Q2 2026 Celestica Inc Earnings Call

July 28, 2026

Speaker #1: Hello everyone. Thank you for joining us, and welcome to the Celestica Q2 2026 financial results and conference call. After today's prepared remarks, we will host a question-and-answer session.

Speaker #1: If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, press *1 again. I will now hand the conference over to Matthew Pallada, Head of Investor Relations.

Speaker #1: Hello, everyone. Thank you for joining us, and welcome to the Celestica Q2 2026 financial results and conference call. After today's prepared remarks, we will host a Q&A session.

Speaker #1: Please go ahead.

Speaker #2: Good morning, and thank you for joining us on Celestica's Q2 2026 financial results conference call. On the call today, we have Rob Mionis, Chair of the Board and Chief Executive Officer, and Mandeep Chawla, Chief Financial Officer.

Speaker #2: Please note that during the course of this call, we will make forward-looking statements including statements relating to the future performance of Celestica, our business outlook, guidance for the third quarter of 2026, our 2026 annual outlook, and anticipated trends in our industry and their anticipated impact on our business.

Speaker #1: Please go ahead.

Speaker #2: Please note that during the course of this call, we will make forward-looking statements, including statements relating to the future performance of Celestica, our business outlook, guidance for the third quarter of 2026, our 2026 annual outlook, and anticipated trends in our industry and their anticipated impact on our business.

Speaker #2: These are based on management's current expectations forecasts and assumptions as of July 27. These forward-looking statements are subject to risks and uncertainties, that could cause actual results to differ materially from our expectations and their potential impact on our results cannot be reliably predicted at this time.

Speaker #2: For identification and discussion of the material assumptions, risks, and uncertainties, please refer to our public filings with the SEC and on Cedar Plus, as well as the Investor Relations section on our website.

Speaker #2: These are based on management's current expectations, forecasts, and assumptions as of July 27. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations, and their potential impact on our results cannot be reliably predicted at this time.

Speaker #2: 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.

Speaker #2: We have included in our earnings release found in the Investor Relations section of our website a discussion of those non-GAAP financial measures and a reconciliation to the most comparable GAAP measures.

Speaker #2: 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.

Speaker #2: We have included in our earnings release found in the investor relations section of our website a discussion of those non-GAAP financial measures and a reconciliation to the most comparable GAAP measures.

Speaker #2: With that, I will now turn the call over to Rob.

Speaker #3: Thank you, Matt. And good morning, everyone. And thank you for joining us on today's call. As we cross the mid-year mark, we continue to see sustained and accelerating momentum across our portfolio.

Speaker #3: In the second quarter, we delivered revenue of $4.7 billion and adjusted EPS of $2.54, both exceeding the high end of our guidance ranges. This performance was backed by an adjusted operating margin of 8.2%, a new high for the company.

Speaker #2: With that, I will now turn the call over to Rob.

Speaker #3: Thank you, Matt. And good morning, everyone. Thank you for joining us on today's call. As we cross the mid-year mark, we continue to see sustained and accelerating momentum across our portfolio.

Speaker #3: These results reflect strong operational execution across both segments, alongside record demand from our CCS customers. Within CCS, we continue to expand with leading hyperscale customers through close alignment on multi-year capacity roadmaps.

Speaker #3: Rapid progression in technology upgrade cycles and networking and AI compute are driving broad demand and we are in the process of ramping a number of significant new programs expected to launch in the second half of the year and into 2027.

Speaker #3: At the same time, our ATS segment continues to see strong profitability improvements alongside solid revenue growth during the quarter. Before I provide an update on our longer-term business outlook, I would like to turn the call over to Mandeep, who will take us through our Q2 results and Q3 guidance.

Speaker #3: Rapid progression in technology upgrade cycles, as well as networking and AI compute, are driving broad demand. We are in the process of ramping a number of significant new programs expected to launch in the second half of the year and into 2027.

Speaker #3: Mandeep, over to you.

Speaker #4: Thank you, Rob. And good morning, everyone. Revenue in the second quarter was $4.70 billion, up 62%, and above the high end of our guidance range.

Speaker #3: At the same time, our ATS segment continues to see strong profitability improvements, alongside solid revenue growth during the quarter. Before I provide an update on our longer-term business outlook, I would like to turn the call over to Mandeep, who will take us through our Q2 results and Q3 guidance.

Speaker #4: That's strong demand and solid operational execution led to higher-than-expected revenue in our ATS segment and both of our CCS and markets. Our non-GAAP operating margin was 8.2%, up a robust 80 basis points, with solid margin expansion in both segments resulting primarily from improved operating leverage.

Speaker #3: Mandeep, over to you.

Speaker #4: Thank you, Rob. And good morning, everyone. Revenue in the second quarter was $4.70 billion, up 62%, and above the high end of our guidance range, a strong demand and solid operational execution led to higher-than-expected revenue in our ATS segment and both of our CCS and markets.

Speaker #4: Our adjusted earnings per share was $2.54, exceeding the high end of our guidance range and an increase of $1.15, or 83%. Moving on to some additional metrics.

Speaker #4: Our non-GAAP operating margin was 8.2%, up a robust 80 basis points, with solid margin expansion in both segments, resulting primarily from improved operating leverage.

Speaker #4: Adjusted gross margin was 11.5%, down 20 basis points, largely due to mix in our CCS segment. Our second quarter adjusted effective tax rate was 20%.

Speaker #4: Our adjusted earnings per share was $2.54, exceeding the high end of our guidance range and an increase of $1.15, or 83%. Moving on to some additional metrics.

Speaker #4: Lastly, our strong earnings growth and disciplined working capital management led to adjusted ROIC of approximately 55%, higher by 20 percentage points compared to the prior year.

Speaker #4: Adjusted gross margin was 11.5%, down 20 basis points, largely due to mix in our CCS segment. Our second quarter adjusted effective tax rate was 20%.

Speaker #4: Turning now to our segment performance. Revenue in our CCS segment was $3.81 billion. Up 84% compared to the prior year period. Driven by very strong growth in both our communications and enterprise end markets.

Speaker #4: Lastly, our strong earnings growth and disciplined working capital management led to adjusted ROIC of approximately 55%, higher by 20 percentage points compared to the prior year.

Speaker #4: In the second quarter, the CCS segment accounted for 81% of total company revenue. Our communications end market revenue was up 62%, higher than our outlook of approximately 50%, primarily driven by growth in our 800G networking switch programs complemented by continued strong demand in our 400G programs.

Speaker #4: Turning now to our segment performance. Revenue in our CCS segment was $3.81 billion, up 84% compared to the prior year period, driven by very strong growth in both our Communications and Enterprise end markets.

Speaker #4: In the second quarter, the CCS segment accounted for 81% of total company revenue. Our Communications end-market revenue was up 62%, higher than our outlook of approximately 50%, primarily driven by growth in our 800G networking switch programs, complemented by continued strong demand in our 400G programs.

Speaker #4: Revenue in our enterprise end market was up by 167%, well above our outlook of approximately 130%, driven by the accelerated ramp of an AI/ML compute program with a hyperscale customer, and supported by stronger-than-expected demand in storage programs.

Speaker #4: In our HPS business, revenue was $1.9 billion in the second quarter, representing growth of 58%, driven by ramping 800G switch programs across multiple hyperscaler customers.

Speaker #4: Revenue in our enterprise end market was up by 167%, well above our outlook of approximately 130%, driven by the accelerated ramp of an AI/ML compute program with a hyperscaler customer and supported by stronger-than-expected demand in storage programs.

Speaker #4: Our HPS business accounted for 41% of total company revenue in the second quarter. ATS revenue for the quarter was $888 million, higher by 8% and above our outlook of a mid-single-digit percentage increase.

Speaker #4: In our HPS business, revenue was $1.9 billion in the second quarter, representing growth of 58%, driven by ramping 800G switch programs across multiple hyperscaler customers.

Speaker #4: The solid performance was driven by revenue growth in each of our businesses, our ATS segment accounted for 19% of total company revenue in the second quarter.

Speaker #4: Moving on to segment margins. Our CCS segment margin was 8.7% in the second quarter, an improvement of 40 basis points, driven by strong operating leverage from significantly higher volumes.

Speaker #4: The solid performance was driven by revenue growth in each of our businesses. Our ATS segment accounted for 19% of total company revenue in the second quarter.

Speaker #4: Our ATS segment margin was 6.3%, up 100 basis points year-to-year, driven by operating leverage and higher engineering-driven product mix. In the second quarter, three customers each accounted for 10% or more of total revenue, accounting for 32%, 17%, and 14%, respectively.

Speaker #4: Moving on to segment margins, our CCS segment margin was 8.7% in the second quarter, an improvement of 40 basis points, driven by strong operating leverage from significantly higher volumes.

Speaker #4: Our ATS segment margin was 6.3%, up 100 basis points year over year, driven by operating leverage and a higher engineering-driven product mix. In the second quarter, three customers each accounted for 10% or more of total revenue, accounting for 32%, 17%, and 14%, respectively.

Speaker #4: Turning to working capital. At the end of the second quarter, our inventory balance was $3.4 billion. A sequential increase of 0.7 billion and higher by 1.5 billion compared to the prior year.

Speaker #4: Driven by continued scaling to support significant growth and upcoming program ramps in our CCS segment, as anticipated. Cash cycle days for the quarter were 47, representing a 19-day improvement over the prior year, and an 8-day improvement sequentially.

Speaker #4: Turning to working capital. At the end of the second quarter, our inventory balance was $3.4 billion, a sequential increase of $0.7 billion, and higher by $1.5 billion compared to the prior year, driven by continued scaling to support significant growth and upcoming program ramps in our CCS segment, as anticipated.

Speaker #4: Moving on to cash flows. We generated $147 million of free cash flow in the second quarter and $285 million year-to-date. Our capital expenditures were $264 million, or approximately $5.6% of revenue, compared to $1.1% of revenue in the prior year quarter.

Speaker #4: Cash cycle days for the quarter were 47, representing a 19-day improvement over the prior year, and an 8-day improvement sequentially. Moving on to cash flows.

Speaker #4: Consistent with our prior outlook, our full year 2026 capital expenditure guidance remains unchanged at approximately $1 billion. Our capital expenditure investments are intended to support the significant anticipated growth from currently ramping and awarded programs.

Speaker #4: We generated $147 million of free cash flow in the second quarter and $285 million year to date. Our capital expenditures were $264 million, or approximately 5.6% of revenue, compared to 1.1% of revenue in the prior-year quarter.

Speaker #4: They are underpinned by strong demand visibility and close alignment on multi-year capacity planning with our key customers. At the end of the second quarter, our cash balance was $536 million.

Speaker #4: While our gross debt was $740 million, resulting in a net debt position of $204 million. We had no draw outstanding on our revolver at the end of the quarter.

Speaker #4: Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.5 terms, an improvement of 0.1 turns sequentially, and 0.4 turns versus prior year.

Speaker #4: While our gross debt was $740 million, resulting in a net debt position of $204 million, we had no draws outstanding on our revolver at the end of the quarter.

Speaker #4: Our cash balance, in combination with our recently upsized revolver, provides us with approximately $2.3 billion of available liquidity. As of June 30th, we were in compliance with all financial covenants under our credit agreement.

Speaker #4: Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.5 turns, an improvement of 0.1 turns sequentially and 0.4 turns versus the prior year.

Speaker #4: We did not repurchase shares for cancellation during the second quarter. While we continue to approach share repurchases on an opportunistic basis, our highest priority at this time is to reinvest in our business to support the unprecedented growth we anticipate over the coming years.

Speaker #4: We maintained a disciplined approach to capital allocation, deploying to the highest return opportunities in order to drive long-term shareholder value. Now moving on to our guidance for the third quarter.

Speaker #4: Third quarter revenue is projected to be between $5.25 billion and $5.55 billion. Representing growth of 69% at the midpoint. Adjusted earnings per share is anticipated to be between $2.88 and $3.08, representing an increase of $1.40 at the midpoint, or 89% growth compared to the prior year.

Speaker #4: We maintained a disciplined approach to capital allocation, deploying to the highest-return opportunities in order to drive long-term shareholder value. Now, moving on to our guidance for the third quarter.

Speaker #4: Third-quarter revenue is projected to be between $5.25 billion and $5.55 billion, representing growth of 69% at the midpoint. Adjusted earnings per share is anticipated to be between $2.88 and $3.08, representing an increase of $1.40 at the midpoint, or 89% growth compared to the prior year.

Speaker #4: Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our adjusted operating margin is expected to be 8.4%, which would represent an increase of 80 basis points.

Speaker #4: We anticipate our adjusted effective tax rate for the third quarter to be approximately 20%. Finally, let's review our revenue outlook for each of our end markets.

Speaker #4: In our CCS segment, we expect revenue in our communications end market to grow approximately 60%, driven primarily by hyperscaler-led growth in 800G programs as well as the commencement of mass production ramps in our first 1.6 terabit programs.

Speaker #4: We anticipate our adjusted effective tax rate for the third quarter to be approximately 20%. Finally, let's review our revenue outlook for each of our end markets.

Speaker #4: In our enterprise end market, we expect growth of approximately 190%, driven in large part by the continued ramp in hyperscaler AI/ML compute, as well as improved demand in storage.

Speaker #4: In our CCS segment, we expect revenue in our communications end market to grow approximately 60%, driven primarily by hyperscaler-led growth in 800G programs, as well as the commencement of mass production ramps in our first 1.6 terabit programs.

Speaker #4: In our ATS segment, we anticipate revenue to be up in the mid-teens percentage range, driven primarily by strong demand in our capital equipment business, as well as by new program ramps in our other businesses.

Speaker #4: In our enterprise end market, we expect growth of approximately 190%, driven in large part by the continued ramp in hyperscaler AI/ML compute, as well as improved demand in storage.

Speaker #4: With that, I will now turn the call back over to Rob to provide an update on our 2026 annual financial outlook. And additional color on the latest developments in our business.

Speaker #1: Thank you, Mandeep. We are once again raising our full year 2026 annual outlook, driven by our strong first-half performance, and strengthening second-half customer forecasts supported by improved component supply.

Speaker #4: With that, I will now turn the call back over to Rob to provide an update on our 2026 annual financial outlook, and additional color on the latest developments in our business.

Speaker #1: Our revenue outlook increases from 19 billion to 20.5 billion representing very strong growth of 65%. We are also raising our adjusted EPS outlook to $11.30, up from $10.15, representing growth of 87%.

Speaker #1: Thank you, Mandeep. We are once again raising our full-year 2026 annual outlook, driven by our strong first-half performance and strengthening second-half customer forecasts, supported by improved component supply.

Speaker #1: Reflected in our outlook is full-year adjusted operating margin of 8.4%, higher than our previous outlook of 8.1%. Finally, we are increasing our free cash flow outlook for 2026 from $500 million to $600 million which includes approximately $1 billion in planned CapEx.

Speaker #1: Reflected in our outlook is full-year adjusted operating margin of 8.4%, higher than our previous outlook of 8.1%. Finally, we are increasing our free cash flow outlook for 2026 from $500 million to $600 million, which includes approximately $1 billion in planned capex.

Speaker #1: Our outlook maintains a prudent view on component availability, and the timing of new program ramps. Looking beyond 2026, our visibility is very strong. This is driven by multi-year global capacity alignment with our key customers, along with improved component supply planning to effectively manage extended component lead times.

Speaker #1: Our outlook maintains a prudent view on component availability and the timing of new program ramps. Looking beyond 2026, our visibility is very strong. This is driven by multi-year global capacity alignment with our key customers, along with improved component supply planning to effectively manage extended component lead times.

Speaker #1: For 2027, as a result of exceptionally strong customer demand and new program wins, we expect our revenue growth rate to accelerate as compared to the 65% growth expected in our 2026 annual outlook.

Speaker #1: Furthermore, as we continue expanding our adjusted operating margins, we anticipate our adjusted EPS growth rate to outpace our revenue growth. We look forward to providing a detailed full-year outlook for 2027 later this year.

Speaker #1: Now moving on to discuss the business outlook for our segments and beginning with CCS. Based on our updated 2026 annual outlook, we now anticipate CCS revenue to grow by approximately 85%.

Speaker #1: In communications, we expect strong momentum to continue through the rest of the year, driven by continued growth in 800G Ethernet switch programs alongside the launch of mass production for 1.6T programs with two hyperscaler customers, beginning in the third quarter.

Speaker #1: Now, moving on to discuss the business outlook for our segments, beginning with CCS. Based on our updated 2026 annual outlook, we now anticipate CCS revenue to grow by approximately 85%.

Speaker #1: In 2027, we expect that the combination of continued growth in 800G volumes alongside the acceleration of 1.6T ramps across our customer base will drive very strong growth.

Speaker #1: In Communications, we expect strong momentum to continue through the rest of the year, driven by continued growth in 800G Ethernet switch programs, alongside the launch of mass production for 1.6T programs with two hyperscaler customers, beginning in the third quarter.

Speaker #1: Within our enterprise end market, our outlook for the second half of 2026 remains exceptionally robust, as we see strengthening demand in our AI compute portfolio.

Speaker #1: In 2027, we expect that the combination of continued growth in 800G volumes, alongside the acceleration of 1.6T ramps across our customer base, will drive very strong growth.

Speaker #1: We expect to continue this strong growth into 2027, driven by the ramp of multiple compute programs. Additionally, later this year, we expect to commence initial deliveries of custom racks for our digital native customer whom we are pleased to share is OpenAI.

Speaker #1: Within our enterprise end market, our outlook for the second half of 2026 remains exceptionally robust, as we see strengthening demand in our AI compute portfolio.

Speaker #1: In our role as a strategic systems partner, Celestica will collaborate with OpenAI and Broadcom in support of their multi-generational custom accelerator roadmaps, beginning with a jalapeño accelerator with mass production planned in 2027.

Speaker #1: As OpenAI's custom accelerator roadmaps advance towards future generations, Celestica will continue to provide its expertise to support their multi-gigawatt scale deployments. Now moving on to our ATS segment, we are updating our full-year outlook, which now calls for revenue growth of approximately 10%.

Speaker #1: In our role as a strategic systems partner, Celestica will collaborate with OpenAI and Broadcom in support of their multi-generational customer accelerator roadmaps, beginning with a Jalapeño accelerator, with mass production planned in 2027.

Speaker #1: Growth is accelerating in the second half of the year, largely driven by sequential growth in our capital equipment business, where stronger wafer fab equipment demand tailwinds are anticipated to continue into 2027.

Speaker #1: As OpenAI's custom accelerator roadmaps advance towards future generations, Celestica will continue to provide its expertise to support their multi-gigawatt scale deployments. Now, moving on to our ATS segment, we are updating our full-year outlook, which now calls for revenue growth of approximately 10%.

Speaker #1: This momentum will be complemented by continued growth across the rest of our portfolio, supported by new program ramps. We also remain positive on the trajectory of strengthening ATS segment margins.

Speaker #1: We anticipate that this momentum will continue as the portfolio benefits from both improving mix and leverage from returning revenue growth. Looking ahead, our demand pipeline remains at record levels, across key customer programs, we continue to see improving multi-year visibility into AI infrastructure investments, which reinforces our confidence in our growth trajectory through the remainder of 2026 and into 2027.

Speaker #1: We anticipate that this momentum will continue as the portfolio benefits from both improving mix and leverage from returning revenue growth. Looking ahead, our demand pipeline remains at record levels across key customer programs. We continue to see improving multi-year visibility into AI infrastructure investments, which reinforces our confidence in our growth trajectory through the remainder of 2026 and into 2027.

Speaker #1: Combined with strong operational execution and disciplined capital allocation, we believe we are well positioned to expand margins delivery EPS growth, and return strong long-term value for our shareholders.

Speaker #1: With that, I will now turn the call over to the operator to open the line for questions.

Speaker #2: We will now begin the question and answer session. We ask that you please limit yourself to one question and rejoin the queue if you have a follow-up.

Speaker #1: Combined with strong operational execution and disciplined capital allocation, we believe we are well positioned to expand margins, deliver EPS growth, and return strong long-term value for our shareholders.

Speaker #2: If you would like to ask a question, please press star one to raise your hand to withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality and if muted locally, please remember to unmute your device.

Speaker #1: With that, I will now turn the call over to the operator to open the line for questions.

Speaker #2: We will now begin the question-and-answer session. We ask that you please limit yourself to one question and rejoin the queue if you have a follow-up.

Speaker #2: Please stand by while we compile the Q&A roster. Your first question comes from the line of Tim Long with Barclays. Your line is open.

Speaker #2: If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality, and if muted locally, please remember to unmute your device.

Speaker #2: Please go ahead.

Speaker #3: Thank you. Yeah, one question and then I'll have a follow-up after. Maybe I know you don't want to get too into the 2027, but the acceleration of growth is obviously pretty meaningful, so we're looking at, I don't know, $13 billion or so of incremental revenues.

Speaker #2: Please stand by while we compile the Q&A roster. Your first question comes from the line of Tim Long with Barclays. Your line is open.

Speaker #3: Could you just maybe at a high level talk about how much those new programs are contributing? I think there's the OpenAI that you mentioned and two others.

Speaker #2: Please go ahead.

Speaker #3: Thank you. Yeah, one question, and then I'll have a follow-up after. Maybe—I know you don't want to get too into the 2027, but the acceleration of growth is obviously pretty meaningful, so we're looking at, I don't know, $13 billion or so of incremental revenues.

Speaker #3: AMD in the $1.6T CPO switch. So if you could just give us a little bit of color on kind of new versus existing, and then I'll have a follow-up right after that.

Speaker #4: Sure, Tim. Good morning. Yeah, what we're seeing in 2027, first, as we see scaling of 800G programs, and also the scaling of the 1.6T switch programs, and this is complemented on top of very strong growth, or I should say continued growth of 400G.

Speaker #3: Could you just, maybe at a high level, talk about how much those new programs are contributing? I think there's the OpenAI that you mentioned, and two others.

Speaker #3: $1.6 trillion CPO switch. So if you could just give us a little bit of color on kind of new versus existing, and then I'll have a follow-up right after that.

Speaker #4: So 400G, as we go from 26 to 27, is remarkably resilient. Then on top of that, half of 2027, we have ramps of next-generation AI/ML compute programs, and then to your question, we have our new custom rack deployments with OpenAI and AMD, both are several billion dollar opportunities that we see in 2027.

Speaker #4: Sure, Tim. Good morning. Yeah, what we're seeing in 2027—first, as we see scaling of 800G programs and also the scaling of the 1.6T switch programs, and this is complemented on top of very strong growth, or I should say continued growth, of 400G.

Speaker #4: Specifically on the AMD Helio scale-up platform, the pipeline on that program continues to grow, and again, that's a multi-billion dollar program in 2027. On top of that, ATS is also really coming into its own.

Speaker #4: Its margins are improving and the growth fueled by capital equipment is really adding fuel to the fire for 2027.

Speaker #4: Specifically, on the AMD Helio scale-up platform, the pipeline on that program continues to grow, and again, that's a multi-billion-dollar program in 2027. On top of that, ATS is also really coming into its own.

Speaker #3: Okay. Great, great. Thanks. And if I could just follow up on growth margin, it seems like a solid performance in the quarter. Maybe just a little bit how we should think of that as the complexion of the business changes.

Speaker #4: It's margins are improving and the growth fueled by capital equipment is really adding fuel to the fire for 2027.

Speaker #3: A lot of these newer programs are pretty scale, and some of them, I think they're mostly HBS. So with just a high level on profitability and how HBS can impact that over the next year.

Speaker #3: Okay, great. Thanks. And if I could just follow up on gross margin, it seems like a solid performance in the quarter. Maybe just a little bit on how we should think of that as these newer programs are pre-scale—and some of them, I think they're mostly HBS.

Speaker #4: Yeah, I hate saying it's maybe pure. So we're pleased with where growth margin is coming in at right now, up a little bit sequentially, and we do believe that we should be able to maintain being around the mid-11th as we go through 2026.

Speaker #4: As we look into 2027, still dialing in some of the specifics. To your point, we do have some positive benefits coming through. We're going to be seeing accelerated growth in HBS, the ramping of networking switches, which are primarily HBS.

Speaker #3: So with just a high level on profitability and how HBS can impact that over the next year.

Speaker #4: Yeah. Hey, Tim. It's Mandeep here. So we're pleased with where growth margin is coming in at right now, up a little bit sequentially, and we do believe that we should be able to maintain being around the mid-11th as we go through 2026.

Speaker #4: And so that definitely helps us. We're still working through the mix impacts, as we look at the rest of the portfolio. But what I'll point you back to then is operating profit.

Speaker #4: We have a lot of confidence right now that we will see operating profit expansion for yet another year as we go into next year.

Speaker #3: Okay. Thank you, guys. Thanks, Tim.

Speaker #2: A reminder to please limit yourself to one question. Your next question comes from the line of Joseph Cardoso with JP Morgan. Your line is open.

Speaker #4: And so, that definitely helps us. We're still working through the mix impacts as we look at the rest of the portfolio. But what I'll point you back to then is operating profit.

Speaker #2: Please go ahead.

Speaker #4: We have a lot of confidence right now that we will see offering profit expansion for yet another year as we go into next year.

Speaker #5: Hey, good morning, and thanks for the question. Maybe as a follow-up to the revenue guidance, it's great to see the increase here for this year, and next year as well.

Speaker #3: Okay. Thank you, guys. Thanks, Tim.

Speaker #5: But maybe just given the context of the broader supply constraints we're seeing in the industry, both perhaps direct and indirect, can you maybe talk to how those have tracked through the quarter, or the quarter today, and to what extent are they acting or still acting as limiters to the guidance?

Speaker #2: A reminder to please limit yourself to one question. Your next question comes from the line of Joseph Cardoso with JP Morgan. Your line is open.

Speaker #2: Please go ahead.

Speaker #3: Hey, good morning, and thanks for the question. Maybe, as a follow-up to the revenue guidance, it's great to see the increase here for this year, and next year as well.

Speaker #5: Are you seeing it kind of much or materialize worse or are you seeing it more easier to navigate? Thanks for the question.

Speaker #4: Thanks, Joe. Yeah, we performed better than we expected. This quarter, the team has really been outstanding in navigating a very tight supply chain. Demand across the AI data center component supply.

Speaker #3: But maybe just given the context of the broader supply constraints we're seeing in the industry, both perhaps direct and indirect, can you maybe talk to how those have tracked through the quarter or the quarter today, and to what extent are they acting or still acting as limiters to the guidance?

Speaker #3: Are you seeing it kind of materialize worse, or are you seeing it as easier to navigate? Thanks for the question.

Speaker #4: However, in our 26 commitments and our 27 outlook, we are appropriately hedged. In fact, frankly, we find it manageable. We're continuing to work closely with our customers and our suppliers to secure even improved capacity as we move into 2027.

Speaker #4: Thanks, Joe. Yeah, we performed better than we expected this quarter. The team has really been outstanding in navigating a very tight supply chain. Demand across the AI data center infrastructure continues to outpace the global component supply.

Speaker #4: And it's an ongoing process, but ultimately, the positive side of this is that the supply tightness that we're seeing really reflects the strength and the multi-year durability of the underlying demand pipeline that we see.

Speaker #4: However, in our '26 commitments and our '27 outlook, we are appropriately hedged. And frankly, we find it manageable. We're continuing to work closely with our customers and our suppliers to secure even improved capacity as we move into 2027.

Speaker #4: And frankly, the unprecedented levels of demand visibility is enabled by extended lead times. So this supply chain constraint is really helping us do a better job of planning with our suppliers and with our customers, and it's giving us confidence in our longer-term outlook.

Speaker #3: Just one thing to maybe add to that would be if you just look at holistically through 26 and through 27, we have the capacity in place to execute the demand that's there for 2026.

Speaker #4: And frankly, the unprecedented levels of demand visibility have been enabled by extended lead times. So this supply chain constraint is really helping us do a better job of planning with our suppliers and with our customers, and it's giving us confidence in our longer-term outlook.

Speaker #3: We have the capacity plans in place to execute the demand in 2027. However, the constraint is really around materials. And so we've taken that into our consideration when providing the figures that we're providing.

Speaker #3: Just one thing to maybe add to that would be, if you just look at it holistically through '26 and through '27, we have the capacity in place to execute the demand that's there for 2026.

Speaker #3: But the demand does exceed the revenue figures that we've been sharing.

Speaker #5: Great. Appreciate the color. Thank you.

Speaker #3: We have the capacity plans in place to execute the demand in 2027. However, the constraint is really around materials, and so we've taken that into our consideration when providing the figures that we're providing.

Speaker #4: Thanks, Joe.

Speaker #2: Your next question comes from the line of Ruben Roy with Stiefel. Your line is open. Please go ahead.

Speaker #6: Yes. Thank you. Rob, to start with, can you maybe spend a minute on how you're thinking about 1.6T ramps? There's been a lot of discussion about pace of those ramps, etc.

Speaker #3: But the demand does exceed the revenue figures that we've been sharing. Great. Appreciate the color. Thank you.

Speaker #6: Obviously, 800G is continuing to do well for you guys, and you're talking about continued expansion into 27. So I'm just wondering if you could maybe talk about what customers are thinking in terms of 1.6T ramps, and if you think there's a crossover coming in 27, or if not, if you can give us how you're thinking about the mix, that would be helpful.

Speaker #4: Thanks, Joe.

Speaker #2: Your next question comes from the line of Ruben Roy with Stifel. Your line is open. Please go ahead.

Speaker #5: Yes, thank you. Rob, to start with, could you maybe spend a minute on how you're thinking about the 1.6T ramps? There's been a lot of discussion about the pace of those ramps, etc.

Speaker #6: Thank you.

Speaker #4: Sure. So 1.6T really starts ramping coming into its own in the back half of 26 and really surging in 2027. We, again, we have 10 active 1.6T programs in the mix, and they'll start really picking up in 2027.

Speaker #5: Obviously, 800G is continuing to do well for you guys, and you're talking about continued expansion in '27. So I'm just wondering if you could maybe talk about what customers are thinking in terms of 1.6T ramps, and if you think there's a crossover coming in '27, or if not, if you can give us how you're thinking about the mix, that would be helpful.

Speaker #4: On top of some very strong growth year-over-year growth in 800G, on top of that, the pipeline for 1.6T in terms of sales pipeline is continuing to grow, and we're probably will end up booking some additional awards here in the coming quarters.

Speaker #5: Thank you.

Speaker #4: Sure. So, 1.6T really starts ramping and coming into its own in the back half of '26, and really surging in '27. Again, we have 10 active 1.6T programs in the mix, and they'll start really picking up in 2027.

Speaker #4: And there's some programs still in development that will also start kicking in in the latter half of 2027.

Speaker #6: Thanks, Rob. I know I only have one question, but if you could maybe just comment on CPO as well. I know you have the one win.

Speaker #6: Is that sort of on track with the way you're thinking about timing and any additional customer discussions around CPO? That's all I have. Thank you.

Speaker #4: And there are some programs still in development that will also start kicking in during the latter half of 2027.

Speaker #4: Yeah. You're welcome. Yeah, the samples for that CPO win will come out in the first half of 27 and mass production for that program will start in the second half of 2027.

Speaker #5: Thanks, Rob. I know I only have one question, but if you could maybe just comment on CPO as well and any of the one-win.

Speaker #4: And we continue to work with our customer on next-generation technologies to kind of further their technology roadmap.

Speaker #5: Is that sort of on track with the way you're thinking about timing, and any additional customer discussions around CPO? That's all I have. Thank you.

Speaker #4: Yeah. You're welcome. Yeah, the samples for that CPO win will come out in the first half of '27 and mass production for that program will start in the second half of 2027.

Speaker #2: Your next question comes from the line of Michael Ing with Goldman Sachs. Your line is open. Please go ahead.

Speaker #7: Hi, good morning. Thank you so much for the question. I just wanted to ask for a few more details on the 2027 revenue growth guidance improvement.

Speaker #4: And we continue to work with our customer on next-generation technologies to further their technology roadmap.

Speaker #7: Could you just talk a little bit about what changed most significantly to raise the growth outlook? Was it more on the communication side or the enterprise side?

Speaker #2: Your next question comes from the line of Michael Ing with Goldman Sachs. Your line is open. Please go ahead.

Speaker #6: Hi, good morning. Thank you so much for the question. I just wanted to ask for a few more details on the 2027 revenue growth guidance improvement.

Speaker #7: Any specific programs or deals that kind of give you that confidence and visibility to increase the outlook at this stage of the year? Thank you.

Speaker #6: Could you just talk a little bit about what changed most significantly to raise the growth outlook? Was it more on the communication side or the enterprise side?

Speaker #4: Sure. So just from 90 days ago, our AI ML compute demand has significantly increased. For 2026, and also leading into 2027, that has given us confidence.

Speaker #6: Are there any specific programs or deals that give you the confidence and visibility to increase the outlook at this stage of the year? Thank you.

Speaker #4: The demand pipeline for the next-generation racks for AMD next-generation racks also continue to increase. And then our base demand across networking for our 800G programs has also just dramatically increased.

Speaker #4: Sure. So, just from 90 days ago, our AI/ML compute demand has significantly increased. For 2026, and also leading into 2027, that has given us confidence.

Speaker #4: For 2027, as Mandeep mentioned earlier, we do have the capacity to support that demand and hence we raised our outlook for 2027.

Speaker #4: The demand pipeline for next-generation racks for AMD next-generation racks also continues to increase. And then our base demand across networking for our 800G programs has also just dramatically increased.

Speaker #3: Michael, maybe I'll just add on to Rob's comments. We've talked about this a little bit over the last six months or so, but the capacity planning discussions we're having are allowing us to have some very forward-looking conversations with our customers.

Speaker #4: For 2027, as Mandeep mentioned earlier, we do have the capacity to support that demand, and hence we raised our outlook for 2027.

Speaker #3: We're having demand conversations in 2027. For 2028, and in some cases, even for 2029. And to Rob's point, the demand is continuing to strengthen.

Speaker #3: The forecast visibility in many cases is widening. But really what's changed in the last three to six months is you got to start ordering the materials.

Speaker #3: And with extended lead times now, with some products being well above 52 weeks, we really needed to solidify the demand outlook for next year.

Speaker #3: We're having demand conversations in 2027. For 2028, and in some cases, even for 2029. And to Rob's point, the demand is continuing to strengthen.

Speaker #3: And so with those orders now in place, it gives us just that one extra level of confidence to be able to share the numbers that we did.

Speaker #3: The forecast visibility in many cases is widening. But really, what's changed in the last three to six months is you guys started ordering the materials.

Speaker #5: Great. Rob, Mandeep, thank you so much for the thoughts.

Speaker #3: Thanks, Michael.

Speaker #3: And with extended lead times now, with some products being well above 52 weeks, we really needed to solidify the demand outlook for next year.

Speaker #2: A reminder that you are welcome to rejoin the queue if you would like to ask a follow-up. Your next question comes from the line of Ruplu Bhattacharya with Bank of America.

Speaker #3: And so, with those orders now in place, it gives us just that one extra level of confidence to be able to share the numbers that we did.

Speaker #2: Your line is open. Please go ahead.

Speaker #6: Hi. Thanks for taking my question. I have one question, but as you may have guessed, it's going to be in two parts. The first question is, Rob, you're guiding very strong growth for fiscal 27, much stronger than we had expected.

Speaker #6: Great. Rob, Mandeep, thank you so much for the thoughts.

Speaker #3: Thanks, Michael.

Speaker #2: A reminder that you are welcome to rejoin the queue if you would like to ask a follow-up. Your next question comes from the line of Ruplu Bhattacharya with Bank of America.

Speaker #6: What are some of the what are two or three of the key assumptions that are embedded in this outlook that investors should monitor over the next six months or so?

Speaker #2: Your line is open. Please go ahead.

Speaker #6: I'm trying to get at what are some of the risk factors that investors should keep in mind. And the follow-up for Mandeep, because of all the geopolitical uncertainty, are you getting requests for more regional manufacturing?

Speaker #7: Hi, thanks for taking my question. I have one question, but as you may have guessed, it's going to be in two parts. The first question is, Rob, you're guiding very strong growth for fiscal '27, much stronger than we had expected.

Speaker #6: And do you see this as an opportunity to expand in North America versus in Southeast Asia and other places? Thank you.

Speaker #7: What are some of the what are two or three of the key assumptions that are embedded in this outlook that investors should monitor over the next six months or so?

Speaker #4: Sure. In terms of the risk factors, they always continue to be the same. It's largely at this stage of the game, around continued material supply and continuity of supply.

Speaker #7: I'm trying to get at what are some of the risk factors that investors should keep in mind. And the follow-up for Mandeep: Because of all the geopolitical uncertainty, are you getting requests for more regional manufacturing?

Speaker #4: That being said, as Mandeep mentioned earlier, the lead times for components are quite long. And our suppliers, I mean, our customers have placed non-capital, non-refundable orders for long lead silicon.

Speaker #7: And do you see this as an opportunity to expand in North America versus in Southeast Asia and other places? Thank you.

Speaker #4: Sure. In terms of the risk factors, they continue to be the same. It's largely, at this stage, about continued material supply and continuity of supply.

Speaker #4: Which gives us confidence that we've also have supply agreements on hard to find components such as memory and PWBs, things along those lines. So we think we've effectively managed the risk on the downside.

Speaker #4: That being said, as Mandeep mentioned earlier, the lead times for components are quite long. And our customers have placed non-cancel, non-refundable orders for long lead silicon.

Speaker #4: In terms of the upside, just unprecedented demand increases across the board, specifically in AI ML compute. And also in networking, we feel like we're gaining share across the board.

Speaker #4: Which gives us confidence that we've also got supply agreements on hard-to-find components such as memory and PWBs, and things along those lines.

Speaker #4: Driven by our ability to execute and execute well at scale and that's also enabling us to provide solid 2027 guidance. Again, for 2027, we feel that it's continuing to unfold and we're refining it.

Speaker #4: So, we think we've effectively managed the risk on the downside. In terms of the upside, there's just unprecedented demand increases across the board, specifically in AI/ML compute.

Speaker #4: And also in networking, we feel like we're gaining share across the board, driven by our ability to execute—and execute well—at scale. That's also enabling us to provide solid 2027 guidance.

Speaker #4: So we're not placing a ceiling on the upside at this time, but the guidance that we gave, we felt very comfortable at this stage.

Speaker #3: And Ruplu, just to also address your question around the operational footprint, and I'll tie it back to dollars as well because I'm sure that this is top of mind as well.

Speaker #4: Again, for 2027, we feel that it's continuing to unfold and we're refining it. So we're not placing a ceiling on the upside at this time, but the guidance that we gave, we felt very comfortable at this stage.

Speaker #3: We still think the billion dollars of CapEx for this year is the right number around a little bit just based on the timing of payments.

Speaker #3: We think the one and a half billion is a good placeholder still for next year. We'll give a number in October. Because if that number is to go up and it may, it'll really be reflective of the demand that we're seeing in 2028.

Speaker #3: And Ruplu, just to also address your question around the operational footprint—and I'll tie it back to dollars as well, because I'm sure that this is top of mind as well.

Speaker #3: So then when you look at where that capacity is being deployed, it really is quite global in nature. We are adding capacity in Thailand, which is one of our flagship locations.

Speaker #3: We still think the $1 billion of CapEx for this year is the right number, give or take a little bit, just based on the timing of payments.

Speaker #3: Supporting a number of the highest growth customers just a fantastic execution track record in Thailand. But we're making expansions in Japan. At the request of our customers as well.

Speaker #3: And moving some switching business into Japan. But we're making significant investments in the United States. In particular, in Richardson, Texas, we're expanding our existing footprint in Fort Worth, Texas.

Speaker #3: So then when you look at where that capacity is being deployed, it really is quite global in nature. We are adding capacity in Thailand, which is one of our flagship locations.

Speaker #3: Supporting a number of the highest growth customers just a fantastic execution track record in Thailand. But we're making expansions in Japan. At the request of our customers as well.

Speaker #3: We are already bringing online some new capacity and more capacity will come online next year, as well. And so we're finding that our customers right now are looking for an equal amount of growth in Asia as well as in the United States.

Speaker #6: Thanks for all.

Speaker #3: In Fort Worth, Texas, we are already bringing online some new capacity, and more capacity will come online next year as well. We're finding that our customers right now are looking for an equal amount of growth in Asia as well as in the United States.

Speaker #2: Your next question comes from the line of David Vought with UBS. Your line is open. Please go ahead.

Speaker #5: Great. Thanks, guys, for taking my questions. I have more with thematic philosophical question for you guys. When you think about the demand that you're seeing that I think you called out, Rob, as unprecedented demand over the next several years, can you help us understand?

Speaker #5: I understand all the programs that are ramping 800 1.6 CPO, but are the bands wider in terms of what you're hearing from your customers?

Speaker #7: Thanks for all.

Speaker #2: Your next question comes from the line of David Vought with UBS. Your line is open. Please go ahead.

Speaker #5: And what I mean by that is, are you seeing sort of a wider range of potential outcomes from your customers given the supply chain uncertainty?

Speaker #5: Great. Thanks, guys, for taking my questions. I have more with thematic philosophical question for you guys. When you think about the demand that you're seeing, that you I think you called out, Rob, as unprecedented demand over the next several years.

Speaker #5: And outside of CapEx, maybe Mandeep, what kind of capital support or working capital support are your customers asking for at this part of the cycle, given how strong demand is?

Speaker #5: Can you help us understand? I understand all the programs that are ramping 800 to 1.6 CPO, but are the bands wider in terms of what you're hearing from your customers?

Speaker #5: And potentially some limitations on capital at some of your potential customers going forward. Thank you.

Speaker #5: And what I mean by that is, are you seeing sort of a wider range of potential outcomes from your customers given the supply chain uncertainty?

Speaker #4: Hi. I would say earlier in the year, as the demand started picking up, our customers' demand signals were very, very dynamic. This is an analogy I think all our customers through a bunch of spaghetti on the wall and they try to figure out what would stick or not.

Speaker #5: And outside of CapEx, maybe, Mandeep, what kind of capital support or working capital support are your customers asking for at this part of the cycle, given how strong demand is?

Speaker #5: And potentially some limitations on capital at some of your potential customers going forward. Thank you.

Speaker #4: And then after the supply chain the broad supply chain tried to understand its true capacity and what it could scale, the demand signals then normalized and strengthened around the theory of constraints if you will.

Speaker #4: Hi. Yeah. I would say earlier in the year, as the demand started picking up, our customers' demand signals were very, very dynamic. This is an analogy I think all our customers through a bunch of spaghetti on the wall and they try to figure out what would stick or not.

Speaker #4: So right now what we're really just seeing is a very constant and growing set of demand signals from our customers. And hence we've been working methodically with our suppliers to expand it.

Speaker #4: And then, after the broad supply chain tried to understand its true capacity and what it could scale, the demand signals then normalized and strengthened around the theory of constraints, if you will.

Speaker #4: So I think the noise has calmed down quite a bit. Our customers again continue to want more than the supply chain could supply, but that is again not perishable demand.

Speaker #4: So right now, what we're really just seeing is a very constant and growing set of demand signals from our customers. And hence, we've been working methodically with our suppliers to expand it.

Speaker #4: It's just giving us more visibility into the future when we're able to responsibly scale to achieve it.

Speaker #3: And David, to your question around the engagement with our customers, look, we're surfacing the best customers in the world right now. We have very open.

Speaker #4: So, I think the noise has calmed down quite a bit. Our customers, again, continue to want more than the supply chain could supply, but that is, again, not perishable demand.

Speaker #3: And detailed conversations. Around balance sheet strength on both sides. Ensuring that the commitments that we're making are supported by strong credit to be very kind of blunt about it.

Speaker #4: It's just giving us more visibility into the future when we're able to responsibly scale to achieve it.

Speaker #3: To be equally blunt, we're not a bank. So we don't go and fund our customers' ability to grow. And so we feel comfortable that when we're signing up for programs that we have the right contractual terms in place to protect both sides.

Speaker #3: And David, to your question around the engagement with our customers—look, we're servicing the best customers in the world right now. We have very open and detailed conversations around balance sheet strength on both sides.

Speaker #3: We do work very collaboratively with our customers. Long-term forecasting and increasing levels of visibility is where it really starts. In some cases we have binding forecasts that go out 12 to 18 months in order to secure the materials.

Speaker #3: Ensuring that the commitments that we're making are supported by strong credit, to be very kind of blunt about it. To be equally blunt, we're not—our customers' ability to grow.

Speaker #3: And so we feel comfortable that when we're signing up for programs that we have the right contractual terms in place to protect both sides.

Speaker #3: We do work with our customers on specialized equipment or non-recurring expenses to be covered by them and we'll cover the majority of the rest of it.

Speaker #3: We do work very collaboratively with our customers, and increasing levels of visibility is where it really starts. In some cases, we have binding forecasts that go out 12 to 18 months in order to secure the materials. We do work with our customers on specialized equipment or non-recurring expenses to be covered by them.

Speaker #3: But really we take a dynamic approach by customer based on their individual situations. But we have no concerns across our customer base at this time.

Speaker #5: Great. That's helpful. Thanks, guys.

Speaker #2: Your next question comes from the line of Thanos Mashapolis with BMO Capital Markets. Your line is open. Please go ahead.

Speaker #3: And we'll cover the majority of the rest of it, but really we take a dynamic approach by customer, based on no concerns across our customer base at this time.

Speaker #7: Hi. Good morning. My name is Helios. There's obviously been a lot of programs announced. Could you give us some color in terms of at this point, I'm in a year involved in what may represent potential opportunities and to what extent you would expect some people in this revenue to start kicking in later this year?

Speaker #5: Great. That's helpful. Thanks, guys.

Speaker #2: Your next question comes from the line of Thanos Mashapolis with BMO Capital Markets. Your line is open. Please go ahead.

Speaker #7: Thank you.

Speaker #4: Sure, Thanos. So again, for the AMD, Helios, we're the R&D, design, and manufacturing partner. For the scale-up networking switch. And this switch forms the interconnect backbone for the entire rack.

Speaker #6: Hi, good morning. My name is Helios. There have obviously been a lot of programs announced. Could you give us some color in terms of, at this point in the year, what may represent potential opportunities and to what extent you would expect some of this revenue to start kicking in later this year?

Speaker #4: We are shipping samples towards the end of 2026. And the ramp begins in earnest in the first half of 2027. Again, this rack has interest and demand and orders from several customers in the pipeline is growing.

Speaker #6: Thank you.

Speaker #4: the AMD, Helios, we're the R&D, design, and manufacturing partner. For the scale-up networking switch. And this switch forms the interconnect backbone for the entire rack.

Speaker #4: At this stage of the game in 2027, we view this as a multi-billion dollar pipeline. And growing.

Speaker #4: We are shipping samples towards the end Sure. of 2026. And the ramp begins in earnest in the first half of 2027. Again, this rack has interest Thanos.

Speaker #4: We are shipping samples towards the end of 2026, and the ramp begins in earnest in the first half of 2027. Again, this rack has interest and demand, and orders from several customers in the pipeline is growing.

Speaker #7: And should be assumed that you're involved in most of those programs? Or is it up to each hyperscaler to determine the configuration of the rack?

Speaker #4: No. We're involved in all of these programs.

Speaker #7: Great. I'll pass along. Thank you.

Speaker #4: Thanks.

Speaker #2: Your next question comes from the line of Robert Young with Canaccord Genuity. Your line is open. Please go ahead.

Speaker #4: dollar pipeline. And so again, for growing.

Speaker #8: Hi. I just wanted to dig deeper on the CCS margin outlook. It looks like the non-HPS elements of that business are tracking at margins approaching HPS.

Speaker #6: And should it be assumed that you're involved in most of those programs, or is it up to each hyperscaler to determine the configuration of the rack?

Speaker #4: No, we're involved in all of these programs.

Speaker #8: I was curious what the driver is. And if you could also discuss the margin profile for 400, which is remaining at higher levels of demand than you expected, and then what it looks like in 800 and 1.6 terabyte going forward.

Speaker #6: Great. I'll pass it along. Thank you.

Speaker #2: Your next question comes from the line of Robert Young with Canaccord Genuity. Your line is open. Please go ahead.

Speaker #5: Hi. I just wanted to dig deeper on the CCS margin outlook. It looks like the non-HPS elements of that business are tracking at margins approaching HPS.

Speaker #8: Is it a similar margin profile or is there something to understand there?

Speaker #3: Yeah. Hey, Rob. Nice to talk to you. Look, the CCS business is performing very well from a margin perspective. Record margin in the last quarter.

Speaker #5: I was curious what the driver is. And if you could also discuss the margin profile for 400, which is remaining at higher levels of demand than you expected, and then what it looks like in 800 and 1.6 terabyte going forward.

Speaker #3: And we think that there continues to be an opportunity to see expansion there. You're hitting on a couple of different points, but how I would maybe bring it up a level is, are we growing in HPS or are we not?

Speaker #5: Is it a similar margin profile, or is there something to understand there?

Speaker #3: And the vast majority of our switching programs are HPS. Meaning a lot of our design is incorporated in there. A lot of our know-how.

Speaker #3: Yeah. Hey, Rob. Nice to talk to you. Look, the CCS business is performing very well from a margin perspective. Record margin in the last quarter.

Speaker #3: And that does allow us to have that reflected in price. And so as we see an acceleration of networking growth next year, that will clearly be a benefit.

Speaker #3: We're still working through mixed impacts. Non-HPS business is not as margin rich as HPS products. So we're working through that piece right now. But then the other area that we have very clear line of sight too is the operating leverage.

Speaker #3: And the vast majority of our switching programs are HPS, meaning a lot of our design is incorporated in there—a lot of our know-how.

Speaker #3: And that does allow us to have that reflected in price. And so, as we see an acceleration of networking growth next year, that will clearly be a benefit.

Speaker #3: We will continue to be very disciplined on our opex spend. And we do believe that we're going to see another year of very good operating leverage coming through on the back of really double-digit productivity across the majority of our sites.

Speaker #3: We're still working through mixed impacts. Non-HPS business is not as margin-rich as HPS products, so we're working through that piece right now. But then the other area that we have very clear line of sight to is the operating leverage.

Speaker #3: And so CCS is performing very well. Just lastly, I'll talk about ATS. ATS is really benefiting us as well. We're really happy to see that the business has returned to growth.

Speaker #3: We will continue to be very disciplined on our opex spend. And we do believe that we're going to see another year of very good operating leverage coming through, on the back of really double-digit productivity across the majority of our sites.

Speaker #3: We see that growth accelerating in the back end of this year. We see growth next year as well. But from a margin perspective as well, ATS just has highest margins in its history.

Speaker #3: And so CCS is performing very well. Just lastly, I'll talk about ATS. ATS is really benefiting us as well. We're really happy to see that the business has returned to growth.

Speaker #3: At 6.3%. And we think that based on the mix of our portfolio, that there's an opportunity for expansion there as well. As we go into next year.

Speaker #3: So really multiple contributors right now to the margin story.

Speaker #3: We see that growth accelerating in the back end of this year. We see growth next year as well. But from a margin perspective as well, ATS just has the highest margins in its history.

Speaker #7: Okay. Thanks.

Speaker #3: Thanks, Rob.

Speaker #2: Your next question comes from the line of George Nodder with Wolf Research. Your line is open. Please go ahead.

Speaker #3: At 6.3%. And we think that based on the mix of our portfolio, that there's an opportunity for expansion there as well. As we go into next year.

Speaker #6: Hey, guys. This is Taron on for George. Can you talk a little bit more about what you're seeing in the scale-up landscape? Are there any other scale-up program opportunities beyond Helios?

Speaker #3: So really multiple contributors right now to the margin story.

Speaker #6: What do you guys are seeing over the next couple of years? Great. Thanks.

Speaker #6: Okay. Thanks.

Speaker #3: Thanks, Rob.

Speaker #4: Yeah. On a scale-up, obviously there is Helios, but there's also the OpenAI rack that we're doing with respect to OpenAI. Timing, we're starting to deliver samples in 2026.

Speaker #2: Your next question comes from the line of George Nodder with Wolf Research. Your line is open. Please go ahead.

Speaker #7: Hey, guys. This is Taron On for George. Can you talk a little bit more about what you're seeing in the scale-up landscape? Are there any other scale-up program opportunities beyond Helios?

Speaker #4: And then that program will ramp in 2027 well into 2028 as well. We review this revenue opportunity again as multi-billion dollar revenue opportunity from this.

Speaker #7: What do you guys are seeing over the next couple of years? Great. Thanks.

Speaker #4: Yeah. On a scale-up, obviously there is Helios, but there's also the OpenAI rack that we're doing with respect to OpenAI. Timing, we're starting to deliver samples in 2026.

Speaker #4: Regarding broader scale-up opportunities, broadly speaking, we have numerous engagements and discussions with folks to go into scale-up. Scale-up for us really started with 1.6T.

Speaker #4: And then that program will ramp in 2027 well into 2028 as well. We review this revenue opportunity again as multi-billion dollar revenue opportunity from this.

Speaker #4: And as we continue to win awards for integrated rack systems, we expect this to be a huge opportunity for us.

Speaker #3: Yeah. And to add from a customer logo perspective, to Rob's point, we're going to be seeing a lot of scale-up demand. With OpenAI as well as AMD.

Speaker #4: Regarding broader scale-up opportunities, broadly speaking, we have numerous engagements and discussions with folks to go into scale-up. Scale-up for us really started with 1.6T.

Speaker #3: But we're also winning a number of networking programs in one of our largest customers. That is also in scale-up. And so we find this to be really encouraging.

Speaker #4: And as we continue to win awards for integrated rack systems, we expect this to be a huge opportunity for us.

Speaker #3: The TAM is expected to grow in scale-up between now and the next three years, quite substantially. And that's tracking for us because we're seeing it come through in the winds that we have.

Speaker #3: Yeah. And to add from a customer logo perspective, to Rob's point, we're going to be seeing a lot of scale-up demand. With OpenAI as well as AMD.

Speaker #6: Awesome. Thank you.

Speaker #3: But we're also winning a number of networking programs with one of our largest customers. That is also in scale-up. And so we find this to be really encouraging, as TAM is expected to grow in scale-up between now and the next three years.

Speaker #3: Thank you.

Speaker #2: Your next question comes from the line of John Chow with TD Cowen. Your line is open. Please go ahead.

Speaker #7: Hey. Good morning, guys. Thanks for taking my question. I just wanted to ask about the turnkey versus consignment consideration. Especially for new programs in 2027.

Speaker #3: Quite substantially, and that's tracking for us because we're seeing it come through in the wins that we have.

Speaker #7: So any changes on how you recognize the revenue given some of your peers are choosing more consignment. And any implications when it comes to OpenAI program given that it's more end-to-end.

Speaker #7: Awesome. Thank you.

Speaker #3: Thank you.

Speaker #2: Your next question comes from the line of John Chow with TD Cowan. Your line is open. Please go ahead.

Speaker #6: Hey. Good morning, guys. Thanks for taking my question. I just wanted to ask about the turnkey versus consignment considerations. Especially for new programs in 2027.

Speaker #7: Thank you.

Speaker #3: Yeah. Hey, John. So the answer is maybe I'll start with OpenAI. I think it's fair to assume right now that that will have the dynamics of a consigned program.

Speaker #6: So, any changes in how you recognize the revenue, given that some of your peers are choosing more consignment? And any implications when it comes to the OpenAI program, given that it's more end-to-end?

Speaker #3: And so therefore the material cost will not be flowing through our revenue. As you know, the vast majority of our networking has a silicon included.

Speaker #3: And the vast majority of our compute does not have the silicon included. And those dynamics are really holding as we go into next year.

Speaker #6: Thank you.

Speaker #3: Yeah. Hey, John. So the answer is maybe I'll start with OpenAI. I think it's fair to assume right now that that will have the dynamics of a consigned program.

Speaker #3: So no big change in the accounting side that's impacting our revenue.

Speaker #7: Thank you.

Speaker #3: Thanks,

Speaker #3: And so therefore the material cost will not be flowing through our revenue. As you know, the vast majority of our networking has a silicon included.

Speaker #2: A reminder that if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Bastian Focalmorin with SIG.

Speaker #3: And the vast majority of our compute does not have the silicon included. And those dynamics are really holding as we go into next year.

Speaker #2: Your line is now open. Please go ahead.

Speaker #3: So, no big change on the accounting side that's impacting our revenue.

Speaker #7: Hi, Rob and Mandy. Thank you for taking my question. I guess my question is on the fiscal year 26 outlook. You've raised both revenues and margin outlook for the year.

Speaker #6: Thank you.

Speaker #3: Thanks, John.

Speaker #2: A reminder that if you would like to ask a question, please press star one to raise your hand. Your next question comes from the line of Bastian Focalmorin with SIG.

Speaker #7: When I look at the incremental margins on that 1.5 billion revenue, I get about 12% of operating margin. Of incremental. And I was wondering how should we think about the drivers behind that margin improvement?

Speaker #2: Your line is now open. Please go ahead.

Speaker #6: Hi, Rob and Mandeep. Thank you for taking my question. I guess my question is on the fiscal year '26 outlook. You've raised both revenue and margin outlook for the year.

Speaker #7: Is that your cost of component supply that is improving? Or are you able to capture more value out of those customers? And as a follow-up, if you were to have more supply unlocked, how should we think about the incremental margins on this website?

Speaker #6: When I look at the incremental margins on that $1.5 billion revenue, I get about 12% operating margin—of incremental. And I was wondering, how should we think about the drivers behind that margin improvement?

Speaker #7: Thank you.

Speaker #3: Yeah. Hi, Bastian. Nice to talk to you. I guess trying to answer that at a little bit of a higher level. Which is we are seeing margin expansion quarter to quarter.

Speaker #6: Is it your cost of component supply that is improving, or are you able to capture more value from customers? And as a follow-up, if you were to have more supply unlocked, how should we think about the incremental margins on this subset?

Speaker #3: And it's being driven by two main things. The first one is that CCS margins are accreted to the company. And CCS is growing at a record rate this year.

Speaker #3: CCS is going to be growing close to 85% year over year. And then we're going to see a similar level of growth next year.

Speaker #6: Thank you.

Speaker #3: Yeah. Hi, Bastian. Nice to talk to you. I guess I'll try to answer that at a little bit of a higher level, which is: we are seeing margin expansion quarter to quarter.

Speaker #3: Just naturally as CCS becomes a bigger part of the pie, margins do have that benefit. Within about. One is we're seeing an increasing level of HPS or ODM content.

Speaker #3: And it's being driven by two main things. The first one is that CCS margins are accreted to the company. And CCS is growing at a record rate this year.

Speaker #3: That allows strong pricing because of the value add that we're bringing. But then we're seeing operating leverage. Our factories right now are running at a high level of utilization.

Speaker #3: CCS is going to be growing close to 85% year over year, and then we're going to see a similar level of growth next year.

Speaker #3: Just naturally, as CCS becomes a bigger part of the pie, margins do have that benefit. Within CCS, it's the two things that I had talked about.

Speaker #3: And it is not by accident. It's intentional. Because we know that you can drive very strong productivity in that type of an environment. And so we are seeing the benefits of operating leverage.

Speaker #3: One is, we're seeing an increasing level of HPS or ODM content. That allows for strong pricing because of the value-add that we're bringing.

Speaker #3: To your point on if revenue was to continue to accelerate, well, we don't expect to add an SG&A dollar for every revenue dollar. So I would say the operating leverage flow through should be there.

Speaker #3: But then we're seeing operating leverage. Our factories right now are running at a high level of utilization, and it is not by accident—it's intentional.

Speaker #3: The rest of it would really be mixed dependent.

Speaker #3: Because we know that you can drive very strong productivity in that type of environment. And so we are seeing the benefits of operating leverage.

Speaker #7: Thank you.

Speaker #3: Thanks for your question.

Speaker #2: Your next question comes from the line of Paul Treber with open. Please go ahead.

Speaker #3: To your point on if revenue were to continue to accelerate, well, we don't expect to add an SG&A dollar for every revenue dollar. So, I would say the operating leverage flow-through should be there.

Speaker #5: Thanks so much. And good morning. You mentioned that you're gaining market share across the board. Can you elaborate further on market share momentum within both enterprise and communications?

Speaker #3: The rest of it would really be mix-dependent.

Speaker #6: Thank you.

Speaker #5: And then specifically with programs becoming larger and larger, are you seeing the competitive intensity of those programs increasing in how you're working to retain share going forward?

Speaker #3: Thanks for your question.

Speaker #2: Your next question comes from the line of Paul Triber with RBC Capital Markets. Your line is open. Please go ahead.

Speaker #5: Thanks so much. Good morning. You mentioned that you're gaining market share across the board. Can you elaborate further on market share momentum within both Enterprise and Communications?

Speaker #4: Yeah. Sure, Paul. So broadly speaking, our customers are valuing continuity and surety of supply. One of the things that we do very, very well is that we're able to deliver high complex products to our customers reliably at scale.

Speaker #5: And then, specifically with programs becoming larger and larger, are you seeing the competitive intensity of those programs increasing in how you're working to retain share going forward?

Speaker #4: So in many cases, where products were dual sourced and that's very common in our industry as products get awarded initially, we're usually the ramp partner.

Speaker #4: Yeah, sure, Paul. So, broadly speaking, our customers are valuing continuity and surety of supply. One of the things that we do very, very well is that we're able to deliver highly complex products to our customers reliably at scale.

Speaker #4: And then as they get mature or sometimes they get offloaded a second source for us to ramp the next generation. In many cases, what we're seeing is our customers are asking us to pick up, take back some share that was potentially awarded through other providers because we can more reliably produce those products at scale, if you will.

Speaker #4: So in many cases, where products were dual sourced and that's very common in our industry as products get awarded initially, we're usually the ramp partner.

Speaker #4: So we're seeing that across the board. And while we're able to rise to the occasion, is that material is already pipeline. So we don't have to get back in line.

Speaker #4: And then, as they get mature, sometimes they get offloaded to a second source for us to ramp the next generation. In many cases, what we're seeing is our customers are asking us to take back some share that was potentially awarded to other providers, because we can more reliably produce those products at scale, if you will.

Speaker #4: We're actually able to pick up that supply chain and just put it through our proven manufacturing processes. And we're seeing that certainly in enterprise and also in communications.

Speaker #3: One thing I would add to that, Paul, is one of those things that we're hearing from our customers is the amount of value that is placed on the transition from designing a program to ramping a program.

Speaker #4: So we're seeing that across the board. And why we're able to rise to the occasion is that material is already pipeline. So we don't have to get back in line.

Speaker #4: We're actually able to pick up that supply chain and just put it through our proven manufacturing processes. And we're seeing that certainly in enterprise and also in communications.

Speaker #3: It is not easy. One of the differentiators we think that Celestica has is we have a very sizable design engineering organization, which we've been investing in for over a decade.

Speaker #3: That organization will be close to 2,000 engineers by the end of this year. And so being able to design the product in collaboration with our customer and then being able to work very collaboratively with the manufacturing side of the business to ramp it successfully.

Speaker #3: One thing I would add to that, Paul, is that one of the things we're hearing from our customers is the amount of value that's placed on the transition from designing a program to ramping a program.

Speaker #3: It is not easy. One of the differentiators we think that Celestica has is we have a very sizable design engineering organization, which we've been investing in for over a decade.

Speaker #3: We believe to add to Rob's point has led to some market share gains.

Speaker #4: Some people do design. Some people do manufacturing. We do both. And that's part of our secret sauce. Thanks for the question, Paul.

Speaker #5: Yeah. Thanks for taking the question.

Speaker #2: There are no further questions at this time. I will now turn the call back to Rob Mionis, CEO, for closing remarks.

Speaker #3: We believe, to add to Rob's point, this has led to some market share gains.

Speaker #4: Thank you. Our strong second quarter performance and momentum carrying us into the second half of the year gives us confidence to raise our full year 2026 outlook.

Speaker #4: Some people do design. Some people do manufacturing. We do both. And that's part of our secret sauce. Thanks for the question, Paul.

Speaker #4: And continued exceptionally strong customer demand and strategic investments in our infrastructure are enabling us to accelerate our 2027 revenue growth past the 2026 65% mark.

Speaker #5: Yeah. Thanks for taking the question.

Speaker #2: There are no further questions at this time. I will now turn the call back to Rob Mionis, CEO, for closing remarks.

Speaker #4: Thank you. Our strong second-quarter performance and the momentum carrying us into the second half of the year give us confidence to raise our full-year 2026 outlook.

Speaker #4: And continued exceptionally strong customer demand and strategic investments in our infrastructure are enabling us to accelerate our 2027 revenue growth past the 2026 65% mark.

Speaker #4: Again, thank you for your support. And we are looking forward to update you next quarter.

Q2 2026 Celestica Inc Earnings Call

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