Celestica(CLS) - 2023 Q3 - Earnings Call Transcript

Financial Data and Key Metrics Changes - The company reported third quarter revenue of $2.04 billion, which was towards the high end of the guidance range and represented a 6% year-over-year increase [79] - Non-IFRS adjusted EPS for the third quarter was $0.65, exceeding the high end of the guidance range and up $0.13 year-over-year [82] - Non-IFRS operating margin for the third quarter was 5.7%, marking the 15th consecutive quarter of year-over-year margin expansion [79][59] - The company raised its non-IFRS adjusted free cash flow expectation for 2023 from $125 million to $150 million, reflecting strong year-to-date performance [89] Business Line Data and Key Metrics Changes - The ATS segment delivered revenue of $859 million, up 12% year-over-year, driven by new program ramps in industrial and solid growth in HealthTech [60] - The CCS segment revenue was $1.18 billion, up 2% year-over-year, accounting for 58% of total revenues [83] - The HPS revenue was $493 million, down 5% year-over-year but up 39% sequentially, with expectations for return to year-over-year growth in 2024 [85] Market Data and Key Metrics Changes - Revenue in the communications end market for the third quarter was down 10% year-over-year, primarily due to tough comparisons from a strong prior year [61] - The enterprise end market revenue increased by 31% year-over-year, exceeding expectations of low double-digit growth [84] - The company anticipates revenues in the communications end market to decline in the mid-teen percentage range year-over-year for the fourth quarter [69] Company Strategy and Development Direction - The company is focused on expanding its services business, particularly in supporting CCS and hyperscaler customers, while being selective in M&A opportunities [44][47] - The company is investing in capacity expansion in Southeast Asia and Thailand to support AI growth, indicating a bullish outlook on AI demand [101][127] - The company expects to maintain a non-IFRS adjusted EPS growth of 10% or more compared to 2023, driven by higher revenue across end markets [70] Management Comments on Operating Environment and Future Outlook - Management noted that the near-term outlook for the communications end market remains soft but expects a return to growth in 2024 as customer investments in compute drive demand [4] - The company is optimistic about the medium-term outlook for its CCS segment, supported by significant investments from hyperscalers in data center capacity [73] - Management acknowledged some macroeconomic deterioration but indicated that their specific markets remain resilient [16] Other Important Information - The company reported a cash balance of $353 million and a total liquidity of approximately $1 billion, sufficient to meet anticipated business needs [67] - Inventory levels improved significantly, down $316 million year-over-year, indicating better working capital management [65] Q&A Session Summary Question: What is the driver behind switch sales and its relation to AI opportunities? - Management indicated that networking demand is recovering as inventory levels normalize, with expectations for increased demand driven by proprietary compute [7][100] Question: Do you have the capacity to grow both AI optimized server and switching businesses? - Management confirmed ongoing capacity expansions in Southeast Asia and Thailand to support AI growth, indicating confidence in meeting future demand [101][127] Question: Have there been changes in competitive positioning with hyperscaler customers? - Management noted that the focus is on reliable partners who can scale production, which plays to the company's strengths in complex compute modules [104] Question: What is the outlook for the enterprise business and its volatility? - Management explained that volatility is driven by specific customer demand fluctuations, particularly in storage, but proprietary compute demand remains strong [147] Question: How is the company positioned for M&A in light of current market trends? - Management stated they are being selective in M&A opportunities, focusing on capability-based acquisitions to enhance service offerings [44][47]