Celestica Inc T.CLS

RBC

[retiredcf]

Celestica Inc. (NYSE: CLS; TSX: CLS)

Outperform, US$63.00 price target

We expect Celestica to report strong Q2 results, with potential upside to consensus, driven by continued AI demand and data center build-outs. Similar to last quarter, Celestica may raise FY24 guidance, which we believe remains conservative with respect to hyperscaler demand. Given the likely beat and raise, we believe the re-rating in Celestica’s shares will continue. Maintain Outperform, increasing price target from $53.00 to $63.00.

Celestica to report Q2 results on July 24. Celestica will report Q2/FY24 results on July 24, after market close. Celestica will host a conference call on July 25 at 8:00 a.m. ET. Webcast is available here.

Q2 may exceed RBC/consensus on continued hyperscaler ramp. Over the past 4 quarters, Celestica has averaged quarterly revenue 4% and adj. EPS 14% above consensus. Therefore, it appears likely that Celestica reports Q2 revenue above consensus, given the continued strongdemand environment from hyperscalers against conservative guidance. As a result, Celestica’s Q2 could reach the high-end of guidance for $2.33B revenue, which would exceed our estimate for $2.28B revenue (17% Y/Y) and consensus at $2.25B. Similarly, we believe adj. EBITDA may slightly exceed our estimate for $176MM (29% Y/Y) and consensus at $173MM, and adj. EPS may be higher than RBC/consensus at $0.82/$0.81. Celestica repurchased 214k shares in Q2 for $10MM ($46.69/share average), which adds $0.001 to Q2e adj. EPS.

Celestica likely to raise FY24 guidance. Last quarter, Celestica raised FY24 guidance to $9.1B revenue (>$8.50B prior) and $3.30 adj. EPS (>$2.70 prior). We believe guidance is conservative,  given the implied deceleration in CCS growth (from 36% Y/Y 1H to 15% Y/Y 2H), and provides room for upward revisions as visibility to sustained hyperscale demand improves. Last year Celestica raised FY23 guidance three times (avg. increase of 1.8% to FY23 revenue guidance and 6% increase to FY23 adj. EPS guidance).

Q3 guidance may bracket consensus. We believe that Celestica may guide Q3 to $2.25-3.75B revenue and $0.80-0.90 adj. EPS, with the low-end near consensus at $2.29B revenue and $0.82 adj. EPS. We believe CCS growth is likely to remain strong, given continued solid hyperscaler demand, and ATS revenue growth may stabilize, with further improvement Q4.

•  For CCS, we expect Q3 guidance to call for revenue up mid 20% Y/Y, slowing from mid 30% Y/Y Q2, which implies CCS revenue is relatively flat on a sequential basis. We expect Celestica to guide for CCS Communications revenue to decelerate to high-teens Y/Y growth in Q3, though upside is possible as new hyperscaler programs ramp. In CCS Enterprise, we expect growth to increase to the mid 30% Y/Y range (vs. low 20% range Q2), due to easier Y/Y comps (+31% Y/Y Q3/FY23 vs. +42% Y/Y Q2/FY23).

•  For ATS, we expect Q3 revenue flat Y/Y, improving from -5% Y/Y 1H and up mid-single digits sequentially. We expect the stabilization in growth to be driven by subsiding headwinds in industrial, improvement in commercial aerospace, defense program ramps, and further recovery in capital equipment.

  Expect CCS growth momentum to continue Q2. Our model calls for CCS revenue to increase 37% Y/Y to $1,474MM (+2% Q/Q) in Q2, with growth stable with 38% Y/Y Q1. We forecast CCS Communications revenue to rise 48% Y/Y to $844MM (+10% Q/Q), in line with guidance for mid-40%. The acceleration in Communications growth (vs. 17% Y/Y Q1) is driven by the ramp of 400G switches. For CCS Enterprise, our model calls for revenue up 25% Y/Y to $630MM (-6% Q/Q), in line with guidance for a low 20% and slowing from 72% Y/Y Q1. The deceleration reflects slower growth in compute (70% Y/Y Q2e vs. 130% Y/Y Q1), on tougher comps and investments shifting to networking. We believe Q2 CCS revenue may exceed our forecast on ramping hyperscaler demand, though OEM is likely to remain soft in Q2. Celestica’s largest customer accounted for 34% of total revenue Q1, up from 22% FY23 and 11% FY22; we believe investors will have a heightened focus on trends in customer concentration and revenue ramp with other large hyperscalers.

  Forecast ATS revenue down 7% Y/Y Q2. Our model calls for ATS revenue to decline 7% Y/Y to $805MM Q2 (+5% Q/Q) on continued softness in industrial end markets, primarily in EV charging. Our outlook is consistent with Celestica’s guidance for “high single-digit” Y/Y decline and compares against -3% Y/Y Q1 (-4% Q/Q).

  Peer Jabil reported Q3 slightly above consensus, retracts FY25 guidance. On June 20, EMS peer Jabil (NYSE:JBL; not covered) reported Q3/FY24 (May-qtr) revenue of $6.8B, above consensus at $6.5B. The company reiterated FY24 revenue guidance. On May 20, Jabil rescinded FY25 guidance, citing softness in key end markets, particularly EVs and semi-cap equipment. Also, Jabil is shifting its portfolio away from certain end markets, which is an $800MM headwind to FY25 revenue. With respect to AI and data centers, the company noted that it is working on making the transition from legacy networking to the next-generation of networking and switches. The company had previously guided to $6B of AI-related revenue for FY25 (+20% Y/Y).

Canadian Technology: Q2/CY24 Preview

Raising target from US$53.00 to US$63.00. Celestica’s shares have significantly re-rated. Celestica is now trading at 17x NTM P/E, above EMS peers (at 15x), whereas Celestica has averaged a 29% discount to EMS peers over the last 5 years. We believe Celestica warrants a multiple above EMS peers, given Celestica’s faster growth as a result of hyperscaler spending and increasing mix of HPS revenue. Our revised $63.00 target is based on 18x CY25e P/E, up from 15x previously, as we have greater confidence in the sustainability of Celestica’s growth to remain above EMS peers.