Q2 2025 Celestica Inc Earnings Call
Unknown Executive: and welcome to the Celestica Q2 2025 financial results and conference call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed into today's call, please press star 9 to raise your hand and star 6 to unmute.
Ladies and gentlemen, thank you for joining us, and welcome to the Celestica Q2 2025 financial results and conference call.
Matthew Pallotta: I will now hand the conference over to Matthew Pallotta, Head of Investor Relations. Please go ahead.
After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please raise your hand. If you have dialed in to today's call, please press *9 to raise your hand, and *6 to unmute.
I will now hand the conference over to Matthew palada head of investor relations. Please go ahead
Matthew Pallotta: Good morning, and thank you for joining us on Celestica's Q2 2025 earnings conference call. On the call today, we have Rob Mionis, President and Chief Executive Officer, and Mandeep Chawla, Chief Financial Officer. Please note that during the course of this call, we will make forward-looking statements relating to the future performance of Celestica, which are based on management's current expectations, forecasts, and assumptions. 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. Certain material factors and assumptions are applied in drawing any such statements.
Good morning, and thank you for joining us on Celestica's Q2 2025 earnings conference call.
On the call today we have Rob, President and Chief Executive Officer, and Mandeep Chawla, Chief Financial Officer.
Please note that during the course of this call, we will make forward-looking statements relating to the Future performance of celestica, which are based on Management's, current, expectations, forecasts, and assumptions.
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.
Matthew Pallotta: For identification and discussion of such factors and assumptions, as well as risk factors that may impact future performance and results of Celestica, please refer to our public filings available at www.sec.gov and www.cedarplus.ca, as well as the investor relations section on our website. We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. 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 TTM adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS, and adjusted effective tax rate.
Certain material factors and assumptions are applied in drawing any such statement.
For identification and discussion of such factors and assumptions as well as a risk factors that may impact future performance and results of celestica. Please refer to our public filings available at www.sec.gov and
We undertake no obligation to update, these forward-looking statements unless expressly required to do, so by law.
Matthew Pallotta: We've included in our earnings release, found in the investor relations section of our website, a reconciliation of non-GAAP financial measures to the most comparable GAAP.
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, TTM adjusted IBA, leverage ratio, adjusted earnings per share or adjusted DPS, and adjusted effective tax rate.
Matthew Pallotta: With respects to our Q3 2025 guidance and 2025 annual outlook. Our earnings release does not include a reconciliation of forward-looking non-GAAP measures to the most directly comparable GAAP measures on a forward-looking basis, as items that we exclude from GAAP to calculate these comparable non-GAAP measures are dependent on future events that are not able to be reliably predicted by management and are not part of our routine operating activities. 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.
We have included in our earnings, release found in the investor relations section of our website, a Reconciliation of non-gaap financial measures to the most comparable gaap measures.
With respect to our Q3 2025 guidance and 2025 annual Outlook.
Reconciliation. A forward-looking non-gaap measures to the most directly comparable gaap measures on a forward-looking basis.
As items that we exclude from Gap to calculate these comparable, non-gaap measures are dependent on future events that are not able to be reliably predicted by management and are not part of our routine operating activities.
We are unable to provide such a Reconciliation without unreasonable effort, due to the uncertainty and inherent difficulty in predicting the occurrence.
Matthew Pallotta: The occurrence, timing, and amount of any of the items excluded from GAAP to calculate non-GAAP could significantly impact our Q3 2025 and 2025 GAAP results. 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.
The financial impact and the periods in which the adjustments may be recognized.
The occurrence timing and amount of any of the items excluded from Gap to calculate non-gaap could significantly impact our Q3 2025 and 2025 Gap results.
Rob Mionis: Let me now turn the call over to Rob. Thank you, Matt. And good morning, everyone. And thank you for joining us on today's call. We saw solid demand across our portfolio in the second quarter, which drove very strong performance. We achieved revenues of $2.89 billion and adjusted EPS of $1.39 with both metrics exceeding the high end of our guidance ranges. Our adjusted operating margin of 7.4% once again marked the highest performance in the company history. Our CCS segment continues to experience very strong growth, driven by the demand for networking products from our hyperscale customers, as they pursue significant expansions of their data center infrastructure to support new AI applications.
Unless otherwise specified all references to Dollars on this call are to US 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.
Thank you, Matt and good morning everyone. And thank you for joining us on today's call.
We saw a solid demand across our portfolio on the second quarter, which drove very strong performance. We achieved revenues of 2.89 billion and adjusted EPS of a139 with both metrics exceeding. The high end of our guidance ranges
All right, just said, operating margin of 7.4%. Once again, it marked the highest performance in the company's history.
Rob Mionis: In our ATS segment, solid demand in our capital equipment business and industrial businesses drove higher than expected revenues. while segment margins of 5.3% continue to improve meaningfully. In the second quarter, the impact from tariffs on our financial results was minimal, as the pause on reciprocal tariffs and exemptions on electronics goods, including data center hardware, insulated the majority of our portfolio.
The CCF segment continues to experience very strong growth, driven by the demand for networking products from our hyperscale customers as they pursue significant expansions of their data center infrastructure to support new AI applications.
in our ATS, segment followed demand in our Capital Equipment, business and Industrial businesses drove higher than expected revenues,
While, segment margins of 5.3% continued to improve meaningfully.
In the second quarter, the impact from tariffs on our financial results was minimal as the pause on reciprocal tariffs and exemptions on electronics Goods, including data center Hardware insulated, the majority of our portfolio.
Mandeep Chawla: Before I provide you with our updated annual financial outlook and some additional follow-up on our businesses, I would like to turn the call over to Mandeep, who will discuss our second quarter financial performance and our guidance for the third quarter of 2025.
before I provide you with our updated annual Financial Outlook and some additional color on our businesses
Mandeep Chawla: Mandeep over to you. Thank you, Rob. And good morning, everyone. Second quarter revenue of $2.89 billion was up 21% and above the high end of our guidance range, driven primarily by very strong demand in our communications and market from hyperscaler customers. Adjusted gross margin for the second quarter was 11.7%, up 110 basis points, driven by higher volumes and improving mix in both segments. Our second quarter adjusted operating margin was 7.4%, up 110 basis points, driven by higher margin across both our CCS and ATS segments. Our adjusted earnings per share for the second quarter was $1.39, exceeding the high end of our guidance range, and an increase of 49 cents, or 54%.
I would like to turn the call over to Mandy, who will discuss our second part of financial performance, and our guidance. For the third quarter of 2025
Made it over to you.
Thank you, Rob, and good morning everyone.
Second quarter revenue of $2.89 billion was up 21% and above the high end of our guidance range, driven primarily by very strong demand in our Communications and Market from hyperscaler customers.
Adjusted gross margin for the second quarter was 11.7%.
110 basis points driven by higher volumes and improving mix in both segments.
Our second quarter adjusted. Operating margin was 7.4% up, 110 basis points driven by higher margin across, both our ccs and ATS segments.
Our adjusted earnings per share. For the second quarter was $1.39 exceeding. The high end of our guidance range and an increase of 49 cents or 54%.
Mandeep Chawla: Our adjusted affected tax rate for the quarter was 20%. And finally, our second quarter adjusted ROIC was 35.5% compared to 26.6% a year ago, driven by higher operating profit and strong working capital.
Our adjusted effective tax rate for the quarter was 20%.
And finally, our second quarter adjusted roic with 35.5% compared to 26.6% a year ago driven by higher operating profit and strong working Capital Management.
Mandeep Chawla: Moving on to our segment performance. ATS segment revenue totaled $819 million, up 7%, and above our guidance of being flat year-over-year. The higher revenue was primarily driven by strong demand in our capital equipment business and returning growth in our industrial Our ATS segment accounted for 28% of total company revenue in the second quarter. Revenue in our CCS segment was $2.07 billion, up 28%, driven once again by very strong growth in our communications end market. The CCS segment accounted for 72% of total company revenue in the quarter. Our communications and market revenues increased by 75% above our guidance of high 50s percentage growth, driven primarily by strong demand and ranking programs in our HPS networking business.
Moving on to our segment performance.
ATS segment revenue totaled $819 million, up 7% and above our guidance of flat year-over-year.
Revenue was primarily driven by strong demand in our Capital Equipment, business and returning growth in our industrial business.
Our ATS segment accounted for 28% of total company revenue in the second quarter.
Revenue in our CCS segment was $2.07 billion, up.
28% driven once again by very strong growth in our Communications and Market.
The CCS segment accounted for 72% of total company Revenue in the quarter.
Mandeep Chawla: complemented by strengthening demand in our optical program. Revenue in our enterprise and market was 37% lower, which was better than our guidance of a low 40s percentage decline. The lower revenues were a result of an anticipated technology transition in an AI ML compute program with one of our hyperscalers. HBS revenues of $1.2 billion in the second quarter were higher by 82% and accounted for 43% of total company revenue. This exceptional growth is being driven by the ramping of several 800G networking switch programs, complementing strong hyperscaler demand for our 400G solution.
Our Communications and Market revenues increased by 75% above our guidance of high 50s percentage growth, primarily driven by strong demand and ramping programs in our HPS networking business.
Complemented by sprinting demand in our optical programs.
40s, percentage decline.
A lower revenues were a result of an anticipated technology transition in an AI ml compute program with 1 of our hyperscaler customers.
HPS revenues of 1.2 billion dollars. In the second quarter were higher by 82% and accounted for 43% of total company Revenue.
This exceptional growth is being driven by the ramping of several 800g, networking switch, programs complimenting, strong hyperscale, and demand for our 400 G switches.
Mandeep Chawla: Moving on to segment margin. ATS segment margin in the second quarter rose to 5.3 percent, up 70 basis points, primarily driven by improved profitability in our A&E. BCS segment margin in the second quarter was 8.3%, an improvement of 130 basis. driven by a higher mix of HBS revenues and strong productivity. During the quarter, we had two customers that each accounted for at least 10% of total revenue, representing 31% and 13% of revenue, respectively.
Moving on to segment margins.
ACS segment margin in the second quarter rose to 5.3%, up 70 basis points, primarily driven by improved profitability in our AMD business.
BCS segment margin in the second quarter was 8.3% and Improvement of 130 basis points driven by a higher, mix of hp's revenues and strong productivity.
During the quarter, we had 2 customers that each accounted for at least 10% of total revenue, representing 31% and 13% of Revenue respectively.
Mandeep Chawla: Moving on to working capital. At the end of the second quarter, our inventory balance was $1.92 billion, a sequential increase of $130 million and a year over year increase of $74 million. Cash Deposits were $397 million at the end of the second quarter, down $75 million sequentially, and down $179 million year-over-year. Fast-Cycle Dave during the second quarter, we're 66.
Moving on to working capital.
At the end of the second quarter, our inventory balance was $1.92 billion, a sequential increase of $130 million and a year-over-year increase of $74 million.
Cash deposits were $397 million at the end of the second quarter, down $75 million sequentially and down $179 million year-over-year.
That cycle days during this second quarter were 66.
Mandeep Chawla: Turning to cash flow. Apple expenditures for the second quarter were $33 million, or approximately 1.1% of revenue, compared to 1.5% in the second quarter of 2024. Year-to-date, our capital expenditures have been below our anticipated range of 1.5% to 2.0% of revenue due to stronger than expected revenue growth and timing of expenditures. However, we anticipate capital expenditures in the second half of the year to increase relative to the first half and for total annual spend to be within our annual range of 1.5% to 2.0% of revenue. During the second quarter, we generated $120 million of free cash flow, $54 million higher than the prior year period.
According to cash flows.
Capital expenditures for the second quarter were $33 million, or approximately 1.1% of revenue, compared to 1.5% in the second quarter of 2024.
Year to date our Capital expenditures have been below. Our anticipated range of 1.5% to 2.0% of Revenue due to stronger than expected Revenue growth and timing of expenditures. However, we anticipate Capital expenditures in the second half of the year to increase, relative to the first half, and for total annual spend, to be within our annual range of 1.5 to, 2.0% of revenues.
Mandeep Chawla: Our free cash flow year-to-date, as of the end of the quarter, totaled $214 million.
During the second quarter, we generated 120 million dollars of free cash flow 54 million higher than the prior year period.
Our free cash flow year to date as of the end of the quarter, total 214 million.
Mandeep Chawla: Turning to our balance sheet and capital allocation. At the end of the second quarter, our cash balance was $314 million. Combined with $660 million of borrowing capacity under our revolver, we currently have approximately $1 billion in total liquidity, which we believe is sufficient to meet our projected business need. Our gross debt at the end of the quarter was $823 million, and our net debt position was $509 million. A gross debt, the non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.9 turns, an improvement of 0.2 turns sequentially, and 0.3 turns versus the prior year period. As of June 30th, we were in compliance with all financial covenants under our credit agreement.
Credit to our balance sheet and capital allocation.
At the end of the second quarter, our cash balance was 314 million combined with 660 million of borrowing capacity. Under our revolver, we currently have a proximately 1 billion in total liquidity, which we believe is sufficient to meet our projected business needs.
Our growth debt. At the end of the quarter was 823 million and our net debt position was 509 million.
Our gross debt the non-gaap trailing 12-month adjusted eidel. Leverage ratio was 0.9 turns and Improvement of 0.2, turn sequentially and 0.3 turns versus the prior year period.
As of June 30th, we were in compliance with all financial covenants under our credit agreement.
Mandeep Chawla: During the second quarter, we repurchased approximately 600,000 shares for cancellation at a cost of $40 million under our normal course issuer bid, bringing our total purchases under the NCIB to $115 million year-to-date. We intend to remain opportunistic on shared buybacks for the second half of 2025.
During the second quarter, we repurchased approximately 600,000 shares for cancellation at a cost of $0 million under our normal course issuer bid, bringing our total purchases under the NCIB to $115 million year to date.
We intend to remain opportunistic on share BuyBacks for the second half of 2025.
Mandeep Chawla: Now let's turn to our guidance for the third quarter of 2025. Similar to last quarter, we highlight that our guidance figures assume no material changes to tariffs or trade restrictions compared to what is in effect as of July 28th, as any changes to these policies and their potential impact on our results cannot be reliably predicted at this time. We also know that substantially all tariffs paid by Celestica are expected to be recovered from our customers and are not expected to materially impact our non-GAAP-adjusted operating earnings or our non-GAAP-adjusted net earnings.
Now, let's transfer guidance to the third quarter of 2025.
Similar to last quarter. We highlight that our guidance figures assume no material changes to tariffs or trade restrictions compared to what is in effect as of July 28th as any changes to these policies and their potential impact on our results. Cannot be reliably predicted at this time.
We also note that substantially all terrorists, paid by Flica, are expected to be recovered from our customers and are not expected to materially impact our non-GAAP adjusted operating earnings or our non-GAAP adjusted net earnings.
Mandeep Chawla: Third quarter revenue is projected to be between $2.875 and $3.125 billion, representing growth of 20% at the midpoint. Adjusted earnings per share are anticipated to be between $1.37 and $1.53, representing an increase of 41 cents at the midpoint, or 39%. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin would be 7.4 percent, an increase of 60 basis points over the prior year period. We expect our adjusted effective tax rate for the third quarter to be approximately 19%.
third, quarter of Revenue is projected to be between 2.875 and 3.125 billion dollars representing growth of 20% at the midpoint,
Adjusted earnings per share, our anticipated to be between $1.37 and $153 representing an increase of 41 cents at the midpoint or 39%.
Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-gaap operating margin would be 7.4%. Then increases 60 basis points over the prior year period.
We expect our adjusted effective tax rate for the third quarter to be approximately 19%.
Mandeep Chawla: Finally, let's review our end market outlook for the third quarter. In our ATS segment, we anticipate revenue to be down in the low single-digit percentage range, as growth in our industrial business is being offset by lower volumes in our A&E due to our previously announced decision not to renew a margin-deleted program. In our CCS segment, we project revenue in our communications and market to grow in the low 60s percentage range, supported by continued demand strength for our networking switches, including ongoing ramps in multiple 800G programs. In our enterprise-end market, we expect a mid-20s percentage decrease in revenue, driven primarily by a technology transition in an AI ML compute program with the latest generation program beginning to ramp in the third quarter.
Finally, let's review our end market outlook for the third quarter.
in our ATS segment, we anticipate Revenue to be down in the low single digit percentage range as growth at our industrial business is being offset by lower volumes and our A&D business, due to our previously announced decision not to renew a margin diluted program
In our CCS segment, we project revenue in our communications market to grow at a low 60s percentage rate, supported by continued demand transfer. Our networking switches are including ongoing ramps in multiple 800G programs.
In our Enterprise and Market, we expect a mid-20s percentage decrease in Revenue driven primarily by a technology transition in an AI ml compute program with the latest generation program beginning to ramp in the third quarter.
Rob Mionis: With that, I will now turn the call back over to Rob for an update on our latest Financial Outlook for 2025 and to provide additional color on our board. Thank you, Mandeep. Given our solid first half performance and the strengthening demand forecast for many of our customers, we are raising our 2025 annual financial outlook. We are increasing our revenue outlook for the year from $10.85 billion to $11.55 billion, reflecting year-over-year growth of 20%. We are also increasing our non-GAAP-adjusted EPS outlook for the year from $5.00 per share to $5.50 per share, which represents year-over-year growth of 42%.
With that, I will now turn the call back over to Rob for an update. On our latest Financial outlook for 2025 and to provide additional color on our business.
Thank you Mandy. You have a solid, first half performance and the strengthening demand forecasts. So many of our customers. We are raising our 2025 annual Financial Outlook. We are increasing our Revenue outlook for the year, from 10.85 billion to 11.55 billion reflecting year, we have growth of 20%
We are also increasing our non-gaap adjusted EPS outlet for the year.
Rob Mionis: Our adjusted EPS outlook reflects an anticipated down-gap operating margin of 7.4%. With a higher anticipated profitability, we're also raising our free cash flow outlet for the year from $350 million to $400 million.
From 5 dollars per share to 5.50 cents per share which represents year-over-year growth of 42%.
Our adjusted EPS outlook reflects an anticipated non-GAAP operating margin of 7.4%.
Rob Mionis: As with our quarterly guidance, these figures assume no material changes to tariffs or trade restrictions compared to those in effect as of July 28th. Now moving on to some additional color on our business In our CCS segment, we now anticipate growth of nearly 30% for the full year. In our communications end market, we continue to ramp multiple 800G programs, while demand for our 400G programs remains strong. Overall, hyperscaler demand for our networking products is very robust, as these customers continue to significantly invest in their data center infrastructure. In our enterprise-end market, as anticipated, Q3 will see us begin to ramp volumes for our next-generation AI ML compute program with a large hyperscale of customer.
With a higher anticipated profitability. We also raising our free cash flow outlet for the year from 350 million to 400 million dollars.
As with our quarterly guidance, these figures assume no material changes to tariffs or trade restrictions compared to those in effect as of July 28.
Now, moving on to some additional color on our businesses.
In our CCS segment. We now anticipate growth of nearly 30% for the full year.
In our Communications and Market, we continue to ramp multiple 800g programs.
While demand for our 400g. Programs, remain strong.
Overall, hyperscaler demand for our networking products is very robust. As these customers continue to significantly invest in their data center infrastructure.
Rob Mionis: We expect this to contribute to a strengthening of enterprise volumes in the second half of the year and into 2026. We also continue to pursue a robust pipeline of opportunities for new awards with hyperscaler and digital native customers across compute, storage, and rack integration.
And our enterprise and market are anticipated. Q3 will see us begin to ramp volumes for our next generation AI ML compute program with a large hyperscaler customer. We expect this to contribute to a strengthening of enterprise volumes in the second half of the year and then to 2026.
We also continue to pursue a robust pipeline of opportunities for new Awards with hyperscaler and digital native customers across compute storage and rack integration.
Rob Mionis: Moving on to our ATS segment, we are maintaining our annual outlook for revenues to remain approximately flat to 2024. In our industrial business, the strength we saw return in the second quarter is expected to continue into the second half of 2025, supported by several ramping programs. In A&E, we continue to see strong improvements in profitability driven by mixed improvements, including our previously communicated decision not to renew a margin dilutive program. The revenue impact from this program began in Q2 and is expected to result in lower year-over-year revenues in A&E for the remainder of the year, despite otherwise healthy demand across the rest of our A&E portfolio.
Moving on to our ATS segment.
We are maintaining our annual outlook for revenues to remain approximately flat to 2024.
In our industrial business. The strength, we saw a return in the second quarter is expected to continue into the second half of 2025 supported by several ramping programs.
N&d.
We continue to see strong improvements in profitability.
Driven by mix improvements including our previously, communicated decision, not to renew a margin dilutive program.
The revenue impact from this program began in Q2.
And is expected to result in lower year-over-year, revenues in AMD for the remainder of the Year, despite otherwise healthy demand across the rest of our A&D portfolio.
Rob Mionis: In our capital equipment business, we achieved solid growth in the first half of 2025, driven by the strength in our base demand, supported by new program ramps. As anticipated, some second half demand was pulled into the first half, and consequently, we expect demand to moderate. The second half revenue is expected to be lower than the first half. Despite this, we anticipate full-year growth approximately in line with market growth rates. Overall, we continue to anticipate another year of solid financial performance for Celestica in 2025. We remain confident in our ability to continue our strong momentum, even with the uncertainty in the current macro environment.
In our Capital Equipment business, we achieved solid growth in the first half of 2025, driven by the strength in our base demand supported by new program ramps.
Approximately in line with market growth rates.
Overall, we continue to anticipate another year of solid financial performance for celestica in 2025.
Rob Mionis: Our portfolio is strongly supported by enduring long term secular talent. We believe Celestica is exceptionally well positioned to help our customers navigate today's uncertain landscape, backed by a globally diversified manufacturing network and our best-in-class supply chain and operations team.
We remain confident in our ability to continue our strong momentum even with the uncertainty in the current macro environment.
Our portfolio is strongly supported by enduring long-term secular tailwinds.
We believe Select is exceptionally well positioned to help our customers navigate today's uncertain landscape.
Rob Mionis: As a company that thrives in managing complexity, we feel these challenges, although we further highlight the critical value we provide With our market-leading capabilities and competitive positioning in key technologies, a disciplined approach to capital allocation, and consistency in our operation execution, we believe we are positioned to continue to excel and to sustain this positive momentum into 2026 and over the long term.
Backfire globally, diversified manufacturing Network and our best-in-class supply chain and operations teams.
as a company that thrives in managing complexity,
We feel these challenges will only further highlight the critical value. We provide.
Rob Mionis: We look forward to updating you on our progress during the next call in October.
With our Market leading capabilities and competitive positioning in key Technologies, a disciplined approach to Capital allocation and consistency. In our operation execution, We believe We Are positioned to continue to Excel and to sustain this positive momentum into 2026 and over the long term.
Unknown Executive: And with that, I will now turn the call back to the operator to begin the Q&A session. Thank you.
We look forward to updating you on our progress during the next call in October. And with that, I will now turn the call back to the operator to begin the Q&A session.
Unknown Executive: We will now begin the question and answer session. Please limit yourself to one question and one follow up. If you'd like to ask a question, please raise your hand now. If you have dialed in to today's call, please press star nine to raise your hand and star six to unmute. Please stand by while we compile the Q&A roster.
Thank you. We will now begin the question and answer session. Please limit yourself to 1 question and 1 follow-up. If you'd like to ask a question, please raise your hand. Now, if you have dialed in to today's call, please press star 9, to raise your hand, and star, 6 to unmute,
Please stand by while we compile the Q&A roster.
Carl Ackerman: And your first question comes from the line of Carl Ackerman with BNP Paribas. Carl, your line is unmuted. You may now go ahead. Great. Thank you, gentlemen. I have two, please.
And your first question comes from the line of Carl Acraman with BNP Paribas.
Carl, your line is, uh, unmuted. You may now go ahead.
Carl Ackerman: Could you speak to the breadth of customers as well as the number of platforms that you have on 800 gig switch ports that are helping drive your upward move by? Is that what for CCS? In other words, I guess, how should investors gauge the breadth of design engagements you have on 800 gig and above relative to 400G?
Great. Thank you gentlemen. Um, I have 2, please, could you speak to the breadth of customers as well as a number of platforms, uh, that you have on 800 gig switch ports, that are helping drive, your upward revised outlook for ccs.
In other words, I guess how should investors gauge the breadth of design engagements you have on 800 n***** above relative to 400 G of the follow up, please?
Rob Mionis: Yeah, hi, Carl. Yeah, on 800G, in terms of the breadth we have versus 400G, I would say every 400G customer we had has turned into a 800G customer. So the breadth of our offering is quite large. Our market share also for 800G is that much larger than market share for 400G as well, based on our early wins. So the breadth that we're seeing across a number of hyperscalers, and the ramps we're seeing across a number of hyperscalers is great to see and it's fairly pronounced.
Yeah, hi Paul. Um,
Yeah. I mean, like G, uh, in terms of the breadth we have versus 400g.
I would say every 400g. Customer we had as, uh, turned into a 800g, uh, uh, customer. So the breath, uh, of our, um,
of our offering is quite a large, our market share also for 800g, uh, is that much larger than, uh, market share for 400g, uh, as well, uh, based on our early wins. So, the breath that we're seeing across, uh, a number of hyperscalers and the ramps we're seeing across a number of hyper scale is is, is, is great to see and it's um, probably pronounced.
Rob Mionis: I'll just add on to that to say, you know, a little bit more color on 400 and 800. So 400 demand has been very strong now for a quite some time. We saw a lot of strength in the first quarter. What was nice about the second quarter is the 800G now is ramping. And it's basically on parity with our 400G volumes in the second quarter. And now we see 800G continue to accelerate. So the point that Rob made, if you think about our top three hyperscaler customers, we've won 800G programs with all We saw an acceleration in demand in the second quarter with one in particular, and the other two are now starting to catch up in the back half.
Nice, thank you for that. And
I'll just add on to that to say um, you know, a little bit more color on on 400 and 800.
Rob Mionis: So it is, there's a lot of breadth. Greetings to that.
400 demand has been very strong for now for a quite some time. Uh, we saw a lot of strength in the first quarter. What was nice about the second quarter is 800g now is ramping. Um, and it's basically on parody with uh our 400g volumes and second quarter. And now we see 800g continue to accelerate. Uh so the point that Rob made if you think about our top 3, hyperscaler customers we're um we've won 800 G programs. With all 3 of them, we saw a acceleration in demand in the second quarter with 1 in particular, and the other 2 are now starting to catch up in the back half. Um, so it is a, there's a lot of threat, I would say,
Rob Mionis: I mean, just given the amount of revenue growth that you're seeing in the business, could you remind us on the manufacturing readiness you have at your Monterey and Richardson campuses today to handle the growing demand of your CCS business? Thank you. Yeah, I can add on if you'd like. From a capacity perspective, we're still very comfortable. We are seeing a significant amount of demand for Southeast Asia, both in Thailand as well as in Malaysia. Customers are continuing to want to invest in the United States in our Richardson, Texas facility, and customers are continuing to look at Mexico.
Greetings to that. Uh yeah. I mean just giving the the amount of Revenue growth that you're seeing in the business, could you remind us uh on the manufacturing rightness you have at your Monterey in Richardson campuses today to handle the growing demand of your CCS business. Thank you.
Yeah, I like to start off.
Are seeing a significant amount of demand for Southeast Asia.
Rob Mionis: And so if you look at our capital plans as well, our CapEx spend, those are the locations where we're spending the money, and we're continuing to invest to support the growth. We have not run out of capacity. And as we commented last quarter, we have the ability to support, I would say, $3 billion to $4 billion of additional revenue should our customers want to continue to invest. And I would add, Carl, that right now, the majority of our networking is coming out of Thailand, but we also are producing networking products, energy products out of our expo facility as well.
Both in Thailand as well as in Malaysia. Uh, customers are continuing to want to invest in the United States and our Richardson Texas facility and customers are continuing to look at Mexico. And so, if you look at our Capital plans as well, our capex spend uh, both at the locations where we're spending the money, uh, and we're continuing to invest and support the growth. We have not run out of capacity. And as we commented last quarter, um, we have the ability uh, to uh,
and I would ask Carl that right now, the majority of, um, a networking is coming out of Thailand, but we also, uh, producing networking products, 8 Energy Products out of our
facility as well.
Unknown Executive: Thank you.
Thank you.
Ruben Roy: Your next question comes from the line of Ruben Roy with Stiefel. Ruben, your line is open. Please go ahead. Yes, hi. Thank you for taking my question. Congrats on the continued momentum.
Thank you. Your next question comes from the line of Ruben Roy with stifel
Ruben, your line is open. Please go ahead.
Ruben Roy: Mandeep, I wanted to zoom out maybe and, you know, given the Q3 guidance and the full year guidance, the implications for Q4, maybe a little decel coming in CCS and, you know, with enterprise, you know, coming back a little bit into year end. Just wondering if you'll walk through some of the puts and takes on how to think about, you know, sort of the momentum into year end. Thank Yeah, thanks, Ruben. I would say that we're pleased with the full year outlook. The 11.550 is 20% growth. We've been more or less that for Q1, Q2, and Q3.
Yes. Hi. Uh, thank you for taking my question. Congrats on the continued momentum. Uh Mandy, I wanted to zoom out maybe and you know, given the Q3 guidance and the full year guidance, um the implications for Q4 uh maybe a little decent, a decel coming um in ccs and you know, with Enterprise, you know coming back a little bit into year. End, just wondering if you could walk through some of the puts and takes on how to think about, um, you know, sort of the momentum into into your end. Thank you.
Yeah. Uh, thanks uh
Mandeep Chawla: To your point, it implies Q4 would maybe grow 18%. We're really just continuing to take into consideration the uncertainties that are out there. What I can tell you is, this is our high confidence Our Demand Outlook is higher than the 11-5-5-0, but we're taking into account challenges such as material availability or situations where customers may choose to temporarily pause just given.
Ruben, I would say that we're we're pleased with the full year outlook, the 1155 is 20% growth. Um, we've been more or less that for if you want to and 3 to your point. Uh, it implies Q4 would would maybe grow at 18%. Um, we're really just continuing to take into consideration, the uncertainties that are out there. What I can tell you is, uh, this is our high confidence view. Uh, our demand Outlook is higher than the 11550, but we're taking into account, uh, you know, challenges,
Such as material availability or situations where customers may choose to temporarily pause. Just given the continuing um turmoil that's happening in the Tariff environment. Um but uh the 11550 is our high confidence unit at this point.
Mandeep Chawla: Got it. Thank you.
Rob Mionis: And then as a follow up for Rob, perhaps, it seems like 400 gig is hanging in, maybe for longer than you folks might have expected earlier this year. And obviously, 800 ramp is happening now. I was wondering if you could maybe comment on updated thoughts around 1.6 T timing. Now that we've got the official launch of the silicon, you know, just wondering how you're thinking about that as we, you know, look forward to 2026. Thank Yeah, thanks, Ruben. You know, we received Tomahawk-6 samples in June, and we successfully brought up the first system within days of receiving that sample, so that bodes well for the silicon and bodes well for our engineering.
Got it. Thank you. Uh, and then as a follow-up for Rob, perhaps, um, it seems like 400 gig is is hanging in maybe for longer than you. Uh, folks might have expected earlier this year and obviously 800 ramp is happening now. I I was wondering if you could maybe comment on updated thoughts around 1.6t timing. Um, now that we've got the, the official launch of the Silicon, uh, you know, just wondering how you're thinking about that as, as we, you know, look forward to 20000 26. Thank you.
Yeah, thanks, Ruben. You know, we received Tomahawk 6 samples in June and...
We successfully brought up the first system within days of receiving that sample. So that bodes well for the silicon and bode well for our engineering.
Rob Mionis: Right now, we have several new programs, Tomahawk-6 programs, 1.62 programs, that will start generating some revenue in the back half of 2026 and certainly into 2027. Again, this will all be paced by silicon availability. Thank you.
Uh, right now, we have several uh new programs uh 1 that tomich 6 programs 1.62 programs, that will start generating some Revenue, uh, in the back, half of uh, 2026 until then to 2027. Again, this will all be Pace by um uh silicon uh, availability.
Appreciate it.
David Vogt: Your next question comes from the line of David Vogt with UBS. David, your line is now open. Please go ahead. Great, guys. Thanks for taking my question. So maybe two for me also.
Thank you. Your next question comes from the line of David vote with UPS, David. Your line is now open. Please go ahead.
David Vogt: So maybe, Rob, can you dig in a little bit on the 800G ramp that you referenced or Mandeep referenced? Looks like Google, you know, if I strip out sort of what's going on with TPU is probably incredibly strong from an 800G ramp. And can you maybe talk to what you're seeing from the other two 800G customers in terms of how they're ramping in 2Q into 3Q? So it looks like maybe one of them might be a little bit more muted to start this 800G ramp. I wonder if that's just more timing.
Rob Mionis: And then I'll give you my follow up is when I think about the capital equipment business that had a little bit of a pull forward into H1, can you maybe shed some light on was that more on the lithography side, memory, logic, kind of what are you seeing by end vertical within capital equipment, you know, H1 versus H2? Thanks.
All right guys, thanks for taking my question. So maybe 2 for me also, so maybe Rob can you dig in a little bit on the 800 G ramp that you referenced or Mandy preference? Um, looks like Google, you know, if I strip out sort of what's going on with TPU, who's probably incredibly strong from an 800 G ramp and can you maybe talk to what you're seeing from the other 2, uh, 800 G customers in terms of how they're ramping into Q into 3 Q. So it looks like maybe 1 of them, might be a little bit more muted to start this 800 G ramp. I wonder if that's just more timing and then I'll give you my follow-up is when I think about the Capital Equipment business that had a little bit of a pull forward into H1. Can you maybe shed some light on? Was that more on the lithography side? Memory logic? Kind of, what are you seeing by end? Vertical within Capital Equipment? You know, H1 versus H2. Thanks.
Rob Mionis: Let me start off with the capital equipment one, and I'll go to the networking one. So on capital equipment, you know, Q2, very strong growth, 20 plus percent. It was really driven by normalization of inventory levels that we started seeing in the second quarter of 2024. As we go into the third quarter, we are seeing some incremental demand from a couple of our customers. But we're also seeing that offset by a decrease in demand by others, and hence kind of flattish as we go into the third quarter. And for those customers, we actually saw an acceleration of what we think is an acceleration of demand from the second half into the first half.
Yeah, let me start off with the, uh, the Capital Equipment segment, and I'll go to the networking segment. So on Capital Equipment, you know, Q2 had very strong growth, over 20 percent. That was really driven by the normalization of, um,
Of inventory levels that we've started seeing in the second quarter of 2024.
Rob Mionis: And so, you know, I do think, and we believe that capital equipment will have a growth here this year in line with market rates, but it will be more front-end focused than back-end focused relative to the pullings that we saw.
As we go into the third quarter, we are seeing some incremental demand from a couple of our customers. Uh, but we're also seeing that offset, uh, by um, a decrease in demand by others and hence, uh, kind of flattish as we go into, uh, the third quarter. Uh, and for those customers, we actually saw an acceleration and what we think is an acceleration of demand from the second half into the first half and so, you know, I do think. Um, and we believe that Capital Clinton will have a growth here uh, this year in line with Market rates, but it will be more front and focused in than back end focused relative to the um,
Rob Mionis: And on the 400G versus the 800G, yeah, we, as Mandeep mentioned earlier, you know, right now in the second quarter, we saw about a, I'll call it a 50-50 split between 400G and 800G networking volumes. As we get into the back half of the year, we certainly see 800G ramping up in excess of that. But 400G also has a very long tail through this year, and certainly in connection with our visibility right now. There will always be ebbs and flows, but, you know, across our customer base, there's certainly a couple of customers that are ramping a lot harder and a lot faster than others on 800G.
Uh, uh, the Ping that uh, that we saw.
She, uh, versus the 800th. Jake. Yeah. We uh, as Mandy mentioned earlier.
Rob Mionis: Great. Thanks, guys. Thank you.
You know, right now in the second quarter we saw about a I call it a 5050 split uh between 400 G and 800 G uh networking uh volumes as we get into the back half of the year, we certainly see 800 G uh, ramping up in excess of that. Uh, but 400g also has a very long tail through this year, in certainly, in the next year based on our visibility right now. Uh, there will always be Edge and flows but um, you know, across our customer base. Uh, there's so many a couple of customers that are are ramping a lot harder and a lot faster uh than others on 8003.
Great. Thanks guys.
Thanos Moschopoulos: Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets. Your line is open. Please go ahead. Hi, good morning.
Thank you. Your next question comes from the line of Thanos Mops with BMO Capital Markets. Your line is open, please go ahead.
Mandeep Chawla: On the cash cycle, is it reasonable to expect some ongoing improvements in cash cycle days just simply as CCS is becoming a bigger part of the mix relative to ATS? Hi, Thanos, Mandeep here. It's certainly an area that we continue to work to improve. We're really happy with our cash generation.
Hi, good morning. Um, on the cash cycle, is it reasonable to expect ongoing improvements in cash cycle days? Just simply as CCs are becoming a bigger part of the mix for all the TTS.
Uh, hi Thanos, Mandy Pierre. Uh, it's certainly an area that we continue to work to improve. We're really happy with our cash generation. Um, you know, we've generated positive free cash flow every quarter for over five years. Um, and we're raising the outlook this year, as you would expect, from $350 million to $400 million. You know, the thing that I'll note is that we continue to have a lot of confidence in our cash generation.
Mandeep Chawla: http://folders.forklott.com In line with what you would have seen pre COVID. And so we do expect to be able to continue to turn inventory quickly.
Mandeep Chawla: 400, we think is the right number for this year and we would be targeting a higher Right. And on the CCS margins, how should we think about the near to medium term trajectory, just given that you'll have enterprise ramping back up, which might provide a negative mix dynamic there? Yeah, I mean, going back to the the outlook that we have, given the 11.550 implies about 18% growth. https://www.youtube.com.uk I'll just say again, though, that our customer outlook is higher than that. And so we're just factoring in right now a lot of the uncertainties, but we would look to see very strong growth in both.
Ability, even while we're growing our Revenue that a 20% clip. And so, you can think about the amount of working capital that we're investing into support this growth. Um, but that being said, we, we do think that we'll continue to have strong inventory, turns lead times on materials, um, are steady, uh, probably at around 16 weeks, which is uh, in line with what you would have seen preco. Uh and so we do expect to be able to continue to turn inventory quickly. Um, 400 we think is the right number for this year and we would be targeting a higher. Number next year,
Right. And, uh, on the CCS margins, how should we think about the near- to medium-term trajectory just given that you'll have Enterprise ramping back up, which, um, might provide a negative mix dynamic there?
Yeah, I mean uh going back to the the Outlook that we have. Um, given the 1155, uh, implies about 18% growth in the, uh, CCS or excuse me. The total company. Uh, our ATS growth is going to be muted because of, um, The Return of that, uh, that profitable
Uh, program, uh, to 1 of our customers. So it's really been driven by CCS. Um, what I would say is to your point, the Enterprise demand is starting to improve as we get into the fourth quarter, we will start to see Enterprise come back to year-to-year growth. Uh, and right now the communications uh demand will continue to be strong driven by 800g. I'll just say, say again though, that our customer Outlook is higher than that. Um, and so, we're just factoring in right now. A lot of the uncertainties, but we would look to see very strong broken both. Um, Communications and
Mandeep Chawla: That's fine, thank you.
That's fine. Thank you.
Unknown Executive: Thank you.
Samik Chatterjee: Your next question comes from the line of Samik Chatterjee with J.P. Morgan. Your line is open. Please go ahead. Yep. Hi. I hope you can hear me. Strong print here.
Thank you. Your next question comes from the line of Sikh chattery with JP Morgan. Your line is open, please go ahead.
Samik Chatterjee: And maybe if I can start with your CCS guide for the folio, you've raised that substantially for the folio. I'm just wondering when you call out strengthening demand for the second half, you're just calling that out more for the enterprise segment itself. Maybe if you can sort of dive into is that the area that you're seeing more visibility from your customers? Does that extend over to 800 gig in terms of volume expectations for the second half? Or is the really sort of the upside surprise on communication more from 400 gig demand being more resilient than you expected earlier?
Samik Chatterjee: And have a follow up. Thank you.
Rob Mionis: Hi, Samik. So, I'd say a couple of pieces. On the enterprise, as we've talked about, and everyone is aware, we're going through a technology transition. That program is ramping nicely in the quarter right now. And so we're seeing a good contribution in the third quarter, and we will get more out of that in the fourth quarter. So, you know, while we are showing negative year-over-year growth rates in the second and third quarter, in the fourth quarter, we expect to start resuming growth.
Yep. Hi, I hope you can hear me. Uh, um, strong print here and maybe if I can start with your CCS guide uh um for the full year, you've reached that substantially uh for the full year. Uh I'm just wondering when you call out strengthening demand for the second half, you're just calling that out more for the Enterprise segment itself. Uh maybe if you can sort of dive into is that the area that you're seeing more visibility from your customers or does that extend over to 800 gig in terms of volume, expectations for the second half or is the really sort of The Upside surprise on communication, more from 400 gig Demand Being more resilient than you expected earlier and have a follow-up. Thank you.
Rob Mionis: On the communication side, when we talk about acceleration of growth, it's in the 800G program. To one of the questions that was given earlier, we saw it in the second quarter with our largest customer. We're now seeing it pick up with our other large hyperscaler customers as well. 400G is moderating, still very strong demand, just not as strong as the first half, because that's being replaced by... And then again, if we saw demand strength across all the areas that we think we could see, we would hope. more than what we could.
Yeah, nice to meet. Um, so uh I I see a couple of pieces on the Enterprise as as we've talked about uh and everyone is aware. We're going through a technology transition that program is ramping nicely in the quarter right now. Uh and so we're seeing a good contribution in the third quarter and we will get more out of that in the fourth quarter. So, you know, while we are showing negative year-over-year growth rates in the second and third quarter in the fourth quarter, we expect to start resuming growth.
On the communication side. Uh, when we talk about acceleration of growth, it's in the 800 view programs. Um, so 1 of the questions that was, um, given earlier, uh, we saw it in the second quarter with our largest customer. Uh, we're now seeing it, pick up with, uh, our other large hyperscaler customers as well. Um,
Rob Mionis: And maybe for the follow-up, you just sort of highlighted this earlier to a question about the 4Q run rate being around that sort of 18, let's call it sort of ballpark 20%, which is what you've been running at. I mean, is that a fair way of thinking about sustainability of growth into next year as well, even as we layer on some of these AIML projects that ramp further? Would you sort of look at that as a sustainable growth base for investors to think about 2026 as a starting point? Thank you. Yeah.
Good, good. And, uh, maybe for the follow-up. Um, you just, um, sort of highlighted this earlier to a question about sort of the 4Q run rate, uh, being around that sort of 18%, let's call it sort of ballpark 20%, which is what you've been running at. I mean, is that a fair way of thinking about sustainability of growth into next year as well? Even as we layer on some of these AI/ML projects that ramp further, would you sort of look at that as a sustainable growth pace for investors to think about 2026 as a starting point? Thank you.
Rob Mionis: I think what you're also getting to is it's probably a bit early to give a full 2026 number. Customer outlooks just don't go out that far at this point.
Just to make.
I think what you're you're also getting to, is it?
Rob Mionis: In October, when we do our Investor Day, we will share our view of 2026. But what I can tell you right now is that the hyperscaler demand is very strong through the back end of this year. And we do have outlooks with our customers going into the first half of next year, and we're not seeing a slowdown. In addition to that, we have a number of programs that we've already won and are in the process of ramping, which gives us further confidence going into the first half right now. And then also, as you think about next year, we do believe that ATS is going to grow in line with our targets that we set, which are typically around 10% over the long term.
September, um, customer outlook just don't go that far at this point. Uh, in October, when we do our Investor Day, uh, we will share our view of 2026. But what I can tell you right now is that the hyperscaler demand is very strong through the back end of this year, and we do have outlooks with our customers going into the first half of next year, and we're not seeing a slowdown. In addition to that, we have a number of programs that we've already won and are in the process of ramping, which gives us further confidence going into the first half right now. And then also, as you think about next year, we do believe that ATS is going to, um, grow, uh, in line with.
Rob Mionis: So right now, the growth is continuing into the first half. We'll just wait to give a full year number. We just need a little bit more time. And Samik, I would also add that we have the capacity... service growth north of 20% per year for sure. Got it.
Our targets that we set, which are typically around 10% over the long term. Um, so right now, the growth is continuing into the first half. We'll just wait to give a full year number. Um, we just need a little bit more time to work with our
Thank you. I would I would also add that uh, we we have the capacity to
Service, uh, growth north of 20% per year, for sure.
Unknown Executive: Thank you.
Unknown Executive: Thanks for coming.
Got it, got it. Thank you. Thanks for the comments.
Paul Treiber: Thank you. Your next question comes from the line of Paul Treiber with RBC Capital Markets. Your line is open. Please go ahead. Yeah, thanks. Thanks very much. And good morning.
Thank you. Your next question comes from the line of Paul Treiber with RBC Capital Markets. Your line is open, please go ahead.
Paul Treiber: Could you speak to the new program pipeline that you're seeing right now, and then the opportunity to expand further with existing hyperscalers, but then also additional hyperscalers beyond the top three that you have? And can you speak to it in terms of on the communication side, but then also the enterprise side? Sure. Yeah, so in terms of new programs, we're continuing to build the breadth that we have in terms of our offering with our existing hyperscalers. So in terms of all the hyperscalers, if we're providing one with networking products for in conversations, or doing proof of concepts or things like that to provide them with AI compute products and things on those lines.
Yeah, thanks. Thanks so much and good morning. Just could you speak to the, to the new program pipeline that you're seeing right now and then the opportunity to expand further with existing hyperscalers. Uh, but then also additional hyperscalers is beyond the top 3, uh, that you have and can you speak to it in terms of on the communication side? But then also the Enterprise side
Uh, sure.
Yeah. So in terms of, um,
Rob Mionis: So our first order of business is to kind of increase our share of wallet with our hyperscalers. And those conversations are mature and ongoing and having some good traction. In terms of penetrating new hyperscalers, we're fairly penetrated.
uh, new programs, we continuing to I call build the breath that we have, uh, in terms of our offering with our existing hyperscalers. So in terms of all the hyperscalers, if they're, if they're providing 1 with networking, uh, products for in conversations or doing proof of Concepts, or things like that, to provide them with, uh, AI can prove products and things on those lines. So,
Rob Mionis: Our focus right now are in new regions, or also with digital natives, as we mentioned, and we're having some very interesting conversations on what the right entry point is for us to help support these customers moving forward. As we mentioned also, in previous terming calls, with our recent digital native wind, which includes the design manufacturing for a full orchestrated AI rack, so not just a networking rack, but a full orchestrated rack. That really gives us incremental proof to broaden our solutions for the whole plethora of additional customers out there.
Our first order of business is to kind of increase our share of wallet with our hyperscalers and those conversations are are mature and ongoing and, and having some, uh, good tractions in terms of, uh, you know, penetrating, uh, new hyperscalers, uh, we're fairly penetrated our Focus right now, are in new regions or also with digital, uh, natives, uh, as we mentioned. And we're having some very interesting conversations on what what the right entry point is for us to help support these customers. Uh, moving forward, as we mentioned also um, uh, in previous turning calls uh, with our recent digital native win, which includes uh the design manufacturing, 40, full full August traded, AI rack notes. So not just
Uh a networking route but a full August shade of rack that really gives us incremental proof points to broaden our solutions for the whole plethora of additional um customers out there.
Rob Mionis: Thanks, and a follow up for that is, is pricing factoring into discussions at this point? Or is it is it one of the items as much lower down discussion point is just given the demand environment at the moment? In our industry, pricing is always a factor, but it is really not the main factor right now. I think our customers are looking for certainly certainty of supply at scale. They're looking for best-in-class designs and technology leadership. And those are the top two on the list. Competitive pricing will always be a factor in our industry, but if you have the first two, then the second one usually just falls in line because the customers understand the value that you're actually delivering to them.
Thanks and and a follow-up for that is is is pricing factoring into discussions at this point or is it? Is it 1 of the that the items is much lower down? Um discussion point is is given uh the demand environment at the moment.
In our industry. Um, pricing is always a factor, but it is really not the main factor right now. I think our customers are looking for certainly, uh, uh, certainty of Supply at scale, uh, they're looking for, uh, best-in-class, uh, designs and Technology leadership. Uh, and those are the, uh, top 2 on on the list. Uh, competitive pricing will always be a factor in our industry, but if you have the, uh, first to then the second 1 usually just Falls in line. Uh, because the customers understand the value that you actually, uh, delivering to them.
Mandeep Chawla: Yeah, only thing I'd add to that one, Paul, is, you know, we constantly work with our customers on total cost of ownership. And we think that our footprint gives us a very sustainable advantage in this space. Whether customers need to be close to the deployment areas, whether they're looking for lower cost geographies, being in 16 countries, we really are able to offer a wide variety And because of, you know, our relative discipline on CAPEX deployment, we aim to run our facilities at a high level of utilization, so we're looking to constantly drive productivity and pass those savings on to our customers.
The only thing I can add to that when Paul is, uh, you know,
Customers on total cost.
And we think that our footprint,
Sustainable Advantage, uh, in this space, uh, whether customers need to be close to the um, deployment areas, uh, whether they're looking for lower cost geographies. Um, being in 16 countries, we really are able to offer a wide variety of solutions to them. Um, and because of, you know, our our relative discipline on on, uh, capex deployment, uh, we aim to run our our facilities at at a high level of utilization. So, we're, we're looking to constantly Drive productivity and pass those savings on to our customers as well.
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Atif Malik: And your next question comes from the line of Atif Malik with Citi. Your line is open. Please go ahead. Hi, thank you for taking my questions and nice results. My first question is on your 10% of sales and more customers. You had three in Q1, it dropped to two.
And your next question comes from the line of Aif Malik with City. Your line is open; please go ahead.
Mandeep Chawla: How many are you expecting in the September quarter?
Hi. Thank you for taking my questions and for a nice result. My first question is on your 10% of sales and more customers. You had 3 in Q1; it dropped to 2. Um, um, how many are you expecting in the September quarter?
Mandeep Chawla: Hi Chief, it's Mandeep here and really nice to see Citibank back in the coverage universe for us. So welcome. We saw strong growth across our top three customers. As you've noted, one of them just fell under, it was just a smidgen under, it rounds to 10% still. And we are seeing both, the good thing is that we still saw quarter to quarter growth with that customer. It's just frankly, the base grew faster.
Yeah. Hi Tiff. It's Mandy pier and uh really nice to see City Bank uh back uh in the coverage Universe for us. Uh so welcome.
Mandeep Chawla: When you go into the following quarters, we do expect that we're going to have three customers above 10% going into the day. Great.
Uh we we saw strong growth across our our top 3 customers. Uh as you've noted uh 1 of them, just fell under, it was just a smidgen under it rounds to 10% still. Uh and we are seeing both. The good thing is is that we still suck quarter to quarter growth with that customer. Uh, it's just frankly, the base grew faster than they did. Uh, when you go into uh, the following quarters, we do expect that we're going to have 3 customers above 10%, uh going into the third and fourth quarter.
Mandeep Chawla: As a follow up in your prepared remarks, you guys talked about strengthening in some optical projects. Can you kind of elaborate on what these projects are? Yes, we have a, an enterprise customer that has been ramping some programs. And I'll call that in the data center, interconnect area, that those products have been wildly successful in the market, and we're supporting them and wrapping those programs. Thank you. Thank you.
Great. And as a follow up in your prepared, remarks, you guys talked about this strengthening in some Optical uh, projects can you kind of elaborate on what these projects are?
yes, we have a um an Enterprise customer uh that has been ramping some uh uh programs uh and I'll call that in the data center, uh, interconnect area,
Uh, that those products have been widely successful in the market and we're supporting them and and nothing is programmed.
Thank you.
Todd Coupland: Your next question comes from the line of Todd Coupland with CIBC. Your line is open. Please go ahead. Can you hear me? Okay. Yeah, thanks. Good morning, everyone. I wanted you to bridge what we hear from hyperscalers. Recently, we heard a big capex increase last week from a large hyperscaler. We're getting three other updates this week.
Thank you. Your next question comes from the line of Todd coopland with CIBC your line is open. Please go ahead.
Rob Mionis: And just bridge how we should think about those increases relative to your change in guidelines. Why don't I start, Todd? Good morning to you. Look, there's always a little bit of a lag, if you will, between the announcements that the hyperscalers are making and the forecast that we're receiving from them. And so when we see these increases come through in prepared remarks from our customers, often it's an affirmation of what we've already been seeing from a demand And so to the comment that I had made earlier, we're seeing very strong demand right now in the back half of this year, that demand outlook with our customers looking at their forecast.
Can you hear me? Okay, yeah, thanks. Good morning, everyone. Um, I wanted you to bridge. Uh, what we hear from hyperscalers, uh, recently, we heard, uh, big capex increase last week from a large hyperscaler. We're getting 3, other updates this week.
And just Bridge, how we should think about those increases relative to your change in guidance.
1 of my favorite talk, good morning to you. Uh,
Rob Mionis: First half.
Rob Mionis: And so really, we look at the absence that it Page PAGE of NUMPAGES www.verbalink.com And Todd, I would add one of our leading indicators, CapEx is certainly a leading indicator. Another leading indicator is also silicon, you know, because of the lead time associated with a lot of this silicon. We look as far ahead as we can and understand what our customers are putting an order asking us to put an order and that helps us align our longer term forecasts and and long term financial and revenue outlooks as well. Thanks for that color.
Look, there's always a little bit of a lag. If you will, uh, between the announcements at the hyperscalers are making and the forecast that we're receiving from them. Uh, and so when we see these, uh, increases come through in prepared remarks, from our customers, uh, often it's an affirmation of what we've already been seeing from a demand perspective, uh, and so to the comment that I had made earlier. Um, we're seeing very strong Demand right now in the back half of this year, that demand Outlook with our customers looking at their forecasts is continuing into the first half. And so, uh, really we look at the announcements that have just been made and and we expect will be made as an affirmation of the forecast that we've already received.
yeah, and thought I would add 1 of our reading Educators capex, is certainly a leading indicator for another leading indicator is also um,
uh silicon uh you know uh because of the lead time associated with a lot of the Silicon silicon as far as head as we can and understand that what our customers are uh, putting on order asking us to put in an order and that helps us a lot on a longer term, uh, forecasts and um,
And uh, long-term financial and revenue outlooks as well.
Rob Mionis: There's been a number of questions on switch market share. I wanted to turn to server market share. It seemed like you had lost a little bit at the end of last year. Now it's coming back. Could you just frame up what your server market share trends are at the moment? Thanks a lot. Yeah, thanks. So You know, I would say that we are gaining share with our largest customers with respect to AI server market share. Frankly, a lot of that is just due to strong execution and ability to build these very complex products at scale.
Uh, great thanks. Thanks for that caller. Um, there's been a number of questions on switch market share. Um, I wanted to turn to server market. Share seemed like you had, uh, lost a little bit at the, the end of last year. Now now, it's coming back. Could you just, uh, frame up, uh, what your server uh, market share Trends are at the moment. Thanks a lot.
Yeah, thanks. So um
you know, I would say that we are gaining share, um, with our largest customers, uh, with respect to, um,
AI server market share.
Scale.
Rob Mionis: And as Mandeep mentioned, we just went through a technology transition. We see these programs starting to ramp in the third quarter and gaining some significant momentum as we exit the year and also into next year. And we will also expect this product line to produce probably even more revenues based on that increased share as we get into 2020, late 26, into 27 and beyond based on next generation programs. Thank you very much.
Uh and uh his name deep mention, we just went through a technology transition. Uh, we see these programs starting to ramp in the third quarter and getting some significant momentum as we exit the year and also into uh, next year
And we will also expect um this product line to uh produce probably even more revenues based on that increased share as we get into, uh, 2020. Uh, late 26 in to 27 and Beyond based on Next Generation programs.
Thank you very much.
Robert Young: Thank you. Your next question comes from the line of Robert Young with Canaccord Genuity. Robert, your line is now open. Please go ahead. Robert, your line is now open. Please go ahead or press star six if you've dialed in. Can you hear me now? Alright, okay.
Thank you. Your next question comes from the line of Robert Young with Canaccord Genuity. Robert, your line is now open. Please go ahead.
Robert, your line is now open, please go ahead or press star 6. If you've dialed in
Can you hear me now?
Robert Young: I think you had, okay, so you've had some very strong momentum on 1.6 terabyte, and I'd love to get some context on whether that has continued. I think earlier in the call you said that the full rack proof point was opening up new opportunities, and so if you could just talk about the halo, that the relationship with the hyperscalers, this 1.6 terabyte win rate, and the full rack proof point. So what is that doing around the opportunity to grow white label opportunities along the ODM path? Yeah, thanks, Rob. So on the 1.6, we continue to win, I call it 1.6T variants.
All right. Okay. Um
I think you had. Um, okay, so you've had some very strong momentum on 1.6 terabyte and I'd love to get some context on, uh, whether that has continued. I think earlier in the call, you said that the full rack proof point was opening up new opportunities. And so if you can just talk about the Halo that the relationship with the hyperscalers, the
1.6 terabyte, uh win rate and uh you know the full rack proof point. So what is that doing around the opportunity to grow white label opportunities along the odm path?
Uh yeah, thanks Rob. So on the
Rob Mionis: So we have 1.6T awards with many of the large hyperscalers. There's a lot of variants, i.e. different types of 1.6T silicon or different use cases in the rack. So we're continuing to kind of grow our market share on these variants for those customers.
On the 1 6, we continue to win. I call it 1.6. Uh, T variants. So, uh, we have 1.6t, um, Awards with many of the large hyperscalers.
Rob Mionis: In terms of the digital native win and doing that fully orchestrated rack, that is certainly opening up new doors and new conversations with people, even the hyperscalers. But the entry point on that might be next generation systems in terms of what more can we do. So those conversations are still, I'll call it in the early phases, but producing a lot of interesting conversations.
Uh, there's a lot of variance. I a different types of 1.62 silicon or isn't, uh, use cases in the rack. So, we're continuing to kind of grow our, our market share on these variants of those customers in terms of the digital native win and doing that fully orchestrated rack. That is certainly opening up, uh, uh, new doors and new conversations, uh, with people, even the hyperscalers. Uh, but the entry point on that, uh, might be next Generation systems in terms of what more, uh, can we do? Uh, so those conversations are still, I'll call it in the, uh, early stages uh, but producing a lot of, um, uh, interesting conversations.
Rob Mionis: And then my second question, just on the... full-wrapped solution as you add maintenance and service into the mix of services? I know that you acquired NCS Global but do you need to acquire or are you well positioned for that shift and then what's the potential timing? If you give any context around margin impact and timing that would be helpful. I'll start. I'll let Mandeep finish on the M&A front. Your services is certainly a major focus area for us at Softka. NCS Global was a fantastic acquisition and is certainly supporting us. In order to really support the demand that we have from our customers on services, we will need and are planning to expand our services footprint and offering.
Okay. And then my second question just on the, um, the full rack solution, uh, as you
Add Maintenance and Service into the mix of services. I know that you acquired NCS Global, but do you need to acquire or are you, well, positioned for that shift? And then what's the potential timing? If you give any context around margin impact and timing, that would be helpful, no pests line.
I'll start. I'll let Mandy finish on the m&a front.
Um,
Mandeep Chawla: And with that, I'll turn it over to Mandeep. Yeah, Robital Services is an area of focus for us. And the acquisition for XCS was able to bring in some good capabilities and a good foundation. We do have a very extensive partner network. And so we don't see any gaps in being able to support the customer with that we've already But there are going to be opportunities along the way to vertically integrate. And so we do continue to look at various targets. to see the synergies come to bear. comfortable to go ahead and act. But our final And obviously, services margins would be north of the company margins as well and be a creative Right.
Yeah, service is a certainly, uh, a major Focus area uh, for ourselves that that and CS Global was a fantastic acquisition. And it's certainly um, uh, supporting us in order to really support the the demand that we have from our customers and services, uh, we will need and our planning to expand our services footprint and offering. And with that, I'll turn it over to Mandy.
Yeah. Um,
Services is an area of focus for us.
And a good foundation. Uh, we do have a very extensive partner network, uh, and so we don't see any gaps in being able to support, uh, the customer with that we've already received, but there are going to be opportunities along the way to vertically integrate. And so, uh, we do continue to look at uh various targets and if we can see the synergies, um, come to bear and then we will be comfortable to go ahead and act but our final look
I'm going to click service Target.
And obviously, um, Services margins would would be north of the company margins as well, and be a creative.
Mandeep Chawla: Is there any timing on the rollout of that services offering? Is that happening today? Or is it something? How do we think about that? From a modeling perspective? It is happening today. It is happening today, but not at the scale where it would be moving the company's financial... I would say. I would think about it, Rob, in terms of a materiality perspective is when we get into that large vision. That's where... offering. That being said, we price and and look to support our customers holistically. And so they're, you know, not everything is going to always be a creature to the company services, certainly will be.
Right. Is, is there any timing on the the rollout of that Services offering? Is that just happening today? Or is it something that how do we think about that?
Um, for modeling perspective.
It is happening today, it is happening today. But um,
Now that the scale where it would be moving, the company's financials.
Native 1.
Mandeep Chawla: But there will be a variety of services we provide. So we're going to be incrementally investing in this area.
Mandeep Chawla: And I would say it has more of a materiality impact, probably as we get to 2027.
Uh, that's where it's going to be a larger part of the of the offering. Uh, that being said we price and and uh, look to support our customers holistically. And so they're, you know, not everything is going to always be accurate to the company services, certainly will be. Um but there will be a variety of services, we provide. Um so we're going to be incrementally investing in this area. And I would say it has more of a materiality impact and I probably have again to 247
Unknown Executive: Yeah, thank Thank you.
Okay, thanks.
David Vogt: Your final question is a follow up from David Vogt from UBS. David, your line is open. Please go ahead. Great, thanks guys for taking my follow up. Mandeep, this is a question for you. You mentioned that you have enough capacity, or maybe Rob mentioned you have enough capacity for calendar year 26 growth in CCS. And you have a, you know, basically visibility for the next 12 months.
Thank you. Your final question. Is a follow-up from David vote from UBS David? Your line is open. Please go ahead.
Mandeep Chawla: Can you help us understand when you would need to make adjustments? to your capacity as we move through 25 into 26 for the back half of 26 and 27. How should we think about that flowing through your capital priorities as demand strengthens or your visibility improves as we move forward?
Great. Thanks guys. For taking my follow-up. Mandy, this is a question for you. You mentioned that you have enough capacity or maybe Rob mentioned, you don't have capacity for calendar year 26 growth in ccs and you have a, you know, basically a visibility for the next 12 months. Can you help us understand when you would need to make adjustments?
To Your Capacity as we move through 25 into 26 for the back half of 26 and 27, how should we think about that, flowing through your Capital priorities as demand strengthens or us visibility improves as we move forward, thanks.
Mandeep Chawla: Yeah, why don't I start off on the number side and Rob can jump in as needed. So we If you look at one of the large buildings that we were able to add on in Thailand, we were able to do it in about 12 months. And so expansions in areas like Mexico and Southeast Asia, about 12 months. This is a reminder on the approach that we take. We have a campus strategy the way our network is set up. And so we do have the ability to add on additional buildings within the campus. https://www.youtube.com We have already made decisions to expand capacity to support programs that we've won in areas such as Thailand, such as Richardson, Texas, such as in Mexico.
Yeah. Why don't I start off on the number side and rock and jump in um, as needed. So we
If you look at 1 of the large buildings that we were able to add on in Thailand, if you were able to do it in about 12 months. And so uh, expansions in areas like Mexico and Southeast Asia about 12 months lead time is, is required. You know, just as a reminder, on the approach that we take in, we have a campus strategy uh the way our network is set up and so we do have the ability to add on additional buildings uh within the campuses typically uh and
Quickly, fill it with a.
Um, we have already made decisions to expand capacity, to support programs that we've won in, uh, areas such as Thailand, such as Richardson, Texas, such as in Mexico.
Mandeep Chawla: You'll see the capex spend in the first half of this year being a little bit on the lighter side. And that's just reflective of, you know, expenditures that we've actually incurred so far. But the back half of this year is going to be a little bit more. is taking a step back from a an overall CapEx intensity perspective, one and a half to 2% is still the right number for us. This year, we'll be tracking towards $200 million. But one and a half to two percent of our revenue. I'll just highlight that only about 40 basis points of our CASA expenditures.
You'll see the capex been in the first half of this year being a little bit on the Lighter Side, um, and that's just reflective of, you know, expenditures that we've actually incurred so far. Uh, but the back half
This year is going to be a little bit more, uh, weighted.
Mandeep Chawla: And so the rest of it is to support growth programs, which gives us a lot of discretion on where we collect those dollars. or actually party one with that. Great.
Mandeep Chawla: Thanks, Mandeep.
Just taking a step back from a an overall capex intensity perspective, 1 and a half to 2% is still the right. Um number for us uh this year we'll be tracking towards 200 million dollars. So just a bit under 2% um but 1 and a half to 2% of our revenues continues to be around the same amount uh that we would expect to spend. And I'll just highlight that only about 40 basis points of our capex spend is for maintenance and so the rest of it is to support growth programs, which gives us a lot of discretion on where we point those dollars. Um, but right now we think that we can meet the demand for the programs. We've already won with that amount.
Great. Thanks. Mandy.
Unknown Executive: Thank you. There are no further questions at this time.
Rob Mionis: I will now turn the call back over to Mr. Rob Mionis for closing remarks. Thank you and thank you all for your time and engagement today. We're pleased to report a strong second quarter, demonstrating a resilience in a dynamic market. The upward revision of our four-year outlet reflects the strength of our customer relationships and the confidence in the current demand environment. We value your ongoing support and look forward to sharing more positive updates with you next quarter.
Thank you. There are no further questions at this time. I will now turn the call back over to Mr. Raab, myanus for closing remarks,
Thank you, and thank you all for your time and engagement today.
Unknown Executive: Thank you again for joining us this morning and have a great day.
We're pleased to report a strong second quarter demonstrating our resilience and a dynamic Market. The upward revision of our 4 year Outlet, reflects the strength of our customer relationships, and the confidence. In the current demand environment. We value your ongoing support and look forward to sharing more positive updates with you next quarter. Thank you again, for joining us this morning and have a great day.
Unknown Executive: This concludes today's call. Thank you for attending. You may now disconnect.
This concludes today's call. Thank you for attending. You may now disconnect.