Q4 2024 Celestica Inc Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to the Scholastica 4th Quarter 2024 Earnings Call. At this time, all lines are in a listen-only mode.
Speaker Change: Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded.
Speaker Change: I would now like to turn the conference over to Craig Oberg, Vice President of Corporate Development and Investor Relations. Please go ahead.
Speaker Change: Good morning, and thank you for joining us on Solexica's Q4 2024 Earnings Conference Call. On the call today, we have Rob Mionis, President and Chief Executive Officer, and Mandeep Chawla, Chief Financial Officer.
Speaker Change: Listeners should note that as previously communicated, all of our financial results, including historical comparisons, will now be reported on a U.S. GAAP basis, having transitioned from reporting under IFRS previously.
Speaker Change: While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast, or projection in the forward-looking statements made today.
Speaker Change: We undertake no obligation to update these forward-looking statements unless expressly required to do so by law.
Speaker Change: In addition, during this call we will refer to various non-GAAP financial measures, including Adjusted Operating Margin, Adjusted Gross Margin, Adjusted Return on Invested Capital or Adjusted ROIC, Free Cash Flow, Gross Debt to Trailing 12-Month Adjusted EBITDA Leverage Ratio.
Speaker Change: Adjusted Earnings Per Share or Adjusted EPS, Adjusted SG&A Expense, and Adjusted Effective Tax Rate.
Speaker Change: We have included in our earnings release found on our investor relations website a reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
Speaker Change: As items that we exclude from GAP to calculate the comparable non-GAP measure are dependent on future events that are not able to be reliably predicted by management and are not part of our routine operating activities.
Speaker Change: We are unable to provide such a reconciliation without unreasonable effort due to the uncertainty and inherent difficulty in predicting the occurrence, the financial impact, and the periods in which the adjustments may be recognized.
Speaker Change: The occurrence, timing, and amount of any of the items excluded from GAAP to calculate non-GAAP could significantly impact our Q1 2025 and 2025 GAAP results.
Speaker Change: Unless otherwise specified, all references to dollars on this call are to U.S. dollars. All per-share information is based on diluted shares outstanding. And all references to comparative figures are a year-over-year comparison.
Let me now turn the call over to Rob.
Rob Mionis: Thank you, Craig, and good morning, everyone, and thank you for joining us on today's call.
Rob Mionis: We delivered strong performance in the fourth quarter, with revenues of $2.55 billion at the high end of our guidance range, and adjusted EPS of $1.11, exceeding the high end of our guidance range.
Rob Mionis: Adjusted operating margin of 6.8% exceeded the midpoint of the revenue and adjusted EPS guidance ranges.
Rob Mionis: This result was driven by robust demand in our CCS segment, which delivered solid growth of 30% year-over-year, as we continue to see strong demand from our hyperscaler customers.
Rob Mionis: ATS segment revenues met expectations in the fourth quarter, reflecting anticipated market dynamics. While we continue to see a moderation of demand in our industrial markets, we are encouraged by the strength in our capital equipment business, which achieved nearly 30% year-over-year growth.
Rob Mionis: Overall, 2024 was an outstanding year for Solstica, in which we continue to build on a positive momentum.
Rob Mionis: For the full year, we achieved $9.65 billion in revenues and adjusted EPS of $3.88.
Rob Mionis: representing growth of 21% and 58% respectively along with a hundred basis point improvement in our adjusted operating margin. We are pleased with the company's performance and the significant progress we have achieved over the past several years.
Rob Mionis: The growth of our AI platforms, along with the exceptional execution by our entire team, continue to be the engines of our strong performance, and we are optimistic about continuing this momentum in the years to come.
Rob Mionis: Before I provide you with some additional color on the outlook of each of our businesses,
Rob Mionis: I would like to hand the call over to Mandeep, who will provide you further details on our financial performance during the fourth quarter and our guidance for the first quarter of 2025. Mandeep, over to you.
Rob Mionis: Adjusted gross margin for the quarter was 11.0%, up 50 basis points, driven by higher volumes and favorable mix.
Rob Mionis: Fourth quarter non-GAAP operating margin was 6.8%, an increase of 80 basis points driven by higher volumes in our CCS segment and better mix due to higher HPS revenues.
Rob Mionis: Our fourth quarter adjusted earnings per share was $1.11, exceeding the high end of our guidance range and an increase of $0.34.
Our adjusted effective tax rate for the quarter was 19%.
Rob Mionis: And finally, our fourth quarter adjusted ROIC was at 29.1%, a significant improvement of 550 basis points, attributed to higher operating profitability and effective working capital management.
Rob Mionis: Moving on to our segment performance for the quarter, ATS segment revenue totaled eight hundred and six million dollars, approximately flat and in line with our guidance.
Rob Mionis: The performance this quarter was the result of lower revenues in our industrial business, offset by continuing strength in capital equipment and aerospace and defense.
Rob Mionis: Our CCS segment revenue reached $1.74 billion, up 30% due to very strong growth in our communications end market. The CCS segment accounted for 68% of total company revenue in the quarter.
Rob Mionis: Revenue in our enterprise and market was lower by 10% in line with our guidance due to the anticipated technology transition in an AI ML compute program with one of our hyperscaler customers.
Rob Mionis: This was partially offset by favorable demand dynamics in certain storage programs.
Rob Mionis: Revenue in our communications and market saw an increase of 64% exceeding our guidance of a high 50s percentage increase.
Rob Mionis: This group was primarily attributed to stronger demand for our HPS networking products.
Rob Mionis: HPS revenue increased by 65%, reaching $807 million in the fourth quarter, representing 32% of total company revenue. This exceptional growth was driven by hyperscaler customer demand for our 400G networking switches, as well as ramping programs for 800G switches.
Now shifting our focus to segment margins.
Rob Mionis: During the quarter, and for the full year, we had two customers that each accounted for over 10% of total revenue.
Rob Mionis: During the fourth quarter, they represented 24% and 12% of sales, respectively. While for the full year, the same two customers accounted for 28% and 11%, respectively.
Rob Mionis: We currently support each of these customers across a number of different programs and continue to win new engagements with them which are expected to ramp through 2025 and beyond. This diversification provides us comfort with our current levels of customer concentration.
In our communications end market, we anticipate strength throughout the year as new 800 G programs with Hyperscale is continue to ramp.
In our enterprise end market, we continue to expect a softer first half of the year, resulting from the technology transition and an AI ml compute program with a large hyperscale customer. However, we anticipate revenues to accelerate in the second half of the year driven by the ramp up of our previously communicated.
All sourced.
Next generation AI ml compete program.
Supported by the ramping of AI ml compute and rack programs with <unk>.
Moving onto our Ats segment.
Our 2025 outlook for our Ats segment revenues is approximately flat as growth is being primarily offset by the decision not to renew a dilutive margin program in our A&D business.
The outlook for our industrial business is stabilizing following a period of softer demand due to macro factors and customer inventory digestion based on customer forecasts, we expect volumes to recover in the back half of the year.
Speaker Change: And capital equipment. The demand environment has continued to improve over the past 90 days and we anticipate continued growth in 2025 on the back of solid demand and new program ramps.
Speaker Change: The A&D base.
Speaker Change: Base demand within our portfolio remains healthy supported by new program ramps and new customer wins.
Speaker Change: Before moving on I would like to take a moment to comment on the recent discussions surrounding deep seeks our one large language model, which has raised concerns about the future of AI model development.
Speaker Change: While deep seats disclosures are still being analyzed we believe this new technology as a neutral to positive impact on <unk> business over the next few years.
Speaker Change: Our AI ml compute business remains well positioned.
Speaker Change: They are compute solutions, primarily leverage custom ASIC designs. These custom chips are optimized for performance and power efficiency and targeted use cases, we are confident that our existing programs and new wins ramping through 2025 and 2026.
Speaker Change: We remain strategically aligned with our customers' needs regardless of advancements in general purpose large language models.
Speaker Change: Additionally, networking opportunities are continuing to accelerate we see a significant upside for our networking business, which represents the majority of our Hyperscale revenue, we believe that increased AI adoption driven by potentially lower training costs will fuel.
Speaker Change: <unk> for high bandwidth low latency networking infrastructure, which could further strengthen our position as a leading provider of networking solutions.
Speaker Change: We believe this development rather than hindering investment in high performance hardware actually highlights the potential for even better cost efficiency, which could accelerate AI adoption.
Speaker Change: As we look ahead, we're excited about several positive indicators that reinforce our optimism for sustained long term growth in particular, we see strong signals of continued customer demand tied to AI driven data center investments.
Speaker Change: We continue to engage in discussions with both existing and new customers.
Speaker Change: Number of programs that we expect will begin to ramp over the next 12 to 18 months and extend through 2026 and beyond.
Speaker Change: Particular, we're excited to announce two major new wins secured in the last quarter.
Speaker Change: First on the networking front, we have been awarded our second one that 60 switching program with another large hyperscale customer, which will begin ramping in 2026.
Hps Program Award includes supporting our customer with a design and production of the fully AI optimized networking rack, which will leverage our advanced system level cooling technology.
Speaker Change: This program represents an inflection point in liquid cooling applications within data center networking towards an increase in available bandwidth from our reduced footprint.
Speaker Change: Next we are also thrilled to announce a significant new HTS win with a leading digital native company, who is a pioneer in the commercialization of AI applications.
We will be collaborating with them to deliver a full rack.
Speaker Change: Which is an optimized AI system solution, both around the customer's custom ASIC accelerator.
Rob Mionis: The program will leverage our proprietary R&D investments and develop expertise in AI ml servers.
Rob Mionis: In addition, this solution will include our one that 60 switch designs, marking our third next generation program Award and high bandwidth switching as well as rack level of cooling and connectivity.
Rob Mionis: Production for this program is expected to begin ramping in the latter part of 2026, and we believe that demand from this customer at scale could achieve a level similar to those of our largest hyperscale customers today.
Rob Mionis: These wins will enable us to showcase our full AI system design capabilities and further solidify our position as a leading provider of AI infrastructure solutions.
Rob Mionis: These wins are also a testament to our more than decade long commitment to building, leading edge capabilities within our HTS platform.
Rob Mionis: Our investments in R&D design engineering and IP.
Rob Mionis: Along with our team of nearly 900 skilled engineers enable us to deliver cutting edge comprehensive solutions.
Rob Mionis: We are pleased to see very strong and broad based momentum across our Ccs portfolio and we believe that the current strength in demand for data center hardware has a multiyear runway ahead.
Rob Mionis: Before I conclude I would also like to note that Loretta culmer. The current chair of our audit Committee has announced his resignation from the board of directors effective January 31 for personal reasons.
Rob Mionis: Well that has been a highly valued member of our board for the past 15 years.
Rob Mionis: And we would like to thank her for her efforts during her tenure and wish her the very best in their future endeavors.
Rob Mionis: The board has appointed Luis Mueller.
Rob Mionis: As the next chair of our audit Committee I would also like to thank our global team for their tireless work and a truly exceptional execution in 2024.
Rob Mionis: As we close out yet another incredibly clear and with that I will.
Speaker Change: I'd now like to turn the call over to the operator to begin the Q&A session.
Speaker Change: Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press the star followed by the one any touchtone phone.
Rob Mionis: Questions will be taken in the order receipt should you wish to cancel your request. Please press star followed by the tail.
Rob Mionis: We are using a speaker phone please lift the handset question any.
Speaker Change: Thank you Keith.
Rob Mionis: Once again that is star one should you wish to ask a question.
Rob Mionis: And your first question is from George Wang from Barclays. Your line is now open.
George Wang: Hey, guys. Thanks for taking my question and congrats on the quarter and our guidance I think just to two quick ones Firstly as we kind of.
Rob Mionis: Looking at the energy a typo.
Speaker Change: Kate all kind of any thoughts continuously pull through on the <unk> for this year and similarly in 2006, you have with <unk>.
Speaker Change: Programs on the $1, a key and any thoughts on whether that's going to cannibalize the lower speeds or should that continue to have.
Rob Mionis: Strong growth across Asia. According to this with lower speeds as well just kind of help us think about wholesale relationships.
Rob Mionis: Hi, George this is Ron.
Rob Mionis: Yes.
George Wang: We see 400, G and 800 GE coexisting for quite some time.
We go into 2025.
Rob Mionis: Obviously ramping up 803 quite a bit and it will be up 3% to 400%.
Rob Mionis: 400, <unk> is also growing.
Rob Mionis: We get into.
Rob Mionis: Our 2025 as well and in the out years again, we see a long tail.
Rob Mionis: As the price points come down on for energy there'll be different use cases.
Rob Mionis: That type of technology. So again, we see these technologies Cogs has been for a long period of time.
Speaker Change: Okay, Great. Just secondly, if I can squeeze in quickly Rob and then Andy but just.
Rob Mionis: It's a remarkable you guys diversified our customer base.
Rob Mionis: Kind of both its kind of tier one hyperscale in the past and you guys talked about rock when last quarter, but also under the largest scale a digital native company that can be potentially as large as <unk>.
Rob Mionis: <unk> customer.
Speaker Change: <unk> run rate of revenue down the road I'm just curious maybe you can talk about your differentiation.
Speaker Change: You guys had a crown jewel assets into missile to HTS networking, but in terms of the silver with a liquid cooling and power management. Maybe you guys are taking share both in some of the incumbents Aida Asia Oems can you kind of or.
Speaker Change: Maybe unpack plentiful going forward there may be potentially the tariff concern kind of offshoring, you guys are kind of well positioned.
Speaker Change: Whether from a design perspective.
Speaker Change: Perspective, what kind of a multi module HTS. So great design, but also kind of a boy Paul recruiting needs can continue to sustain this differentiation versus some of that.
Speaker Change: <unk> and Chinese Oems.
Jonathan: Yes, thanks, Jonathan.
Rob Mionis: Mind, you a little bit of a background.
The digital native win.
Rob Mionis: We alluded to in the script. So this is a major design win and then <unk>.
Rob Mionis: The manufacturer.
Rob Mionis: Services for August.
Rob Mionis: Now this rock is optimized for artificial intelligence and this particular customer they were looking for a strategic partner with extensive expertise and capability on liquid cooled system design.
So able to manufacture at scale and that are named written all over it they conducted a rigorous award process and ultimately they decided to select us.
Rob Mionis: Because we had strong technical knowledge, we had cycles of learning we have intellectual property.
Rob Mionis: We had significant design and manufacturing capabilities and we also had a resilient supply chain capabilities across multiple countries beginning in the USA.
Rob Mionis: This solution that we're providing them includes a $1 16 networking switch and also proprietary compute. It also includes significant services component, which means installation and maintenance and again, we will be supporting this across multiple geographies. So I think.
Rob Mionis: The fact that we have decade decade plus experience.
Rob Mionis: In this space led us to win against the Oems.
Rob Mionis: Okay.
Rob Mionis: Okay, Great I'll go back to the queue Congrats again.
Rob Mionis: Thank you.
Rob Mionis: Thank you.
Speaker Change: And your next question is from Robert Young from Canaccord Genuity. Your line is now open.
Speaker Change: Hi, good morning on the the new win for the integrated rack with a custom ASIC I'm just curious if you just talk about the.
Speaker Change: The relationship with Broadcom, who has been very.
Speaker Change: Bullish on the market around custom ASIC is this.
Speaker Change: Our relationship with Broadcom is that influenced by Broadcom and how is that relationship developing.
Speaker Change: Yes.
Speaker Change: Hi, Rob. This is Rob are you talking about the Hyperscale win.
Speaker Change: And Joe maybe digital native.
Speaker Change: It didn't go Nathan.
Speaker Change: Yes on the networking side this is using our <unk>.
Speaker Change: A long standing relationship.
Speaker Change: With.
Speaker Change: Our custom silicon providers.
Speaker Change: Can't go into too many specifics there but.
Speaker Change: So quite a bit we have been using for the majority of our high bandwidth switches.
Speaker Change: And on the compute side the customer side.
Speaker Change: Our customers custom silicon.
Speaker Change: It will be.
Speaker Change: Liquid cooling on the calculating in designing into a fully integrated brac.
Speaker Change: Okay, and then you already talked a little bit about the HTS content in this rack solution could you just go into more detail on how deep the.
Speaker Change: Is selected as the ODM and IP contribution to this win is like is it just the switch is in servers and storage.
Speaker Change: Highlighted cooling maybe you could just go through the contribution that Alaska is expecting to make from its own IP.
Speaker Change: Yes. Thanks, Robert This is a very significant design project for us.
Speaker Change: Absolutely and anti Iraq. So it includes.
Speaker Change: As I mentioned before the switching.
Speaker Change: <unk> module and accrued stock.
Speaker Change: <unk> plans of crudes the rack itself.
Speaker Change: Good morning.
Speaker Change: It's not just tracking the ratio we're doing we're actually doing full rack orchestration. So.
Speaker Change: Leveraging.
Speaker Change: The amount of IP that we've developed over the past 10 plus years.
Speaker Change: And I presume you would be able to develop that IP further around this yes.
Rob Mionis: I think to that point Rob.
Speaker Change: When we successfully execute this full rack system.
Speaker Change: B you have enough proof points that will lead to further growth for us.
Speaker Change: This customer and with other some of our customers across the industry.
Speaker Change: Okay and last one for me is just on the guidance for the year.
Speaker Change: If you just look at the cadence through the year it looks as though the growth is a little bit weaker in the back half. Despite all of the Ah ramps in second half and so I'm curious I know you don't give guidance on Q2 at this point, but if you could give us a sense of maybe the cadence of <unk>.
Speaker Change: Revenue through the year to better model that and then I'll pass the line.
Rob Mionis: Yes, hi, Rob good morning.
Speaker Change: I want to reiterate what we said on the call.
Speaker Change: This is our high competency, we're pleased to be able to raise the revenue outlook to $10 7 million from 10, four at 11% growth.
Speaker Change: And then the EPS, a 22% growth to 475, but what you'll notice is in the first quarter.
Speaker Change: Those numbers are higher so we've guided at the midpoint, 15% revenue growth and EPS is growing 30.
Speaker Change: 30% and so we're taking a view right now on what we know is solid and in front of US Q2 to Q4.
Speaker Change: We have very good visibility and now through the third quarter with our largest customers, but frankly, the fourth quarter visibility is not yet fully locked down it's improving.
Speaker Change: Internet and we're having very positive discussions.
Speaker Change: These things will continue to solidify as we go through the coming months.
Speaker Change: So this is our high competent team.
Speaker Change: We would of course be looking to do better than that that's become linear.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you. Your next question is from MS. <unk> from BMO capital markets. Your line is now open.
Speaker Change: Hi, good morning, congrats on the new customer wins.
Speaker Change: With respect to enterprise is the program transition placed a large customer proceeding as expected and just to clarify would you expect Q1 to meet the bottom end.
Speaker Change: Terms of that transition from a sequential perspective or.
Speaker Change: What would be your outlook on that.
Dan: Yeah, Hey, Dan.
Speaker Change: Yes.
Speaker Change: Things are going as we expected them to be.
Speaker Change: Enterprise is down year over year is that still a swift program is moving towards end of life, we will see a little bit of a reduction as we go through the first half of the year.
Speaker Change: The new program that we have won a while ago is on track for ramping in the third quarter and we would expect to return to year over year growth as we get to the end of 2025.
Speaker Change: So those things.
Speaker Change: Our largest customer is completely on track and then as a reminder.
Speaker Change: The win that we announced before with Brock that program ramp is already working well and we're seeing sequential improvement in that program. As we go from Q4 to Q1 and that will strengthen as we go through the year.
Speaker Change: And then with this new.
Speaker Change: New customer win that Rob it's just been speaking about it it's really nice to see yet another custom server win.
Speaker Change: That will be ramping in 2026, so we are continuing to make some good progress on the server side.
Speaker Change: And on that note is there any incremental color you can provide in terms of just need to strengthen the pipeline you are seeing some more additional server and custom opportunities.
Speaker Change: Yes.
Speaker Change: Sure.
There is a very strong pipeline of additional.
Speaker Change: Sort of opportunities again.
Speaker Change: And to play on the commentary.
Speaker Change: And Thats, where our focus is.
Speaker Change: And we also tend to play on the Hbf, 5% somewhere in that high design content I would say the pipeline is quite healthy.
Speaker Change: Great I'll leave it there thanks.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Thank you. Your next question is from David <unk> from UBS. Your line is now open.
Speaker Change: Great. Good morning, guys. Thanks for taking my questions I've got a couple if you will as well so so rob or <unk> on the second one that six terabyte program that you won with a large hyperscale customer can we clarify is that an existing customer as they migrate to faster speeds or is that a new customer and along those lines is there an opportunity to expand the relationship.
Speaker Change: From an optimized networking rack to other parts of the network edge compute and I'll give you. My second question on the digital native customer I think I heard Rob say, it's across multiple geographies is it fair to say that this customer historically has been sort of answered a band based customer and this is sort of an initial opportunity to.
Speaker Change: To deploy Ethernet technology from Celestica across obviously, a more complete solution, but just trying to get a better understanding of kind of how to think about the technological roadmap.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Hi, David Yes, so on the <unk>.
Speaker Change: Hyper scaler customer, yes, they are an existing customer we currently support this customer wins on both 408 hundred trees.
Speaker Change: Switches.
Speaker Change: So this isn't really a natural extension of our relationship and Thats for their next generation family.
Speaker Change: Sex liquid cold networking rack. So again this is not just a switch but the entire Iraq.
Speaker Change: And we will be.
Speaker Change: Final integrator for the system again, this will be a multi node.
Speaker Change: Our solution for them in terms of both the U S and southeast.
John: Hey, John and on.
Speaker Change: And you also asked.
Speaker Change: Let me see the opportunity to expand our solutions for this customer absolutely.
Speaker Change: Based on what we're doing with digital native customer and also what we're doing with this hyper scaler.
Speaker Change: We see opportunities to.
Speaker Change: Grow our share of wallet with stellar as well.
Speaker Change: With respect to the digital native customer, yes, they have very.
Speaker Change: Specific and unique needs from the data center.
Speaker Change: I wouldn't say there.
Speaker Change: When a bank customer growing their.
Speaker Change: Their own custom.
Speaker Change: Design from the data center, and we're supporting them with a fully customized frac.
Speaker Change: Great. Thanks, guys congrats.
David: Thanks, David.
David: Thank you.
Speaker Change: Next question is from Steven Fox from Oxo Advisors. Your line is now open.
Steven Fox: Hi, I was wondering if I could follow up on some of these questions from maybe a thousand foot level, which is <unk> had a couple of landmark wins now the last couple of quarters that are diversifying you guys away from you.
The large cloud.
Steven Fox: Cloud guys, you've been selling to and you're doing it with more complex rack integration and orchestration. So like from those two aspects customer diversity and more complexity on Iraq, how does how should we think about the business changing over say the next 12 months to 18 months or 24 months too.
Steven Fox: Towards those trends and then I had a follow up.
Steven Fox: Thanks, David.
Steven Fox: Yes.
Speaker Change: Step back in time, we are keeping a high level.
Steven Fox: Back in the day as I say.
Speaker Change: Contract manufacturers.
Steven Fox: Yeah, Matt I think we're clearly.
Steven Fox: And our Ccs business and the ODM category with these new wins were actually well under our way to be a product company in the OEM.
Steven Fox: Infection. So I think these are just further proof points system.
Steven Fox: Ourselves from ODM, and OEM land, and I think that's where our gas business.
Speaker Change: That's helpful. And then just on the liquid cooling in front of me I'm, a little I just want make sure I understand on these wins are we talking about leveraging your own technology at the board level with coal plates as well as at the rack level.
Speaker Change: And how much of that would you be manufacturing yourself as opposed to just design and integration.
Speaker Change: Yes, we're talking about.
Speaker Change: Rack level and also.
Speaker Change: Chip level.
Speaker Change: Australia.
Speaker Change: And we have ecosystem partners that do the math.
Speaker Change: Factoring in we're integrating and applying a process.
Speaker Change: Processes at scale to make sure that we're able to sort of a fully integrated system.
Speaker Change: Okay.
Speaker Change: One of the things that we have been hearing from our customers is the challenge really gets to being able to produce.
Speaker Change: Liquid cooling solutions at scale and we have demonstrated strong capabilities in this area. It's trial and we have a lot of experience in that area and Thats a lot of the knowhow that we are able to bring to the table as well.
Speaker Change: Great. Thank you very much.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Your next question is from Reuben Willey from Stifel. Your line is now open.
Reuben Willey: Thank you very much for letting me ask a question.
Speaker Change: Randy I was wondering.
Speaker Change: Just kind of following up on some of the questions around the extensive.
Speaker Change: No.
Speaker Change: Development cycle, I guess with the new customer are you thinking about Capex would you would you have to make any changes to your capacity to support.
Speaker Change: Neither of these new programs are both what does it mean for capex levels of sales going forward. Please.
Speaker Change: Yeah. So first of all welcome Reuben really nice to have you take over from Stifel.
Speaker Change: Yes to answer your question, we're very comfortable with.
Speaker Change: To me that we have we've been growing at strong double digit now three years in a row and we've been able to maintain our capex spend at less than 10% just as a reminder, the majority of the Capex that we spend is on growth Capex. We only have about 40 basis points of maintenance and that gives us a lot of discretion on where we want to put those dollars.
Speaker Change: Has the capacity, we need right now to execute all of demand that's in front of us.
Speaker Change: We'll be targeting some of the growth capex that we have in 2025 to areas like continuing to expand in Thailand. We have shown that in southeast Asia, we can bring on capacity in our existing campuses in under a year when needed to support our customer demands.
Speaker Change: And so the way to think about Capex in 2025.
Speaker Change: Similar to what we've been saying in the previous year is 1.5% to 2% of revenue and I don't really see at this point that need because that can be very different than the other years either.
Speaker Change: Got it thank you Mindy and then Rob.
Speaker Change: Thanks for the comments on your early assessment of how to think about deep seek but I guess given that you've given us some thought the comment around networking the networking opportunity longer term, maybe if you could just give us a little more detail about how youre thinking about that it sounds like if we do get to a point where we.
Speaker Change: We can get cheaper AI to the edge.
Speaker Change: That could be a good thing is that what youre thinking about but what does that mean for sort of scale up and scale out of the big clusters.
Speaker Change: We're getting used to I guess, just any more detail about how youre thinking about the networking opportunity.
Speaker Change: If you have any would be great. Thank you.
Speaker Change: Thanks, Robert and again welcome.
Speaker Change: Yes.
Speaker Change: Some of the industry pundits are saying.
Speaker Change: <unk> AI accessibility will drive demand not talk to us as well and in the middle of all this is networking really remains a crucial it's crucial for scaling all the AI systems for transporting data for training and consulting and networking really is agnostic to the type of.
Speaker Change: Large language models are being used today.
Speaker Change: If you think about networking.
Speaker Change: It might require real time analytics on a steep sequence used for real time applications like high frequency trading fraud detection autonomous vehicle control the need for minimal latency becomes critical and high bandwidth switching offerings a solution to that even if you think.
Speaker Change: Deep sequel trials distributed computing.
Speaker Change: If it's distributed across a cluster of sovereigns again, you'll still need.
Speaker Change: Hi.
Speaker Change: Bandwidth switching so.
Speaker Change: We actually view in terms of our networking business such as the Permian pathogen.
Speaker Change: Development to actually drive growth.
Speaker Change: Portfolio.
Speaker Change: That's great detail. Thanks.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Thank you once again that is star one should you wish to ask a question.
Speaker Change: And your next question is from Paul Treiber from RBC. Your line is now open.
Paul Treiber: Alright, thanks, very much and good morning.
Speaker Change: A comment or a question on the win with the digitally native customer.
Speaker Change: And just more broadly speaking in terms of your pipeline are you seeing a trend towards customers shifting to procuring end to end full.
Speaker Change: Full rack solutions versus you know maybe in the past.
Speaker Change: Individual components.
Speaker Change: But certainly.
Thanks, Paul.
Speaker Change: Native customers I mean, this class of customers.
Speaker Change: Really want a full solution as I mentioned with this particular customer not only ends with a full rack solution and we're actually doing services.
Speaker Change: I'd, probably signs all service solution.
Speaker Change: We think that.
Speaker Change: This win will.
Speaker Change: Give us a further proof point to expand our market share.
Speaker Change: Customers with respect to Hyperscale.
Speaker Change: Does it depend on Hyperscale as we mentioned.
Speaker Change: Mentioned.
Speaker Change: In the script.
Speaker Change: Hyperscale or win that we had on the 1000 feet.
Speaker Change: 1000, <unk> switching was an inflection point and what we're providing with this customer.
Speaker Change: With a dedicated networking rack and.
Speaker Change: Again designed specifically for <unk>.
Speaker Change: I am not workloads.
Speaker Change: And it's optimized.
Speaker Change: Have an optimized fabric it improves efficiency incorporates liquid cooling directly within the rock and the switch itself initially.
Speaker Change: Initial most likely be required for all of the latest.
Speaker Change: 1000, <unk> defined so again in terms of full Frac solutions, and that's where we think the market is going on we think we're very well positioned.
Speaker Change: And along with that do you made an interesting comment about the shift from contract manufacturing EMS to ODM, and then and then product and the importance of your H P. S.
Speaker Change: On business to contract wins when you when you look at your pipeline and you look at the mix sort of differentiation from H P. S. How would you compare that like how how how much of a factor.
Speaker Change: Or is that having to your ability to win.
Speaker Change: These contracts as you look out in the next couple of years.
Speaker Change: We've been.
Speaker Change: Increasingly investing in R&D and design capability and expanding our define net.
Network.
Speaker Change: For the past 10 plus years.
Speaker Change: Incrementally more time and more over.
Speaker Change: $175 million, we're going to be spending this year end.
Speaker Change: We're comfortable spending up to $100 million 90 to 225 as well.
Speaker Change: And based on our growth.
Speaker Change: Anticipate to continue to invest in design capabilities and migrating towards that journey that I imagine.
Speaker Change: Yes.
Speaker Change: I know you know this.
Speaker Change: We have over 900 denying the chairs.
Speaker Change: We are engaging with customers in multiple ways, so as Rob talked about.
Speaker Change: Our OEM type of offerings that we have.
Speaker Change: Electrical products that have is lets go logo on it and our customers that have been tested in.
Speaker Change: Meet our customers' needs directly but then in addition to that we have the same engineers, who can work with customers on customizing a solution to what they were looking for.
Speaker Change: And we worked it and collaborations along the way and so while some of our wins do fall under the <unk> umbrella.
The heavy level of our design content.
Speaker Change: We also use our engineers to help us win on the EMS side.
Speaker Change: So we find that our engineering expertise is a key differentiator, which is why again, if you think back like five years ago, we were spending about $25 million in R&D. We're now spending three ex that and going again into 25 years before that and the return on that investment is very high.
Speaker Change: And lastly, if I can squeeze in one more just with the change in the U S Administration, you can talk about tariffs and also enthusiasm for onshoring is or are your customers you mentioned, Thailand and expanding in time, but are you getting more requests for production in the U S and how you're thinking about.
Speaker Change: U S.
Speaker Change: Facility expansion going forward.
Speaker Change: Okay.
Speaker Change: Yeah right now.
Speaker Change: Customers are in a wait and see mode.
Speaker Change: Right.
Speaker Change: We've done in the past.
Speaker Change: Resilience inside our network.
Speaker Change: Tariffs in one area.
Speaker Change: Hum.
Speaker Change: There are customers, who want a shift we feel we can serve them in another area.
Speaker Change: You know right now.
Speaker Change: We have ample capacity in the U S.
Speaker Change: Capacity, not just physical capacity, but it also means power and we've actually secured.
Speaker Change: Our Ccs business for years to come in anticipation of growing.
Speaker Change: So we're keeping our eyes open and we're keeping them off of right now customers are.
Speaker Change: In a wait and see mode.
Speaker Change: So every.
Speaker Change: Every day is a kind of a new direction that you know what I mean.
Speaker Change: And specifically to the U S. Just as a reminder, we do a lot of semiconductor manufacturing on the west coast of the United States, We do very complex aerospace and defense work.
Speaker Change: Sure.
Speaker Change: The Midwest and then we do have in Richardson, Texas, a very large facility, which is supporting our hyperscale customers and we've been doubling revenue for a couple of years now and the Texas facility, we will be more than doubling the revenue again in 2025 and again as I mentioned earlier all within the Capex envelope.
Speaker Change: We would expect.
Speaker Change: Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Next question is from Todd Coupland CIBC. Your line is now open.
Todd Coupland: Yes, good morning, everyone.
Speaker Change: I wanted to ask about the communications business.
Speaker Change: Pacific Li on the margin side. So if you could help US bridge your networking margins relative to peers in the market that are nicely into the double digits and we think about your guide. It implies the majority of your business will be a networking by the end of the year.
Speaker Change: So why shouldn't your margins be a lot higher than they are just talk us through that that spread thanks a lot.
Todd Coupland: Hey, Todd.
Speaker Change: So of course, our communications business has.
Speaker Change: A lot of it is what our networking businesses theres, a substantial amount of Brooklyn there.
Speaker Change: It includes a lot of our hps revenue, but it also includes EMS revenue as well, we do manufacture communications gear for a leading Oems.
Speaker Change: Or sometimes selling into the small medium business.
Speaker Change: Side of things, sometimes selling into the hyper scalar side of things.
Speaker Change: Need to think about communications on a blended basis the way I would characterize the margins overall, though is look Ccs had record operating margins in the fourth quarter, seven 9% and our hps business.
Speaker Change: Is accretive to that and so as we continue to grow <unk> types of revenue. It provides an opportunity for continuing margin expansion. The majority of our <unk> portfolio today is switches and so we would expect to see some margin expansion. It will also lift up the communications numbers, but the best way to think about.
Speaker Change: More of an apples to apples comparison, if you're thinking about an ODM that that's an example would be how does our hps business performed relative to those Oems and we're not that.
Speaker Change: All of them pretty much the same Zip code.
Speaker Change: That's great. Thanks for that color and then I just wanted to go back to deep seek as well.
Speaker Change: So is your takeaway at this point that it's going to drive custom silicon demand at the expense of merchant Silicon and that's an incremental driver. Thanks a lot.
Speaker Change: Yes in terms of.
Speaker Change: Our custom Silicon man, that's where we play in our view.
Speaker Change: We're growing.
Speaker Change: Market custom silicon is really around specialized applications.
Speaker Change: We feel that.
Speaker Change: We're focusing on where the majority of our growth comes from.
Speaker Change: Okay.
Speaker Change: Great. Thanks, a lot appreciate the color.
Speaker Change: Yeah.
Robert Young: Thank you there are no further questions at this time I will now hand, the call back to Robert.
Speaker Change: And it's pretty closing remarks.
Robert Young: Thank you operator.
Speaker Change: Thank you for joining US. This morning, 2024 was a solid year for us and we're looking forward on building on this positive momentum as we get further into 2025.
Speaker Change: Products that we Havent development combined with our recent win also gives us confidence in our long term outlook and our future is certainly quite bright and we look forward to updating you next quarter and have a wonderful day.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: Ladies and gentleman. The conference has now ended thank you all for joining you may all disconnect your lines.
Speaker Change: Yes.