- Revenue: $2.39 billion, up 23% year-over-year.
- Adjusted EPS: $0.91, $0.36 higher year-over-year.
- Non-IFRS Operating Margin: 6.3%, up 80 basis points year-over-year.
- Adjusted Free Cash Flow: $63 million for the quarter, $129 million year-to-date.
- CCS Segment Revenue: $1.62 billion, up 51% year-over-year.
- CCS Segment Margin: 7.2%, up 120 basis points year-over-year.
- ATS Segment Revenue: $768 million, down 11% year-over-year.
- ATS Segment Margin: 4.6%, down 20 basis points year-over-year.
- HPS Revenue: $686 million, up 94% year-over-year.
- Adjusted Gross Margin: 10.6%, up 90 basis points year-over-year.
- Adjusted ROIC: 26.7%, up 6.7% year-over-year.
- Inventory Balance: $1.85 billion, down $106 million sequentially and $493 million year-over-year.
- Cash Balance: $434 million.
- Gross Debt: $750 million.
- Net Debt Position: $316 million.
- Gross Debt to Non-IFRS Trailing 12-Month Adjusted EBITDA Leverage Ratio: 1.1 turns.
- Share Repurchases: 200,000 shares for $10 million in the quarter, 700,000 shares for $27 million year-to-date.
- Third Quarter Revenue Guidance: $2.325 billion to $2.475 billion.
- Third Quarter Adjusted EPS Guidance: $0.86 to $0.96.
- Annual Revenue Outlook for 2024: $9.45 billion.
- Annual Adjusted EPS Outlook for 2024: $3.62.
- Annual Non-IFRS Operating Margin Outlook for 2024: 6.3%.
- Annual Adjusted Free Cash Flow Outlook for 2024: $250 million.
Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Celestica Inc (CLS, Financial) achieved revenues of $2.39 billion and adjusted EPS of $0.91, both exceeding the high-end of their guidance ranges.
- The CCS segment saw a 51% year-over-year increase in revenues, driven by strong demand from hyperscale customers.
- Adjusted free cash flow for the quarter was $63 million, bringing the year-to-date total to $129 million.
- Non-IFRS operating margin improved to 6.3%, an increase of 80 basis points over the prior-year period.
- The company raised its annual outlook for 2024, now anticipating revenue of $9.45 billion and adjusted EPS of $3.62, representing growth of 19% and 49%, respectively, compared to 2023.
Negative Points
- ATS segment revenues were down 11% year-over-year, driven by continued softness in the industrial business.
- Despite the overall positive performance, the ATS segment margin decreased by 20 basis points compared to the prior-year period.
- Inventory balance at the end of the second quarter was $1.85 billion, indicating a significant amount of capital tied up in inventory.
- The company is experiencing a technology transition in its AI compute servers, which may lead to a temporary decline in enterprise revenue.
- Gross debt at the end of the second quarter was $750 million, resulting in a net debt position of $316 million.
Q & A Highlights
Q: Can you update us on where you are from a capacity perspective?
A: We have two capacity expansions ongoing. One in Malaysia, which opened on March 1, and another in Thailand, expected to be ready for new business in Q1 2025. We also have ample capacity in our Richardson, Texas facility.
Q: Is there any change to your CapEx plans in response to strong demand?
A: We are maintaining our current CapEx plans, operating between 1.5% and 2% of revenue, with the majority targeted towards growth CapEx. We are keeping a close eye on it to ensure we have full factories without turning away demand.
Q: Regarding the program transitions on the server business, how should we think about that from a timing perspective?
A: The technology transition on the single-sourced program will start plateauing and decreasing towards the end of the year, with new products ramping mid-2025. We are seeing accelerated demand for our HPS networking products, which will fill in nicely in the back half of the year and through 2025.
Q: How long do you see the strength in the 400G switch business holding up, and what is the outlook for 800G?
A: The 400G switch business will remain strong through 2024 and into 2025. The 800G switch will start picking up as we exit the year and into 2025 and beyond. We are also seeing an acceleration towards 1.6, which we expect to ramp in the outyears.
Q: Can you isolate the impact of year-over-year improvements on margins from mix versus operating leverage?
A: We don't break out margins at that level, but HPS margins are accretive to overall CCS. The strong profitability is due to high levels of utilization in Southeast Asia and the pricing within HPS programs.
Q: Can you speak to the industrial confidence that inventories are washing out soon and the growth outlook?
A: We are seeing channel inventory being consumed and expect our industrial business to return to growth in 2025. Outside of industrial, we are seeing strong growth in capital equipment and A&D, with improving outlooks.
Q: Is it fair to assume that next-generation AI compute servers could carry higher ASP and margins?
A: Yes, as products transition from EMS to HPS, margins will increase due to higher value add. Early in the lifecycle, ASPs are higher and tend to normalize over time.
Q: Do you have visibility on whether the mix of white box versus OEM networking equipment will change in AI data centers?
A: Our hyperscale customers continue to embrace the disaggregated model, buying more from us rather than switching to an OEM model. We are also seeing growth from digital natives adopting open architecture.
Q: Can you speak to the sense of urgency from hyperscaler customers for AI infrastructure buildouts?
A: Customers feel we are in the early innings of a transformative era and view the risk of underinvesting as higher than overinvesting. They are making decisions to preserve investment in AI technologies.
Q: How are you addressing potential impacts from China trade restrictions?
A: We are monitoring the situation closely. With our vast footprint and scale, we can move quickly if needed. We have ample capacity in Southeast Asia, Mexico, Europe, and North America to adapt to any changes.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
