Celestica Inc. (CLS:CA) Q4 2025 Earnings Call Transcript

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Overview

The earnings call indicates strong financial performance, with increased revenue and EPS guidance for 2025 and 2026. The company has a solid free cash flow outlook and a strong balance sheet. Despite slower growth guidance for 2026, management remains optimistic about future opportunities, particularly in AI/ML and networking. The Q&A section revealed cautious optimism and strategic investments in growth areas, which should positively impact the stock price. However, macroeconomic uncertainties pose potential risks. Overall, the sentiment leans positive, with expected stock price movement in the 2% to 8% range.

Key Financial Performance

Revenue (Q4 2025) $3.65 billion, up 44% year-over-year, driven by strong demand in the CCS segment.

Non-GAAP Operating Margin (Q4 2025) 7.7%, up 90 basis points year-over-year, driven by strong margin improvement in both segments.

Adjusted Earnings Per Share (Q4 2025) $1.89, an increase of $0.78 or 70% year-over-year, exceeding the high end of guidance.

Adjusted Gross Margin (Q4 2025) 11.3%, up 30 basis points year-over-year, driven by higher volumes and stronger productivity.

Adjusted Effective Tax Rate (Q4 2025) 19%, no year-over-year change mentioned.

Adjusted Return on Invested Capital (ROIC) (Q4 2025) 43%, up 14 percentage points year-over-year, driven by strong profitability and disciplined working capital management.

ATS Segment Revenue (Q4 2025) $795 million, down 1% year-over-year, due to lower volumes in Capital Equipment and portfolio reshaping in A&D, partially offset by stronger demand in other end markets.

CCS Segment Revenue (Q4 2025) $2.86 billion, up 64% year-over-year, driven by growth in communications and enterprise end markets.

Communications End Market Revenue (Q4 2025) Increased by 79%, driven by strong demand and ramping programs for 800G networking switches with hyperscaler customers.

Enterprise End Market Revenue (Q4 2025) Increased by 33%, driven by the ramping of a next-generation AI/ML compute program with a hyperscaler customer.

HPS Business Revenue (Q4 2025) $1.4 billion, up 72% year-over-year, driven by ramping volumes in 800G switch programs with multiple hyperscaler customers.

ATS Segment Margin (Q4 2025) 5.3%, up 70 basis points year-over-year, driven by improved profitability in the A&D business.

CCS Segment Margin (Q4 2025) 8.4%, up 50 basis points year-over-year, driven by strong operating leverage.

Inventory Balance (End of Q4 2025) $2.19 billion, up $427 million year-over-year, to support continuing revenue growth in the CCS segment.

Cash Cycle Days (Q4 2025) 61 days, an improvement of 8 days year-over-year.

Free Cash Flow (Q4 2025) $156 million, contributing to total annual adjusted free cash flow of $458 million in 2025, up $152 million year-over-year, driven by strong profitability and disciplined working capital management.

Capital Expenditures (2025) $201 million or 1.6% of revenue, no year-over-year change mentioned.

Gross Debt to Non-GAAP Trailing 12-Month Adjusted EBITDA Leverage Ratio (End of Q4 2025) 0.7 turns, an improvement of 0.3 turns year-over-year.

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Operating Highlights

AI-related demand for data center technologies: Growth in AI-related demand for data center technologies contributed to a 28% increase in revenue and a 56% rise in adjusted EPS for 2025.

800G networking switches: Strong demand and ramping programs for 800G networking switches drove a 79% increase in revenue in the communications end market.

Next-generation AI/ML compute program: Acceleration in the ramping of a next-generation AI/ML compute program with a large hyperscaler customer led to a 33% increase in enterprise end market revenue.

Geographic diversification: Investments in manufacturing capacity in Mexico and Japan to support customer demand for geographic diversification and supply chain risk mitigation.

Expansion in Thailand: Over 1 million square feet of additional manufacturing capacity being added in Thailand to meet strong customer demand.

U.S. investments: Significant investments in Texas, including over 700,000 square feet of new capacity in Richardson and Fort Worth, to support R&D, manufacturing, and advanced assembly.

Adjusted operating margin: Achieved a record adjusted operating margin of 7.7% in Q4 2025, driven by strong operational execution and improved leverage.

Cash flow management: Generated $156 million in free cash flow in Q4 2025, contributing to a total of $458 million for the year, exceeding the annual outlook.

Capital expenditures: Planned $1 billion in capital expenditures for 2026 to support revenue-enabling capacity, funded through operating cash flow.

AI/ML revolution: Positioned as a critical enabler of the AI/ML revolution, focusing on advanced liquid cooling solutions and next-generation networking platforms.

Customer alignment: Close collaboration with hyperscaler customers on capacity planning to align with their multiyear requirements.

Google partnership: Long-term investments to support Google's Tensor processing unit systems and networking technologies, including expanded manufacturing capacity.

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Risk or Challenges

Tariffs or Trade Restrictions: The forward-looking statements are based on the assumption that there are no material changes to tariffs or trade restrictions compared to what is in effect as of January 28. Any changes could adversely impact the company's performance.

Capital Equipment Business: The ATS segment experienced a decline in revenue driven by lower volumes in the Capital Equipment business, which is expected to continue in the near term.

Portfolio Reshaping in A&D Business: The ATS segment's revenue was also impacted by previously communicated portfolio reshaping in the Aerospace and Defense (A&D) business.

Inventory Management: Inventory balance increased by $427 million compared to the prior year to support revenue growth in the CCS segment, which could pose risks if demand forecasts are not met.

Capital Expenditures: The company plans to significantly increase capital expenditures to approximately $1 billion in 2026, which could strain financial resources if anticipated demand does not materialize.

Geographic Diversification: Investments in geographic diversification, such as new manufacturing lines in Mexico and Japan, aim to derisk supply chains but could face execution challenges.

Market-Related Softness: Market-related softness in the Capital Equipment business is expected to impact ATS segment revenue in the near term.

Customer Concentration: Three customers accounted for a significant portion of revenue (36%, 15%, and 12%), which poses a risk if any of these customers reduce their business with the company.

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Guidance & Outlook

Revenue Growth: Revenue growth is expected to accelerate in 2026, with a raised annual revenue outlook to $17 billion, representing a 37% year-over-year increase. The CCS segment is projected to grow approximately 50% in 2026, driven by strong demand and new program ramps.

Adjusted EPS: The adjusted EPS outlook for 2026 has been raised to $8.75, representing a 45% year-over-year growth.

Capital Expenditures: Capital expenditures for 2026 are anticipated to be approximately $1 billion, or 6% of the current annual revenue outlook. These investments are aimed at expanding global manufacturing capacity and capabilities to support demand growth.

Free Cash Flow: The free cash flow outlook for 2026 is maintained at $500 million, demonstrating the company's ability to fund significant capital investments organically.

CCS Segment Growth: The CCS segment is expected to experience strong demand, particularly in communications and enterprise end markets. Mass production for 1.6T switching programs is anticipated to begin ramping in late 2026, with further growth expected into 2027.

ATS Segment Outlook: ATS segment revenues are expected to remain flat to grow in the mid-single-digit percentage range for 2026, with growth in Industrial and HealthTech businesses offset by near-term softness in Capital Equipment and A&D businesses. Recovery in Capital Equipment volumes is anticipated in the second half of 2026.

Geographic and Capacity Investments: Significant investments are planned in Texas, Thailand, Mexico, and Japan to expand manufacturing capacity and capabilities. These include new facilities, upgrades, and advanced technologies to support customer demand and geographic diversification.

AI/ML and Data Center Growth: Strong growth is anticipated in AI/ML compute programs and data center infrastructure, driven by hyperscaler customers. The company expects to support next-generation AI/ML compute programs and advanced networking technologies into 2027.

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Shareholder Return Plan

Share Repurchase Program: During the fourth quarter, Celestica received regulatory approval to launch a new normal course issuer bid, allowing the company to purchase up to approximately 5% of its public float until November 2, 2026. In Q4 2025, the company repurchased approximately 132,000 shares for $36 million. For the full year 2025, Celestica repurchased 1.36 million shares at a total cost of $151 million, averaging approximately $111 per share.

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Key Q&A

Q:Why does the revenue guidance for fiscal 2026 imply slower growth in the remaining three quarters?

A:The company is taking a pragmatic view, focusing on securing supply and accounting for macro uncertainties. They have no concerns about supply ramping but are being cautious due to potential macroeconomic risks. They aim to update numbers as the year progresses.

Q:What is the company's approach to risk management and maintaining free cash flow despite increasing CapEx?

A:The company is confident in its ability to generate at least $500 million in free cash flow after $1 billion in CapEx. They have a strong balance sheet and leverage in the supply chain. Risks are seen as uncontrollable, like geopolitical risks, but demand continues to outstrip supply, especially in networking and AI/ML compute.

Q:What is the timeline for the CapEx investment and its impact on revenue?

A:The CapEx investment is based on booked business and will enable additional capacity for 2027 and 2028. The investments for 2026 will also have a follow-on effect into 2027, supporting the backlog of business.

Q:Does the outlook for CCS growth into 2027 include the digital native customer?

A:Yes, the outlook includes the digital native customer, which is expected to contribute meaningfully in 2027. The company has updated its CCS growth numbers, projecting $7 billion in 2027, up from $5 billion previously.

Q:How does the company view the margin trajectory given the mix shift in CCS?

A:The company expects strong operating leverage and disciplined cost management to offset any potential mix headwinds. They project a 30 basis point margin expansion in 2026 and aim to exceed this expectation.

Q:Has the capital intensity of the business changed with the $1 billion CapEx?

A:The majority of CapEx is growth-oriented, tied to specific program wins. Maintenance CapEx remains predictable at $70-$80 million. The company is willing to increase CapEx if wins continue, but expects it to moderate eventually.

Q:What is the company's opportunity in multi-rack scale-up XPU networks and co-packaged optics-based switches?

A:The company sees this as a major growth driver, with increasing R&D expenditures and customer engagements. They are working on 3.2T programs and expect mass adoption of co-packaged optics in the future.

Q:What is the outlook for new program wins and their returns?

A:The company sees unprecedented visibility into 2027 and 2028, with a focus on complex, high-value programs. They are ROIC-driven and aim to expand margins and top-line growth. Competitive intensity is increasing, but their engineering and scale provide a strong competitive moat.

Q:What is the status of the digital native customer and its impact on CapEx?

A:The digital native customer program is on track, with samples being shipped in 2026 and ramping in 2027. A portion of CapEx is allocated to this program, but the majority supports hyperscaler programs.

Q:How does the company view the 1.6T programs and their impact on margins?

A:The company has 10 active 1.6T programs, with 5 ramping in late 2026 and others in 2027-2028. Margins are expected to be strong, with more programs moving towards HPS, which typically has better pricing.

Q:What is the company's relationship with Google regarding TPU programs?

A:The company is a preferred manufacturing partner for Google’s TPU programs, with a strong, integrated relationship. They expect to support Google’s growth as TPU adoption increases.

Q:How does the company address inflation and pricing in its guidance?

A:Inflation and pricing are factored into the guidance. Networking growth includes silicon price inflation, which is passed on to customers. Margin compression is not expected at this time.

Q:Review of Unclear Management Responses

A:Management avoided directly addressing the specific reasons for the implied slowdown in revenue and EPS growth in the latter part of fiscal 2026, attributing it to pragmatism and macro uncertainties without providing detailed explanations.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

CLS Transcript

Celestica Inc. (CLS:CA) Q4 2025 Earnings Call Transcript

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The earnings call presents strong financial metrics, optimistic guidance, and strategic growth in AI/ML and networking, which are positive indicators. The Q&A section highlights robust customer commitments and future growth opportunities, despite some management reticence on specifics. The raised annual revenue and EPS outlooks, along with increased free cash flow, support a positive sentiment. The positive impact of the shareholder return plan and strong financial health further contribute to the positive outlook. However, the lack of specific guidance on some future aspects tempers the overall rating to 'Positive' rather than 'Strong positive.'

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The earnings call summary and Q&A indicate strong financial performance, with raised revenue and EPS guidance, and significant growth in key segments like CCS. The management's confidence in sustaining growth, despite some uncertainties, and the positive sentiment from analysts support a positive outlook. However, the lack of long-term guidance and uncertainties in material availability slightly temper expectations. Overall, the short-term outlook is positive, likely leading to a stock price increase of 2% to 8% over the next two weeks.

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The earnings call indicates strong financial performance, with a 20% revenue increase and a 45% rise in adjusted EPS, both exceeding guidance. The share repurchase plan is substantial, likely boosting shareholder confidence. Despite some uncertainties in the Q&A, such as tariff impacts and unclear guidance, the overall sentiment is positive due to robust growth, particularly in the CCS segment, and optimistic future guidance. The market is likely to react positively, with a potential 2% to 8% increase in stock price.

CLS Slides

Celestica Q4 2025 slides: 44% revenue surge, major capacity expansion planned

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CLS Report

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