Q1 2024 Celestica Inc Earnings Call
Including non.
<unk> operating margin adjusted gross margin adjusted return on invested capital or adjusted ROIC.
Adjusted free cash flow gross debt to non <unk> or S. Trailing 12 month, adjusted EBITDA leverage ratio adjusted earnings per share or adjusted EPS.
Adjusted SG&A expense adjusted effective tax rate and non <unk> operating earnings.
Additional information about material factors that could cause actual results to differ materially from a conclusion forecast or projection in the forward looking information as well as risk factors that may impact future performance results.
Celestica.
Reconciliations of such non <unk> financial measures to their most directly comparable <unk> financial measures are contained in our public filings at SEDAR, plus dossier and SEC dot Gov as well as in our press release that was distributed yesterday and which may be found on our website.
Unless otherwise specified all references to dollars on this call are to U S dollars and per share information is based on diluted shares outstanding.
Let me now turn the call over to Rob.
Thank you Craig and good morning, everyone and thank you for joining us on today's call.
Rob: Excited enough of the year with a very strong first quarter, achieving revenue was $2 to $1 billion.
While our adjusted EPS came in at 86.
Rob: Both exceeding the high end of our guidance ranges.
Rob: Our non <unk> operating margin was six 2%.
Rob: Which was above the midpoint of our revenue and adjusted EPS guidance ranges are.
Rob: Our solid nine <unk> operating margins resulted in adjusted free cash flow of $65 million during the quarter.
Rob: Long performance to kick off the year was driven by the ongoing strength in our Ccs segment.
Rob: Sorted by continued demand strength from our Hyperscale customers.
Rob: This dynamic drove solid sequential and year over year growth in revenues across both our enterprise and communications end markets.
Rob: And resulted in Ccs segment margin of 7%.
Rob: Wondered 20 basis point improvement year over year.
Rob: And our ACS segment revenues were down slightly year to year as anticipated driven primarily by demand softness from customers in our industrial business, partially offset by growth across our other ats businesses.
Rob: Our A&D business continues to see solid double digit year to year revenue growth and the outlook for the year remains positive.
Rob: And after several tough quarters in our capital equipment business revenues appear to have stabilized and customer forecast are suddenly that year to year growth will accelerate in the coming quarters.
Rob: We're also pleased to share an update regarding our recent tuck in acquisition.
Rob: Following the close of the quarter, we signed a definitive agreement to acquire NCS Global services LLC.
Rob: U S based.
Infrastructure and asset management business with $36 million. This acquisition accelerates, our IP services roadmap within our Ccs segment by expanding our strategic capabilities and geographic footprint and allowing us to enhance our service offerings across the entire lifecycle of our customers' assets.
Rob: This acquisition is strongly aligned to our strategic Roadmaps and meets our financial hurdles, including being accretive to our adjusted EPS in 2024.
Rob: Overall, we are very pleased with our start to the year.
Rob: We are encouraged by our solid execution, our strong financial performance and by the positive market tailwind across a number of the businesses in our portfolio.
Rob: I would now like to turn the call over to Mandy.
Mandy: We will provide further details on our first quarter financial performance and our guidance for the second quarter of 2024.
Mandy: Sandeep over to you.
Mandy: Thank you, Rob and good morning, everyone.
Sandeep: First quarter revenue came in at $2 to $1 billion.
Above the high end of our guidance range and up 20% year over year.
Sandeep: The increase was supported by stronger than expected growth in our Ccs segment, partially offset by an anticipated modest decline in our Ats segment.
Sandeep: Our first quarter non <unk> operating margin of six 2% was an improvement of 100 basis points year over year.
Sandeep: And Mark the first time that our quarterly non <unk> operating margin exceeded 6.0%.
Sandeep: The margin expansion was driven by improved profitability in both segments as a result of favorable mix and production efficiencies.
Sandeep: Our adjusted earnings per share for the first quarter was 86.
Sandeep: Which exceeded the high end of our guidance range.
Sandeep: Our adjusted EPS was up 39 compared to the prior year period.
Sandeep: Driven primarily by higher non <unk> operating earnings and a more favorable adjusted effective tax rate.
Sandeep: Our first quarter adjusted effective tax rate expectation was 20% assuming that global minimum tax would be enacted in Canada by March 31.
Sandeep: Given the legislation has not yet been enacted our adjusted effective tax rate came in favorably at 15% leading to a benefit of approximately <unk> <unk> per share.
Sandeep: Moving onto our segment performance.
Sandeep: Ats revenue in the first quarter was $768 million down.
Sandeep: Down 3% year over year.
Sandeep: Was in line with our expectations of a low single digit.
Sandeep: Okay.
All financial covenants under our credit agreement.
During the first quarter, we purchased approximately 460000 shares for cancellation under our normal course issuer bid at a cost.
$17 million.
We intend to continue to repurchase shares on an opportunistic basis in 2024.
Now turning to our guidance for the second quarter of 2024.
Revenues in the second quarter are expected to be in the range of $2 $1 75 billion to $2 $3 billion to $5 billion.
Which is the midpoint of this range is achieved would represent growth of 16% compared to the prior year period.
Second quarter adjusted earnings per share are expected to be in the range of 75 to 85.
Which at the midpoint would represent an improvement of 25 per share or 45%.
To support continued demand strength or Ccs offering into 2025.
As such we are continuing to make the necessary investments, including in capacity expansion and engineering capabilities in order to maintain our position as a leading provider of critical products and services for the data center.
Now moving onto our end markets.
The demand outlook.
Our enterprise end markets remains very healthy as we continue to benefit from the growing investment in AI ml compute capacity by Hyperscale.
We anticipate enterprise demand to remain strong in the coming quarters supported by increasing AI ml compute deployments and new program ramps.
Our communications end market saw a stronger than anticipated demand to start the year and.
And we expect this momentum to accelerate in the coming quarters.
Anticipate sustained growth throughout 2024.
<unk> by strong demand from Hyperscale customers for HTS networking products and the ramping of new programs.
Within our HTS business.
Rob: Demand largely mirrors that of our communications end market our outlook calls for sustained double digit growth throughout 2024.
Speaker Change: Supported by increased deployment of networking infrastructure from Hyperscale is that.
Speaker Change: After a period of inventory digestion in 2023.
Speaker Change: In addition, new program wins, including for our 800 <unk> platforms are expected to ramp throughout the year and into 2025.
We feel that our portfolio is well positioned for another very strong year in 2024.
Rob: We continue to prioritize the fundamentals adherence to our strategic roadmap.
Rob: Solid execution, and prudent decision, making and all of our businesses regardless of the dynamics at play within the underlying markets.
Rob: We remain confident in our ability to deliver on our financial targets and continue generating long term value for our shareholders.
Speaker Change: With that I would now like to turn the call over to the operator for questions.
Speaker Change: Thank you.
Rob: Yeah.
Operator: Thank you for centuries, and ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the number one on you touched on phone.
Rob: We'll hear problems that you had has been raised and should you wish to decline from the polling process. Please press the star followed by the number too.
Rob: If youre using a speaker phone please lift the handset before pressing any.
Speaker Change: And one moment. Please for your first question.
Rob: Your first question comes from the line of Robert Young of Canaccord Genuity. Your line is now open.
Robert Young: Hi, good morning, congrats on the quarter.
Robert Young: Question I had was related to the full year guide and it was just simply take the Q1 and Q2 guide out of there.
Rob: As a decelerating a deceleration in the top line in the second half and so I'm just curious if that visibility into the second half or is there something spin.
Rob: Specific to call out there.
Rob: Or any other factor.
Speaker Change: Yes, good morning, Robin Thank you.
Speaker Change: So hyperscale demand remains healthy across multiple markets.
Speaker Change: And the demand signals remain healthy, but really it comes down to visibility and you touched on it. So hyperscale customers generally provide about a 12 month outlook, but beyond six months there are some dynamics demand dynamics at play.
Rob: Demand continues to exceed supply so as material availability improves orders accelerate.
And then secondarily there is some variability in customer deployment plans driven by customers' resource constraints or to some extent.
Mandy: Technology transitions.
Mandy: So our visibility into the fourth quarter is a bit murky should firm up in the next few months.
Mandy: Hence our view.
Sandeep: Flattish relative to the first half.
Sandeep: Full year outlook, Yes, Hey, Rob <unk> here just to build on what Rob was mentioning.
Speaker Change: The 9100 reflects 14% year over year growth.
Sandeep: And to your point, the second half year over year is a little bit.
Sandeep: A lower than the first half, but still a strong double digit set.
Sandeep: Set of numbers I think the important thing to take away is that the demand environment in Ccs in particular remains healthy.
Not seeing areas of concern.
Sandeep: But we are being mindful of things such as material availability and going back to our customers and say look Q2 came in stronger than what we had thought it was going to be.
Sandeep: What are the implications for the back half of the year and so those discussions are continuing.
Speaker Change: Okay. Thanks, that's very helpful. Second question for me would be on <unk>.
Sandeep: Customer concentration I think last quarter, you suggested that <unk>.
Sandeep: Networking recovery would maybe help that out a little bit and so with hps returning to growth I was surprised to see the concentration actually go up and so is that.
Speaker Change: Networking plus AI at that first that largest customer or is there any other dynamic at play and then I'll pass the line.
Speaker Change: Yes, you hit on it Rob, which is 34% with our biggest customer at the same time, we saw a very large level of growth happening in comms and it's continuing to the second quarter and it just underscores what we had talked about last quarter, which is we do a number of programs 20, plus programs with this largest customer and so not only are we seeing that.
Sandeep: <unk> strength on the compute side with that large customer, but we're also seeing an acceleration now on the switching side as well.
Sandeep: So we're happy that our portfolio is able to support them in multiple areas.
Speaker Change: And I'll add.
Speaker Change: Beyond the top customer growth remains.
Speaker Change: Very healthy across a number of our hyperscale customers as well along those same platforms comms enterprise.
Sandeep: And just as a follow on there the HTS.
Sandeep: Growth I was assuming is driven by 400 gig switch.
Speaker Change: Is that.
Speaker Change: Spread across a large number of customers is broader.
Speaker Change: Then just that large customer maybe you can give us a sense of how many customers you have there how broad that businesses.
Speaker Change: Yes, 400 gig is across a number of customers. We're also ramping 800 gig switches this year and into next year.
Speaker Change: Next year additional customers will come on on 800 <unk>.
Speaker Change: Switch ramps.
Speaker Change: On <unk>, it's also important.
Speaker Change: Important to point out that <unk>.
Speaker Change: <unk> is not just limited to networking is also a fair amount of Hbo's content and compute module three states as well.
Speaker Change: Okay. Thanks, I'll pass along.
Speaker Change: Okay.
Thank you so much.
Speaker Change: And your next question comes from the line of Daniel Chan of TD Cowen. Please go ahead.
Hi, Good morning, maybe just the top up on that on that communications question.
Daniel Chan: As you get more mix of 800 G. How does that affect the financials in other words like what is the price and margin profile difference between an 800 G and at 400 G program.
Daniel Chan: Hi, Dan Thanks for the question so.
Dan: The Asps of course changed a little bit as you go from 400 G to date Entergy.
Dan: Not necessarily twice as much and so it's really a conversation of how many units are being shipped et cetera. I think if we were to just up level. It and look at overall revenue, we expect revenue growth to be higher year over year.
Dan: As the 100 gig deployments happen.
Dan: The question that you're asking 400 G demand is really as you know communications slow down because of an inventory overbuild. We're now seeing customers not only work with us on program development around 800 gig product.
Dan: So taking for energy products in the meantime, as well and so it's nice to see that we're actually shipping both products right. Now we would expect naturally for 400 G to start slowing down going into next year.
Dan: Filled more than one for one on 800 gig side.
Speaker Change: Thanks, that's helpful. When you talk to your cloud customers and you look at the AI data Center architecture.
Speaker Change: Because you get the sense that the mix of your products within an AI data center it could be higher than what is what was done for a traditional data center.
Speaker Change: Okay.
No that's a hard one to discern but what.
Speaker Change: I do know is we have all the solutions that our customers need.
Speaker Change: That go into an AI data center and we're currently providing them. So hence we're firing on.
Speaker Change: All cylinders, we have hbo's content across compute modules.
Speaker Change: We provide high value Ms across compute modules we have.
Speaker Change: We have content on 403 hundred switches and we're also in advanced development on future generation.
Speaker Change: Network devices, and we also as you know have storage.
Speaker Change: Solutions, both for HTS and traditional as well so.
Speaker Change: Customers are really picking.
Speaker Change: Advantage of our full solutions.
Speaker Change: And as you know.
Not all Hyperscale lease are created equal and there are some hyperscale or is that lean towards more complex challenging product deployment and that really works out well for us. The reason that youre seeing the amount of growth that we're showing in hbf is because those are the solutions that really fit the demand requirements of certain hyperscale and so as we.
Speaker Change: See this shift towards more AI type of data centers.
It implies more complex product, which is <unk>.
Speaker Change: But we want to see.
Speaker Change: Great that's helpful. Maybe.
Speaker Change: Maybe squeezing one more in on the enterprise the enterprise growth is expected to decelerate next quarter have you been successful in diversifying your hyperscale hyperscale customer base and AI compute just given your experience with the survey using custom AI chipsets.
Speaker Change: And if so what does that ramp look like.
New run rate for the remainder of the year.
Speaker Change: Thank you.
Speaker Change: Yeah I'll start off.
Speaker Change: We finished the second quarter dynamic in terms of enterprise.
Speaker Change: In the twenties.
Speaker Change: Main driver is really tough comps from a year ago and what we're seeing in the second quarter is also.
Speaker Change: Storage demand declining, but we're seeing very healthy.
Steady demand from compute as well we're also as we mentioned earlier happy that content up.
Speaker Change:
Speaker Change: Significantly ahead, Ccs is up significantly as well.
Speaker Change: Yeah.
Speaker Change: What I would say is is that the enterprise.
Speaker Change: Revenues, especially as we go into the second quarter continued to increase on a sequential basis.
Speaker Change: And as we did talk about the demand signals continued to be healthy we do serve.
Speaker Change: More than.
Speaker Change: A number of customers on the server side, but.
But I think what's important to look at comms and enterprise side is as we up level. It to total revenue with our hyper scaler, we're seeing that growth continuing theyre shifting capex now and then from one type of product deployment to another but overall.
Speaker Change: Continuing to see strong topline growth with hyper scaler in aggregate.
Speaker Change: Okay.
Thank you.
Speaker Change: Thank you Dave.
Speaker Change: Thank you. So much. Your next question comes from the line of Matt Sheerin of Stifel. Your line is now open.
Matthew John Sheerin: Yes. Thank you a couple of questions for me. Please one.
Matthew John Sheerin: Just on the balance sheet.
Matthew John Sheerin: I saw that the inventory gross inventory was down and net inventory was down where your cash deposits were also down yet.
Matthew John Sheerin: Growing significantly so could you talk about the dynamics going on there.
Matthew John Sheerin: Given the growth in the Hyperscale business are you seeing there.
Matthew John Sheerin: A shift in terms of consignment inventory.
Matthew John Sheerin: That you're not passing through your your Cogs.
Speaker Change: Thanks for the question Matt.
Speaker Change: Yes, strong working capital performance happy with the free cash flow that we generated $65 million happy that we're able to raise the overall free cash flow number for the year to 250, we want to continue to monitor how healthy our conversion is and we're comfortable with the conversion ratios that we have and we don't we try not to say it anymore, but as you know.
Speaker Change: Over five years of positive free cash flow every quarter under the covers as you're hitting on it we are seeing some unwind on the inventory side as we were anticipating our inventory turns are improving and it's really a function of continuing to be collaborative with our customers and seen lead times come in <unk>.
Speaker Change: Lead times on semi as well as passes are now under 20 weeks, which is allowing us to do some of that unwind.
Speaker Change: The deposits were also unwinding again as expected because we were always working with our customers, saying as long as lead times are really extended how.
Speaker Change: How do we come into a model where they can help fund some of that as they were coming in now we're happy to return the deposits and still generate positive free cash flow to your point on inventory build from a dollar perspective inventory may go up as you go through the year, but we're very focused on turns.
Speaker Change: And we don't think that the turns are necessarily going to take a step back and then in terms of consigned unconfined nothing nothing really to note in terms of any differences.
Speaker Change: Okay. Thank you for that.
Speaker Change: And I wanted to ask a question on the competitive landscape obviously.
Speaker Change: We're gaining market share, particularly with the one hyperscale customer.
Speaker Change: There is some concern that we're seeing more competition from your your North American EMS peers, but also obviously from the Oems.
Speaker Change: Asia.
Speaker Change: Could you talk about your competitive edge and whether you expect.
Speaker Change: Your large customer to bring on other suppliers.
Speaker Change: What does that do to your dynamic in that relationship.
Speaker Change: Yeah, Hi, Matt.
Speaker Change: This is second sourcing and the EMS ecosystem is nothing new.
Speaker Change: What typically happens is new programs are single sourced from the onset and over time as the technology matures second sources broad into the equation.
Speaker Change: My name is enabling the primary source to introduce next generation.
Speaker Change: Products and.
Speaker Change: This is currently a play in some respects.
Speaker Change: There is a competitive dynamic where a second source is being brought onto <unk>.
Speaker Change: While our customers and other cases, where we are.
Speaker Change: The benefactor of being a second source to some of our competition. So it goes both ways.
Speaker Change: Also I would add that on hps product, there's a little bit of a different dynamic at play.
Speaker Change: Products are typically single sourced for the life of the program and that's given the stringent qualification process.
Speaker Change: And also next generation products.
Speaker Change: We are awarded to the incumbent assuming strong initial performance because switching costs are also.
Speaker Change: Prohibitive.
Speaker Change: Within our <unk>.
Speaker Change: AI ml.
Speaker Change: Data set of offerings a lot of our high value EMS programs are transitioning to HTS products. All the time because of the value add with April to brings to the equation, which we think is a competitive advantage versus our EMS peers.
Speaker Change: Maybe just to add on one point, which is as we all know the pie continues to get bigger the capex spend across the top Hyperscale is who we all support.
Speaker Change: Is growing materially this year, everyone knows that the expectation is that that's going to there's going to be a good level of Brooklyn into next year as well and so as the pie continues to get bigger our revenue with the Hyperscale is also continuing to grow.
Speaker Change: The when second sourcing is happening on less complex products the positive way to look at that as it allows us to redeploy capacity to the more complex products and the more complex products are what Rob just and should whether it would be H b S or heavy engineering content.
Speaker Change: And so there has not been any dynamics on the competitive landscape I would say that has surprised us.
Speaker Change: Really playing out as expected.
Speaker Change: Okay, Great just just in light in line with that.
Speaker Change: Are you still you've talked about being exclusive in terms of the AI ml programs is that still the case with your big customer.
Speaker Change: No I wouldn't say, so I would say it's on a program by program basis, Matt.
Speaker Change: Some programs were exclusive some programs we're not in those dynamics.
Speaker Change: As I mentioned that we might change over time.
Speaker Change: Okay, great product license through the product lifecycle.
Speaker Change: Okay. Thanks very much.
Speaker Change: Thanks, Matt.
Speaker Change: Thank you. So much. Your next question comes from the line of status Ms. Coppola list of BMO capital markets. Your line is now open.
Ms. Coppola: Hi, good morning.
Ms. Coppola: At your Ccs growth in the quarter outside of your largest customer.
Ms. Coppola: That growth rate has been a fair bit more subdued is that just a function of how you've been prioritizing capacity to that to deal with perhaps some tough year over year comps on the programs you are exposed to the Hyperscale orders are and any color you could provide would be helpful.
Speaker Change: I'll start off and I'll, let maybe.
Speaker Change: It's not a function of.
Speaker Change: Capacity I would say, we do have ample capacity at our sites and we're also.
Speaker Change: Building forward investing forward.
Speaker Change: To make sure it stays that way as it was mentioned in the script.
Speaker Change: Our.
Speaker Change: Roku in fact, we just came online.
Speaker Change: And we have additional Thailand capacity.
Speaker Change: It's coming online in the second half of 'twenty five we're currently ahead of schedule.
Speaker Change: It really has to go with.
Speaker Change: Buying patterns and capacity expansion plans of a hyperscale is they all have different investment cycles and different expansion plans. So it's kind of a bio rhythms and we'll be able to kind of happy to support each of them. Some of our heavier this year if that might be heavier next.
Speaker Change: Next year.
Speaker Change: And just to build on that Dana so the growth that we saw in the first quarter that youre seeing in comms is being started up by our largest customer what we're encouraged with is that the growth that we're seeing in comms going into Q2 is now spreading to the rest of the hyperscale customers and so while the point you made this very valid as you look at the <unk>.
Speaker Change: First quarter when we're looking at it in terms of the full year, we are seeing growth across a number of customers not just one or two.
Dana: Okay. That's helpful.
Dana: With respect to margins.
Dana: Maybe it's too early to talk about 2025, but as.
Dana: As we think about the fact that you've got this weakness in.
Dana: Capital equipment, and industrial which might improve later in the year and into next year.
Dana: And then you've got the growing HTS mix.
Dana: Is there any reason for why we should not expect margins to be sustainable to expand next year.
Dana: Any offsetting constraints, we should think about.
Speaker Change: Yeah, I'll start off and broken that if needed.
Speaker Change: We're happy with the way that the margins are coming together clearly six 2% in the first quarter highest in our history.
Dana: And the outlook now that we're providing a six 1%.
Dana: Up year over year.
Dana: When achieved.
Dana: We will be the highest in the company's history.
Dana: From a mix perspective, hyper scaler margins because of the level of complexity that is involved is.
Dana: Accretive to the overall company and so as we continue to grow hyperscale or.
Dana: Revenues were looking to maintain Ccs margins.
Dana: Plus or minus a little bit the opportunity I think as you talk about for next year really goes to ETF.
Dana: So our outlook for Aps right now is to be below 5% on a full year basis.
Dana: It is $4 seven in the first quarter, but to your point the demand returns of capital equipment, which is profitable by the way.
Dana: But as the demand comes back we get leverage benefits and as industrial which is.
Dana: A strong margin business contributes more both of those will help.
Dana: Margins at HSN so.
Dana: We think there'll be some opportunities going into 'twenty five.
Speaker Change: All right I'll pass the line. Thank you.
Speaker Change: Makes sense. Thanks.
Speaker Change: Thank you so much.
Speaker Change: Your next question comes from the line of Jesse <unk> of <unk> Securities. Please go ahead.
Jesse: Hey, good morning, when you think about the increased guidance for 2024 in the context of <unk>.
Jesse: You laid out for 2025 and 2026 at the November Investor Day.
Jesse: I guess is the increase really is it just like you said the pipe getting bigger or is there. Some demand is maybe being pulled forward.
Speaker Change: Yes, Hi, Jesse first of all welcome to the call and really pleased to see core Mark.
Speaker Change: Providing some coverage.
Speaker Change: To answer your question, yes, the demand signals continue to be healthy across diapers killers.
Speaker Change: To say that pull ins or not happening.
Speaker Change: Probably wouldn't be accurate because as you see we came in above the high end of our guidance rate in Q2 or excuse me in Q1.
Speaker Change: And some of that was fulfilling demand dropped in as we went through the quarter.
Speaker Change: As Rob had talked about it because it's not a 12 month rolling forecast, we don't have clear visibility to how.
Speaker Change: How that revenue that may have been a few quarters youre getting backfill, but at the.
Speaker Change: Higher customer level, we're not seeing shifts in the demand patterns.
Speaker Change: So what that would imply is that yes, we're continuing to see strong growth in the back half of this year as we talked about at the beginning of the Q&A.
Speaker Change: <unk> digit growth rates the.
Speaker Change: The demand signals continue to be positive for data center deployments going into 2025.
Speaker Change: But then to your point.
Speaker Change: We're already now ahead or pretty close to what our 2025 outlook was in in April of 2024, and so we will wait for six months to really give a better outlook for 2025, but right now we're not feeling like it's feeling from 2025.
Speaker Change: Demand signals just seem to be that the overall tide is rising.
Speaker Change: Okay. That's that's helpful. And then can you just comment a little bit on what youre seeing in the <unk>.
Speaker Change: Working side of things.
Speaker Change: Kind of beyond the Hyperscale was more in the traditional cloud space.
Speaker Change: Yeah most of our.
Speaker Change: Networking.
Speaker Change: Business is actually going to.
Speaker Change: The cloud providers in terms of 403 hundred 800 gig switches.
Speaker Change: On the OEM side.
Speaker Change:
Speaker Change: We are seeing continued.
Speaker Change: Softness.
Speaker Change: As the industry burned through some excess inventory, we do see some of that recovering in the back half of the year.
Speaker Change: Yeah as you know the OEM side of the business are exposed not just hyperscale. It is but also the small and medium businesses and.
Speaker Change: Those capital type of deployments have been impacted.
Speaker Change: From the macroeconomic conditions.
Speaker Change: But we don't believe that that demand is going to be permanently gone.
Speaker Change: But there does continue to be a slowdown in hyperscale and market.
Speaker Change: Okay.
Speaker Change: I'll pass the line.
Speaker Change: Thanks Jesse.
Speaker Change: Thanks Jesse.
Jesse: Thank you. So much. Your next question comes from the line of Paul Treiber of RBC capital markets. Your line is now open.
Paul Treiber: Oh, Thanks, and good morning.
Paul Treiber: <unk> been very successful your largest customer but otherwise.
Paul Treiber: A couple of years or are you going to have what's your visibility in strategy to try to replicate that degree of success with the other hyperscale customers.
Paul Treiber: Oh.
Paul Treiber: I would say we are actually replicating that success with other customers.
Paul Treiber: We have very strong positions.
Paul Treiber: Majority of the of the Big Hyperscale wins, we've won a number of new programs.
Paul Treiber: With those Hyperscale guys that are either in development are currently ramping.
Speaker Change: So we're not.
Paul Treiber: We're not solely reliant on that one customer we have actually very healthy portfolios across a number of hyperscale and across a number of platforms within those hyperscale is.
Paul Treiber: Just so happens that our number one customer happens to be a heavy investment mode right now.
Paul Treiber: And those those are driving some of the concentration numbers overtime.
Paul Treiber: Those investment levels might come down, but other hyperscale or investment levels will increase so our overall hyperscale a portfolio is actually very very healthy.
Speaker Change: That's helpful.
Speaker Change: In here.
Speaker Change: The earlier comments on being comfortable with our customer concentration is that.
Speaker Change: Without getting too specific outlook for or what you're seeing that customer concentration could you just give us a sense of why youre comfortable with it.
Speaker Change: At 34% this past quarter.
Speaker Change: Yes, because it's.
Speaker Change: It's not a single program.
Speaker Change: It's multiple programs.
Speaker Change: Programs.
Speaker Change: Multiple technologies.
Speaker Change: Crossing.
Speaker Change: A decade I would think.
Speaker Change: <unk> been over a decade of past relationships.
Speaker Change: And with continued strong performance not just on.
Speaker Change: High value BMS, but across engineering engagements as well so it's a very sticky.
Speaker Change: Relationship one backed by mutual respect and high performance.
Speaker Change: We never take these things for granted.
Speaker Change: But.
Speaker Change: We're happy with the breadth of solutions that we're providing this customer.
Speaker Change: And then just lastly, just on the capacity side of the equation. I mean, you mentioned that you do have capacity can you speak to your capacity utilization and how it compares to what you've historically average and then are you seeing additional opportunities with your customers or for co investments.
Speaker Change: In capacity expansion.
Speaker Change: Yes so.
Speaker Change: Capacity or utilization is extremely high in our Asia sites, where the majority of our.
Speaker Change: Demand is fulfilled.
Speaker Change: With our business are highly utilized sites.
Speaker Change: We leveraged sites are very profitable sites and Thats, what youre seeing in our results and we carefully manage our capacity.
Speaker Change: We have decided to invest in some additional capacity and we think those investments should take care of us for the next couple of time.
Speaker Change: We don't foresee any indeed for any additional co investments at this time, we think the expansions that are underway should take care of us for a period of time and keep those high utilization rates yeah, Paul just to add on to that in November when we gave our Investor day, we provided a revenue outlook going into 2026.
Speaker Change: Arrange with 95% of $10 billion.
Paul Treiber: And we had stated at that time that we believe that we have the footprint now to fulfill that.
Paul Treiber: So we don't need to Greenfield a brand new factory in a new country in order to keep up with that demand outlook.
Speaker Change: So it's one of the things that we're pleased about is that we believe we're able to capex, maybe a little bit elevated more or less in line with our historical levels.
Speaker Change: While still being able to grow revenue.
Speaker Change: Okay. Thanks.
Speaker Change: Thanks, Paul.
Speaker Change: Thank you so much and as a reminder, if you want this to ask a question. Please press star one.
Speaker Change: And your next question comes from the line of Todd Coupland of CIBC. Your line is now open.
Todd Adair Coupland: Great. Thanks, and good morning, everyone I wanted to ask.
Todd Adair Coupland: Specifically about compute we're seeing that decelerate.
Todd Adair Coupland: Into Q2 and into the second half of the year.
Todd Adair Coupland: What factors are you looking for in terms of re accelerating that line and.
Todd Adair Coupland: Give us any indication on when do you think that might happen. Thanks a lot.
Speaker Change: Yeah I'll start so.
Speaker Change: And and Q1 was.
Todd Adair Coupland: Over 130% year over year.
Todd Adair Coupland: Compute in Q2 is up in the 70 percentage range on a year over year basis, I would not call that at least in the first half of your decelerating.
Todd Adair Coupland: As we go into the second half of the year.
Todd Adair Coupland: Some of that is at least our outlook is driven by a little bit American as we exit the year, but broadly speaking our compute.
Todd Adair Coupland: Volume and demand.
Todd Adair Coupland: Remains a material constraint, so again demand exceeds supply and as material availability becomes available.
Speaker Change: I think that's an opportunity.
Todd Adair Coupland: To increase our output, but this is the visibility that we have at this point in time.
Speaker Change: And Todd I would maybe just add to that to say.
Todd Adair Coupland: As we talked about when the demand cycle for Hyperscale has started to really accelerate in the middle of last year is that we believed it was going to start with compute and that it was going to start migrating over to AI.
Todd Adair Coupland: Type of networking, which is.
Todd Adair Coupland: 400 gig switches, but moving data into the switches as well so we're starting to see that.
Todd Adair Coupland: Customers have a fixed level of capital and they choose on where they deploy that capital and what we're seeing right now is more of a shift towards the comm side.
Todd Adair Coupland: Because communications is a larger part of our portfolio, we think that we're going to come out.
Todd Adair Coupland: More head because of that.
Todd Adair Coupland: Not to say that that compute is going away because the other dynamic that is keep in mind is that the comps are becoming quite high.
Todd Adair Coupland: But overall, we are seeing healthy demand.
Todd Adair Coupland: Coming into Q1 and going into Q2.
Speaker Change: And if I could just follow up on that.
Todd Adair Coupland: <unk> had this debate on merchant silicon versus custom silicon and obviously, the hyperscale are all coming up with their or their own custom processors.
Todd Adair Coupland: That's yet to come I guess I would've thought that that might have started to flow into your business and just just wondering if you could help.
Speaker Change: Bridge bridge that gap of understanding thanks, a lot.
Speaker Change: Yes, we are.
Speaker Change: Definitely heavily tilted towards custom silicon versus merchant silicon and we have been the benefactor of that switch.
Speaker Change: See the announcements in the press the Hyperscale is on continuing to.
Todd Adair Coupland: To invest in custom silicon.
Todd Adair Coupland: And as these new.
Todd Adair Coupland: Custom silicon.
Todd Adair Coupland: <unk> to market.
Todd Adair Coupland: We feel confident that we'll be able to.
Todd Adair Coupland: Good access to them and also provide these types of solutions for customers moving forward. So that trend is continuing.
Todd Adair Coupland: And I think we're taking advantage of it.
Speaker Change: Thank you for the color appreciate it.
Speaker Change: Thanks Scott.
Speaker Change: Thank you so much.
Speaker Change: And there are no further questions at this time presenters I would now like to turn the call back to our speaker, Rob <unk> for closing remarks.
Rob: Thank you overall.
Rob: Overall, I'm very pleased that we posted another solid quarter and a strong momentum is giving us confidence to increase our outlook for 2024.
Rob: I'm also very pleased by our continued strong execution and encouraged with our strong market position.
Rob: Especially with some new products like eight under <unk> and strong in growing markets I. Thank you all for joining today's call and we look forward to updating you next quarter.
Rob: Yeah.
Speaker Change: Thank you presenters and thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation and you may now disconnect have a good day.
Speaker Change: [music].