Executive Summary / Key Takeaways

• Celestica delivered a strong Q1 2025 performance, exceeding guidance with 20% revenue growth and a record 7.1% adjusted operating margin, driven primarily by robust demand from hyperscaler customers in its Connectivity & Cloud Solutions (CCS) segment.
• The company is strategically pivoting towards higher-value, complex solutions, particularly within its Hardware Platform Solutions (HPS) offering, which saw 99% year-over-year growth in Q1 2025 and is accretive to CCS margins.
• Significant program wins, including new 800G optical transceiver business and multiple 1.6T switching and full AI rack programs with hyperscalers and digital natives, underscore Celestica's technological differentiation in areas like liquid cooling and complex system integration.
• Celestica raised its full-year 2025 outlook, projecting $10.85 billion in revenue and $5.00 in adjusted EPS, reflecting confidence in durable secular demand, operational execution, and the ability to manage macroeconomic and trade policy uncertainties.
• Key factors to watch include the successful ramp of new, complex programs, the impact of ongoing technology transitions in the Enterprise segment, the recovery trajectory of the Industrial business, and the potential effects of evolving trade policies and customer concentration.

The Strategic Ascent: From EMS Roots to AI Infrastructure Powerhouse

Celestica Inc., a global leader in design, manufacturing, and supply chain solutions, has strategically evolved from its traditional Electronics Manufacturing Services (EMS) foundation to become a critical provider of complex hardware platforms, particularly for the burgeoning Artificial Intelligence (AI) and cloud infrastructure markets. Operating through two primary segments – Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS) – the company leverages a globally diversified manufacturing footprint spanning 16 countries. This extensive network, coupled with a sustained, decade-long investment in its Hardware Platform Solutions (HPS) capabilities and a team of over 900 design engineers, underpins Celestica's ability to deliver high-value solutions to some of the world's most innovative companies, including leading hyperscalers.

The competitive landscape in the EMS and ODM industries is intense, featuring major global players like Jabil Inc. (JBL), Benchmark Electronics Inc. (BHE), Flex Ltd. (FLEX), and Sanmina Corporation (SANM). While many competitors offer broad manufacturing services, Celestica has carved out a differentiated position by focusing on complex, high-mix, low-volume products and increasingly, on integrated hardware platforms and design services. This strategic emphasis is particularly evident in its CCS segment, where the company competes directly with rivals for hyperscaler business. While larger peers like FLEX and Jabil often boast higher overall revenue and market share, Celestica aims to compete on technological complexity, engineering expertise, and end-to-end solution delivery rather than pure scale or lowest cost. For instance, while some competitors may offer lower upfront costs, Celestica's focus on precision and integration aims for higher reliability and performance, critical factors for demanding AI and cloud workloads.

Central to Celestica's competitive moat is its technological differentiation, particularly within its HPS offering and its capabilities in handling complex systems like AI racks and high-speed networking. The company has developed significant expertise in areas such as liquid cooling, a technology becoming increasingly vital for managing the heat generated by powerful AI processors. While specific quantifiable performance metrics for Celestica's cooling solutions versus alternatives are not detailed, management highlights their demonstrated capability to produce these complex solutions "at scale," a key challenge for customers. Furthermore, the company's investments in R&D, projected to reach $100 million or more in 2025, are focused on developing proprietary IP and design capabilities in AI/ML servers, high-bandwidth switching (400G, 800G, and 1.6T), and rack-level integration. This allows Celestica to offer integrated solutions, including custom ASIC-based systems, moving beyond traditional build-to-print EMS towards a more ODM or even OEM-like role for specific products. This strategic pivot towards higher design content and complex integration is intended to yield higher margins and create stickier customer relationships compared to more commoditized manufacturing services offered by some competitors.

Performance Reflecting Strategic Momentum

Celestica's financial performance in the first quarter of 2025 strongly reflects the success of its strategic focus, particularly within the CCS segment. Total revenue reached $2.65 billion, a significant 20% increase compared to Q1 2024, exceeding the high end of the company's guidance range. This growth was predominantly fueled by the CCS segment, which saw its revenue surge by 28% year-over-year to $1.84 billion, now representing 70% of total revenue. The Communications end market within CCS was a standout performer, growing an impressive 87% year-over-year, driven by insatiable demand for HPS networking products from hyperscaler customers. HPS revenue itself grew by a remarkable 99% year-over-year to approximately $1.0 billion, accounting for 39% of total revenue. This robust HPS growth, particularly in 400G and ramping 800G switches, underscores the strong market tailwinds in AI infrastructure and Celestica's ability to capture this demand.

Profitability metrics demonstrated notable improvement, with the adjusted gross margin expanding by 110 basis points year-over-year to 11.0% and the adjusted operating margin reaching a company record of 7.1%, up 120 basis points from Q1 2024. This margin expansion was primarily attributed to the favorable mix shift towards higher-margin HPS revenue within CCS and strong operational performance across both segments. The CCS segment margin specifically improved to 8.0% from 6.8% in the prior year. While the Enterprise end market within CCS experienced a 39% year-over-year revenue decrease in Q1 2025 due to an anticipated technology transition in an AI/ML compute program, the strength in Communications and the overall CCS segment more than offset this temporary headwind.

Despite the strong top-line and margin performance, net earnings decreased slightly to $86.2 million from $91.8 million in Q1 2024. This was primarily due to significantly higher Selling, General, and Administrative (SGA) expenses, which increased by $47.7 million year-over-year, largely driven by unfavorable fair value adjustments related to the total return swap (TRS) agreement and higher variable compensation and expected credit losses. Income tax expense also increased, influenced by factors including withholding taxes related to Pillar Two legislation and tax uncertainties in Asian subsidiaries, partially offset by reversals of prior uncertainties.

Liquidity remains sound. Celestica generated $130.3 million in cash from operating activities in Q1 2025 and $93.6 million in non-GAAP free cash flow. While working capital requirements increased year-over-year, influenced by dynamics in accounts receivable, inventory, and accounts payable, the company maintains a healthy balance sheet. As of March 31, 2025, cash and cash equivalents stood at $303.0 million, supplemented by $588.9 million available under the revolving credit facility, providing approximately $900 million in total liquidity. The company was in compliance with all credit facility covenants.

The ATS segment, while smaller at 30% of total revenue, also contributed positively, with revenue growing 5% year-over-year to $807.2 million, primarily driven by strength in the Capital Equipment business. ATS segment margin improved to 5.0% from 4.2%, benefiting from strong operating performance in Capital Equipment and profit improvement in the A&D business.

Outlook and the Path Forward

Building on the strong start to the year and increasing visibility into customer demand, Celestica raised its full-year 2025 financial outlook. The company now anticipates revenue of $10.85 billion, up from the previous outlook of $10.7 billion, representing 12% year-over-year growth. Adjusted earnings per share is projected to be $5.00, an increase from the prior outlook of $4.75. This revised outlook implies a full-year non-GAAP operating margin of approximately 7.2%, reflecting expected continued operating leverage and favorable mix. The outlook for adjusted free cash flow remains strong at $350 million.

Management's confidence in the raised outlook is rooted in the perceived durability of secular demand drivers, particularly AI-driven investments by hyperscalers. They highlight close collaboration with customers, new program awards, and reaffirmations of 2025 capital expenditure plans as key factors supporting this conviction. The CCS segment is expected to drive growth, with the full-year outlook raised to high-teens percentage growth. This will be fueled by continued strength in Communications, driven by accelerating ramps of 800G programs and healthy demand for 400G, and an expected acceleration in the Enterprise segment in the second half of the year as a next-generation AI/ML compute program ramps into mass production.

The ATS segment outlook remains approximately flat year-over-year. While demand is strengthening in Capital Equipment and Industrial volumes are stabilizing with forecasts for solid growth, management remains cautious on the extent of the Industrial recovery. The strategic decision to exit a dilutive margin program in A&D will impact ATS revenue but is expected to improve profitability and margin within that business. Capital expenditures for 2025 are expected to remain within the range of 1.5% to 2.0% of revenue, supporting ongoing capacity expansions in strategic locations like Thailand and Malaysia and investments in new program ramps.

Risks and Considerations

Despite the positive momentum and raised outlook, investors should remain mindful of several key risks. Celestica's significant customer concentration, with a small number of hyperscalers accounting for a substantial portion of revenue (three customers over 10% in Q1 2025), exposes the company to potential volatility if demand from these customers changes or if programs are transferred to competitors. While management emphasizes the breadth of programs and sticky relationships, this remains a structural risk in the EMS industry.

Macroeconomic uncertainty and evolving trade policies, particularly between the U.S. and China, also pose potential challenges. While temporary tariff exemptions for key data center hardware have provided near-term clarity, the environment remains fluid. Celestica expects to recover substantially all tariffs from customers, but any inability to do so or significant shifts in trade policies could impact demand or require costly manufacturing transfers. The company's global footprint and capacity in regions like the U.S. and Mexico offer flexibility, but such transfers can incur costs and disruptions.

Technology transitions, while presenting opportunities, also carry risks. The temporary revenue decline in the Enterprise segment due to an AI/ML compute program transition highlights the potential for near-term headwinds as customers adopt new generations of technology. Successful execution of complex new program ramps, such as 1.6T switches and full AI racks, is critical to realizing future growth potential.

Finally, while liquidity is currently sufficient, the company's outstanding indebtedness requires cash flow for debt service, which could limit flexibility for future investments or acquisitions. Compliance with credit facility covenants depends on continued financial performance.

Conclusion

Celestica's strong first quarter performance and upward revision to its 2025 outlook underscore a compelling investment narrative centered on its successful strategic pivot towards high-value AI and cloud infrastructure solutions. The company's differentiated HPS offering, coupled with its expertise in complex system integration and a globally resilient manufacturing footprint, positions it favorably to capitalize on durable secular demand from hyperscaler customers. While challenges such as customer concentration, macroeconomic volatility, and technology transitions persist, Celestica's demonstrated operational execution, expanding margins, and robust pipeline of new program wins, particularly in next-generation networking and AI compute, provide a solid foundation for continued growth. The investment thesis hinges on Celestica's ability to successfully execute on its complex program ramps, maintain its technological edge in areas like liquid cooling, and navigate the dynamic geopolitical and economic landscape, ultimately translating strong top-line growth into sustainable profitability and free cash flow generation.