Celestica Inc. (NYSE:CLS) Q2 2025 Earnings Call Transcript

Celestica Inc. (NYSE:CLS) Q2 2025 Earnings Call Transcript July 29, 2025

Operator: Ladies and gentlemen, thank you for joining us, and welcome to the Celestica Q2 2025 Financial Results and Conference Call. [Operator Instructions] I will now hand the conference over to Matthew Pallotta, Head of Investor Relations. Please go ahead.

Matthew P.: Good morning and thank you for joining us on Celestica’s Q2 2025 earnings conference call. On the call today, we have Rob Mionis, President and Chief Executive Officer; and Mandeep Chawla, Chief Financial Officer. Please note that during the course of this call, we will make forward-looking statements relating to the future performance of Celestica, which are based on management’s current expectations, forecasts and assumptions. While these forward-looking statements represent our current judgment. Actual results could differ materially from a conclusion, forecast or projection in the forward-looking statements made today. Certain material factors and assumptions are applied in drawing any such 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 this call, we will refer to various non-GAAP financial measures, including adjusted operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, free cash flow, gross debt to trailing 12-month TTM adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS and adjusted effective tax rate. We have included in our earnings release found in the Investor Relations section of our website, a reconciliation of non-GAAP financial measures to the most comparable GAAP measures. With respect to our Q3 2025 guidance and 2025 annual outlook, our earnings release does not include a reconciliation of forward- looking non-GAAP measures to the most directly comparable GAAP measures on a forward-looking basis.

As items that we exclude from GAAP to calculate these comparable non-GAAP measures are dependent on future events that are not able to be reliably predicted by management and are not part of our routine operating activities. We are unable to provide such a reconciliation without unreasonable effort due to the uncertainty and inherent difficulty in predicting the occurrence, the financial impact and the periods in which the adjustments may be recognized. The occurrence timing and amount of any of the items excluded from GAAP to calculate non-GAAP could significantly impact our Q3 2025 and 2025 GAAP results. Unless otherwise specified, all references to dollars on this call are to U.S. dollars. All per share information is based on diluted shares outstanding and all references to comparative figures are a year-over-year comparison.

Let me now turn the call over to Rob.

Robert Andrew Mionis: Thank you, Matt, and good morning, everyone, and thank you for joining us on today’s call. We saw a solid demand across our portfolio in the second quarter, which drove very strong performance. We achieved revenues of $2.89 billion and adjusted EPS of $1.39, with both metrics exceeding the high end of our guidance ranges. Our adjusted operating margin of 7.4% once again marked the highest performance in the company history. Our CCS segment continues to experience very strong growth, driven by the demand for networking products from our hyperscale customers, as they pursue significant expansions of their data center infrastructure to support new AI applications. In our ATS segment, solid demand in our capital equipment business and industrial businesses drove higher-than-expected revenues, while segment margins of 5.3% continue to improve meaningfully.

In the second quarter, the impact from tariffs on our financial results was minimal as the pause on reciprocal tariffs and exemptions on electronics goods, including data center hardware, insulated the majority of our portfolio. Before I provide you with our updated annual financial outlook and some additional color on our businesses, I would like to turn the call over to Mandeep, who will discuss our second quarter financial performance and our guidance for the third quarter of 2025. Mandeep, over to you.

Mandeep Chawla: Thank you, Rob, and good morning, everyone. Second quarter revenue of $2.89 billion was up 21% and above the high end of our guidance range, driven primarily by a very strong demand in our communications end market from hyperscaler customers. Adjusted gross margin for the second quarter was 11.7%, up 110 basis points, driven by higher volumes and improving mix in both segments. Our second quarter adjusted operating margin was 7.4%, up 110 basis points, driven by higher margin across both our CCS and ATS segments. Our adjusted earnings per share for the second quarter was $1.39, exceeding the high end of our guidance range and an increase of $0.49 or 54%. Our adjusted effective tax rate for the quarter was 20%.

And finally, our second quarter adjusted ROIC was 35.5% compared to 26.6% a year ago, driven by higher operating profit and strong working capital management. Moving on to our segment performance. ATS segment revenue totaled $819 million, up 7% and above our guidance of being flat year- over-year. The higher revenue was primarily driven by strong demand in our capital equipment business and returning growth in our industrial business. Our ATS segment accounted for 28% of total company revenue in the second quarter. Revenue in our CCS segment was $2.07 billion, up 28%, driven once again by a very strong growth in our communications end market. The CCS segment accounted for 72% of total company revenue in the quarter. Our communications end market revenues increased by 75%, above our guidance of high 50s percentage growth, driven primarily by strong demand and ramping programs in our HPS networking business, complemented by strengthening demand in our optical programs.

Revenue in our enterprise end market was 37% lower, which was better than our guidance of a low 40s percentage decline. The lower revenues were a result of an anticipated technology transition in an AI/ML compute program with one of our hyperscaler customers. HPS revenues of $1.2 billion in the second quarter were higher by 82% and accounted for 43% of total company revenue. This exceptional growth is being driven by the ramping of several 800G networking switch programs, complementing strong hyperscaler demand for our 400G switches. Moving on to segment margins. ATS segment margin in the second quarter rose to 5.3%, up 70 basis points, primarily driven by improved profitability in our A&D business. CCS segment margin in the second quarter was 8.3%, an improvement of 130 basis points driven by a higher mix of HPS revenues and strong productivity.

During the quarter, we had 2 customers that each accounted for at least 10% of total revenue, representing 31% and 13% of revenue, respectively. Moving on to working capital. At the end of the second quarter, our inventory balance was $1.92 billion, a sequential increase of $130 million and a year-over-year increase of $74 million. Cash deposits were $397 million at the end of the second quarter, down $75 million sequentially and down $179 million year-over-year. Cash cycle days during the second quarter were 66. Turning to cash flows. Capital expenditures for the second quarter were $33 million or approximately 1.1% of revenue compared to 1.5% in the second quarter of 2024. Year-to-date, our capital expenditures have been below our anticipated range of 1.5% to 2.0% of revenue due to stronger-than-expected revenue growth and timing of expenditures.

However, we anticipate capital expenditures in the second half of the year to increase relative to the first half, and for total annual spend to be within our annual range of 1.5% to 2.0% of revenues. During the second quarter, we generated $120 million of free cash flow, $54 million higher than the prior year period. Our free cash flow year-to-date as of the end of the quarter totaled $214 million. Turning to our balance sheet and capital allocation. At the end of the second quarter, our cash balance was $314 million, combined with $660 million of borrowing capacity under our revolver, we currently have approximately $1 billion in total liquidity, which we believe is sufficient to meet our projected business needs. Our gross debt at the end of the quarter was $823 million, and our net debt position was $509 million.

Our gross debt, the non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 0.9 turns, an improvement of 0.2 turns sequentially and 0.3 turns versus the prior year period. As of June 30, we were in compliance with all financial covenants under our credit agreement. During the second quarter, we repurchased approximately 600,000 shares for cancellation at a cost of $40 million under our normal course issuer bid, bringing our total purchases under the NCIB to $115 million year-to-date. We intend to remain opportunistic on share buybacks for the second half of 2025. Now let’s turn to our guidance for the third quarter of 2025. Similar to last quarter, we highlight that our guidance figures assume no material changes to tariffs or trade restrictions compared to what is in effect as of July 28, as any changes to these policies and their potential impact on our results cannot be reliably predicted at this time.

We also note that substantially all tariffs paid by Celestica are expected to be recovered from our customers and are not expected to materially impact our non-GAAP adjusted operating earnings or our non-GAAP adjusted net earnings. Third quarter revenue is projected to be between $2.875 billion and $3.125 billion, representing growth of 20% at the midpoint. Adjusted earnings per share are anticipated to be between $1.37 and $1.53, representing an increase of $0.41 at the midpoint or 39%. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin would be 7.4%, an increase of 60 basis points over the prior year period. We expect our adjusted effective tax rate for the third quarter to be approximately 19%.

Finally, let’s review our end market outlook for the third quarter. In our ATS segment, we anticipate revenue to be down in the low single-digit percentage rate, as growth in our industrial business is being offset by lower volumes in our A&D business, due to our previously announced decision not to renew a margin-dilutive program. In our CCS segment, we project revenue in our communications end market to grow in the low 60s percentage range, supported by continued demand strength for our networking switches, including ongoing brands in multiple 800G programs. In our enterprise end market, we expect a mid-20s percentage decrease in revenue, driven primarily by a technology transition in an AI/ML compute program with the latest generation program beginning to ramp in the third quarter.

With that, I will now turn the call back over to Rob for an update on our latest financial outlook for 2025 and to provide additional color on our business.

Robert Andrew Mionis: Thank you, Mandeep. Given our solid first half performance, and the strengthening demand forecast from many of our customers, we are raising our 2025 annual financial outlook. We are increasing our revenue outlook for the year from $10.85 billion to $11.55 billion, reflecting year-over-year growth of 20%. We are also increasing our non-GAAP adjusted EPS outlook for the year from $5 per share to $5.50 per share, which represents year- over-year growth of 42%. Our adjusted EPS outlook reflects an anticipated non-GAAP operating margin of 7.4%. With a higher anticipated profitability, we’re also raising our free cash flow outlook for the year from $350 million to $400 million. As with our quarterly guidance, these figures assume no material changes to tariffs or trade restrictions compared to those in effect as of July 28.

Now moving on to some additional color on our businesses. In our CCS segment, we now anticipate growth of nearly 30% for the full year. In our communications end market, we continue to ramp multiple 800G programs, while demand for our 400G programs remain strong. Overall, hyperscaler demand for our networking products is very robust. As these customers continue to significantly invest in their data center infrastructure. In our enterprise end market, as anticipated, Q3 will see us begin to ramp volumes for our next-generation AI/ML compute program with a large hyperscaler customer. We expect this to contribute to a strengthening of enterprise volumes in the second half of the year and into 2026. We also continue to pursue a robust pipeline of opportunities for new awards with hyperscaler and digital native customers across compute, storage and rack integration.

Moving on to our ATS segment. We are maintaining our annual outlook for revenues to remain approximately flat to 2024. In our industrial business, the strength we saw a return in the second quarter is expected to continue into the second half of 2025, supported by several ramping programs. In A&D, we continue to see strong improvements in profitability, driven by mix improvements, including our previously communicated decision not to renew a margin-dilutive program. The revenue impact from this program began in Q2 and is expected to result in lower year-over-year revenues in A&D for the remainder of the year, despite otherwise healthy demand across the rest of our A&D portfolio. In our capital equipment business, we achieved solid growth in the first half of 2025 driven by the strength in our base demand, supported by new program ramps.

As anticipated, some second half demand was pulled into the first half, and consequently, we expect demand to moderate, the second half revenue is expected to be lower than the first half. Despite this, we anticipate full year growth approximately in line with market growth rates. Overall, we continue to anticipate another year of solid financial performance for Celestica in 2025. We remain confident in our ability to continue our strong momentum even with the uncertainty in the current macro environment. Our portfolio is strongly supported by enduring long-term secular tailwinds. We believe Celestica is exceptionally well positioned to help our customers navigate today’s uncertain landscape, backed by our globally diversified manufacturing network and our best-in-class supply chain and operations teams.

As a company that thrives in managing complexity, we feel these challenges will only further highlight the critical value we provide with our market-leading capabilities and competitive positioning in key technologies, a disciplined approach to capital allocation and consistency in our operation execution, we believe we are positioned to continue to excel and to sustain this positive momentum into 2026 and over the long-term. We look forward to updating you on our progress during the next call in October. And with that, I will now turn the call back to the operator to begin the Q&A session.

Q&A Session

Operator: [Operator Instructions] And your first question comes from the line of Karl Ackerman with BNP Paribas.

Karl Ackerman: I have 2, please. Could you speak to the breadth of customers as well as a number of platforms that you have on 800-gig switch ports that are helping drive your upward revised outlook for CCS? In other words, I guess, how should investors gauge the breadth of design engagements you have on 800-gig and above relative to 400G? And I have a follow-up, please.

Robert Andrew Mionis: Yes. Karl, on 800G in terms of the breadth we have versus 400G, I would say every 400G customer we had has turned into an 800G customer. So the breadth of our offering is quite large. Our market share also for 800G is that much larger than market share for 400G as well based on our early wins. So the breadth that we’re seeing across a number of hyperscalers and the ramps we’re seeing across a number of hyperscalers is great to see, and it’s fairly pronounced.

Mandeep Chawla: Karl, I’ll just add on to that to say a little bit more color on 400 and 800. The 400 demand has been very strong now for a quite some time. We saw a lot of strength in the first quarter. What was nice about the second quarter is the 800G now is ramping and it’s basically on parity with our 400G volumes in the second quarter. And now we see 800G continuing to accelerate. So the point that Rob made, if you think about our top 3 hyperscaler customers, we’re — we’ve won 800G programs with all 3 of them. We saw an acceleration in demand in the second quarter with one in particular, and the other 2 are now starting to catch up in the back half. So it is — there’s a lot of breadth, I would say.

Karl Ackerman: Great [indiscernible]. I mean, just given the amount of revenue growth that you’re seeing in the business, could you remind us on the manufacturing readiness you have at your Monterrey and Richardson campuses today to handle the growing demand of your CCS business?

Mandeep Chawla: Yes, I can start off and Rob can add on if you’d like. From a capacity perspective, we’re still very comfortable. We are seeing a significant amount of demand for Southeast Asia, both in Thailand as well as in Malaysia. Customers are continuing to want to invest in the United States in our Richardson, Texas facility and customers are continuing to look at Mexico. And so if you look at our capital plans as well, our CapEx spend, those are the locations where we’re spending the money, and we’re continuing to invest to support the growth. We have not run out of capacity. And as we commented last quarter, we have the ability to support, I would say, $3 billion to $4 billion of additional revenue should our customers want to continue to be in those geos.

Robert Andrew Mionis: And I would add, Karl, that right now, the majority of our networking is coming out of Thailand, but we also producing networking products, 800G products out of our Mexico facility as well.

Operator: Your next question comes from the line of Ruben Roy with Stifel.

Ruben Roy: Congrats on the continued momentum. Mandeep, I wanted to zoom out maybe and given the Q3 guidance and the full year guidance. The implications for Q4, maybe a little decel coming in CCS and with enterprise coming back a little bit into year-end. Just wondering if you can walk through some of the puts and takes on how to think about sort of the momentum into year-end.

Mandeep Chawla: Yes. Thanks, Ruben. I would say that we’re pleased with the full year outlook. The [ 11,550 ] is 20% growth. We’ve been more or less that for Q1, 2 and 3. To your point, it implies Q4 would maybe grow at 18%. We’re really just continuing to take into consideration the uncertainties that are out there. What I can tell you is this is our high confidence view. Our demand outlook is higher than the [ 11,550 ], but we’re taking into account challenges such as material availability or situations where customers may choose to temporarily pause just given the continuing turmoil that’s happening in the tariff environment. But the [ 11,550 ] is our high confidence view at this point.

Ruben Roy: Got it. And then as a follow-up for Rob, perhaps, it seems like 400 gig is hanging in maybe for longer than you folks might have expected earlier this year and obviously, 800 ramp is happening now. I was wondering if you could maybe comment on updated thoughts around 1.6T timing now that we’ve got the official launch of the silicon. Just wondering, how you’re thinking about that as we look forward to 2026?

Robert Andrew Mionis: Yes. Thanks, Ruben. We received Tomahawk 6 samples in June, and we successfully brought up the first system within days of receiving the sample. So that bodes well for the silicon and bodes well for our engineering. Right now, we have several new programs one Tomahawk 6 programs, 1.6T programs that will start generating some revenue in the back half of 2026 and certainly into 2027. Again, this will all be paced by silicon availability.

Operator: Your next question comes from the line of David Vogt with UBS.

David Vogt: So maybe 2 for me also. So maybe, Rob, can you dig in a little bit on the 800G ramp that you referenced, or Mandeep referenced? It looks like Google, if I strip out sort of what’s going on with TPU, was probably incredibly strong from an 800G ramp. And can you maybe talk to what you’re seeing from the other 2 800G customers in terms of how they’re ramping in 2Q into 3Q? Because it looks like maybe one of them might be a little bit more muted to start this 800G ramp. I wonder if that’s just more timing. And then I’ll give you my follow-up is when I think about the capital equipment business that had a little bit of a pull forward into H1, can you may be shed some light on — was that more on the lithography side, memory, logic? Kind of what are you seeing by end vertical within capital equipment H1 versus H2?

Robert Andrew Mionis: Let me start off with the capital equipment one, and I’ll go to the networking one. So on capital equipment, Q2, very strong growth, 20-plus percent, that was really driven by normalization of inventory levels that we started seeing in the second quarter of 2024. As we go into the third quarter, we are seeing some incremental demand from a couple of our customers, but we’re also seeing that offset by — a decrease in demand by others and hence, kind of flattish as we go into the third quarter. And for those customers, we actually saw an acceleration of what we think is an acceleration of demand from the second half into the first half. And I do think — and we believe that capital equipment will have a growth year this year in line with market rates, but it will be more front-end focused than back-end focused relative to the pull that we saw.

And on the 400G versus the 800G, yes, we — as Mandeep mentioned earlier, right now in the second quarter, we saw about a, I’ll call it, a 50-50 split between 400G and 800G networking volumes. As we get into the back half of the year, we certainly see 800G ramping up in excess of that. But 400G also has a very long tail through this year and certainly into next year based on our visibility right now. There will always be ebbs and flows, but across our customer base, there’s certainly a couple of customers that are ramping a lot harder and a lot faster than others on 800G.

Operator: Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets.

Thanos Moschopoulos: On the cash cycle, is it reasonable to expect some ongoing improvement in cash cycle days just simply as CCS is becoming a bigger part of the mix relative to ATS?

Mandeep Chawla: Thanos, Mandeep here. It’s certainly an area that we continue to work to improve. We’re really happy with our cash generation. We’ve generated positive free cash flow every quarter for over 5 years, and we’re raising the outlook this year, as you would expect, from $350 million to $400 million. The thing that I’ll note is that we continue to have a lot of confidence in our cash generation ability even while we’re growing our revenues at a 20% clip. And so you can think about the amount of working capital that we’re investing in to support this growth. But that being said, we do think that we’ll continue to have strong inventory turns, lead times on materials are steady, probably at around 16 weeks, which is in line with what you would have seen pre-COVID. And so we do expect to be able to continue to turn inventory quickly. 400, we think, is the right number for this year, and we would be targeting a higher number next year.

Thanos Moschopoulos: Great. And on the CCS margins, how should we think about the near- to medium-term trajectory just given that you’ll have enterprise ramping back up, which might provide a negative mix dynamic there?

Mandeep Chawla: Yes. I mean, going back to the outlook that we have given the [ 11,550 ] implies about 18% growth in the CCS — or excuse me, in the total company. Our ATS growth is going to be muted because of the return of that unprofitable program to one of our customers. So it’s really being driven by CCS. What I would say is, to your point, the enterprise demand is starting to improve as we get into the fourth quarter, we will start to see enterprise come back to year-to-year growth. And right now, the communications demand will continue to be strong, driven by 800G. I’ll just say again, though, that our customer outlook is higher than that. And so we’re just factoring in right now a lot of the uncertainties, but we would look to see very strong growth in both communications and enterprise.

Operator: Your next question comes from the line of Samik Chatterjee with JPMorgan.

Samik Chatterjee: Strong print here and maybe if I can start with your CCS guide for the full year. You’ve raised that substantially for the full year. I’m just wondering, when you call out strengthening demand for the second half, you’re just calling that out more for the Enterprise segment itself. Maybe if you can sort of dive into, is that the area that you’re seeing more visibility from your customers? Or does that extend over to 800 gig in terms of volume expectations for the second half? Or is there really sort of the upside surprise on communication more from 400 gig demand being more resilient than you expected earlier? And I have a follow-up.

Mandeep Chawla: Yes, Samik. So I’d say a couple of pieces on the enterprise, as we’ve talked about and everyone is aware, we’re going through a technology transition. That program is ramping nicely in the quarter right now. And so we’re seeing a good contribution in the third quarter and we will get more out of that in the fourth quarter. So while we are showing negative year-over-year growth rates in the second and third quarter, in the fourth quarter, we expect to start resuming growth. On the communications side, when we talked about acceleration of growth, it’s in the 800G programs. So one of the questions that was given earlier, we saw it in the second quarter with our largest customer. We’re now seeing it pick up with our other large hyperscaler customers as well.

400G is moderating, still very strong demand, just not as strong as the first half because that’s being replaced by 800G. And then again, if we saw demand strength across all the areas that we think we could see, we would hope that we could do more than what we’ve outlined.

Samik Chatterjee: Got it. Got it. And maybe for the follow-up, you just sort of highlighted this earlier to a question about sort of the 4Q run rate being around that sort of 18%, let’s call it, sort of ballpark 20%, which is what you’ve been running at. I mean, is that a fair way of thinking about sustainability of growth into next year as well, even as we layer on some of these AI/ML projects that ramp further? Would you sort of look at that as a sustainable growth pace for investors to think about 2026 as a starting point?

Mandeep Chawla: Yes. Samik, I think what you’re also getting to is it’s probably a bit early to give a full 2026 number. Customer outlooks just don’t go that far at this point. In October, when we do our Investor Day, we will share our view of 2026. But what I can tell you right now is that the hyperscaler demand is very strong through the back end of this year, and we do have outlooks with our customers going into the first half of next year, and we’re not seeing a slowdown. In addition to that, we have a number of programs that we’ve already won and are in the process of ramping, which gives us further confidence going into the first half right now. And then also, as you think about next year, we do believe that ATS is going to grow in line with our targets that we set, which are typically around 10% over the long-term.

So right now, the growth is continuing into the first half. We’ll just wait to give a full year number. We just need a little bit more time to work with our customers.

Robert Andrew Mionis: Samik, I would also add that we have the capacity, the service growth north of 20% per year, for sure.

Samik Chatterjee: Got it.

Operator: Your next question comes from the line of Paul Treiber with RBC Capital Markets.

Paul Michael Treiber: Yes. Just could you speak to the new program pipeline that you’re seeing right now and then the opportunity to expand further with existing hyperscalers, but then also additional hyperscalers beyond the top 3 that you have. And can you speak to it in terms of — on the communications side, but then also the enterprise side?

Robert Andrew Mionis: Sure. Yes. So in terms of new programs, we’re continuing to, I’ll call it, build the breadth that we have in terms of our offering with our existing hyperscalers. So in terms of all the hyperscalers, if we’re providing one with networking products were in conversations or doing proof of concepts or things like that to provide them with AI compute products and things on those lines. So our first order of business is to kind of increase our share of wallet with our hyperscalers and those conversations are mature and ongoing and having some good traction. In terms of penetrating new hyperscalers, we’re fairly penetrated. Our focus right now in new regions or also with digital natives, as we mentioned, and we’re having some very interesting conversations on what the right entry point is for us to help support these customers moving forward.

As we mentioned also in previous earnings calls with our recent digital native win, which includes the design manufacturing for a full orchestrated AI rack, so not just a networking rack, but a full orchestrated rack. That really gives us incremental proof points to broaden our solutions for the whole plethora of additional customers out there.

Paul Michael Treiber: And a follow-up for that is, is pricing factoring into discussions at this point? Or is it one of the items is much lower down discussion point, just given the demand environment at the moment?

Robert Andrew Mionis: Yes. In our industry, pricing is always a factor, but it is really not the main factor right now. I think our customers are looking for certainly — certainty of supply at scale. They’re looking for best-in-class designs and technology leadership. And those are the top 2 on the list. Competitive pricing will always be a factor in our industry. But if you have the first 2, then the second one usually just falls in line because the customers understand the value that you’re actually delivering to them.

Mandeep Chawla: Yes. The only thing I’d add to that one, Paul, is we constantly work with our customers on total cost of ownership. And we think that our footprint gives us a very sustainable advantage in this space, whether customers need to be close to the deployment area, whether they’re looking for lower-cost geographies. Being in 16 countries, we really are able to offer a wide variety of solutions to them. And because of our relative discipline on CapEx deployment, we aim to run our facilities at a high level of utilization. So we’re looking to constantly drive productivity and pass those savings on to our customers as well.

Operator: [Operator Instructions] And your next question comes from the line of Atif Malik with Citi.

Atif Malik: Nice results. My first question is on your 10% of sales and more customers. You had 3 in Q1, it dropped to 2. How many are you expecting in the September quarter?

Mandeep Chawla: Atif, it’s Mandeep here, and really nice to see Citibank back in the coverage universe for us. So welcome. We saw strong growth across our top 3 customers. As you’ve noted, one of them just fell under. It was just a smidge and under. It rounds to 10% still. And we are seeing — the good thing is that we still saw quarter-to-quarter growth with that customer. It’s just, frankly, the base grew faster than they did. When you go into the following quarters, we do expect that we’re going to have 3 customers above 10% going into the third and fourth quarter.

Atif Malik: Great. And as a follow-up, in your prepared remarks, you guys talked about strengthening in some optical projects. Can you kind of elaborate on what these projects are?

Robert Andrew Mionis: Yes. We have an enterprise customer that has been ramping some programs, and I’ll call that in the data center interconnect area. Those products have been wildly successful in the market, and we’re supporting them in ramping those programs.

Operator: Your next question comes from the line of Todd Coupland with CIBC.

Todd Adair Coupland: Can you hear me, okay? Yes. I wanted you to bridge what we hear from hyperscalers. Recently, we heard a big CapEx increase last week from a large hyperscaler, we’re getting 3 other updates this week. And just bridge how we should think about those increases relative to your change in guidance?

Mandeep Chawla: Why don’t I start, Todd. Look, there’s always a little bit of a lag, if you will, between the announcements of the hyperscalers are making and the forecast that we’re receiving from them. And so when we see these increases come through in prepared remarks from our customers, often it’s an affirmation of what we’ve already been seeing from a demand perspective. And so to the comment that I had made earlier, we’re seeing very strong demand right now in the back half of this year. That demand outlook with our customers looking at their forecast is continuing into the first half. And so really, we look at the announcements that have just been made and we expect will be made as an affirmation of the forecast that we’ve already received.

Todd Adair Coupland: Yes.

Robert Andrew Mionis: And Todd, I would add one of our leading indicators, CapEx is certainly a leading indicator, another leading indicator is also silicon because of the lead time associated with a lot of the silicon to look as far ahead as we can and understand what our customers are putting an order, asking us to put an order, and that helps us align our longer-term forecast and long-term financial and revenue outlooks as well.

Todd Adair Coupland: Great. There’s been a number of questions on switch market share. I wanted to turn to server market share. It seemed like you had lost a little bit at the end of last year. Now it’s coming back. Could you just frame up what your server market share trends are at the moment?

Robert Andrew Mionis: Yes, thanks. So I would say that we are gaining share with our largest customers with respect to AI server market share. Frankly, a lot of that is just due to strong execution and ability to build these very complex products at scale. And as Mandeep mentioned, we just went through a technology transition. We see these programs starting to ramp in the third quarter and gaining some significant momentum as we exit the year, and also into next year. And we also expect this product line to produce probably even more revenues based on that increased share as we get into late ’26 and into ’27 and beyond based on next-generation programs.

Operator: Your next question comes from the line of Robert Young with Canaccord Genuity.

Robert Young: Can’ you hear me now?

Robert Andrew Mionis: Yes, we can hear you.

Robert Young: All right. Okay. I think you had — okay, so you’ve had some very strong momentum on 1.6 terabyte, and I’d love to get some context on whether that has continued. I think earlier in the call, you said that the full rack proof point was opening up new opportunities. And so if you can just talk about the halo, that the relationship with the hyperscalers, this 1.6 terabyte win rate and the full rack proof point. So what is that doing around the opportunity to grow white label opportunities along the ODM path?

Robert Andrew Mionis: Yes. Thanks, Rob. So on the 1.6, we continue to win I’ll call it, 1.6T variant. So we have 1.6T awards with many of the large hyperscalers. There’s a lot of variants, i.e., different types of 1.6T silicon or different use cases in the rack. So we’re continuing to kind of grow our market share on these variants with those customers. In terms of the digital native win and doing that fully orchestrated rack, that is certainly opening up new doors and new conversations with people, even the hyperscalers. But the entry point on that might be next-generation systems in terms of what more can we do. So those conversations are still, I’ll call it, in the early stages, but producing a lot of interesting conversations.

Robert Young: Okay. And then my second question, just on the full rack solution as you add maintenance and service into the mix of services. I know that you acquired NCS Global, but do you need to acquire? Or are you well positioned for that shift? And then what’s the potential timing? If you give any context around margin impact and timing, that would be helpful. I’ll pass on.

Robert Andrew Mionis: Yes, I’ll start. I’ll let Mandeep finish on the M&A front. Services is certainly a major focus area for us at NCS Global was a fantastic acquisition and is certainly supporting us in order to really support the demand that we have from our customers on services, we will need and are planning to expand our services footprint and offering. And with that, I’ll turn it over to Mandeep.

Mandeep Chawla: Yes. Rob, so services is an area of focus for us. And the acquisition for NCS was able to bring in some good capabilities and a good foundation. We do have a very extensive partner network. And so we don’t see any gaps in being able to support the customer wins that we’ve already received. But there are going to be opportunities along the way to vertically integrate. And so we do continue to look at various targets. And if we can see the synergies come to bear, then we will be comfortable to go ahead and act. But our funnel does continue to include service target.

Robert Andrew Mionis: And obviously, services margins would be north of the company margins as well and be accretive.

Robert Young: Right. Is there any timing on the rollout of that services offering? Is that happening today? Or is it something — how do we think about that from a modeling perspective?

Mandeep Chawla: Yes.

Robert Andrew Mionis: It is happening today, but not at the scale where it would be moving the company’s financials, I would say. Mandeep anything there?

Mandeep Chawla: Yes, I would think about it, Rob, as Rob [ Mionis ], in terms of a materiality perspective is when we get into that large digital native win, that’s where it’s going to be a larger part of the offering. That being said, we price and look to support our customers holistically. And so there — not everything is going to always be accretive to the company services certainly will be, but there will be a variety of services we provide. So we’re going to be incrementally investing in this area. And I would say it has more of a materiality impact probably as we get into 2026.

Operator: Your final question is a follow-up from David Vogt from UBS.

David Vogt: Mandeep, this is a question for you. You mentioned that you have enough capacity or maybe Rob mentioned you had enough capacity for calendar year ’26 growth in CCS, and you have — basically a visibility for the next 12 months. Can you help us understand when you would need to make adjustments to your capacity as we move through ’25 into ’26 for the back half of ’26 and ’27? How should we think about that flowing through your capital priorities as demand strengthens or your visibility improves as we move forward?

Mandeep Chawla: Yes. Why don’t I start off on the number side, and Rob can jump in as needed. So we — if you look at one of those large buildings that we were able to add on in Thailand, we were able to do in about 12 months. And so expansions in areas like Mexico and Southeast Asia, about 12-month lead time is required. Just as a reminder on the approach that we take is, we have a campus strategy, the way our network is set up. And so we do have the ability to add on additional buildings within the campuses typically, and then we can quickly fill them with equipment. We have already made decisions to expand capacity to support programs that we’ve won in areas such as Thailand, such as Richardson, Texas, such as in Mexico. You’ll see the CapEx spend in the first half of this year being a little bit on the lighter side, and that’s just reflective of expenditures that we’ve actually incurred so far.

But the back half of this year is going to be a little bit more weighted. Just taking a step back from an overall CapEx intensity perspective, 1.5% to 2% is still the right number for us. This year, we’ll be tracking towards $200 million, just a bit under 2%. But 1.5% to 2% of our revenues continues to be around the same amount that we would expect to spend. And I’ll just highlight that only about 40 basis points of our CapEx spend is for maintenance. And so the rest of it is to support growth programs, which gives us a lot of discretion on where we point those dollars. But right now, we think that we can meet the demand for the programs we’ve already won with that amount spend.

Operator: Thank you. There are no further questions at this time. I will now turn the call back over to Mr. Rob Mionis for closing remarks.

Robert Andrew Mionis: Thank you, and thank you all for your time and engagement today. We’re pleased to report a strong second quarter, demonstrating our resilience in a dynamic market. The upward revision of our full year outlook reflects the strength of our customer relationships and the confidence in the current demand environment. We value your ongoing support and look forward to sharing more positive updates with you next quarter. Thank you again for joining us this morning, and have a great day.

Operator: This concludes today’s call. Thank you for attending. You may now disconnect.