TD QUICK TAKE: EARNINGS UPDATE
Q1/24: AI BOOSTING COMMUNICATIONS EXPECTATIONS EARLIER THAN EXPECTED
THE TD COWEN INSIGHT
Celestica posted a solid quarter with a beat across most line items and a raise that exceeded above-guidance estimates. The results support our thesis that Celestica will be a significant beneficiary of both GenAI compute and networking datacentre investments. Notably, Celestica's Communications segment is starting to show signs of demand strength earlier than we expected.
Event
Q1/24 Results.
Conference Call: Thursday, April 25, 2024, at 8:00 a.m. ET. Link Impact: POSITIVE
GenAI continues to fuel Enterprise strength... Enterprise exceeded expectations, growing 72% y/y, slightly higher than our estimate for 68% growth. The company saw continued demand for AI/ML compute products from its hyperscaler customers. Growth in this segment is expected to be in the low-twenties y/y off a strong y/y comp, but is still a deceleration. It could be related to the timing of program ramps, but we'll look for more colour on the on the call.
...and Communications too. Communications posted a surprise quarter with growth expected to accelerate next quarter. Our thesis of Celestica's Communications business benefiting from GenAI investments is coming in faster than we expected. The company highlighted demand from hyperscalers to support AI/ML. Considering this is where HPS programs are recognized, we believe the ramp up of Communications programs could also drive margins higher. HPS revenue grew 40% y/y, which likely helped drive CCS EBIAT margin to a solid 7.0%.
GenAI could support continued momentum. Meta (META-US) reported results last night. Capex of $6.4bln still hasn't started to ramp, but increased 2024 capex guide of $35bln- $40bln, from $30bln-$37bln, implies $10.4bln/quarter throughout the remainder of
2024. Capex is expected to continue increasing next year as they "invest aggressively" to support their AI efforts. We believe this sets up a competitive dynamic amongst Celestica's customers that supports continued CCS growth.
Could increased guidance still be conservative? 2024 guidance was increased well above consensus estimates, which were already above prior guidance. New 2024 revenue guidance is 4% higher than consensus and EPS guidance is 13% higher, as EBIAT margin expectations were also raised above the high end of the prior range. Despite the raised guidance we believe there could be further upside to both revenue and margin given anticipated capex ramps from hyperscalers throughout the year.