Celestica Q4 2024 Earnings Call Transcript

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Provided by Quartr
January 30, 2025

Key Takeaways

  • Celestica reported Q4 revenues of $2.55 billion (up 19% YoY) and adjusted EPS of $1.11, both exceeding the high end of guidance.
  • The CCS segment saw 30% year-over-year growth, led by a 65% increase in high-performance switching (HPS) networking products, with HPS revenue reaching $807 million.
  • ATS segment revenue was flat at $806 million, as weakness in industrial markets offset strength in capital equipment and aerospace & defense, with a slight 10 bp margin decline.
  • Management raised 2025 guidance to $10.7 billion in revenue (11% growth), $4.75 adjusted EPS (22% growth), and $350 million in free cash flow.
  • Two major wins were secured: a second 1.6 Tbps liquid-cooled networking rack program with an existing hyperscaler and a full AI-optimized rack solution with a leading digital native customer, showcasing expanded OEM capabilities.
AI Generated. May Contain Errors.
Earnings Conference Call
Celestica Q4 2024
00:00 / 00:00

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Operator

Good morning, ladies and gentlemen, and welcome to the Celestica 4th Quarter 2024 Earnings Call. At this time, all lines are in a listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded. I would now like to turn the conference over to Craig Oberg, Vice President of Corporate Development and Investor Relations. Please go ahead.

Craig Oberg
Craig Oberg
Vice President, Investor Relations & Corporate Development at Celestica

Good morning, and thank you for joining us on Celestica's Q4 2024 Earnings Conference Call. On the call today, we have Rob Mionis, President and Chief Executive Officer and Mandeep Chawla, Chief Financial Officer. Listeners should note that as previously communicated, all of our financial results, including historical comparisons, will now be reported on a U. S. GAAP basis, having transitioned from reporting under IFRS previously.

Craig Oberg
Craig Oberg
Vice President, Investor Relations & Corporate Development at Celestica

Please note that our guidance for Q4 2024 was issued on an IFRS basis and has not been restated due to our assessment that the impact of the transition to U. S. GAAP standards did not have a material impact on these figures. Please note that during the course of this call, we will make forward looking statements relating to the future performance of Celestica, which are based on management's current expectations, forecasts and assumptions. While these forward looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or projection in the forward looking statements made today.

Craig Oberg
Craig Oberg
Vice President, Investor Relations & Corporate Development at Celestica

Certain material factors and assumptions are applied in drawing any such statement. For identification and discussion of such factors and assumptions as well as risk factors that may impact future performance and results of Celestica, please refer to our public filings available at sec.govandsedarplus. Ca as well as our Investor Relations 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 GAAP financial measures, including adjusted operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, free cash flow, gross debt to trailing 12 month adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS, adjusted SG and A expense and adjusted effective tax rate.

Craig Oberg
Craig Oberg
Vice President, Investor Relations & Corporate Development at Celestica

We have included in our earnings release found on our Investor Relations website a reconciliation of non GAAP financial measures to the most comparable GAAP measures. With respect to our Q1 2025and 2025 annual outlook, our earnings release does not include a reconciliation of forward looking non GAAP measures to the most directly comparable GAAP measures on a forward looking basis as items that we exclude from GAAP to calculate the comparable non GAAP measure are dependent on future events that are not able to be reliably predicted by management and are not part of our routine operating activities. We are unable to provide such a reconciliation without unreasonable effort due to the uncertainty and inherent difficulty in predicting the occurrence, the financial impact and the periods in which the adjustments may be recognized. The occurrence, timing and amount of any of the items excluded from GAAP to calculate non GAAP could significantly impact our Q1 2025 and 2025 GAAP results. Unless otherwise specified, all references to dollars on this call are to U.

Craig Oberg
Craig Oberg
Vice President, Investor Relations & Corporate Development at Celestica

S. Dollars, all per share information is based on diluted shares outstanding, and all references to comparative figures are a year over year comparison. Let me now turn the call over to Rob.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Thank you, Craig, and good morning, everyone, and thank you for joining us on today's call. We delivered strong performance in the 4th quarter with revenues of $550,000,000 at the high end of our guidance range and adjusted EPS of $1.11 exceeding the high end of our guidance range. Our adjusted operating margin of 6.8% exceeded the midpoint of the revenue and adjusted EPS guidance ranges. This result was driven by robust demand in our CCS segment, which delivered solid growth of 30% year over year as we continue to see strong demand from our hyperscale customers. ATS segment revenues met expectations in the 4th quarter, reflecting anticipated market dynamics.

Rob Mionis
Rob Mionis
President & CEO at Celestica

While we continue to see a moderation of demand in our industrial markets, we are encouraged by the strength in our capital equipment business, which achieved nearly 30% year over year growth. Overall, 2024 was an outstanding year for Celestica in which we continue to build on our positive momentum. For the full year, we achieved $9,650,000,000 in revenues and adjusted EPS of $3.88 representing growth of 21% 58%, respectively, along with 100 basis point improvement in our adjusted operating margin. We are pleased with the company's performance and the significant progress we have achieved over the past several years. The growth of our AI platforms along with the exceptional execution by our entire team continue to be the engines of our strong performance and we are optimistic about continuing this momentum in the years to come.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Before I provide you with some additional color on the outlook of each of our businesses, I would like to hand the call over to Mandeep, who will provide you further details on our financial performance during the Q4 and our guidance for the Q1 of 2025. Mandeep, over to you.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Thank you, Rob, and good morning, everyone. 4th quarter revenue of $2,550,000,000 was up 19% and at the high end of our guidance range. This strong performance was fueled by significant demand from hyperscaler customers in our CCS segment, primarily for networking products within our HPS business. Adjusted gross margin for the quarter was 11.0%, up 50 basis points, driven by higher volumes and favorable mix. 4th quarter non GAAP operating margin was 6.8%, an increase of 80 basis points, driven by higher volumes in our CCS segment and better mix due to higher HPS revenues.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Our 4th quarter adjusted earnings per share was $1.11 exceeding the high end of our guidance range and an increase of $0.34 Our adjusted effective tax rate for the quarter was 19%. And finally, our 4th quarter adjusted ROIC was at 29.1%, a significant improvement of 5 50 basis points attributed to higher operating profitability and effective working capital management. Moving on to our segment performance for the quarter. ATS segment revenue totaled $806,000,000 approximately flat and in line with our guidance. The performance this quarter was a result of lower revenues in our Industrial business, offset by continuing strength in capital equipment and aerospace and defense.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Our ATS segment accounted for 32% of total revenue. Our CCS segment revenue reached $1,740,000,000 up 30% due to very strong growth in our communications end market. The CCS segment accounted for 68% of total company revenue in the quarter. Revenue in our enterprise end market was lower by 10% in line with our guidance due to the anticipated technology transition in an AIML Compute program with 1 of our hyperscaler customers. This was partially offset by favorable demand dynamics in certain storage programs.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Revenue in our communications end market saw an increase of 64%, exceeding our guidance of a high 50s percentage increase. This growth was primarily attributed to stronger demand for our HPS networking products. HPS revenue increased by 65%, reaching $807,000,000 in the 4th quarter, representing 32% of total company revenue. This exceptional growth was driven by hyperscaler customer demand for our 400 gs networking switches as well as ramping programs for 800 gs switches. Now shifting our focus to segment margins.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

ATS segment margin in the 4th quarter was 4.6%, down 10 basis points, primarily due to reduced operating leverage in our industrial end market, partly offset by expanding margins in our Capital Equipment business. BCS segment margin for the quarter reached 7.9%, an improvement of 110 basis points, driven by increased operating leverage and a higher mix of HPS revenues. During the quarter and for the full year, we had 2 customers that each accounted for over 10% of total revenue. During the Q4, they represented 24% 12% of sales, respectively, while for the full year the same two customers accounted for 28% 11%, respectively. We currently support each of these customers across a number of different programs and continue to win new engagements with them, which are expected to ramp through 2025 beyond.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

This diversification provides us comfort with our current levels of customer concentration. Now moving on to working capital. At the end of the 4th quarter, our inventory balance was $1,760,000,000 a sequential decrease of $60,000,000 and a year over year decrease of $344,000,000 We are pleased with the reduction in our overall inventory levels, while still being able to support significant growth in customer demand. Cash deposits were $512,000,000 at the end of the quarter, down $9,000,000 sequentially and down $393,000,000 year over year as we continue to return some deposits to customers as gross inventories declined. Cash cycle days during the Q4 were 69.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Turning our attention to cash flows. Capital expenditures for the quarter were $48,000,000 or approximately 1.9% of revenue compared to 1.5% in the Q4 of 2023. Net capital expenditures for 2024 were 1.7 percent of revenue, in line with our full year outlook. In the Q4, we generated $96,000,000 of free cash flow, dollars 10,000,000 higher than our prior year period.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

For the full year 2024, we generated $306,000,000 of free cash flow above our most recent annual outlook of $275,000,000 We are pleased with our ability to continue to generate consistent and growing free cash flow, while making the necessary investments to support the strong growth in our business. Now moving on to the balance sheet and capital allocation. At the end of the Q4, our cash balance was $423,000,000 combined with $750,000,000 of borrowing capacity under our revolver. This provides us with approximately $1,200,000,000 in total liquidity, which we believe is sufficient to meet our projected business needs. Our gross debt at the end of the Q4 was $741,000,000 resulting in a net debt position of $318,000,000 Our gross debt to non GAAP trailing 12 month adjusted EBITDA leverage ratio was 1.0 turns, down 0.1 turns both sequentially and year over year.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

As of December 31, we were in compliance with all financial covenants under our credit agreement. During the Q4, we repurchased approximately 300,000 shares for cancellation under our normal course issuer bid for a total of $25,500,000 This brings our total share repurchases in 2024 to $152,000,000 resulting in a reduction of 2.4 percent of our shares outstanding. We expect to continue to generate solid free cash flow in 2025 and we'll maintain our approach to repurchase shares on an opportunistic basis. Now let's turn to our guidance for the Q1 of 2025. Revenue is projected to be between $2,475,000,000 $2,625,000,000 representing growth of 15% at the midpoint.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Adjusted earnings per share are anticipated to be between $1.06 1 $0.16 signifying an increase of $0.28 per share or 34% at the midpoint. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non GAAP operating margin would be 6.8%, an increase of 90 basis points year over year. We expect our adjusted effective tax rate for the Q1 to be approximately 20%. Finally, let's turn to our end market outlook for the Q1 of 2025. In our ATS segment, we anticipate revenue to be approximately flat as demand strength in our Capital Equipment and Aerospace and Defense businesses are being offset by softness in other end markets.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

In our CCS segment, we project revenue in our communications end market to grow in the low 80s percentage range, fueled by ongoing demand strength for our networking switches, including accelerating ramps in our 800 gs programs. In our enterprise end market, we expect a mid-40s percentage decrease in revenue, resulting from a temporary decline in volumes due to a technology transition in a single source AIML Compute program. With that, I'd like to turn the call back over to Rob to discuss our updated annual financial outlook for 2025 and provide some additional color on our businesses.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Thank you, Mandeep. We are pleased to raise our full year outlook, reflecting strengthening demand in our CCS segment. This increased confidence is supported by strengthening forecast from our customers through the 1st three quarters and growing visibility into the Q4. These targets represent our current high confidence view of 2025 and we will continue to assess market dynamics and provide updates accordingly as the year progresses. We now anticipate revenues of $10,700,000,000 an increase from our previous outlook of $10,400,000,000 reflecting growth of 11%.

Rob Mionis
Rob Mionis
President & CEO at Celestica

This translates to a non GAAP adjusted EPS of $4.75 representing 22% growth based on a non GAAP operating margin outlook of 6.9%. Finally, we are raising our outlook for free cash flow to $350,000,000 demonstrating strong earnings conversion while continuing to invest in growth to meet robust customer demand. Next, I would like to provide you some additional color on our businesses for the year. In our CCS segment, we are now anticipating mid double digit revenue growth in 2025 compared to our outlook of low double digit growth communicated in October. In our communications end market, we anticipate strength throughout the year as new 800 gs programs with hyperscalers continue to ramp.

Rob Mionis
Rob Mionis
President & CEO at Celestica

In our enterprise end market, we continue to expect a softer first half of the year resulting from the technology transition in an AIML Compute program with a large hyperscaler customer. However, we anticipate revenues to accelerate in the second half of the year, driven by the ramp up of a previously communicated sole sourced next generation AIML Compute program, further supported by the ramping of AIML Compute and Rack programs with Grok. Moving on to our ATS segment. Our 2025 outlook for our ATS segment revenues is approximately flat as growth is being primarily offset by the decision not to renew a dilutive margin program in our A and D business. The outlook for our industrial business is stabilizing, following a period of softer demand due to macro factors and customer inventory digestion.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Based on customer forecasts, we expect volumes to recover in the back half of the year. In capital equipment, the demand environment has continued to improve over the past 90 days and we anticipate continued growth in 2025 on the back of solid demand and new program ramps. In A and D, base demand within our portfolio remains healthy, supported by new program ramps and new customer wins. Before moving on, I would like to take a moment to comment on the recent discussions surrounding DeepSeq's R1 large language model, which has raised concerns about the future of AI model development. While DeepSeq's disclosures are still being analyzed, we believe this new technology has a neutral to positive impact on Celestica's business over the next few years.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Our AI ML Compute business remains well positioned. Today, our compute solutions primarily leverage custom ASIC designs. These custom chips are optimized for performance and power efficiency in targeted use cases. We are confident that our existing programs and new wins ramping through 20252026 remain strategically aligned with our customers' needs regardless of advancements in general purpose large language models. Additionally, networking opportunities are continuing to accelerate.

Rob Mionis
Rob Mionis
President & CEO at Celestica

We see a significant upside for our networking business, which represents the majority of our hyperscale revenue. We believe that increased AI adoption driven by potentially lower training costs will fuel demand for high bandwidth, low latency networking infrastructure, which could further strengthen our position as a leading provider of networking solutions. We believe this development rather than hindering investment in high performance hardware actually highlights the potential for even better cost efficiency, which could accelerate AI adoption. As we look ahead, we're excited about several positive indicators that reinforce our optimism for sustained long term growth. In particular, we see strong signals of continued customer demand tied to AI driven data center investments.

Rob Mionis
Rob Mionis
President & CEO at Celestica

We continue to engage in discussions with both existing and new customers on a number of programs that we expect will begin to ramp over the next 12 to 18 months and extend through 2026 and beyond. In particular, we're excited to announce 2 major new wins secured in the last quarter. First, on the networking front, we have been awarded our second 1.6p switching program with another large hyperscale customer, which will begin ramping in 2026. This HPS program award includes supporting our customer with the design and production of a fully AI optimized networking rack, which will leverage our advanced system level cooling technology. This program represents an inflection point in liquid cooling applications within data center networking towards an increase in available bandwidth from a reduced footprint.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Next, we are also thrilled to announce a significant new HPS win with a leading digital native company, who is a pioneer in the commercialization of AI applications. We will be collaborating with them to deliver a full rack, which is an optimized AI system solution built around the customer's custom ASIC accelerator. The program will leverage our proprietary R and D investments and develop expertise in AIML servers. In addition, this solution will include our 1.6 t switch designs, marking our 3rd next generation program award and high bandwidth switching as well as rack level cooling and connectivity. Production for this program is expected to begin ramping in the latter part of 2026 and we believe that demand from this customer at scale could achieve a level similar to those of our largest hyperscaler customers today.

Rob Mionis
Rob Mionis
President & CEO at Celestica

These wins will enable us to showcase our full AI system design capabilities and further solidify our position as a leading provider of AI infrastructure solutions. These wins are also a testament to our more than decade long commitment to building leading edge capabilities within our HPS platform. Our investments in R and D, design, engineering and IP, along with our team of nearly 900 skilled engineers enable us to deliver cutting edge comprehensive solutions. We are pleased to see very strong and broad based momentum across our CCS portfolio, and we believe that the current strength in demand for data center hardware has a multiyear runway ahead. Before I conclude, I would also like to note that Loretta Culmer, the current Chair of our audit committee has announced a resignation from the Board of Directors effective January 31 for personal reasons.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Loretta has been a highly valued member of our Board for the past 15 years and we would like to thank her for her efforts during her tenure and wish her the very best in her future endeavors. The Board has appointed Louise Mueller as the next Chair of our Audit Committee. I would also like to thank our global team for their tireless work and a truly exceptional execution in 2024. As we close out yet another incredibly successful year. And with that, I would now like to turn the call over to the operator to begin the Q and A session.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer And your first question is from George Wang from Barclays. Your line is now open.

George Wang
Vice President at Barclays Investment Bank

Hey, guys. Thanks for taking my question and congrats on the quarter and the guidance. Just two quick ones. Firstly, as we kind of look at the 800 gs upgrade cycle, just can you talk about kind of any thoughts on continuously pull through on the 400 gs for this year? And similarly, into 2026, you have 1, 2, 3 programs on the 1.6 gs.

George Wang
Vice President at Barclays Investment Bank

And any thoughts on whether that's going to cannibalize lower speeds or should continue to have strong growth across 800 gs coexist with lower speeds as well? Just kind of how to think about those relationships?

Rob Mionis
Rob Mionis
President & CEO at Celestica

Hi, George. Yes, this is Rob. So we see 400 gs and 800 gs coexisting for quite some time. As we go into 2025, we're obviously ramping up 800 gs quite a bit. It will be up 300% to 400%.

Rob Mionis
Rob Mionis
President & CEO at Celestica

But 400 gs is also growing as we get into 2025 as well. And in the out years, again, we see a long tail for 400 gs. As the price points come down on 400 gs, there will be different use cases for that type of technology. So again, we see these technologies coexisting for a long period of time.

George Wang
Vice President at Barclays Investment Bank

Okay, great. Just a second one, if I can squeeze in quickly, Rob and Mandy, Just it's remarkable you guys diversified the customer base kind of versus kind of Tier 1 hyperscalers in the past. And you guys talked about GROC win last quarter, but also another larger scale digital native company can be potentially as large as your largest customer at a peak run rate of revenue down the road. I'm just curious, maybe you can talk about your differentiation. Everybody know you guys have crown jewel assets in terms of the HPS networking.

George Wang
Vice President at Barclays Investment Bank

But in terms of the server with the liquid cooling and the power management, maybe you guys are taking share versus some of the incumbents, I. E. The Asia ODMs. Can you kind of maybe unpack kind of going forward, maybe potentially the tariff concern kind of onshoring, you guys are kind of well positioned, whether from a design perspective, kind of a mostly modular HPS, silver design, but also kind of a more power cooling needs can continue to sustain this differentiation versus some of the Taiwanese and Chinese ODMs?

Rob Mionis
Rob Mionis
President & CEO at Celestica

Yes. Thanks, George. I'll provide you a little bit of a background on the digital native win that we alluded to in the script. So this is a major design win and it includes design, the manufacturing and services for a fully orchestrated rack. Now this rack is optimized for artificial intelligence.

Rob Mionis
Rob Mionis
President & CEO at Celestica

And this particular customer, they were looking for a strategic partner with extensive expertise and capability in liquid cooled system design and also able to manufacture at scale and that had our name written all over it. They conducted a rigorous award process. And ultimately, they decided to select us because we had strong technical knowledge. We had cycles of learning. We had intellectual property.

Rob Mionis
Rob Mionis
President & CEO at Celestica

We had significant design and manufacturing capabilities. And we also had a resilient supply chain capabilities across multiple countries, beginning in the USA. This solution that we're providing them includes a 1.16 networking switch and also proprietary compute. It also includes significant services component, which means installation and maintenance. And again, we'll be supporting this across multiple geographies.

Rob Mionis
Rob Mionis
President & CEO at Celestica

So I think the fact that we have decades decade plus experience in this space have led us to win against the OEMs.

George Wang
Vice President at Barclays Investment Bank

Okay, great. I'll go back to the queue. Congrats again.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Thank you.

Operator

Thank you. And your next question is from Robert Young from Canaccord Genuity. Your line is now open.

Robert Young
Managing Director & Head of Research at Canaccord Genuity Inc

Hi, good morning. On the new win for the integrated rack with a custom ASIC, I was curious to just talk about the relationship with Broadcom who's been very bullish on the market around custom ASIC. Is this a relationship with Broadcom? Is that influenced by Broadcom? And how is that relationship developing?

Rob Mionis
Rob Mionis
President & CEO at Celestica

Yes. Hi, Rob. This is Rob. Are you talking about the hyperscale win, the digital native platform?

Robert Young
Managing Director & Head of Research at Canaccord Genuity Inc

Digital native. The digital native.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Yes. So on the networking side, this is using our long standing relationship with our custom silicon providers. Can't go into too many specifics there, but it's the silicon providers that we have been using for the majority of our high bandwidth switches. And on the compute side, the custom compute side, this will be the customer's custom compute silicon, which will be liquid cooling and encapsulating and designing into a fully integrated rack.

Robert Young
Managing Director & Head of Research at Canaccord Genuity Inc

Okay. And then you already talked a little bit about the HPS content in this rack solution. Could you just go in more detail on how deep the Celestica's ODM and IP contribution to this win is? Like is it in just the switch? Is it in servers and storage?

Robert Young
Managing Director & Head of Research at Canaccord Genuity Inc

You've highlighted cooling. Maybe you could just go through the contribution that Celestica is expecting to make from its own IP.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Yes. Thanks, Rob. This is a very significant design project for us. It is actually an entire rack. So it includes, as we mentioned before, the switching, the compute module and includes the cable backplanes, includes the rack itself, the rack equipment cooling.

Rob Mionis
Rob Mionis
President & CEO at Celestica

And it's not just rack integration we're doing, we're actually doing full rack orchestration. So this is leveraging a significant amount of our IP that we've developed over the past 10 plus years.

Robert Young
Managing Director & Head of Research at Canaccord Genuity Inc

And I presume you'd be able to develop that IP further around this?

Rob Mionis
Rob Mionis
President & CEO at Celestica

Yes. And we think to that point, Rob, that when we successfully execute this full rack system, this is just going to be yet another proof point that will lead to further growth for us with this customer and with other similar customers across the industry.

Robert Young
Managing Director & Head of Research at Canaccord Genuity Inc

Okay. And last one for me is just on the guidance for the year. If you just look at the cadence through the year, it looks as though the growth is a little bit weaker in the back half despite all of the ramps in second half. And so I'm curious, I know you don't give guidance on Q2 at this point, but if you could give us a sense of maybe the cadence of revenue through the year to better model that? And then I'll pass the line.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Yes. Hi, Rob. Good morning. I want to reiterate what we said on the call, which is this is our high confidence view. We're pleased to be able to raise the revenue outlook to $10,700,000 from $10,400,000 at 11% growth.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

And then the EPS had 22% growth to $4.75 But what you'll notice is in the Q1, those numbers are higher. So we've guided at midpoint 15 percent revenue growth and EPS is growing above 30%. And so we're taking a view right now on what we know is solid in front of us Q2 to Q4. We have very good visibility and now through the Q3 with our largest customers. But frankly, the Q4, the visibility is not yet fully locked down.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

It's improving. We're confident in it, and we're having very positive discussions. But these things will continue to solidify as we go through the coming months. So this is our high confidence view. We would, of course, be looking to do better than that as we go through the year.

Robert Young
Managing Director & Head of Research at Canaccord Genuity Inc

Thank you.

Operator

Thank you. Your next question is from Thanos Moschopoulos from BMO Capital Markets. Your line is now open.

Thanos Moschopoulos
Thanos Moschopoulos
Managing Director - Equity Research at BMO Capital Markets

Hi, good morning and congrats on the new customer wins. With respect to enterprise, is the program transition with a large customer proceeding as expected? And just to clarify, would you expect Q1 to be at the bottom in terms of that transition from a sequential perspective? Or what would be your outlook on that?

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Yes. I think, Thanos, yes, things are going as we expected them to be. Enterprise is down year over year as the full source program is moving towards end of life. We will see a little bit of a reduction as we go through the first half of the year. The new program that we have won a while ago is on track for ramping in the Q3.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

And we would expect to return to year over year growth as we get to the end of 2025. So those things with our largest customers completely on track. And then as a reminder, with the win that we announced before with Brock, that program ramp is already working out well, and we're seeing sequential improvement in that program as we go from Q4 to Q1, and that will strengthen as we go through the year. And then with this new customer win that Rob has just been speaking about, it's really nice to see yet another custom server win that will be ramping in 2026. So we are continuing to make some good progress on the server side.

Thanos Moschopoulos
Thanos Moschopoulos
Managing Director - Equity Research at BMO Capital Markets

And while Matt noted, is there any incremental color you can provide in terms of just the strength of the pipeline you're seeing for additional server and custom rack opportunities?

Rob Mionis
Rob Mionis
President & CEO at Celestica

Yes. Sure, Thad. There is a very strong pipeline of additional server opportunities. Again, we tend to play on the proprietary compute side and that's where our focus is. And we also tend to play on the HPS side of things, so where there's high design content. And I would say the pipeline is quite healthy.

Thanos Moschopoulos
Thanos Moschopoulos
Managing Director - Equity Research at BMO Capital Markets

All right. I'll leave it there. Thanks.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Thank you.

Operator

Thank you. Your next question is from David Vogt from UBS. Your line is now open.

David Vogt
David Vogt
Managing Director at UBS Group

Great. Good morning, guys. Thanks for taking my questions. I've got a couple, if you will, as well. So Rob or Mandeep, on the second 1.6 terabyte program that you won with a large hyperscale customer, Can we clarify, is that an existing customer as they just migrate to faster speeds?

David Vogt
David Vogt
Managing Director at UBS Group

Or is that a new customer? And along those lines, is there an opportunity to expand the relationship from an optimized networking rack to other parts of the network and or ad compute? And I'll give you my second question on the digital native customer. I think I heard Rob say it's across multiple geographies. Is it fair to say that this customer historically has been sort of an incident based customer and this is sort of an initial opportunity to deploy Ethernet technology from Celestica across obviously a more complete solution, but just trying to get a better understanding of kind of how to think about the technological roadmap? Thanks.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Hi, David. Yes, so on the hyperscaler customer, yes, they are an existing customer. We currently support this customer with both 400 gs and 800 gs switches. So this is really a natural extension of our relationship. And it's for their next generation family of 1.6T liquid cooled networking rack.

Rob Mionis
Rob Mionis
President & CEO at Celestica

So again, this is not just a switch, but the entire rack. And we will be the final integrator for the system. Again, this will be a multi node solution for them in terms of both U. S. And Southeast Asia.

Rob Mionis
Rob Mionis
President & CEO at Celestica

And on and you also asked, do we see the opportunity to expand our solutions for this customer? Absolutely. Based on what we're doing with the digital native customer and also what we're doing with this hyperscaler, we see opportunities to grow our share of wallet with this hyperscaler as well. And with respect to the digital native customer, they have very specific and unique needs for the data center that they're building. I wouldn't say they're an InfiniBand customer going to Ethernet.

Rob Mionis
Rob Mionis
President & CEO at Celestica

I would say this is their own custom design for the data center and we're supporting them with a fully customized rack.

David Vogt
David Vogt
Managing Director at UBS Group

Great. Thanks guys. Congrats.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Thanks David.

Operator

Thank you. Your next question is from Steven Fox from Fox Advisors. Your line is now open.

Steven Fox
Founder & CEO at Fox Advisors, LLC

Hi. I was wondering if I could follow-up on some of these questions from maybe 1,000 foot level, which is, you've had a couple of landmark wins now the last couple of quarters that are diversifying you guys away from your the large cloud guys you've been selling to. And you're doing it with more complex rack integration and orchestration. So like from those two aspects, customer diversity and more complexity on the rack, how should we think about the business changing over say the next 12 months to 18 months or 24 months towards those trends? Thanks. And then I had a follow-up.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Thanks,

Rob Mionis
Rob Mionis
President & CEO at Celestica

Steve. If you step back in time, you're going to keeping it at a high level. Back in the day, as they say, contract manufacturers turns to EMS. I think we're clearly in our CCS business in the ODM category with these new wins. We're actually well underway to be a product company in the OEM section.

Rob Mionis
Rob Mionis
President & CEO at Celestica

So I think these are just further proof points to distance ourselves from ODM into OEM land. And I think that's where our CCS business is going.

Steven Fox
Founder & CEO at Fox Advisors, LLC

That's helpful. And then just on the liquid cooling front, I'm a little I just want to make sure I understand on these wins. Are we talking about leveraging your own technology at the board level with cold plates as well as at the rack level? And how much of that would you be manufacturing yourself as opposed to just design and integration? Thanks.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Yes. We're talking about focus at the rack level and also at the chip level and orchestrating it. And we have ecosystem partners that do the manufacturing and we're integrating and applying our processes at scale to make sure that we're able to deliver fully integrated system.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Stephen, I'll just add one of the things that we have been hearing from our customers is the challenge really gets to being able to produce liquid cooling solutions at scale. And we have demonstrated strong capabilities in this area and strong and we have a lot of experience in that area and that's a lot of the know how that we're able to bring to the table as well.

Steven Fox
Founder & CEO at Fox Advisors, LLC

Great. Thank you very much.

Operator

Thank you. Your next question is from Rivan Roy from Stifel. Your line is now open.

Ruben Roy
Ruben Roy
Managing Director - Equity Research at Stifel Financial Corp

Thank you very much for letting me ask a question. Mandeep, I was wondering, just kind of following up on some of the questions around the extensive development cycle, I guess, with the new customer. Are you thinking about CapEx? Would you have to make any changes to your capacity to support either of these new programs or both? What does it mean for CapEx levels of sales going forward, please?

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Yes. So first of all, welcome, Ruben. Really nice to have you take over for Matt at Stifel. Yes, to answer your question, we're very comfortable with the capacity that we have. We've been growing at strong double digits now 3 years in a row, and we've been able to maintain our CapEx spend at less than 10%.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Just as a reminder, the majority of the CapEx that we spend is on growth CapEx. We only have about 40 basis points of maintenance, and that gives us a lot of discretion on where we want to point those dollars. We have the capacity we need right now to execute all of the demand that's in front of us. We will be targeting some of the growth CapEx that we have in 2025 to areas like continue to expand in Thailand. We have shown that in Southeast Asia, we can bring on capacity in our existing campuses in under a year when needed to support our customer demand strength.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

And so the way to think about CapEx in 2025 is similar to what we've been saying in the previous year is 1.5% to 2% of revenue. And I don't really see at this point a need for that to be very different in the outer years either.

Ruben Roy
Ruben Roy
Managing Director - Equity Research at Stifel Financial Corp

Got it. Thank you, Mehdi. And then Rob, thanks for the comments on your early assessment of how to think about DeepSeq. But I guess given that you've given us some thought, the comment around networking, the networking opportunity longer term, maybe if you could just give us a little more detail about how you're thinking about that? It sounds like if we do get to a point where we can get cheaper AI to the edge, that could be a good thing.

Ruben Roy
Ruben Roy
Managing Director - Equity Research at Stifel Financial Corp

Is that what you're thinking about? But what does that mean for sort of scale up and scale out of the big clusters that we're getting used to? I guess just any more detail about how you're thinking about the networking opportunity, if you have any would be great. Thank you.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Thanks, Ruben, and again, welcome. Yes, as some of the industry pundits are saying, increased AI accessibility will drive demand at subviews as well. In the middle of all this is networking really remains crucial. It's crucial for scaling all the AI systems for transporting data for training for inferencing. And networking really is agnostic to the type of large language models that are being used today.

Rob Mionis
Rob Mionis
President & CEO at Celestica

If you think about networking, it might require real time analytics. So as DeepSeq is used for real time applications like high frequency trading or fraud detection or autonomous vehicle control, the need for minimal latency becomes critical and high bandwidth switching offers a solution to that. Even as you think deep seek will drive distributed computing, Again, if it's distributed across a cluster of servers, again, you'll still need high bandwidth switching. So we actually view in terms of our networking business, this is a very positive development to actually drive growth in our category portfolio.

Ruben Roy
Ruben Roy
Managing Director - Equity Research at Stifel Financial Corp

That's great detail. Thanks.

Operator

Thank you. And your next question is from Paul Treiber from RBC. Your line is now open.

Paul Treiber
Paul Treiber
Director & Research Analyst at RBC Capital Markets

Thanks very much and good morning. Just a comment or a question on the win with the digital native customer and just more broadly speaking in terms of your pipeline. Are you seeing a trend towards customers shifting to procuring end to end full rack solutions versus maybe in the past procuring individual components?

Rob Mionis
Rob Mionis
President & CEO at Celestica

That's certainly the case, Paul, with digital native customers. I mean, this class of customers really want a full solution. As I mentioned with this particular customer, not only is it the full rack solution, we're actually doing services, a fairly sizable service solution. So we think that this win will give us a further proof point to expand our market share with this new class of customers. With respect to hyperscalers, it does depend on hyperscalers.

Rob Mionis
Rob Mionis
President & CEO at Celestica

We mentioned in the script that hyperscaler win that we had on the 1.60 the 1.60 switching was an inflection point. And what we're providing with this customer was a dedicated AI networking rack. And this is again designed specifically for AI ML workloads and it's optimized has optimized fabric, it improves efficiency, it incorporates liquid cooling directly within the rack and the switch itself. And this will most likely be required for all the latest 1.60 designs. So again, in terms of full rack solutions, this is where we think the market is going and we think we're very well positioned.

Paul Treiber
Paul Treiber
Director & Research Analyst at RBC Capital Markets

And along with that, you made an interesting comment about the shift from contract manufacturing EMS to ODM and then product and the importance of your HPS business to contract wins. When you look at your pipeline and you look at the mix or differentiation from HPS, how do you compare that? Like how much of a factor is that having to your ability to win these contracts as you look out over the next couple of years?

Rob Mionis
Rob Mionis
President & CEO at Celestica

We've been increasingly investing in R and D and design capability and expanding our design network for the past 10 plus years. I think Mandeep will chime in. We're over

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

$175,000,000 we're going to be spending this year, and we are comfortable spending up to $100,000,000 in 2025 as well.

Rob Mionis
Rob Mionis
President & CEO at Celestica

And based on our growth, we anticipate continue to invest in design capabilities and migrate towards that journey that I mentioned.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Yes. I know you know this, Paul. We have over 900 design engineers. They are engaging with customers in multiple ways. So as Rob talked about, our OEM type of offerings are we have Celestica products that have a Celestica logo on it that our customers that have been tested and meet our customers' needs directly.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

But then in addition to that, we have the same engineers who can work with customers on customizing a solution to what they're looking for. And we work in collaboration along the way. And so while some of our wins do fall under the HPS umbrella, because they have a heavy level of our design content, we also use our engineers to help us win on the EMS side. And so we find that our engineering expertise is a key differentiator, which is why again, if you think back like 5 years ago, we were spending about $25,000,000 in R and D. We're now spending 3x that and going again into 25x, it's going to be 4x that and the return on that investment is very high.

Paul Treiber
Paul Treiber
Director & Research Analyst at RBC Capital Markets

And lastly, if I can squeeze in one more. Just with the change in the U. S. Administration, you talk about tariffs and also enthusiasm for on shoring. Is are your customers asking you mentioned Thailand and expanding in Thailand, but are you getting more requests for production in the U.

Paul Treiber
Paul Treiber
Director & Research Analyst at RBC Capital Markets

S? And how are you thinking about U. S. Facility expansion going forward?

Rob Mionis
Rob Mionis
President & CEO at Celestica

Yes. Right now, our customers are in a wait and see mode. But as we've done in the past, we have resilience inside our network. So if tariffs in one area end up causing a customer to want to shift, we feel we can serve them in another area. Right now, we have ample capacity in the U.

Rob Mionis
Rob Mionis
President & CEO at Celestica

S. And ample capacity not just means physical capacity, but also means power. We've actually secured power for our CCS business for years to come in anticipation of our growing businesses. So we're keeping our eyes open and we're keeping nimble. But right now, customers are in a wait and see mood because every day is kind of a new direction, if you know what I mean.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

And specifically to the U. S, just as a reminder, we do a lot of semiconductor manufacturing on the West Coast of the United States. We do very complex aerospace and defense work in the Midwest. And then we do have in Richardson, Texas, a very large facility, which is supporting our hyperscaler customers. And we've been doubling revenue for a couple of years now in the Texas facility.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

We will be more than doubling the revenue again in 2025. And again, as I mentioned earlier, all within the CapEx envelope that we would expect.

Paul Treiber
Paul Treiber
Director & Research Analyst at RBC Capital Markets

Thanks for taking the questions.

Operator

Thank you. Your next question is from Todd Coupland from CIBC. Your line is now open.

Todd Coupland
Managing Director at CIBC World Markets

Yes. Good morning, everyone. I wanted to ask about the communications business, specifically on the margin side. So if you could help us bridge your networking margins relative to peers in the market that are nicely into the double digits. We think about your guide, it implies majority of your business will be in networking by the end of the year.

Todd Coupland
Managing Director at CIBC World Markets

So why shouldn't your margins be a lot higher than they are? Just talk us through that spread. Thanks a lot.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

Yes. Hey, Todd. So of course, our communications business has a lot of is what our networking business is. There's a substantial amount of growth in there. It includes a lot of our HPS revenue, but it also includes EMS revenue as well.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

We do manufacture communications gear for leading OEMs that are sometimes selling into the smallmedium business side of things, sometimes selling into the hyperscaler side of things. So you need to think about communications on a blended basis. The way I would characterize the margins overall though is that look, CCS had record operating margins in the Q4, 7.9%. And our HPS business is accretive to that. And so as we continue to grow HPS types of revenue, it provides an opportunity for continuing margin expansion.

Mandeep Chawla
Mandeep Chawla
CFO at Celestica

The majority of our HPS portfolio today is switches. And so we would expect to see some margin expansion. It will also lift up the communications numbers. But the best way to think of it more of an apples to apples comparison if you're thinking about an ODM as an example would be how does our HPS business perform relative to those ODMs. And we're not that we're all in pretty much the same zip code.

Todd Coupland
Managing Director at CIBC World Markets

That's great. Thanks for that color. And then I just wanted to go back to DeepSeq as well. So is your takeaway at this point that it's going to drive custom silicon demand at the expense of merchant silicon and that's an incremental driver? Thanks a lot.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Yes. In terms of the custom silicon demand, that's where we play and our view is that that's the growing market. Custom silicon is really around specialized AI applications. And we feel that's the place that we're focusing on where the majority of the growth will actually come from.

Todd Coupland
Managing Director at CIBC World Markets

Great. Thanks a lot. Appreciate the color.

Operator

Thank you. There are no further questions at this time. I will now hand the call back to Rob Maionis for the closing remarks.

Rob Mionis
Rob Mionis
President & CEO at Celestica

Thank you, operator. And again, thank you for joining us this morning. 2024 was a solid year for us, and we're looking forward on building on this positive momentum as we get further into 2025. The products that we have in development combined with our recent wins also gives us confidence in our long term outlook and our future is certainly quite bright. We look forward to updating you next quarter and have a wonderful day.

Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect your lines.

Executives
    • Craig Oberg
      Craig Oberg
      Vice President, Investor Relations & Corporate Development
    • Rob Mionis
      Rob Mionis
      President & CEO
    • Mandeep Chawla
      Mandeep Chawla
      CFO
Analysts
    • George Wang
      Vice President at Barclays Investment Bank
    • Robert Young
      Managing Director & Head of Research at Canaccord Genuity Inc
    • Thanos Moschopoulos
      Managing Director - Equity Research at BMO Capital Markets
    • David Vogt
      Managing Director at UBS Group
    • Steven Fox
      Founder & CEO at Fox Advisors, LLC
    • Ruben Roy
      Managing Director - Equity Research at Stifel Financial Corp
    • Paul Treiber
      Director & Research Analyst at RBC Capital Markets
    • Todd Coupland
      Managing Director at CIBC World Markets
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