41 at the midpoint or 39%.
Q3 2025 Non-GAAP Operating Margin: Expected to be 7.4%, an increase of 60 basis points over the prior year period.
Q3 2025 Adjusted Effective Tax Rate: Expected to be approximately 19%.
2025 Annual Revenue Outlook: Increased from $10.85 billion to $11.55 billion, reflecting year-over-year growth of 20%.
2025 Annual Non-GAAP Adjusted EPS Outlook: Increased from $5 per share to $5.50 per share, representing year-over-year growth of 42%.
2025 Annual Free Cash Flow Outlook: Raised from $350 million to $400 million.
CCS Segment 2025 Growth: Anticipated growth of nearly 30% for the full year, driven by robust hyperscaler demand for networking products.
Enterprise End Market Outlook: Q3 will see the ramping of next-generation AI/ML compute program with a large hyperscaler customer, contributing to strengthening enterprise volumes in the second half of 2025 and into 2026.
ATS Segment 2025 Revenue Outlook: Revenues expected to remain approximately flat compared to 2024.
Industrial Business Outlook: Strength seen in Q2 is expected to continue into the second half of 2025, supported by several ramping programs.
A&D Business Outlook: Profitability improvements expected due to mix improvements, despite lower year-over-year revenues from a margin-dilutive program decision.
Capital Equipment Business Outlook: Second half revenue expected to be lower than the first half due to demand moderation, but full-year growth anticipated to align with market growth rates.
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Shareholder Return Plan
Share Repurchase: During the second quarter, Celestica repurchased approximately 600,000 shares for cancellation at a cost of $40 million under its normal course issuer bid (NCIB). This brings the total purchases under the NCIB to $115 million year-to-date. The company intends to remain opportunistic on share buybacks for the second half of 2025.
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Key Q&A
Q:Could you speak to the breadth of customers and platforms on 800-gig switch ports driving the upward revised outlook for CCS? How does it compare to 400G?
A:Every 400G customer has transitioned to 800G, resulting in a larger market share for 800G. The breadth of offerings is significant, with strong ramps across multiple hyperscalers. 800G volumes are now on parity with 400G and are accelerating, with wins across the top 3 hyperscaler customers.
Q:What is the manufacturing readiness at Monterrey and Richardson campuses to handle growing CCS demand?
A:The company is comfortable with its capacity, with significant demand in Southeast Asia, Richardson, Texas, and Mexico. Investments are being made in these locations to support growth, with the ability to support $3-4 billion of additional revenue. Networking products, including 800G, are being produced in Thailand and Mexico.
Q:Can you walk through the momentum into year-end, given Q3 guidance and full-year outlook?
A:The full-year outlook of $11,550 million reflects 20% growth, with Q4 expected to grow at 18%. The company is considering uncertainties like material availability and tariff environment challenges. This is their high-confidence view.
Q:What are the updated thoughts on 1.6T timing following the official launch of the silicon?
A:Tomahawk 6 samples were received in June, and the first system was brought up within days. Several 1.6T programs are expected to generate revenue in the back half of 2026 and into 2027, paced by silicon availability.
Q:Can you elaborate on the 800G ramp and capital equipment business trends?
A:800G volumes were 50-50 with 400G in Q2 and are expected to exceed 400G in the back half of the year. Some customers are ramping faster than others. Capital equipment saw strong growth in Q2 due to inventory normalization, with flattish demand expected in Q3. Growth is expected to be front-end focused.
Q:Is it reasonable to expect ongoing improvement in cash cycle days as CCS becomes a bigger part of the mix?
A:The company continues to generate positive free cash flow and expects strong inventory turns. Lead times on materials are steady at around 16 weeks, and the cash generation outlook has been raised from $350 million to $400 million.
Q:How should we think about CCS margins given enterprise ramping back up?
A:Enterprise demand is improving and expected to return to year-over-year growth in Q4. Communications demand, driven by 800G, remains strong. The company is factoring in uncertainties but expects strong growth in both communications and enterprise.
Q:What is driving the substantial raise in CCS guidance for the full year?
A:Strengthening demand in the enterprise segment and acceleration in 800G programs are driving the raise. 400G demand remains strong but is being replaced by 800G. The company sees strong demand across all areas.
Q:Is the 20% growth pace sustainable into next year?
A:The company has strong demand visibility into the first half of next year and expects ATS to grow in line with long-term targets of around 10%. They are confident in sustaining growth but will provide a full-year outlook in October.
Q:What is the new program pipeline and opportunity to expand with existing and additional hyperscalers?
A:The company is focused on increasing its share of wallet with existing hyperscalers and penetrating new regions and digital natives. Conversations are ongoing, supported by a recent digital native win involving a full orchestrated AI rack.
Q:Is pricing a factor in discussions with hyperscalers?
A:Pricing is always a factor but not the main focus. Customers prioritize certainty of supply, best-in-class designs, and technology leadership. The company works on total cost of ownership and offers a wide variety of solutions.
Q:How many customers are expected to contribute 10% or more of sales in the September quarter?
A:Three customers are expected to contribute 10% or more of sales in the September quarter.
Q:What are the strengthening optical projects mentioned?
A:The company is supporting an enterprise customer in ramping data center interconnect products, which have been very successful in the market.
Q:How should we think about hyperscaler CapEx increases relative to the company's guidance?
A:Hyperscaler CapEx increases affirm the company's demand forecasts. Strong demand is expected in the back half of this year and into the first half of next year.
Q:What are the server market share trends?
A:The company is gaining share in AI server market share with its largest customers. Programs are ramping in Q3 and gaining momentum into next year, with further growth expected in late 2026 and beyond.
Q:What is the momentum in 1.6T wins and full rack solutions?
A:The company continues to win 1.6T variants with hyperscalers and is having conversations about next-generation systems. The full rack solution is opening new opportunities, including with hyperscalers.
Q:What is the timing and impact of the services offering?
A:Services are being incrementally invested in, with material impact expected by 2026. The company is expanding its services footprint and considering vertical integration opportunities.
Q:When would capacity adjustments be needed for growth into 2026 and 2027?
A:Capacity expansions require about 12 months lead time. The company has already made decisions to expand in Thailand, Richardson, Texas, and Mexico. CapEx intensity is expected to remain at 1.5-2% of revenues.
Q:Review of Unclear Management Responses
A:Management avoided providing a direct answer on the sustainability of 20% growth into 2026, stating it was too early to give a full-year number and that customer outlooks don't extend that far. They deferred providing detailed guidance until October's Investor Day.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Ackerman BNP
Adair Coupland
Atif Malik
BNP Paribas
Bank Research
CEO Director
CIBC Capital
Celestica non
Chase Co
Citigroup Inc
Co Research
Conference Instructions
Corp
Mandeep
Markets Research
Relations section
Research Division
change
date
demand program
figure
item
market percentage
networking switch
occurrence
outlook color
program enterprise
release
section website
segment communication
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transition AI
CLS Transcript
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The earnings call indicates strong revenue growth, improved profitability, and positive financial metrics. The raised revenue and EPS outlooks for 2026 suggest optimism, despite some risks in forward-looking statements. The Q&A section did not reveal significant concerns from analysts. Overall, the financial performance and future guidance are positive, likely resulting in a positive stock price movement.
Celestica Inc. (CLS:CA) Q4 2025 Earnings Call Transcript
Positive1-29
The earnings call indicates strong financial performance, with increased revenue and EPS guidance for 2025 and 2026. The company has a solid free cash flow outlook and a strong balance sheet. Despite slower growth guidance for 2026, management remains optimistic about future opportunities, particularly in AI/ML and networking. The Q&A section revealed cautious optimism and strategic investments in growth areas, which should positively impact the stock price. However, macroeconomic uncertainties pose potential risks. Overall, the sentiment leans positive, with expected stock price movement in the 2% to 8% range.
Celestica Inc. (CLS:CA) Q3 2025 Earnings Call Transcript
Positive10-28
The earnings call presents strong financial metrics, optimistic guidance, and strategic growth in AI/ML and networking, which are positive indicators. The Q&A section highlights robust customer commitments and future growth opportunities, despite some management reticence on specifics. The raised annual revenue and EPS outlooks, along with increased free cash flow, support a positive sentiment. The positive impact of the shareholder return plan and strong financial health further contribute to the positive outlook. However, the lack of specific guidance on some future aspects tempers the overall rating to 'Positive' rather than 'Strong positive.'
Celestica Inc. (CLS) Q2 2025 Earnings Call Transcript
Positive7-29
The earnings call summary and Q&A indicate strong financial performance, with raised revenue and EPS guidance, and significant growth in key segments like CCS. The management's confidence in sustaining growth, despite some uncertainties, and the positive sentiment from analysts support a positive outlook. However, the lack of long-term guidance and uncertainties in material availability slightly temper expectations. Overall, the short-term outlook is positive, likely leading to a stock price increase of 2% to 8% over the next two weeks.
CLS Slides
CLS Report
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