Celestica’s AI Surge Drives Ambitious Earnings Outlook

Celestica ((TSE:CLS)) has held its Q4 earnings call. Read on for the main highlights of the call.

Celestica’s Earnings Call Signals Powerful AI-Driven Upswing, With Risks Around Capital Intensity and Customer Concentration

Celestica’s latest earnings call projected a strongly positive tone, underscoring accelerating revenue and earnings momentum powered by its Connectivity & Cloud Solutions (CCS) business, particularly in networking and AI compute. Management highlighted record profitability, strong free cash flow, and a major uplift to its 2026 outlook, all underpinned by hyperscaler demand and new high‑speed networking design wins. At the same time, the company acknowledged rising execution risk as it ramps capital spending, builds inventory, and leans more heavily on a small number of very large cloud customers.

Quarterly and Annual Revenue Outperformance

Celestica delivered standout top‑line growth, significantly beating its own expectations. Fourth‑quarter revenue reached $3.65 billion, up 44% year‑over‑year and above the high end of guidance, reflecting powerful demand from cloud, networking, and AI customers. For the full year, revenue climbed to $12.4 billion, an increase of 28% from the prior year. This kind of double‑digit expansion places Celestica among the faster‑growing hardware and infrastructure suppliers leveraged to AI and data‑center spending, and sets a high bar for the newly raised 2026 targets.

Strong Earnings and Margin Expansion

Profitability improved even faster than revenue, underscoring operating leverage as AI‑related volumes scale. Q4 adjusted EPS came in at $1.89, up 70% year‑over‑year and above guidance, while full‑year adjusted EPS rose 56% to $6.05. Non‑GAAP operating margin reached a record 7.7% in Q4 and 7.5% for the full year, marking the second straight year of 100 basis‑point improvement. This margin expansion is notable in a contract manufacturing and services model typically characterized by thinner margins, suggesting Celestica is capturing higher‑value, more complex programs in AI and networking.

Robust CCS Segment Growth

The CCS segment, which includes networking and AI‑related compute, remains the engine of Celestica’s growth story. CCS revenue jumped 64% in Q4 to $2.86 billion and now represents 78% of total company revenue. Within CCS, the communications end market surged 79%, while enterprise grew 33%, both comfortably ahead of prior guidance. This mix shift toward higher‑growth cloud and networking customers is reshaping the company’s profile and reinforcing its positioning as a key manufacturing and design partner for next‑generation data‑center infrastructure.

Hyperscaler and HPS Momentum

Celestica’s Hardware Platform Solutions (HPS) business, which focuses on more integrated, higher‑value offerings for data‑center and hyperscale customers, is emerging as a critical growth vector. HPS revenue reached $1.4 billion in Q4, up 72% year‑over‑year and accounting for 38% of total revenue. The company also secured a major 1.6‑terabit networking switch design and manufacturing win with a third hyperscaler, and now counts 10 active 1.6T programs in its pipeline. These wins signal deepening strategic ties with top‑tier cloud providers and suggest Celestica is increasingly embedded in the build‑out of next‑generation AI and networking infrastructure.

Cash Generation and Return Metrics

Despite the high‑growth backdrop and rising investment demands, Celestica continues to generate substantial cash. Free cash flow in Q4 totaled $150 million, and full‑year adjusted free cash flow came in at $458 million, up $152 million from the prior year and ahead of earlier expectations. The company’s adjusted return on invested capital (ROIC) climbed to an impressive 43%, up 14 percentage points year‑over‑year, highlighting management’s ability to convert capital deployment into high returns. For investors, this combination of growth, expanding margins, and strong ROIC reinforces the case that Celestica is not just growing but doing so efficiently.

Raised 2026 Financial Outlook

On the back of strong execution and robust demand visibility, Celestica upgraded its medium‑term outlook. The company now targets 2026 revenue of $17.0 billion, implying 37% year‑over‑year growth, and adjusted EPS of $8.75, up 45% year‑over‑year. Importantly, management maintained its free cash flow target of $500 million despite planning a step‑change in capital investment. The raised outlook signals confidence that hyperscaler and AI‑driven demand will remain strong into the back half of the decade, and that Celestica can sustain margin expansion even as it scales.

Planned Strategic Capacity Investments

To support the AI and data‑center build‑out, Celestica is embarking on an aggressive capacity expansion plan. Capital expenditures are expected to reach about $1.0 billion in 2026, roughly 6% of the current annual revenue outlook, compared with just $201 million in 2025 (1.6% of revenue). The investments include more than 700,000 square feet of new space in Texas and over 1 million square feet in Thailand, plus new HPS Design Centers in Austin and Taiwan and upgrades in Mexico and Japan. Management frames these moves as customer‑driven and essential to serving multi‑year hyperscaler programs, but they sharply raise the company’s capital intensity and execution stakes.

Healthy Balance Sheet and Capital Return

Celestica enters this investment phase from a relatively strong financial position. The company reported $596 million in cash against $724 million in gross debt, for net debt of just $128 million, and roughly $1.3 billion of available liquidity. Gross debt to adjusted EBITDA stands at a modest 0.7 times, providing flexibility to weather any timing or ramp‑up hiccups. At the same time, Celestica is returning capital to shareholders: in 2025 it repurchased about 1.36 million shares for $151 million at an average price of roughly $111, signaling confidence in the company’s intrinsic value and earnings trajectory.

ATS Segment Softness

While the AI and cloud‑driven CCS business is booming, Celestica’s Advanced Technology Solutions (ATS) segment remains a relative soft spot. ATS revenue was $795 million in Q4, down 1% year‑over‑year and representing 22% of total company revenue. The decline was driven by lower capital equipment volumes and portfolio reshaping in aerospace and defense. Though not a major drag on overall results given CCS’s scale, ATS softness underscores that Celestica is increasingly dependent on data‑center and networking markets for growth, leaving less diversification across end markets.

Significant Inventory Build and Working Capital Needs

To keep pace with rapid CCS growth and hyperscaler ramps, Celestica is building inventory aggressively. Inventory rose to $2.19 billion, up $141 million sequentially and $427 million year‑over‑year, pushing up working capital requirements despite an improved cash conversion cycle of 61 days. Management argues that this inventory build is necessary to ensure supply availability and meet customer schedules, but it adds balance‑sheet risk if demand timing shifts or specific ramps are delayed. For investors, it’s a sign that the growth story is capital‑hungry and operationally complex.

Sharp Increase in Capital Intensity

The planned jump in CapEx from $201 million in 2025 to about $1.0 billion in 2026 marks a structural shift in Celestica’s capital intensity. At roughly 6% of the current 2026 revenue outlook, the new spending profile looks more like that of a large‑scale infrastructure provider than a traditional electronics manufacturing services company. Management insists this is fully supported by customer commitments and expects to fund it largely through operating cash flow, but the scale of the ramp introduces heightened execution and rollout risk. Any delays in customer programs or supply‑chain constraints could temporarily compress free cash flow or pressure returns.

Customer Concentration Risk

Celestica’s outsized reliance on a handful of large hyperscaler and networking customers is both a strength and a vulnerability. In Q4, three customers accounted for 36%, 15%, and 12% of revenue, respectively; for the full year, those figures were 32%, 14%, and 12%. These deep relationships underpin the company’s growth and design‑win momentum, but also introduce concentration risk: changes in ordering patterns, internal capacity decisions, or strategic shifts at any of these customers could meaningfully impact Celestica’s results. Investors will likely watch closely for any signs of diversification or new large‑account wins to balance this exposure.

Potential Supply Chain and Macro Risks

Management also flagged external risks that could affect execution and margins. These include geopolitical tensions, supplier ramp constraints, and inflation in silicon pricing. While Celestica believes it can pass through higher silicon costs in its networking business, rising average selling prices and any broad supply‑chain disruption could affect the timing of revenue recognition or squeeze margins in less flexible contracts. With the company leaning harder into AI and high‑performance networking, where component availability and lead times can be critical, these macro and supply‑side risks bear close monitoring.

Guidance and Forward-Looking Outlook

Management’s guidance underscores confidence in another year of very strong growth, albeit with some built‑in caution around the second half. For Q1 FY2026, Celestica expects revenue of $3.85–$4.15 billion, implying about 51% year‑over‑year growth at the midpoint, and adjusted EPS of $1.95–$2.15, up roughly 71% at the midpoint, with operating margins around 7.8% and a tax rate near 21%. Segment‑wise, ATS is expected to be down low single digits, while CCS communications is projected to grow in the low‑60% range and CCS enterprise in the high‑teens, supporting roughly 50% CCS growth for the year. For full‑year 2026, the company raised its targets to $17.0 billion in revenue and $8.75 in adjusted EPS, while reiterating a $500 million free cash flow goal and budgeting about $1.0 billion of CapEx to be funded from operating cash flow. Analyst questions highlighted that Q1’s implied growth outpaces the full‑year midpoint, suggesting either a conservative stance on the second half or an expectation of slower sequential growth as development milestones and silicon availability gate later‑year ramps.

Celestica’s earnings call painted a picture of a company riding a powerful AI and data‑center wave, delivering rapid growth, record margins, and strong cash generation, while leaning into a bold, customer‑driven expansion plan. The upgraded 2026 outlook and hyperscaler design‑win momentum are clear positives for growth‑oriented investors, but they come with heightened capital intensity, inventory build‑up, customer concentration, and exposure to supply‑chain and macro risks. For market participants, Celestica now stands as a high‑beta play on the multi‑year AI infrastructure build‑out, with execution in the coming investment cycle likely to be the key driver of whether the company can fully realize its ambitious financial targets.