Celestica(CLS) - 2024 Q3 - Earnings Call Transcript

Financial Data and Key Metrics - Q3 2024 revenue was $2.5 billion, up 22% YoY, exceeding the high end of guidance [8][10] - Adjusted EPS for Q3 was$ 1.04, $0.39 above the high end of guidance [8][10] - Non-IFRS operating margin improved to 6.7%, up 100 basis points YoY [8][10] - Adjusted gross margin was 10.7%, up 90 basis points YoY [13] - Adjusted ROIC improved to 28.6%, up 7.1% YoY [13] - Inventory balance at the end of Q3 was$ 1.83 billion, down $434 million YoY [14] - Adjusted free cash flow for Q3 was$ 75 million, compared to $34 million in the prior year period [15] Segment Performance Connectivity and Cloud Solutions (CCS) - CCS segment revenue grew 42% YoY to$ 1.69 billion, driven by strong demand from hyperscaler customers [8][11] - CCS segment margin improved to 7.6%, up 140 basis points YoY [8][12] - HPS (Hardware Platform Solutions) revenue grew 54% YoY to $761 million, accounting for 30% of total company revenue [12] - Enterprise end market revenue grew 38% YoY, driven by strong demand in the storage business [12] - Communications end market revenue grew 45% YoY, driven by demand for 400G and 800G networking switches [12] Advanced Technology Solutions (ATS) - ATS segment revenue declined 5% YoY to$ 814 million, driven by softness in the industrial business [8][11] - ATS segment margin was 4.8%, down 10 basis points YoY [12] - Aerospace and Defense (A&D) revenue grew 15% YoY [8] - Capital Equipment revenue grew 31% YoY [8] Market Performance - Hyperscaler customers accounted for 74% of CCS portfolio revenue in 2024 [31] - The Ethernet switch market for bandwidth of 400G and higher is expected to grow at a 52% CAGR over the next three years [42] - The AI server market is expected to grow from $100 billion in 2024 to over$ 250 billion by 2027 [48] Strategic Direction and Industry Competition - The company is focused on building a resilient, growth-oriented, and diversified portfolio to withstand cyclical fluctuations [27] - Investments in next-generation products and ODM capabilities are key strategic priorities [28] - The company is well-positioned to capitalize on the growing demand for AI infrastructure, with a focus on hyperscalers, digital-native companies, and sovereign data center projects [34][36] - The company is investing in advanced cooling systems and thermal management solutions to support the increasing power demands of AI silicon [47] Management Commentary on Operating Environment and Future Outlook - Management expects Q4 2024 revenue to be in the range of $2.425 billion to$ 2.575 billion, representing 17% growth at the midpoint [18] - Full-year 2024 revenue is expected to be $9.6 billion, up 21% YoY, with adjusted EPS of$ 3.85, up 58% YoY [20] - For 2025, the company anticipates revenue of $10.4 billion, representing 8% growth, with adjusted EPS of$ 4.42, up 15% YoY [65] - The company expects CCS segment revenue to grow in the low double-digit percentage range in 2025, driven by hyperscaler programs and new AI/ML compute wins [65] Other Important Information - The company repurchased 2.2 million shares in Q3 at an average cost of $44 per share, totaling$ 100 million [17] - The company plans to transition from IFRS to U.S. GAAP reporting starting January 1, 2025 [22] - The company has a strong liquidity position with $399 million in cash and$ 750 million in borrowing capacity, providing total liquidity of $1.1 billion [16] Q&A Session Summary Question: Impact of Cisco entering the hyperscaler market - The company believes that hyperscalers still value optimized hardware and that its ODM capabilities provide a competitive advantage [73][74][75] Question: Back-end network opportunities and Ethernet switch market - The company sees strong demand for 400G and 800G Ethernet switches, with significant growth expected in the AI/ML networking infrastructure [77][78][79] Question: Growth prospects for the CCS segment in 2025 - The company expects strong double-digit growth in the communications end market, driven by 800G switches, while the enterprise end market may see a decline due to a technology transition [95][96] Question: Pricing pressure in the enterprise server business - The company differentiates itself through system-level innovation and advanced cooling solutions, which help mitigate pricing pressure [97][98][99] Question: Margin outlook for 2025 - The company expects a non-IFRS operating margin of 6.7% in 2025, with improvements in the ATS segment offsetting potential mix impacts in CCS [104][105] Question: Growth opportunities with digital-native companies - The company is engaging with digital-native companies, with opportunities to expand design involvement and leverage its ODM capabilities [121][122][123] Question: Hyperscaler CapEx and market growth - The company is monitoring hyperscaler CapEx trends, with strong growth expected in 2024 and low double-digit growth anticipated for 2025 [136][137][138]