Celestica Inc. Price & Performance (CLS)

Thank you for joining us on Celestica's Q1 twenty twenty five Earnings Conference Call. On the call today, we have Rob Mayonis, President and Chief Executive Officer and Mandeep Challa, 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 the forward looking statements made today. Certain material factors and assumptions are applied in drawing any such statement. 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.sedarplus.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 the 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 twelve month adjusted EBITDA leverage ratio adjusted earnings per share or adjusted EPS, and adjusted effective tax rate.

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 Q2 twenty twenty five 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 our GAAP to calculate the comparable non GAAP measure are dependent on future events that are not able to be reliably predicted by management and are not part of our routine operating activities. 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. The occurrence, timing and amount of any of the items excluded from GAAP to calculate non GAAP could significantly impact our Q2 twenty twenty five 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 on 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're off to a solid start in 2025, Our strong performance in the first quarter saw us achieve revenues of $2,650,000,000 and adjusted EPS of $1.2 each exceeding the high end of our guidance ranges. Adjusted operating margin of 7.1% marked our highest performance in the company's history. Both our CCS and ATS segments surpassed our outlook for the quarter, Our CCS segment continues to benefit from very strong demand across our hyperscaler customers, in particular, for our HPS networking switches. In our ATS segment, we are in encouraged by the solid demand we are seeing in our capital equipment business as well as signs of returning growth in our industrial business. Since our January call, the macro environment has become increasingly dynamic due to trade policy uncertainty. While the environment remains fluid with frequent policy adjustments, recent announcements have provided near term clarity. Notably, the U. S. Administration has provided temporary exemptions for key data center IT hardware including servers and networking switches which comprise the majority of our CCS portfolio. We are closely collaborating with our customers as they evaluate the evolving policy landscape To date, this has not translated into decisions to shift existing programs or new awards across our sites.

Importantly, we are seeing resilient overall demand in our CCS portfolio with only minor adjustments in ATS. Our global manufacturing footprint offers a distinct advantage providing ample capacity in The U. S. And Mexico for any future program adjustments. We remain vigilant and prepared to adapt swiftly to policy changes. Before I provide you with our latest annual financial outlook, and an update on our businesses, I would like to hand the call over to Mandeep. Who will provide more details on our financial performance during the first quarter, and our guidance for the second quarter of twenty twenty five. Mandeep? Over to you.

Thank you, Rob. Good morning, everyone. First quarter revenue of $2,650,000,000 was up 20% above the high end of our guidance range. Driven primarily by strong demand from hyperscaler customers in our CCS segment. Adjusted gross margin for the quarter was 11%, up 110 basis points driven by higher volumes, and favorable mix. First quarter adjusted operating margin was 7.1%, up 120 basis points. Driven by higher margin across both our CCS and ATS segments. Our adjusted earnings per share for the first quarter was $1.2 exceeding the high end of our guidance range. And an increase of $0.37 or 45%. Our adjusted effective tax rate for the quarter was 20%. Finally, our first quarter adjusted ROIC was 31.5%, a seven seventy basis points improvement driven by higher operating profit and effective working capital management. Moving on to our segment performance. ATS segment revenue totaled $8.00 $7,000,000 up 5% and above our guidance of being flat year over year. The higher revenue this quarter was primarily the result of significant growth in our capital equipment business, Our ATS segment accounted for 30% of total company revenue. Our CCS segment revenue was $1,840,000,000 up 28% driven by very strong growth for networking switches in our communications end market.

The CCS segment accounted for 70% of total revenue in the quarter. Our communications end market revenues increased by 87% above our guidance of low 80s percentage growth driven primarily by strong demand for our HPS networking products. Revenue in our enterprise end market was 39% lower, though better than our guidance of a mid-40s percentage decline. The lower revenues were due to the anticipated technology transition in an AIML compute program with one of our hyperscaler customers. HPS revenue grew by 99% in the first quarter to just over $1,000,000,000 accounting for 39% of total company revenue. This exceptional growth is being driven by continuing hyperscaler demand for our 400 gs networking switches. As well as the ramping of our 800 gs switch programs. Moving on to segment margins. ATS segment margin for the first quarter was 5%, up 80 basis points. Primarily driven by strong operating performance in our capital equipment business [indiscernible] improved profitability in our A and D business. CCS segment margin in the quarter was 8%, an improvement of 120 basis points. Driven by a higher mix of HPS revenues and strong operational performance. [indiscernible] During the quarter, we had three customers that each accounted for at least 10% of total revenue, representing 281310% of revenue, respectively.

Moving on to working capital. At the end of the first quarter, our inventory balance was $1,790,000,000 a sequential increase of $28,000,000 and a year over year decrease of $163,000,000 We continue to effectively manage inventory levels while supporting significant growth in customer demand. Cash deposits were $472,000,000 at the end of the quarter. Down $40,000,000 sequentially and down $248,000,000 year over year. Cash cycle days during the first quarter '69. Turning our attention to cash flows. Capital expenditures for the first quarter were $37,000,000 or approximately 1.4% of revenue. Compared to 1.8% in the first quarter of twenty twenty four. We continue to anticipate capital expenditures to remain within the range of 1.5% to 2% of revenues for the full year. During the quarter, we generated $94,000,000 of free cash flow dollars 26,000,000 higher than the prior year period. Turning to the balance sheet and capital allocation. At the end of the first quarter, our cash balance was $3.00 $3,000,000 Combined with $600,000,000 of borrowing capacity under our revolver, we currently have approximately $900,000,000 in total liquidity which we believe is sufficient to meet our projected business needs. Our gross debt at the end of the quarter was $887,000,000 and our net debt position was $584,000,000 Our gross debt to non GAAP trailing twelve month adjusted EBITDA leverage ratio was 1.1 turns, up 0.1 turns sequentially and flat versus the prior year period.

As of March 31, we were in compliance with all financial covenants under our credit agreement. During the first quarter, we repurchased $75,000,000 of shares for cancellation under our normal course issuer bid. In addition, we following the end of the quarter, we repurchased an additional $40,000,000 of shares, bringing our total repurchases under the NCIB to $115,000,000 year to date. We intend to continue being opportunistic on share buybacks for the remainder of 2025. Now let's turn to our guidance for the second quarter of twenty twenty five. Please note that our guidance figures assume no material changes to tariffs or trade restrictions compared to what is in effect today. Substantially, all tariffs paid by Celestica are expected to be recovered from our customers, are not expected to impact our non GAAP adjusted EBITDA or non GAAP adjusted net earning dollars. These amounts are not anticipated to be material at this time. Second quarter revenue is projected to be between 2,575,000,000.000 and $2,725,000,000 representing growth of 11% at the midpoint. Adjusted earnings per share are anticipated to be between $1.17 and $1.27 representing an increase of $0.32 per share at the midpoint or 36%. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non GAAP operating margin would be 7.2%.

An increase of 90 basis points over the prior year period. We expect our adjusted effective tax rate for the second quarter to be approximately 20%.

Finally, let's turn to our end market outlook for the second quarter. In our ATS segment, we anticipate revenue to be approximately flat year over year. As demand strength in capital equipment, a recovery in industrial volumes are being offset by our previously announced decision not to renew a dilutive margin program in our A and D business. In our CCS segment, we project revenue in our communications end market to grow in the high 50s percentage range. Fueled by ongoing demand strength for our networking switches, including accelerating ramps in our 800 gs programs. In our enterprise end market, we expect a low 40 percentage decrease in revenue. Driven primarily by a technology transition in an AIML compute program. With that, I will now turn the call back over to Rob to discuss our latest financial outlook for 2025 and to provide an update on our business.

Thank you, Mandeep. We are encouraged with our strong first quarter performance and the positive demand outlook our customers have shared with us for the remainder of 2025. As a result, we are raising our revenue outlook for the year from $10,700,000,000 to $10,850,000,000 reflecting year over year growth of 12%. We're also raising our non GAAP adjusted EPS outlook from $4.75 per share to $5 per share. This improvement in profitability is reflective of strong revenue growth, operating leverage and improved mix. As with our quarterly guidance, these outlook figures assume no material changes to tariffs or trade restrictions compared to those in effect today. As Nandeep noted, we expect that substantially all tariffs will be treated as a pass through charge to our customers and that these amounts are not anticipated to be material at this time. Our free cash flow outlook for the year continues to be $350,000,000 Despite the heightened uncertainty presented by tariffs and the overall macro backdrop, we continue to have confidence in our 2025 outlook. Our conviction reflects the durable secular demand we are seeing in our CCS segment which is supported by a close collaboration and demand planning with our customers, new program awards, and reaffirmation of 2025 CapEx plans from some of the leading hyperscalers.

Now moving on to additional color on our businesses. In our CCS segment, we now anticipate growth in the high teens percentage range in 2025. Compared to our outlook of mid teens growth provided in January. The year over year growth we are seeing in CCS is primarily being driven by our hyperscale customers where demand is strong across numerous networking programs. In our communications end market, we anticipate continued strength throughout the year. As we ramp multiple 800 gs programs. We also continue to see healthy demand for our 400 gs programs for multiple customers. Additionally, we are encouraged by the solid traction we continue to see on new wins across networking and optical programs. Recently, we were awarded a new program with a leading optical OEM to build high speed optical transceivers out of our Thailand site. We see this as an opportunity to broaden our exposure to pluggable transceiver segment is a natural complement to our market leading portfolio in data center switching. We expect to begin ramping production in the second half of this year. In our switching business, we also continue to see very strong momentum on one dot 60 wins at this early stage in the cycle.

Since we spoke last quarter, we are pleased to have secured multiple new awards for 1.6 programs leveraging our HPS solutions, including our first with a major OEM customer, In our enterprise end market, we continue to expect our next generation AIML compute programs with a large hyper scale customer to begin ramping mass production volumes the third quarter. Leading to a resumption of sequential growth in the second half. The market share gains we've achieved with hyperscale customers through awarded programs are expected to continue driven by our strong and expanding pipeline of opportunities. Moving on to our ATS segment. We are maintaining our 2025 outlook for revenues to be a approximately flat on a year over year basis. In our industrial business, volumes are stabilizing after an extended period of declines. Looking forward, our customer forecast reflects solid growth due to our recovery in base demand across multiple submarkets as well as new program ramps. However, we remain cautious on the extent of this growth. In A and D, base demand remains healthy, supported by new program ramps and recent customer wins. While overall revenues will be lower this year, to the strategic decision not to renew our dilutive margin program, this action positions us for higher profitability dollars and margin in A and D in 2025.

In capital equipment, we continue to expect above market growth in 2025 on the back of strong customer demand and new program ramps. Overall, we continue to anticipate another year of solid financial performance for the company in 2025. We remain confident in our ability to continue our strong momentum despite the uncertainty presented by the current macro environment. Our portfolio continues to be supported by strong secular tailwinds which we believe are enduring and long term in nature. Furthermore, we believe that Celestica is very well positioned to help our customers navigate the uncertainty of the current environment. Supported by our globally diversified manufacturing network and our best in class supply chain operations teams. We are a company that thrives in managing complexity, and we feel that these challenges will serve to further highlight the critical value we are able to provide. With that, I will now turn the call to the operator to begin the Q and A session. Thank you.

At this time, I would like to remind everyone in order to ask a question, press star. Then the number one on your telephone keypad. We do request for today's session that you please limit to one and one follow-up. We will pause for just a moment to compile the Q and A roster. Your first question comes from the line of David Voigt with UBS. Your line is now open. Please go ahead.

Great. Thanks, guys. We appreciate all the details, particularly in a difficult macro backdrop. I'm going to ask a question on that as well.

So Rob or Mandeep, can you kind of share with us kind of the level of visibility that you're having with your customers, particularly in CCS given the uncertainty? I know you touched on it in the prepared remarks, citing that you don't see a lot of changes, whether it's in terms of infrastructure deployments and or demand. But just can you give us a sense for how we're sitting here today in late April and what that visibility looks like? And then I have a Thanks.

So David, I'll start off and I'll see if Mandy has anything to add. Typically in CCS, hyperscaler customers provide a full year outlook with respect to their CapEx plans. And that's firmed up on a quarterly basis. That hasn't changed as a result of the tariffs environment. We continue to ramp a number of new programs with our hyperscaler customers. We continue to win share with our hyperscaler customers. That visibility pre tariff and post tariff environment, really has a changed. That was contingency, very strong demand. Across the board with our hyperscale customers.

The other thing I would just add is, of course, there's what's happening this year and what's happening in the coming years. And so in addition to validating the forecast for '25, we've had conversations with our on new program ramps. In terms of where we're ramping it for them. As well as the sign and the prototype work that happened and, we're happy to see that There's been no change in the activity, this year in terms of design work. For programs that are, you know, one year and even two years out. So the resilience of hyperscalers continues to be strong. Great. And then just as a quick follow-up along those lines, maybe on the enterprise side, obviously you're ramping or you're expecting a reacceleration in the second half. With, I would imagine, an existing customer within enterprise and also a ramp with new customer, maybe a couple of customers. Can you kind of share with kind of the magnitude or how you're thinking about that reacceleration in the second half of twenty twenty five, particularly in enterprise with those with the existing customer and new customer that you cite Thanks.

Yes, David. So in 2025 towards the back end of twenty twenty four into the first half of twenty twenty five. We mentioned on previous calls that one of our largest customers was going through AI ML compute transition. That transition is now starting to ramp in the third quarter, picking up momentum into the fourth quarter. And then even more so into 2026. So that new program is ramping or will be ramping quite nicely here in the back half of the year. Also in enterprise, we have seen some program dynamics in our storage facility, will be a in a source demand, which will be down on a year over year basis. So it's kind of suppressing some of the enterprise numbers that you're seeing.

Your next question comes from the line of Samik Shatterjee with JPMorgan. Please go ahead.

Hi. Thanks for taking my questions. Maybe if I can start off with a question on tariffs and the reference you had to some minor adjustments from customers in ATS. Can you just outline for us what portion of your sort of customer footprint or revenue currently is under the purview of tariffs and you have to pass on price increases to customers at this point. And when you mentioned the minor adjustments from customers and ATS, was that primarily a pull forward or some sort of delays? If you can just flesh that out for me, and I have a follow-up. Thank you.

Sure, Samik. I'll start off and I'll let Mandy finish. So within ATS, haven't seen any slowdown in demand to date as a result of [indiscernible] But our customers in chatting with them, have expressed some concern over the macroeconomic slowdown So as such, we have factored into some risk into our full year outlook. Overall within ATS, the tariff impact is somewhat muted if you just go down by line item of business. Within A and D, majority of our demand is covered by USMCA in The Americas. We do have some limited impact in our cooling facility in Southeast Asia. Within industrial, industrial largely runs a regional supply chain. So a lot of the product stays in region. Within capital equipment, the majority of the tools, 85, 90% of the tools remain in Asia. So the impact has been minimal as well. And health tech impact has been minimal as well. The minor impact we have been saying is that we have seen where we're dual sourced some migration of product from Asian facilities into our competitive Mexico facilities. But on the flip side, we also have seen some increased share in our Mexican facilities. So net net, ATS is pretty flat relative to prior reviews.

Got And for my follow-up, if I can just ask you to unpack the guide for 2Q for CCS abate And as I look at the guide, as it currently sorry. I'm more specifically referring to communications within CCS. You're guiding flat to flat sequential revenues from 1Q to 2Q. Despite what you had as a pretty big step up from 4Q to 1Q, And I think Mandeep in his prepared remarks to talk about sort of accelerating 800 gig ramps as well. So I'm just trying to match that up with the guidance here for more sequence sequential revenue. In communications communications despite going through, what is the accelerating 800 Thank you.

Yeah. I think first of all, welcome. To the call, and we're really happy to have you and JPMorgan along with us here. Right now, we're continuing to see strong year over year growth in comms at As you know, It really is just the timing of programs. We're continuing to see very strong demand on the 400 gs side, eight gs programs are ramping nicely. Nothing that's off of our expectations And so I read too much into comps being flat sequentially as much as continue to look at the year over year and just know that there are going be some demand dynamics between the quarters whether it comes to material availability largely around material availability.

But overall, we're seeing good growth in the second quarter and going to the next half.

Our next question comes from the line of George Wang with Barclays. Please go ahead. Your line is now open.

Hey, guys. Thanks for taking my question. I have two quick ones. Just on the 1.6 t switch, you guys talked about additional wings since the last time we spoke. And also you mentioned first OEM 1.6 T switching wings. And apart from that, you know, can you also talk about availability of Tomahawk six? Earlier, you guys talked about kind of the the ramp that depends on the component availability. Just curious into 2026, do you have reaffirm the view in terms of 1.6 shipment? Or there's any nuance in terms of the timeline? Thanks.

Thanks, George. Yes.

Well, first, I'll start off. I 2024, we just finished our strongest bookings year on record. Across the company. CCS also posted some very, very strong numbers. And our sales pipeline is quite strong. Now in the first quarter, as I mentioned on the call, we did win another 1.6 program with a major OEM In terms of silicon availability, we are starting to see samples in the first half of this year. In terms of when that will turn into mass production, we're still thinking 1.6 will be ramping on the majority of our programs in the back half of twenty twenty six. Also, I want to point out that we continue to gain share with our hyperscale customers across the board. And that share is in the areas of AI compute networking and also rack systems as well. These next generation of products that we're producing are very complex in nature. And I feel there's very few folks out there that could produce at the rate that we can at scale consistently and fulfill our customers' requirements. For that reason, we're continuing to gain share.

And George, just on the 1.6T program, as you know, we're doing multiple programs now across a number of different customers. And Austin filter availability will be the gating factor. No concerns at this point. I think they're on track. But just as a result of still in development time, we you're looking at probably more mass production towards the second half of twenty six Okay. Great. Just a quick follow-up to ask if I cancel both Rob and Mandy. You know, I just think of the services component is underappreciated for the RS story, especially as you look out to '26, twenty seven with a digital native customer, you guys talk about kind of adopting more full rack solution. With a bit of more higher margins services slash maintenance content. Can you kind of talk about any refresher view just on driving from a higher margin services component, especially you guys begin to do more sort of end to end, the full solution for across digital native and the tier one hyperscale.

Yes, Josh, thank you for bringing that up. We completed several quarters ago the acquisition of NCS Global is a services company, which was a great complement to what we're doing. NCS Global does everything from iPad services to supporting our aftermarket services repair, break, fix and things along those lines. And as you pointed out, that is a higher offering and full life cycle solution that we support across with our customers. We're also continuing to grow that line of business The growth in that business is very, very strong. And based on some of the new awards that we have with our hyperscaler customers, and digital natives, we'd be looking to expand that offering to support our customers in the future as well.

Question, mister Huang. And your next question comes from the line of Robin Roy with Stifel. Please go ahead.

Thank you very much. Mandeep, I want to start with [indiscernible] enterprise side. And the first question, you talked about the ramps. Into year end. Obviously, have the full year guide and congrats on continued improvement in profitability. But how should we think about sort of exit rate on margins as you have stronger enterprise exiting the year? [indiscernible] I hi, everybody. Good morning. Nice to talk to you.

Look, the margins that we're seeing right now, just given in the first half of the year, are stronger than what we had anticipated just three months ago. So that's why when we've raised the full year guide to 7.2%, you know, that's up from what we have again talked about three months ago. So what we're seeing is the strength that's happening right now from a mixed perspective.

Which is largely driven by more of each PS business. Carrying through, towards, or through the rest of this year.

And so we are gonna we're on a very nice run rate right now in terms of HPS. And that's a large contributor.

When you're thinking about the margin profile between enterprise and comms, when you're thinking about it between hyperscalers and non hyperscalers, there's not that much of a differentiation within the hyperscaler portfolio. Specifically.

The other thing too is that we are growing revenue second half versus first half. And as a result, we will be seeing operating leverage benefit which we would hope then to fall to the bottom line.

Perfect.

Thank you. And a quick follow-up for Rob on the optical transceiver win. You talked about competitively sort of why you won what the [indiscernible] beat is of the transceiver and sort of type of customer perhaps that you're dealing with for that win? Thank you.

Yes. Thanks, Ruben. So it's 800 gs optical transceiver. It was a competitive win. We went up against several other OEMs and ODMs. What we're doing is the complete transceivers of the the chip on board, the optical alignment and the entire mechanical assembly. The volumes will scale over time.

And they'll be significant. We're actually building some incremental infrastructure in Thailand to support these new volumes. And lastly, would say that this win really provides additional optical proof points and white label opportunities for us with our hyperscaler customers as well.

Thank you for your question, Mr. Roy. Your next question comes from the line of Hannes Mysopoulos with BMO Capital Markets. Please go ahead.

Hi, good morning.

A bit of a hypothetical question at this point, but can you comment qualitatively or quantitatively respect to how quickly you could shift production to The U. S? And associated CapEx costs if tariffs were to come back?

Yes, Thanos, I'll start off on that one. So in The U. S, and Mexico as well, Richardson and our facility in Monterrey. We do about $800,000,000 a year in revenue. Give or take, out of those facilities. Without adding additional footprint square footage. We could triple that revenue. So we had several billion dollars worth of revenue out of those both those facilities without having the need for more space.

And if we did actually ignore more space then we do have plenty of options. In terms of shifting production, from one region to the next, it really depends on the complexity of product that we are moving Some of the more complex products that we do the hyperscalers would be more difficult more rack systems, things like that would be less difficult. We're seeing with our customers if and when they ever decide to move will probably be more of a regional strategy where final assembly and integration will be done in the region where the product has moved and moved the more complex assembly will be done in centers of excellence. And we think we're well geared to kind of support that emerging trend. [indiscernible] [indiscernible] In Richardson at run rate towards the end of the year and 800,000,000 right now in Monterrey. So being able to add, you know, 2,000,000,000 to $3,000,000,000 of revenue with the existing capacity to be done relatively quickly. But as Rob talked about, some programs can move quicker than others. All of our large all of our conversations with our customers right now are on that TCOO basis. We're helping them understand the dynamics from a cost perspective.

Labor cost is a major consideration. Duties are a major consideration. But the capabilities are very important to keep in mind. And so what we're seeing right now is customers reaffirming plans to grow in even regions outside of North America. Because the capabilities are just that established. And so as a result, while we'll support our customers for any move, we think we have a very strategic footprint to help them. We think the reason we're not seeing these moves happen as of yet is because of the value that they're putting on capabilities in certain regions.

So please go ahead and service.

Sorry. Thank you for that question, mister Moskopoulos. Your next question comes from the line of Steven Fox with Fox Advisors. Please go ahead.

Hi, good morning. Can I just follow-up on that last answer first off and then I had a follow-up to my question? You're saying $800,000,000 of revenues in Richardson plus 800,000,000 in Monterrey.

And then secondly, Mandeep, can you just expand on what you mean by capabilities? Like what's specific capabilities are you referring to outside of North America that are hard to replicate? In The U. S. Or Mexico? Thanks. And I had a follow-up.

You know what, I'll let Rob expand on this one. What I was referring to was from a talent perspective, the engineering capabilities that you build over many, many years. It's one of the reasons that we have had business and new business awarded to places like Thailand and like Malaysia. You know, it's expanding here to reestablish that. So there's also the supply chain capabilities that are intertwined with the site. And so a lot of that supply chains are regionalized. And it takes many, many years to move those to other countries. [indiscernible] the liquid cooling that we're doing on the AI ML compute and on networking, is very complex and it's very complex to do that at scale. The level of automation that we've mastered in our Thailand facility is very unique And those are the capabilities that I think are very special [indiscernible] Thailand, frankly, across the entire industry. Some of the other capabilities in terms of assembling racks, things like that tend to be a little more easier to replicate. And that's those types of things we could move more quickly than not.

Again, do have the recipe move these products as Mandeep mentioned should we need to do that, but they are a little more complex than nature.

And just clarifying the the 800,000,000 again. Sorry. And then I wanna ask one more.

Yeah. No. You you you got it right, Steven. So we're doing 800,000,000 of revenue this year in And we're ramping a number of programs already in Richardson So our exit rate at the end of the year in Richardson will be about 800,000,000 as And your next question Thank you for that question.

Operator, if we could go back to Steven, just let him ask you the next question.

Alright. Your line is now open, mister Fox.

Thanks for that. Sorry to confuse things. Just on the semi cap market, I was wondering if you could provide more color, underlying growth seems to be better now than maybe you talked about ninety days ago, but also new wins. So wondering if you could just provide some more detail on that market. Thanks again.

Sure, Stephen. So capital equipment will have a very good year this year. But the growth will be first half loaded. We saw strong growth exiting last year and we're seeing strong growth in the front half of this year. As we get into the back half of year, we're seeing some program dynamics where the growth might flatten out a little bit. We are winning share with our newest customer. And those are very, again, very complex products.

Tend to be slower ramps and some of the program dynamics I just alluded to to.

Thank you.

Question comes from the line of Paul Trallber. With RBC Capital Markets. Please go ahead.

Thanks very much and good morning. Just a couple of questions around price elasticity. So you mentioned now with the tariffs where they are you have visibility to demand for the year. Did you during the period when tariffs were at an elevated level, did you get feedback from your customers that at those levels, would a challenge and a your various segments, you have a sense of the general price elasticity to be in regards to the added cost of tariffs?

Good question, Paul. In the short period of time, the reciprocal tariffs were announced, we did get a lot with our customers and they did not show any wavering with respect to their commitment on their CapEx plans or the demand outlook for the foreseeable future. So I think they have a much longer term view and strategic view of what they're trying to do in the AI data center space. With some of our OEM customers, we they have asked and we have developed, as Mandeep alluded to earlier, these very complex total cost of ownership models depending on where tariffs may or may not settle in, We understand what's the most economical way to produce it. They also have alluded to the fact that they will, as many folks have across the industry, prepare to put a line item on their pricing for surcharges and pass costs on to their end customers. And that's what we're seeing not just in CCS but also on ATS that it's once you're gonna need to be passed on to end end users. And some of the inflationary concerns that we think the economists talk about in the news every day.

And a quick on that is related to the pipeline. Has the you mentioned that the pipeline here is very strong. Over the last month, or so, have you seen any changes one way or another in regards to your pipeline?

Paul, no. We really haven't Bookings continue to be very strong.

Sales continue to be very strong. So to date, we haven't seen any major changes as a result of tariffs. We have seen a little bit of maybe a delay of making some decisions But in the overall magnitude of our pipeline, wouldn't call that material at all.

Paul, just to be double click on that one, which is if there is an area that we're seeing customers revisit their the award that they're considering giving. Within the industrial space. And it's gonna be more around yeah, product types in that area. We're not seeing a reduction in any of the new ones across the vast majority of rest of the portfolio.

Thank you for that question, mister Trevor. Your next question comes from the line of Mr. Robert Young with Canaccord Genuity. Please go ahead.

Hi, good morning. Just wanted to get your thoughts on the various ramps you've announced and how those impact your guidance, which the back half of the year looks like it's a bit of a deceleration So I'm trying to understand the timing of the resumption of the networking or sorry, the resumption of the AIML server and then the Grok program. And then there's also the two new programs rack programs that you announced last quarter, which I believe are in 2026. So can you just talk about those various ramps and how those interact with the guidance? It looks like it's going decelerate in the second half.

Yes. Hey, Rob. Look, we're looking at sequential growth as we go into the second half. So the second half revenue is up by $200,000,000 relative to the first half. We are seeing right now 1.6p development on track. As I mentioned earlier, that's going to be more of a 2020 thing.

We're ramping 800 new programs right now. We're going see a continuing level of growth on the 800 gs side. 400 gs is the one that we can continue to watch. We've been seeing very strong growth on 400 gs. In the 10.85 is reflective of interlocks that we have with our customers. And it's our high confidence too. It's our risk adjusted view. It's our high confidence view. We do have the plans where it could exceed that. But we think right now we're being prudent balancing all of these various dynamics that are happening.

Okay. Thanks. And then for my follow-up, the sequential margin improvement in ATS, I think it's suggested the A and D program roll off hasn't happened yet. I'm curious, is that in the the current margin structure or is there opportunity for ATS to deliver further margin structure in the second half? Further margin improvement. [indiscernible] Yes. So the Andy, the margin dilutive program that we made a strategic decision not to renew is reflective our second quarter guidance and our full year outlook That transition is actually happening happened in April already. So that is now in all of our numbers. We're really pleased with the performance that we're seeing, the improvement that we're seeing in ATS. You know, we have some businesses that have been performed very well for a period of time on capital equipment. We're seeing return to growth in industrial as inventories have started to you know, come down. But on the A and D piece specifically, there was a lot of heavy lifting that's happened over the last twelve months. On the commercial side of the business.

And so we have seen a noticeable improvement in profitability in our A and D business. Compared to last year. As we go forward for the rest of this year, we do think that there's an opportunity for margin expansion still in in ATS.

You for that question, Mr. Robert Young. Your next question comes from the line of Todd Coupland with CIBC. Your line is now open.

Yes. Good morning, everyone.

So I wanted to step back from all the detail around the bookings and just help us understand when we hear commentary around data center lease pauses from Hyper scalers, questions around timing of builds, etcetera. How should we interpret that relative to the types of bookings growth you are seeing? Give us us a little bridge to that, that'd be helpful. Thanks.

Good morning, Todd. What we're hearing from our hyperscale customers inside the data center is that they're continuing to want to invest in AIML compute, [indiscernible] [indiscernible] And we're not seeing any slowdown inside data center. We're we're we're because we're now actually involved in new data center builds or emerging very long term plans five six years out. We haven't had those conversations with them. But the data centers that we're filling and our strong backlog have several years, I think, of life in it. The only it's only one hyperscale that I've seen in the news anyway that's pulling back on new data center build. But I haven't read anything publicly on a pullback from any of the other major high hyperscalers. So I think to some extent that's a little bit of a wait and see.

Thank you. My follow-up question is, with all the design wins that you've been talking about, would you expect additional 10% new customers to emerge from those lists if so, talk about the product areas where that's going to be. Thanks.

We're very happy that we actually have a new 10% customers It's just a testament to the breadth of products that we're offering to these customers and our strong win rates I do there is a potential actually for additional 10% customers as some of these programs that we won, in the 1.6 fully integrated systems to emerge in the future. So that's certainly in our our eyesight. Again, I think that would be twenty seven potentially timeframe. But based on some of the backlog and some of the bookings that we have, and our outlook that certainly is something that could potentially happen. [indiscernible] using today's denominator 10% of the billion dollars, Yes, we have the opportunity as Rob talked about with some of the wins that we've had to get another customer above the billion dollars But based on the ramp cycles and design time, that's maybe more towards 2027. At the same time, we anticipate that our denominator is gonna grow. So we'll figure it out at that time whether or not $1,000,000,000 and 10%.

Thank you for that question, Mr. Copeland. Your next question comes from the line of Jess Pitlak with Cormark Securities. Please go ahead.

Hey, good morning. Just wondering if you could us a sense on the mix of 400 gs versus 800 gs switches this quarter and then just some insight on how pricing has been trending for 400 gs?

So I'll start off, Howard, Mandy. So for the for the full year, answer the question. We do expect 800 gs to be north of fifty percent and four gs to be less than 50%. So 800 gs will be the majority of product shipping out this year versus 400 That will in 2026 and 2027 eight hundred gs will continue to be gaining share relative to 400 gs. But 400 gs has a very long tail as well as prices come down and our customers find new use cases for that. So I would say four gs has a very long tail and 800 gs is ramping quite nicely. Yeah. Jesse, we're gonna see a nice acceleration in 800 g production as we go into the second and third quarter. As I mentioned earlier, four gs has been a very nice resilient part of our portfolio. We don't see one cannibalizing the other. But as 800 does ramp there'll be a little bit maybe able to pull back on the 400 gs side. But overall, this year, you know, in our networking business on a full year basis, Round numbers, may wanna say half is 400 g and half of it's gonna be 500 g.

Understood. Thanks for that. And then just secondly, just kind of given the more dynamic macro environment, wondering if this is maybe changing your thoughts or priorities or approach to potential M and A? We continue to have a very healthy balance sheet We're on track for generating $350,000,000 this year. That's our high confidence view. We are targeting to do better than that.

And we hope we will. We are deploying the capital, along the way, you know, as much as makes sense strategically, we're we're gonna be opportunistic on share buyback. We're investing very heavily on the R and D side. You'll notice our CCS business, our R and D spend will be on track for about $100,000,000 this year.

Or even a little bit more. So we're actively investing organically. And then we still have a healthy balance sheet. Our leverage is only just above above one times right now, gross leverage. We're looking at a number of different targets to accelerate our strategies. They're both in CCS as well as in ATS. Admittedly, though, it's it's a challenging environment right now to need to get deals done. And so we may see some, cycles take longer than we we normally would. But if the business is aligned with our strategy and if it will help accelerate you know, our business. Then we're very open to m and a, for the right deal.

That concludes our q and a session. I will now turn the call back over Mr. Rob Mianez, for closing remarks.

Thank you, and thank you for your time and engagement today.

We are pleased to report a strong beginning to 2025, demonstrating our resilience in a very fluid market. The upward revision of our full year outlook supported by a robust backlog and the strength of our key customer relationships positions us well for continued success. Value your ongoing support and anticipate providing further positive updates next quarter. Thank you again for joining us this morning. Have a wonderful day.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. Thank you all for may now disconnect.