Q2/24 PREVIEW: EXPECTING A COMMUNICATIONS RAMP
THE TD COWEN INSIGHT
With Enterprise growth expected to normalize in H2, we believe investor focus will be on the pace of acceleration in Communications revenue, driven by hyperscaler demand for Celestica's ODM networking equipment. An earlier-than-expected ramp in networking could also support upside to 2024 guidance. We will revisit our estimates, target price, and recommendation after results are released.
Event:
Q2/24 Results: Wednesday, July 24, 2024, after markets close. Conference Call: Thursday, July 25, 2024, at 8:00 a.m. ET. Link Impact: NEUTRAL
We forecast total revenue of $2.2bln, up 15% y/y. We estimate Advanced Technology Solutions (ATS) revenue of $787mm, down 9% y/y; Communications revenue of $818mm, up 45% y/y; and Enterprise revenue of $628mm, up 23% y/y. We forecast EBIAT of $137mm, or 6.1% EBIAT margin, up ~60bps y/y. We also expect EPS of $0.80.
AI networking acceleration could offset normalizing Enterprise growth. We believe Celestica's Communications business is well-positioned to benefit from ramping demand
for networking equipment in support of GenAI data centres, given its technology is aligned with hyperscaler architecture needs and its existing leadership in next-generation ethernet switches. HPS growth was a solid ~40% y/y in Q1 and is expected to continue through the year. Recent discussions across data centre OEMs and networking silicon leaders support our thesis that ethernet-based networking could see significant growth over the next several years in support of GenAI network build-outs, with Celestica expected to continue to play a critical role as a leading ODM/white-box provider across all top 5 global hyperscalers.
ATS end markets remain volatile in the near term. We expect continued demand strength in A&D, supported by growth in defense and commercial aerospace. Softness in Industrial is expected to persist, particularly in demand for EV charging, although growth is expected to return by Q4/24. Capital Equipment is expected to return to growth in 2024 after a decline in 2023, supported by new program ramps and improving momentum in the base portfolio. Industry stakeholders continue to expect the semiconductor market to recover throughout the year, driven by improving electronic equipment sales, stabilizing inventories, and an increase in wafer fab capacity. Longer term, the ATS segment continues to be a large opportunity, in our view, given lower outsourced manufacturing penetration in markets that require a high level of engineering expertise.