Celestica Inc T.CLS

RBC

[retiredcf]

November 20, 2024

Celestica Inc.
Highlights from the RBC Global TIMT Conference

We hosted Mandeep Chawla, Celestica's Chief Financial Officer, at the 2024 RBC Capital Markets Global Technology, Internet, Media and Telecommunications (TIMT) conference today. We remain Outperform.

Key takeaway: Celestica's solid positioning in 400G and faster switches has allowed the company to benefit from the rapid rise in data center capex at hyperscaler customers. As a result, Celestica's revenue mix has shifted into higher margin, more defensible segments. Visibility to continued growth in 2025-2026 appears strong and the company appears well positioned to capture share in the long term.

• A market leader in hyperscaler networking. Celestica expects to generate $2.4B revenue from HPS/ODM Ethernet switches in FY24, up from $900MM in FY21. Celestica has gained significant share in Ethernet switching in recent years and is now the market leader in 400G switches. The company attributes its success to its development of high performance 400G switching products that meet the needs of hyperscalers for performance, flexibility and customization. Management believes the company is well positioned to continue taking share as hyperscaler customers upgrade to 800G and 1.6T through 2027. Celestica has already won 800G follow-on programs with its largest and second largest hyperscaler customers for next year and secured a win with another hyperscaler customer for 1.6T switches, with revenue from this program beginning in mid-2026.

• Solid traction in compute. Celestica is also seeing strong traction with hyperscalers for custom compute, with server revenue expected to reach $1.6B in FY24 (+26% Y/Y). The end of life of a large sole sourced contract is creating near-term headwinds, though Celestica has already won next-gen programs with the same customer, which is expected to ramp in Q3/FY25. Moreover, Celestica has secured other contracts in compute that are set to commence in 2026, including with its largest customer, and is in active discussions with other hyperscalers regarding programs likely to ramp in 2025, 2026, and 2027. Management noted that revenue realization from these server programs is 150-200% of initial estimates, compared to 70% historically, as hyperscalers continue to see incrementally higher demand each quarter.

• Celestica's networking business has a stronger moat than compute. Management noted that the competitive moat around networking is significantly higher than compute, given the proprietary IP and R&D involved in its HPS/ODM business. In comparison, the EMS server market is very competitive. Additionally, EMS server program life cycles are now just 4-6 quarters, vs. 2-3 years previously, which means companies need to win programs much more frequently. While this may open the door to win new programs, the competitive dynamics are more likely to drive margin pressure in the server business. As a result, Celestica sees a more compelling long-term growth opportunity in networking.

• Current capex levels are sufficient to sustain growth. Celestica has historically spent 1.5-2.0% of revenue on capex, with 40 bps of this allocated to maintenance capex. Management believes Celestica can continue to support strong growth over the next 3 years while managing within its historical capex spending range. The company is cautious not to overbuild capacity, and management noted that hyperscaler customers take a collaborative approach and either co-pay for existing capex or provide cash deposits for inventory to ensure Celestica has a backstop if volume does not materialize. Moreover, Celestica has a strong footprint in key geographies (South East Asia, Mexico, U.S.), and is well positioned if tariffs shift more production out of China.

• ATS remains a long-term strategic focus. Management noted that its ATS business (~1/3 of revenue) remains a key strategic area. ATS differentiates Celestica from its competitors and is well diversified across industries (industrial, aerospace and defence, capital equipment, healthcare). With OEMs still manufacturing 80% of their total production, management sees a large growth opportunity in ATS over the next decade.