Celestica ((TSE:CLS)) has held its Q1 earnings call. Read on for the main highlights of the call.
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Trade CLS with leverageCelestica struck an upbeat tone on its latest earnings call, underscoring breakneck growth, rising profitability, and a significant upgrade to its multi‑year outlook. Management acknowledged mounting supply chain tightness, inventory build, and heavy capital needs, but emphasized that demand momentum, marquee AI and networking wins, and a stronger balance sheet more than offset these headwinds.
Explosive Top-Line Growth Led by CCS
Celestica delivered Q1 revenue of $4.05 billion, up 53% year over year, powered by a surge in its Communications & Commercial segment. CCS revenue jumped 76% to $3.24 billion and now represents roughly 80% of total sales, while ATS revenue held flat at $806 million and accounted for the remaining 20% of the business mix.
Record Margins and Surging EPS
Profitability marched higher alongside growth, with adjusted operating margin reaching a record 8.0%, up 90 basis points from last year. Adjusted EPS climbed 80% to $2.16, beating the high end of guidance, as operating leverage and scale benefits flowed through despite some cost and supply pressures.
Stronger Gross Margins and ROIC
Adjusted gross margin ticked up to 11.3%, an improvement of 30 basis points year over year as mix and execution improved. Return on invested capital was a standout at roughly 50%, more than 18 percentage points above last year, helped by ATS margins at 6.0% and CCS margins at 8.6%.
Full-Year Outlook Raised Across the Board
Management sharply lifted its full‑year 2026 targets, now guiding revenue to $19 billion versus $17 billion previously. The company also increased its adjusted EPS outlook to $10.15 and nudged its operating margin target to 8.1%, while reaffirming expectations for about $500 million in free cash flow.
AI-Led Demand, Backlog and Program Wins
The CEO highlighted the strongest awarded backlog and pipeline seen in his tenure, fueled by accelerating hyperscaler demand. Celestica announced key wins including a collaboration with AMD on its Helios scale‑up switch and a flagship 1.6T CPO Ethernet switch program, with 10 active 1.6T initiatives now underway.
Enhanced Liquidity and Low Leverage
The company bolstered its financial flexibility by expanding its revolving credit facility by $1.0 billion to $1.75 billion. With cash of $378 million and gross debt of $719 million, net debt stands at $341 million and leverage sits at a modest 0.6x trailing 12‑month adjusted EBITDA.
Q2 Outlook Signals Continued Momentum
For Q2, Celestica guided revenue to a range of $4.15–$4.45 billion, implying roughly 49% growth at the midpoint. Adjusted EPS is expected between $2.14 and $2.34 with non‑GAAP operating margin around 8.0%, supported by strong CCS and continued growth in ATS.
HPS Scale and R&D Drive Future Upside
High‑performance systems remain a key growth vector, with HPS revenue reaching $1.7 billion in Q1, up 63% and representing 42% of sales. Management is leaning into this opportunity with about 1,350 design engineers, deepening R&D capabilities to support complex HPS programs and extended product lifecycles.
Heavy Capex to Support Capacity Ramps
To keep pace with CCS demand, Q1 capital spending reached $230 million, or 5.7% of revenue. The company plans roughly $1.0 billion of capex in 2026 and signaled elevated spending, potentially around $1.5 billion in 2027, to align manufacturing capacity with long‑dated customer ramps.
Supply Chain Tightness and Component Gating
Despite strong growth, management flagged worsening component shortages compared with just 90 days ago, spanning custom silicon, memory, complex PCBs, power, and optical parts. Extended lead times are gating certain product ramps, limiting how quickly the company can convert its robust pipeline into revenue.
Program Ramps Skewing Further Out
Some next‑generation programs are now expected to reach volume production later than initially hoped, pushing parts of the growth curve into 2027. The high‑profile 1.6T CPO Ethernet switch, for example, is slated for mass production that year, tempering the near‑term upside but extending the long‑term growth runway.
Inventory Build and Working Capital Strain
To buffer supply risk and support CCS ramps, Celestica increased inventory to $2.67 billion, up $485 million sequentially and $885 million year over year. This stockpiling elevates working capital and ties up cash, underscoring the trade‑off between securing components and maintaining balance sheet efficiency.
Free Cash Flow Squeezed by Capital Intensity
Free cash flow in Q1 came in at $138 million, modest relative to the rapid revenue expansion and stepped‑up capex. With projected spending of roughly $1.0 billion in 2026 and potentially around $1.5 billion in 2027, the business faces a period of higher capital intensity and near‑term cash demands.
Customer Concentration and Cost Pressures
Three customers each delivered at least 10% of quarterly revenue and together accounted for roughly 65%, highlighting concentration risk if spending patterns shift. At the same time, management cautioned that rising memory and silicon costs could pressure gross margins and partially offset operating leverage.
Supply Issues Highlight Execution Risk
The company noted that its Q1 AI and machine learning compute ramp was partially constrained by a material supply issue, which it says has now been resolved. Even so, this episode underscored how dependent key programs are on timely component availability in a tightening supply environment.
Guidance Points to Strong Growth Despite Headwinds
Looking ahead, Celestica expects Q2 2026 revenue of $4.15–$4.45 billion and adjusted EPS of $2.14–$2.34, with margins holding near 8.0% and a tax rate around 21%. For 2026 as a whole, the company now targets $19 billion of revenue, EPS of $10.15, solid margin expansion, roughly $500 million in free cash flow, and robust CCS growth outpacing steady ATS gains.
Celestica’s earnings call painted a picture of a company riding powerful AI and networking cycles while battling the growing pains of scale. Investors are being asked to accept higher capital intensity, inventory build, and concentrated demand in exchange for rapid growth, better margins, and marquee program wins that could underpin the story well into 2027 and beyond.