Q1/24: DIVERSIFYING THE AI CUSTOMER BASE
THE TD COWEN INSIGHT
Market reaction has been muted, potentially on the implied flattish H2 guidance. We continue to believe that Celestica will benefit from the ramp up of additional hyperscale customers and an increased mix of higher margin, higher ASP Communications revenue throughout the year. We view this as a buying opportunity.
Event:
Celestica reported Q1/24 results and held its conference call this morning. Impact: POSITIVE
AI setup looks positive through 2024 and into 2025. There are a couple AI factors which leave us positive on CLS:
Additional hyperscaler customers are expected to ramp throughout the year. We believe this is supported by Meta's increased 2024 capex expectations which could start ramping next quarter. Management noted that much of its AI success has come from one customer, but others are expected to ramp throughout the year, particularly in the Communications segment.
Communications benefiting from AI. While we expected the AI investment cycle to start driving Communications demand from H2/24 onwards, Celestica is already starting to see strength. Q1/24 Communications growth was driven by its largest customer, but additional customers are expected to ramp from Q2/24 onwards. Moreover, early demand is for 400G products, while higher ASP 800G volume is expected to ramp throughout the year and into 2025. We believe this will drive continued top line growth.
There could be upside to 2024 guidance. Despite the significantly higher 2024 guidance that is coming in above 2025 targets, we believe there is still potential for upside from the earlier-than-expected AI Communications ramp up. Offsetting that could be some normalization in H2 enterprise given the strong y/y comps. We also believe there could be EBIAT margin upside from a higher mix of HPS and as ATS volumes recover.
ATS stabilizing. 2024 ATS revenue is expected to be flat as Industrial weakness continues to improve throughout the year and A&D strength continues. Consistent with our view, capital equipment is stabilizing and showing early signs of a recovery. Management expects the segment to return to growth in 2024 as new programs ramp.