Celestica (CLS) Q2 2026 earnings call transcript

I will now hand the thank you for joining us on Celestica's Q226 Financial Results Conference Call. On the call today, we have Rob Myonis, Chair of the Board and Chief Executive Officer and Medeep Challa Chief Financial Officer. Please note that during the course of this call, we will make forward-looking statements, including statements relating to the future performance of Celestica, our business outlook, guidance for the third quarter of 2026, our 2026 annual outlook, and and their anticipated impact on our business. These are based on management's current expectations, forecasts, and assumptions as of July 27th. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations, and their potential impact on our results cannot be reliably predicted at this time.

For identification and discussion of the material assumptions, risks, and uncertainties, please refer to our public filings with the SEC and on CDAR+, as well as the Investor Relations section on our website. We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-GAP financial measures. We have included, in our earnings release, found in the Investor Relations section of our website, a discussion of those non-GAP financial measures and a reconciliation to the most comparable GAP measures. Unless otherwise specified, all references to dollars on this call are to U. S. dollars, all per share information is based on diluted shares outstanding, and all references to comparative figures are a year over year comparison.

With that, I will now turn the call over to Rob.

Thank you, Matt, and good morning, everyone, and thank you for joining us on today's call. As we cross the mid-year mark, we continue to see sustained and accelerating momentum across our portfolio. In the second quarter, we delivered revenue of $4.7 billion and adjusted EPS of $2.54, both exceeding the high end of our guidance ranges. This performance was backed by an adjusted operating margin of 8.2%, a new high for the company. These results reflect strong operational execution across both segments, alongside record demand from our CCS customers. Within CCS, we continue to expand with leading hyperscale customers through close alignment on multi-year capacity roadmaps.

Rapid progression and technology upgrade cycles in networking and AI compute are driving broad demand, and we are in the process of ramping a number of significant new programs, expected to launch in the second half of the year, and into 2027. At the same time, our ATS segment continues to see strong profitability improvements alongside solid revenue growth during the quarter.

Before I provide an update on our long-term business outlook, I would like to turn the call over to Mandeep, who will take us through our Q2 results and Q3 guidance. Mandeep, over to you.

Thank you, Rob, and good morning, everyone. Revenue in the second quarter was $4.70 billion, up 62%, and above the high end of our guidance range, as strong demand and solid operational execution led to higher than expected revenue in our ATS segment and both of our CCS and markets.

Our non-GAP operating margin was 8.2% up of robust 80 basis points with solid margin expansion in both segments, resulting primarily from improved operating leverage. Our adjusted earnings per share was $2.54, exceeding the high end of our guidance range, and an increase of $1.15, or 83%.

Moving on to some additional metrics. Adjusted gross margin was 11.5% down 20 basis points, largely due to mix in our CCS segment. Our second quarter adjusted effective tax rate was 20%.

Lastly, our strong earnings growth and discipline working capital management led to adjusted ROIC of approximately 55% higher by 20 percentage points compared to the prior year. Turning now to our segment performance. Revenue in our CCS segment was $3.81 billion, up 84% compared to the prior year period, driven by very strong growth in both our communications and enterprise and markets.

In the second quarter, the CCS segment accounted for 81% of total company revenue. Our communications and market revenue was up 62%, higher than our outlook of approximately 50%, primarily driven by growth in our 800G networking switch programs, complemented by continued strong demand in our 400G programs.

Revenue in our enterprise and market was up by 167%, well above our outlook of approximately 130%, driven by the accelerated ramp of an AIML compute program with a hyperscalar customer and supported by stronger than expected demand in storage programs. In our HPS business, revenue was $1.9 billion in the second quarter, representing growth of 58%, driven by ramping 800G switch programs across multiple hyperscalar customers. Our HPS business accounted for 41% of total company revenue in the second quarter.

ATS revenue for the quarter was $888 million, higher by 8%, and above our outlook of a mid-single digit percentage increase. The solid performance was driven by revenue growth in each of our businesses. Our ATS segment accounted for 19% of total company revenue in the second quarter.

Moving on to segment margins. Our CCS segment margin was 8.7% in the second quarter, an improvement of 40 basis points, driven by strong operating leverage from significantly higher volumes. Our ATS segment margin was 6.3% up 100 basis points year to year, driven by operating leverage and higher engineering driven product mix.

In the second quarter, three customers each accounted for 10% or more of total revenue, accounting for 32%, 17% and 14% respectively. Turning to working capital. At the end of the second quarter, our inventory balance was $3.4 billion, a sequential increase of $0.7 billion and higher by $1.5 billion compared to the prior year, driven by continued scaling to support significant growth and upcoming program rams in our CCS segment as anticipated. Cash cycle days for the quarter were $47, representing a 19-day improvement over the prior year, and an 8-day improvement sequentially.

Moving on to cash flows, we generated $147 million of free cash flow in the second quarter and $285 million year to date. Our capital expenditures were $264 million, or approximately 5.6% of revenue, compared to 1.1% of revenue in the prior year quarter. Consistent with our prior outlook, our full year 2026 capital expenditure guidance remains unchanged at approximately $1 million.

Our capital expenditure investments are intended to support the significant anticipated growth from currently ramping and awarded programs. They are underpinned by strong demand visibility and close alignment on multi-year capacity planning with our key customers. At the end of the second quarter, our cash balance was $536 million, while our gross debt was $740 million, resulting in a net understanding on our revolver at the end of the quarter. Our gross debt to non-gap trailing 12-month adjusted EPDOT leverage ratio was 0.5 turns, an improvement of 0.1 turns sequentially, and 0.4 turns versus prior year. Our cash balance, in combination with our recently upside revolver, provides us with approximately $2.3 billion of available equity.

As of June 30th, we were in compliance with all financial covenants under our credit agreement. We did not repurchase shares for cancellation during the second quarter. While we continue to approach share repurchases on an opportunistic basis, our highest priority at this time is to reinvest in our business to support the unprecedented growth we anticipate over the coming years.

We maintained a disciplined approach to capital allocation, deploying to the highest return opportunities in order to drive long-term shareholder value. And moving on to our guidance for the third quarter. Third quarter revenue is projected to be between $5.25 billion and $5.55 billion, representing growth of 69% at the midpoint. Adjusted earnings per share is anticipated to be between $2.88 and $3.08, representing an increase of $1.40 at the midpoint or 89% growth compared to the prior year. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our adjusted operating margin is expected to be 8.4%, which would represent an increase of 80 basis points. We anticipate our adjusted effective tax rate for the third quarter to be approximately 20%.

Finally, let's review our revenue outlook for each of our end markets. In our CCS segment, we expect revenue in our communications end market to grow approximately 60% driven primarily by hyperscaler-led growth in 800G programs, as well as the commencement of mass production ramps in our first 1.6-terabit programs. In our enterprise end market, we expect growth of approximately 190% driven in large part by the continued ramp in hyperscaler AI and ML compute, as well as improved demand in storage. In our revenue to be up in the mid-teens percentage range, driven primarily by strong demand in our capital equipment business, as well as by new program ramps in our other businesses.

With that, I will now turn the call back over to Rob to provide an update on our 2026 annual financial outlook and additional color on the latest developments in our business.

Thank you, Mandeep. We are once again raising our full year 2026 annual outlook, driven by our customer forecast supported by improved component supply. Our revenue outlook increases from $19 billion to $20.5 billion, representing very strong growth of 65%. We are also raising our adjusted EPS outlook to $11.30 up from $10.15, representing growth of 87%. Reflected in our outlook is full year adjusted operating margin of 8.4%, higher than our previous outlook of 8.1%.

Finally, we are increasing our free cash flow outlook for 2026 from $500 million to $600 million, which includes approximately $1 billion in planned CAPX. Our outlook maintains a prudent view on component availability and the timing of new program ramps. Looking beyond 2026, our visibility is very strong. This is driven by multi-year global capacity alignment with our key customers, along with improved component supply planning to effectively manage extended component lead times. For 2027, as a result of exceptionally strong customer demand and new program wins, we expect our revenue growth rate to accelerate as compared to the 65% growth expected in our 2026 annual outlook. Furthermore, as we continue expanding and our adjusted operating margins, we anticipate our adjusted EPS growth rate to outpace our revenue growth.

We look forward to providing a detailed full year outlook for 2027 later this year. Now, moving on to discuss the business outlook for our segments and beginning with CCS. Based on our updated 2026 annual outlook, we now anticipate CCS revenue to grow by approximately 85%. In communications, we expect strong momentum to continue through the rest of the year, driven by continued growth in 800G Ethernet switch programs, alongside the launch of mass production for 1.60 programs with two in 2027, we expect that the combination of continued growth in 800G volumes alongside the acceleration of 1.60 ramps across our customer base will drive very strong growth. Within our enterprise end market, our outlook for the second half of 2026 remains exceptionally robust, as we see strengthening demand in our AI compute portfolio.

We expect to continue this strong growth into 2027, driven by the ramp of multiple compute programs. Additionally, later this year, we expect to commence initial deliveries of customer acts for our digital native customer whom we are pleased to share is OpenAI. In our role as a strategic systems partner, Celesteika will collaborate with OpenAI and Broadcom in support of their multi-generational custom accelerator roadmaps, beginning with a jalapeno accelerator with mass production planned in 2027. As OpenAI's custom accelerator roadmaps advanced towards future generations, Celesteika will continue to provide its expertise to support their multi gigawatt scale deployments.

Now, moving on to our ETS segment, we are updating our full year outlook, which now calls for revenue growth of approximately 10%. Growth is accelerating in the second half of the year, largely driven by sequential growth in our capital equipment business, where stronger way for fab equipment demand tailwinds are anticipated to continue into 2027. This momentum will be complemented by continued growth across the rest of our portfolio, supported by new program wraps. We also remain positive on the trajectory of strengthening ETS segment margins. We anticipate that this momentum will continue as the portfolio benefits from both improving mix and leverage from returning revenue growth.

Looking ahead, our demand pipeline remains at record levels across key customer programs. We continue to see improving multi-year visibility into AI infrastructure investments, which reinforces our confidence on our growth trajectory through the remainder of 2026 and into 2027. Combined with strong operational execution and discipline capital allocation, we believe we are well positioned to expand margins, deliver EPS growth, and return strong long term value for our shareholders.

With that, I will now turn the call over to the operator to open the line for questions.

Sure, Tim. Good morning. And what we're seeing in 2027, first is we see scaling of 800G programs and also the scaling of the 1.60 switch programs. And this is complemented on top of very strong growth, or I should say, continued growth of 400G. So 400G, as we go from 26 to 27, is remarkably resilient. Then on top of that, after 2027, we have ramps of next generation AI ML compute programs. And then to your question, we have our new customer act deployments with open AI and AMD, both are several billion dollar opportunities that we see in 2027. Specifically on the AMD Helios scale up platform, the pipeline on that program continues to grow. And again, that's a multi-billion dollar program in 2027.

On top of that, DTS is also really coming into its own. Its margins are improving and the growth fueled by capital equipment is really adding fuel to the fire for 2027. Okay, great, great. If I can just follow up on gross margin, it seems like a solid performance in the quarter, maybe just a little bit how we should think of that as the complexion of the business changes. A lot of these newer programs are pretty scale, and some of them, I think they're mostly HBS. So with just a high level on profitability and how HBS can impact that over the next year.

Yeah, hey Tim, it's Mandy Pier. So we're pleased with where gross margin is coming in at right now, up a little bit sequentially. And we do believe that we should be able to maintain being around the mid 11th as we go through 2026. As we look into 2027, still dialing in some of the specifics to your point, we do have some positive benefits coming through working and be seeing a accelerated growth in HBS. The ramping of network switches, which are primarily HBS, and so that definitely helps us. We're still working through the mixed impacts as we look at the rest of the portfolio. But what I'll point to you back to then is operating profit.

We have a lot of confidence right now that we will see operating profit expansion for yet another year as we go into next year. Okay, thank you guys.

Thanks for the question.

Thanks, Joe. Yeah, we performed better than we expected. This quarter, the team has really been outstanding in navigating a very tight supply chain. You know, demand across the AI data center infrastructure continues to outpace the global component supply. However, in our 26 commitments and our 27 outlook, we are appropriately hedged. In fact, frankly, we find it manageable. We're continuing to work closely with our customers and our suppliers to secure even improved capacity as we move into 2027. And it's an ongoing process, but you know, ultimately the positive side of this is that the supply tightness that we're seeing really reflects the strength and the multi-year durability of the underlying demand pipeline that we see. And frankly, the unprecedented levels of demand visibility is enabled by extended lead times.

So this supply chain constraint is really helping us do a better job of planning with our suppliers and with our customers. And it's giving us confidence in our longer-term outlook.

Just one thing to maybe add to that would be, you know, if you just look at holistically through 26 and through 27, we have the capacity in place to execute the demand up there for 2026. We have the capacity plans in place to execute the demand in 2027. However, the constraint is really around the material. And so we've taken that into our into consideration when providing the figures that we're providing, but the demand does exceed, you know, the revenue figures that we've been sharing.

Sure. So 1.6T really starts ramping coming into its own in the back half of 26 and really surging in 2027. We again, we have 10 active 1.6T programs in the mix and they'll start really picking up in 2027 on top of some very strong growth, the OVA growth in 800G. On top of that, the pipeline for 1.6T in terms of sales pipeline is continuing to grow and where probably will end up booking some additional awards here in the coming quarters. And there's some programs still in development that will also start kicking in in the latter half of 2027.

You're welcome. The samples for that CPO win will come out in the first half of 27 and mass production for that program will start in the second half of 2027. And we continue to work with that customer on next-generation technologies to kind of further the technology roadmap.

I'm sure. So just from 90 days ago, our AI ML compute demand has significantly increased for 2026 and also leading into 2027. That has given us confidence. The demand pipeline for the next-generation racks for AMD, next-generation racks also continue to increase. And then our base demand across networking for 800G programs has also just dramatically increased for 2027. As Mandate mentioned earlier, we do have the capacity to support that demand and hence we raised our outlook for 2027.

Michael, maybe I'll just add on to Rob's comments. We've talked about this a little bit over the last six months or so, but the capacity planning discussions we're having are allowing us to have some very poor looking conversations with our customers. We're having demand conversations in 2027 for 2028, and in some cases even for 2029. And to Rob's point, the demand is continuing to strengthen. The forecast visibility in many cases is widening.

But really what's changed in the last three, six months is you've got to start ordering the materials. And with extended lead times now, with some products being well above 52 weeks, we really need to solidify the demand outlook for next year. And so with those orders now in place, it gives us just that one extra level of confidence to be able to share the numbers we did.

In terms of risk factors, they always continue to be the same. It's largely at this stage of the game around continued material supply and confidentiality supply. You know, that being said, as Mandeep mentioned earlier, the lead times for components are quite long and our suppliers, I mean, our customers have placed non-cancel number fundable orders for a long lead silicon, which gives us confidence that we've also had supply agreements on hard to find components such as memory and PWBs, things on those lines. So we think we've effectively managed the risk on the downside.

In terms of the upside, just unprecedented demand increases, you know, across the board, specifically in AI, ML Compute. And also in networking, we feel like we're gaining share across the board driven by our ability to execute and execute well at scale. And that's also enabling us to provide, you know, solid 2027 guidance. Again, for 2027, we feel that it's continuing to unfold and we're refining it. So we're not placing a ceiling on the upside at this time, but the guidance that we gave, we felt very comfortable at this stage.

And we've just to also address your question around the operational footprint. And I'll tie it back to dollars as well, because I'm sure that this is top of mind as well. We still think the billion dollars of CapEx for this year is the right number. I mean, around a little bit, just based on timing of payments. We think the one and a half billion is a good placeholder still for next year. We'll give a number in October.

Because if that number is to go up in May, it'll really be reflective of the demand that we're seeing in 2028. So then when you look at where that capacity is being deployed, it really is quite global in nature. We are adding capacity in Thailand, which is one of our flagship locations, you know, supporting a number of the highest growth customers, just a fantastic execution track record in Thailand. But we're making expansions in Japan at the request of our customers as well, and moving some switching business into Japan.

But we're making significant investments in the United States. In particular, in Richardson, Texas, we're expanding our existing footprints in Fort Worth, Texas. We are already bringing online some new capacity and more capacity will come online next year as well. And so we're finding that our customers right now are looking for an equal amount of growth in Asia, as well as in the United States.

I would say earlier in the year, as the demand started picking up our customers, demand signals are very, very dynamic. You know, just using analogy, I think all our customers through a bunch of spaghetti on the wall, and they try to figure out what would stick or not. And then after the supply chain, the broad supply chain tried to understand its true capacity and what it could scale, the demand signals then normalized and strengthened around the, you know, the theory of constraints, if you will. So right now, what we're really just seeing is a very constant and growing set of demand signals from our customers, and hence we've been working methodically with our community to want more than the supply chain could supply, but that is, again, not perishable demand.

It's just giving us more visibility into the future when we're able to responsibly scale to achieve it.

And David, to your question around, you know, the engagement with our customers, like we're servicing the best customers in the world right now, we have very open and detailed conversations around, you know, balance sheet strength on both sides, ensuring that, you know, the commitments that we're making, you know, are supported by strong credit to be very blunt about it, to be equally blunt, we're not a bank. So we don't go and fund our customers' ability to grow. And so we feel comfortable that, you know, when we're signing up for programs that we have the right contractual terms in place, we do work very collaboratively with our customers, you know, long-term forecasting and increasing levels of visibility is where it really starts.

In some cases, we have binding forecasts that go out 12 to 18 months in order to secure the materials. We do work with our customers on, you know, specialized equipment or non-recurring expenses to be covered by them, and we'll cover, you know, the majority of the rest of it. But really, we take a dynamic approach by customer based on, you know, their individual situations, but we have no concerns across our customer base at this time.

Sure, Thanos. So, again, for the AMD Helios, where the R&D design and manufacturing partner for the scale-up networking switch, and this switch forms the interconnect backbone for the entire R&D. We are shipping samples towards the end of 2026, and the ramp begins in earnest in the first half of 2027. Again, this R&D has interest and demand and orders from several customers, and the pipeline is growing.

No, we're involved in all these programs.

Hey, Rob, nice to talk to you. The CCS businesses performing very well from a margin of perspective, record margins in the last quarter, and we think that there continues to be an opportunity to see expansion there. You're hitting on a couple of different points, but how I would maybe bring it up a level is are we growing in HPS or are we not?

And the vast majority of our switching programs are HPS, meaning a lot of our design is incorporated in there, a lot of our know-how, and that does allow us to have that reflected in price. And so as we see an acceleration of networking growth next year, that will clearly be a benefit. We're still working through mixed impacts, non-HPS business is not as margin rich as HPS products, so we're working through that piece right now. But then the other area that we have very clear line of sight to is the operating leverage. We will continue to be very disciplined on our op-ex spend, and we do believe that we're going to see another year of very good operating leverage coming through on the back of really double digit productivity across the majority of our site.

And so CCS is performing very well. Just lastly, I'll talk about HPS. HPS is really benefiting. We have to see that the business is returning to growth. We see that growth accelerating in the back end of this year. We see growth next year as well. But from a margin perspective as well, HPS just has highest margins in its history at 6.3%, and we think that based on the mix of our portfolio that there's an opportunity for expansion there as well, as we go into next year. So really multiple contributors right now to the margin story.

Yeah, on scale up, obviously, there is Helios, but there's also the OpenAI rack that we're doing with respect to OpenAI timing. We're starting to deliver samples in 2026, and then that program will ramp in 2027 well into 2028 as well. We review this revenue opportunity as again as multi-billion dollar revenue opportunities from this.

Regarding broader scale up opportunities, you know, broadly speaking, we have numerous engagements and discussions with folks to go into scale up. Scale up for us really started with 1.6T, and then we can enjoy the win awards for integrated rack, since we expect this to be a huge opportunity for us.

Yeah, and, you know, to add from a customer logo perspective to Rob's point, we're going to be seeing a lot of scale up demand with OpenAI as well as AMD, but we're also winning a number of networking programs and one of our largest customers, but it's also in scale up. And so we find this to be really encouraging as a TAM is expected in scale up, you know, between now and the next three years, place substantially tracking for us.

Yeah. Hey, John. So the answer is, maybe I'll start with OpenAI. I think it's fair to assume right now that that will have the dynamics of a consignment program. And so therefore, the material costs will not be flowing through our revenue. As you know, the vast majority of our compute does not have the filling and those dynamics are really holding as we go into next year. So no big change in the accounting size that's impacting our revenue.

Yeah, hi, Bastian. I'm trying to answer that a little bit of a higher level, which is we are seeing margin expansion quarter to quarter. And it's being driven by two main things. The first one is that CCS margins are created to the company. And CCS is growing at a record rate. This year, CCS is going to be growing close to 85% year over year. And then we're going to see a similar level of growth next year, just naturally as CCS becomes a bigger part of the pie margins to have that benefit. Within CCS, it's the two things that I talked about. One is we're seeing an increasing level of HPS or ODM content that allows strong pricing because of the value that we're bringing.

But then we're seeing operating leverage. Our factories right now are running at a high level of utilization. And it is not by accident, it's intentional, because we know that you can drive very strong productivity in that type of an environment. And so we are seeing the benefits of operating leverage. To your point on if revenue was to continue to accelerate, well, we don't expect to add an SG&A dollar for every revenue dollar. So I would say the operating leverage flow through should be there. The rest of it would really be next dependent.

Sure Paul. So, you know, broadly speaking, our customers are valuing continuity and surety of supply. One of the things that we do very, very well is that we're able to deliver high complex products to our customers reliably at scale. So in many cases where products were usually the ramp partner. And then as they get mature, sometimes they get off-loaded a second sauce for us to ramp the next generation. In many cases, what we're seeing is our customers are asking us to pick up, take back some share that was potentially awarded to other providers because we can more reliably produce those products at scale, if you will. So we're seeing that across the board and why we're able to rise to the occasion is that material is already pipeline.

So we don't have to get back in line. We're actually able to pick up that supply chain and just put it through our proven manufacturing processes. And we're seeing that certainly in enterprise and also in communications.

One thing I would add to that is one of those things that we're hearing from our customers is the amount of value that is placed on the transition from designing a program to ramping a program. It is not easy. One of the differentiators we think that Schleska has is we have a very sizable design engineering organization which we've been investing in for over a decade. That organization will be close to 2000 engineers by the end of this year.

And so being able to design the product in collaboration with our customer and then being able to work very collaboratively with the manufacturing side of the business to ramp it successfully, you know, we believe that to Rob's point has led to the market sure game. Some people do design. Some people do manufacture and we do both and that's part of our secret sauce.

Thanks for the question, Paul.

Thank you. Our strong second quarter performance in momentum carrying us into the second half of the year gives us confidence to raise our full year 2026 outlook and continued exceptionally strong custom demand and strategic investments on our infrastructure are enabling us to accelerate our 2027 revenue growth past the 2026 65 mark. Again, thank you for your support and we are looking forward to update you next quarter.