Celestica Inc

TSX:CLS

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Celestica Q1 2021 Earnings Conference Call. [Operator Instructions] And as a reminder, today's conference call is being recorded.I would now like to hand the conference over to your speaker today, Craig Oberg, Vice President of Investor Relations and Development. Please go ahead.

[Craig Oberg]

Good morning, and thank you for joining us on Celestica's first quarter 2021 earnings conference call. On the call today are Rob Mionis, President and Chief Executive Officer; and Mandeep Chawla, Chief Financial Officer.As a reminder, during this call, we will make forward-looking statements within the meanings of the U.S. Private Securities Litigation Reform Act of 1995, and applicable Canadian securities laws. Such forward-looking statements are based on management's current expectations, forecasts and assumptions, which are subject to risks, uncertainties and other factors that could cause actual outcomes and results to differ materially from conclusions, forecasts or projections expressed in such statements. For identification and discussion of such factors and assumptions as well as further information concerning forward-looking statements, please refer to yesterday's press release, including the cautionary note regarding forward-looking statements therein, our most recent annual report on Form 20-F and our other public filings, which can be accessed at sec.gov and sedar.com. We assume no obligation to update any forward-looking statement, except as required by law.In addition, during this call, we will refer to various non-IFRS measures, including operating earnings, operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, free cash flow, gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio, adjusted net earnings, adjusted EPS, adjusted SG&A and adjusted effective tax rate.Listeners should be cautioned that references to any of the foregoing measures during this call denote non-IFRS measures, whether or not specifically designated as such. These non-IFRS measures do not have any standardized meanings prescribed by IFRS and may not be comparable to similar measures presented by other public companies that use IFRS or who report under U.S. GAAP and use non-GAAP measures to describe similar operating metrics. We refer you to today's press release and our Q1 2021 earnings presentation, which are available at celestica.com under the Investor Relations tab for more information about these and certain other non-IFRS measures, including a reconciliation of historical non-IFRS measures to the most directly comparable IFRS measures from our financial statements. Unless otherwise specified, all references to dollars on this call are to U.S. dollars, and per share information is based on diluted shares outstanding.Let me now turn the call over to Rob.

[Robert Andrew Mionis, President, CEO & Director]

Thank you, Craig. Good morning, everyone, and thank you for joining us on today's conference call. Celestica is off to a strong start in 2021, delivering solid first quarter results. Revenue and adjusted EPS were both above the midpoint of our guidance ranges. And I'm pleased that our non-IFRS operating margin is up 60 basis points on a year-over-year basis, reflecting the strength of our strategy and strong execution. Our portfolio transformation initiatives continue to yield results, and our core business is growing, although revenue decreased 6% in Q1 2021 compared to Q1 2020, the decrease was largely driven by a disengagement from Cisco, whose revenue accounted for 13% of our total Q1 2020 revenue. The revenue of the company's non-Cisco business grew 7% year-over-year. Furthermore, we executed the transition seamlessly, and we were able to meet our revenue and mix backfall objectives.Within our ATS segment, we experienced slightly better-than-expected revenue results due to strong growth in HealthTech and capital equipment. We also reported our fourth consecutive quarter of sequential margin expansion and continue to target being back in our 5% to 6% target margin range by the end of the year. Within CCS, after having successfully concluded our Cisco disengagement in the fourth quarter of 2020, we are focused on growth. While CCS revenue in the first quarter was down on a year-over-year basis, primarily because of the Cisco disengagement, our remaining CCS portfolio grew by 16% year-over-year. The CCS segment continues to perform well, with our year-over-year improvement in segment margin for the fifth consecutive quarter and once again operating above our 2% to 3% target range.Our hardware platform solutions or HPS business, previously referred to as our GDN business remains an engine for growth within our CCS segment. HPS generated $200 million of revenue in the first quarter, a 46% increase on a year-to-year basis. We continue to expect our HPS business to be a catalyst for both CCS revenue growth and segment margin strength.Last quarter, we also highlighted that we refer to revenue from our HPS business and ATS segment as life cycle solutions. It is our view that the businesses which compromise our life cycle solutions portfolio share several key characteristics that reflect the focus of our commercial strategy. We consider a life-cycle solutions revenue to be diversified revenue, and our strategy continues to be to expand this portfolio as a percent of the total company, enabling long-term profitable growth. This strategy includes pursuing markets with high barriers to entry, robust long-term growth prospects, attractive margins and the opportunity to offer our customers higher value-added solutions throughout the product life cycle. We are pleased that our life-cycle solutions portfolio grew in the first quarter, both sequentially and on a year-over-year basis.I will offer some further color on our end markets and the overall business outlook shortly. However, first, I would like to turn the call over to Mandeep to provide you with some financial details on the first quarter as well as our second quarter guidance.

[Mandeep Chawla, Chief Financial Officer]

Thank you, Rob, and good morning, everyone. First quarter 2021 revenue came in at $1.23 billion, slightly above the midpoint of our guidance range. Revenue decreased 6% year-over-year and 11% sequentially. Despite Q1 traditionally being a seasonally soft quarter from a volume perspective, we delivered non-IFRS operating margin of 3.5%, exceeding the midpoint of our guidance range by 10 basis points, reflecting the benefits of our portfolio reshaping activities and improved mix across several businesses. Year-over-year, non-IFRS operating margin improved by 60 basis points, driven by a significant improvement in our ATS end market. Sequentially, non-IFRS operating margin declined by 10 basis points, driven by lower volumes in CCS. This was partially offset by higher sequential ATS segment margin, driven by higher volumes and favorable mix. Non-IFRS adjusted earnings per share were $0.22, $0.01 above our guidance midpoint and an improvement of $0.06 year-over-year, while down $0.04 sequentially. First quarter IFRS earnings per share were $0.08, up $0.10 year-over-year and down $0.08 sequentially. Our ATS segment accounted for 43% of our consolidated revenue during the quarter, our highest level of ATS concentration reported to date and up from 41% in the first quarter of last year. ATS revenue was down 3% compared to last year, ahead of our expectations of a mid- single-digit percentage year-over-year decline. Sequentially, ATS revenue was up 4%. The year-over-year revenue decline in ATS was driven by weakness in commercial aerospace and industrial, partially due to COVID-19, largely offset by new program ramps in HealthTech and very strong demand growth in capital equipment. Sequential growth was driven by strength in capital equipment and HealthTech, offsetting moderate headwinds in A&D and industrial.Our CCS segment revenue was down 9% year-over-year, largely driven by the Cisco disengagement and partly offset by strong demand from service provider customers, including in our HPS business. Sequentially, CCS revenue was down 19%, driven by seasonality in our enterprise business as well as the Cisco disengagement. With the Cisco disengagement behind us, we are pleased with the growth in the remainder of our core CCS portfolio, whose revenue increased 16% year-over-year. Within our CCS segment, the communications end market represented 40% of our consolidated first quarter revenue, up from 39% in the first quarter of last year. Communications revenue in the quarter was down 2% year-over-year as the declines resulting from the Cisco disengagement were largely offset by robust demand from service provider customers. Sequentially, communications revenue was down 16%, mainly driven by seasonality as well as the Cisco disengagement. Our enterprise end market represented 17% of consolidated revenue in the first quarter, down from 20% in the same period last year. Enterprise revenue in the quarter was down 21% year-over-year and down 27% sequentially. The year-over-year and sequential declines were driven by program-specific demand softness and seasonality.Our HPS business once again delivered strong growth in the first quarter, with revenue up 46% year-over-year, led by higher demand from service provider customers. HPS accounted for 16% of our consolidated revenue, up from 10% a year ago and 15% in Q4 2020. Our top 10 customers represented 65% of revenue during the first quarter, down 1% year-over-year and 2% sequentially. For the first quarter, no customer represented 10% or more of our total revenue versus 1 customer in the first quarter of 2020 and 2 in the prior quarter.Turning to segment margins. Achieving a margin of 4.0%, the ATS segment achieved its fourth consecutive quarter of sequential margin expansion, up 130 basis points year-over-year and up 10 basis points sequentially. The year-over-year improvements were driven by accretive new programs in HealthTech and capital equipment, more than offsetting headwinds in our A&D business. CCS segment margins of 3.1% came above our target range of 2% to 3%, up 10 basis points year-over-year and down 30 basis points sequentially. Year-over-year margin improvement was primarily driven by favorable mix. The sequential margin decline was due to lower volumes due to seasonal demand dynamics, partly offset by favorable mix.Moving to additional financial metrics. IFRS net earnings for the quarter were $10.5 million or $0.08 per share compared to a net loss of $3.2 million or a $0.02 loss per share in the same quarter of last year and net earnings of $20.1 million or $0.16 per share in the previous quarter. Adjusted gross margin of 8.6% was up 130 basis points compared to the same period last year and up 20 basis points sequentially, both on a lower base of volume. Year-over-year and sequential improvements were largely driven by a higher percentage of life cycle solutions portfolio revenue, which is made up of our HPS and ATS businesses, which generate more favorable margins than our non HPS CCS revenues.First quarter adjusted SG&A of $53.6 million was up $3.7 million versus a year ago, primarily due to higher functional spend and unfavorable foreign exchange impacts. Adjusted SG&A was down $2.9 million sequentially. Non-IFRS operating earnings were $43.3 million, up $5.2 million from the same quarter last year and down $6.7 million sequentially. Our non-IFRS adjusted effective tax rate for the first quarter was 21% compared to 24% for the prior year period and 19% last quarter. For the first quarter, adjusted net earnings were $27.8 million compared to $20.7 million for the prior year period and $33.3 million last quarter. Non-IFRS adjusted earnings per share of $0.22 were $0.01 above our guidance midpoint and up $0.06 year-over-year due to higher non-IFRS operating earnings and lower interest expense. Sequentially, non-IFRS adjusted earnings per share were down $0.04, mainly due to lower sequential non-IFRS operating earnings. First quarter non-IFRS adjusted ROIC of 10.8% was up 1.3% compared to the same quarter of last year and down 1.6% sequentially.Moving on to working capital. Our inventory at the end of the quarter was $1.15 billion, up $62 million sequentially and up $81 million compared to the prior year period, largely to support growth in our HPS business. Inventory turns were 4.0 in the first quarter, down from 4.4 turns last quarter and from 4.8 turns in the prior year period. Capital expenditures for the first quarter were $13 million or approximately 1% of revenue. Non-IFRS free cash flow was $20.9 million in the first quarter compared to $53.8 million for the same period last year and up from $18.5 million in the prior quarter. We are pleased to have delivered positive non-IFRS free cash flow for 9 straight quarters.Cash cycle days in the first quarter were 82 days, up 13 days year-over-year and up 9 days sequentially. Our cash cycle days are higher than normal, partially due to the lower level of revenue we experienced in the first quarter. Our expectations are for cash cycle days to improve as we continue through 2021. In the first quarter, we incurred $6 million of restructuring charges to further adjust our cost base to align with changing demand levels, primarily in our A&D business.Moving on to some additional key metrics. Our cash balance at the end of the first quarter was $449 million, down $23 million year-over-year and down $14 million sequentially. Combined with our $450 million revolver, which remains undrawn, we continue to have a very strong liquidity position of approximately $900 million in available funds. We believe our liquidity is sufficient to meet our current business needs. During the quarter, we repaid $30 million of our long-term debt and ended the quarter with gross debt of $440 million, achieving net cash of $9 million. This marks the first time we have achieved a positive net cash position since the third quarter of 2018. Our first quarter gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.4 turns, an improvement of 0.2 turns sequentially and an improvement of 0.6 turns from the same quarter last year. We are pleased with the progress we have made to deleverage our balance sheet, which we have achieved as a result of strong non-IFRS free cash flow generation and disciplined capital management. At the end of 2021, we were compliant with all financial covenants under our credit agreement. Since announcing our NCIB program last November, we have repurchased approximately 0.6 million shares at a cost of $5.3 million or an average price of $8.35 per share. As we proceed through 2021, we will continue to take a balanced approach towards capital allocation. We are focused on generating $100 million or more of free cash flow and utilizing this cash to primarily pay down debt to reduce our interest expense and maintain maximum financial flexibility. We will, however, also be opportunistic towards share buybacks under our existing NCIB program. Our long-term capital allocation priorities remain unchanged. We are focused on generating consistent non-IFRS free cash flow, achieving our annual targets and returning 50% of that capital to shareholders, with the other 50% to be in reinvested in our business.Now turning to our guidance for the second quarter of 2021. We are projecting second quarter revenue to be in the range of $1.325 billion to $1.425 billion. At the midpoint of this range, revenue would be up 11% sequentially and down 8% year-over-year, including the impact of our disengagement from Cisco. For our non-Cisco portfolio, achievement of the midpoint of our guidance range would represent revenue growth of 3% year-over-year. Second quarter non-IFRS adjusted earnings per share are expected to range between $0.21 to $0.27 per share. At the midpoint of our revenue and adjusted EPS guidance ranges, non-IFRS operating margin would be approximately 3.5%, an increase of 10 basis points over the same period last year and flat sequentially. Non-IFRS adjusted SG&A expense for the second quarter is expected to be in the range of $54 million to $56 million. We anticipate our non-IFRS adjusted effective tax rate to be approximately 21%, excluding any impacts from taxable foreign exchange or unanticipated tax settlements.Turning to our end market outlook for the second quarter of 2021. In our ATS end market, we anticipate revenue to be up in the mid-teen percentage range year-over-year, driven by continued demand strength in our capital equipment and HealthTech businesses and a return to growth in industrial, partly offset by continuing weakness in commercial aerospace as a result of COVID-19. In CCS, we anticipate our communications end market revenue to be down in the low double-digit percentage range year-over-year, driven by our disengagement from Cisco. The remainder of our communications portfolio is growing, driven by strength in demand from our service provider customers as well as our HPS business. In our enterprise end market, we anticipate revenue to decrease in the low 30s percent range year-over-year due to market demand softness and very strong performance in the same quarter last year.I'll now turn the call back over to Rob for additional color on our end markets and overall business outlook.

[Robert Andrew Mionis, President, CEO & Director]

Thank you, Mandeep. We are pleased with our company's continuing execution of our strategy, which reflects our team's work ethic and ability to navigate the unique challenges presented by the current business environment. We are off to a strong start with our first quarter results, which we believe position us for a successful 2021. We continue to navigate several challenges in the context of the current macro environment. The pipe constraints continue to impact most of our end markets, resulting in extended lead times for components. In the first quarter, due to our advanced planning and proactive approach to securing necessary components and materials, we were able to limit the impact on our revenues to $12 million. While we have accounted for our best estimate of the potential impacts of component shortages in our second quarter outlook, we are seeing further tightening of supply chains and market conditions are becoming more challenging. We continue to monitor the situation and are working closely with our suppliers and customers to mitigate the impact on our business. We expect these conditions will persist for the remainder of 2021. Despite the challenges from COVID-19, we continue to operate at normal capacity levels across our network. We are seeing the number of COVID-19 cases rise again in certain regions, while many parts of the globe in the midst of a third wave. While some jurisdictions such as Canada and Western Europe are responding with additional restrictions, other jurisdictions are easing their restrictions. Our global operations team continues to work diligently to implement the required health and safety protocols and the health and well-being of our employees and business partners remains our highest priority as we navigate through these dynamic times.Now turning to our segments. In ATS, we are very encouraged by the resiliency of our diversified businesses, and we reiterate that we are targeting 10% revenue growth in 2021 compared to 2020. We also remain focused on reentering our target segment margin range of 5% to 6% by the end of the year, despite the continued weakness in commercial aerospace. Our capital equipment business continues to exhibit very strong growth, primarily led by new wins and market share gains from our semi-cap customers. The demand backdrop in the semiconductor space remains quite strong, supported by secular tailwinds. We expect our capital equipment business to remain robust in the second quarter and for the remainder of 2021. And our display business, as noted in our comments last quarter, we continue to anticipate growth towards the end of the year and into 2022. In industrial, demand has largely stabilized on a sequential basis. With the worst of the impact of COVID-19 on our industrial business now behind us, we expect to return to year-over-year revenue growth in the second quarter. In A&P, headwinds in the commercial aerospace market continue to pressure our results as operators have meaningfully pared back expenditures in the face of lower levels of commercial air traffic. We have taken the actions, we believe to be necessary to adjust our cost structure to align with a lower level of demand. Looking ahead, while we expect the commercial aerospace market to remain depressed throughout 2021, we are anticipating higher revenue in the second half of the year compared to the first half as new program wins ramp. In our HealthTech business, we continue to see strong growth, both year-to-year and sequentially, supported by the ramping of a number of new program wins. We anticipate this strength to continue throughout 2021.Now turning to CCS. Having successfully completed the Cisco disengagement in Q4 of 2020, we continue to see the benefits of our portfolio reshaping initiatives, which have resulted in improved mix and higher year-over-year non-IFRS operating margin despite operating on a lower base of revenue. Our CCS segment margin once again surpassed our target range of 2% to 3%, and we expect full year margins to be at the high end of the range or slightly higher. As noted, while revenues are lower on a year-to-year basis as a result of the Cisco disengagement, our non-Cisco CCS business grew 16% in the first quarter compared to the prior period. We anticipate further growth for our non-Cisco CCS portfolio in '21 compared to 2020. Our Hardware Platform Solutions business demonstrated another excellent quarter, with year-to-year growth of 46% in the first quarter on the back of strong demand from service providers in our communications end market. This growth helps to offset some of the impact from our Cisco disengagement. HPS represented 16% of our total business in the first quarter, up from 15% last quarter and 10% a year ago. Based on the orders we have received from our customers to date, we currently expect HPS to grow in the double-digit percentage range in 2021, higher than the high single-digit percentage growth range we indicated in January. In the communications end market, we expect demand to remain robust in our core portfolio of business in 2021, supported by the recent strength in demand from service providers. On a year-to-year basis, however, revenue growth will be pressured by the Cisco disengagement. In our enterprise end market, demand has been relatively soft in recent quarters, and we expect these conditions to persist for the near-to-medium term.As previously discussed, our HPS revenue and ATS segment revenue together represent what we call life-cycle solutions. In the first quarter, our life cycle solutions portfolio grew 7% year-to-year and grew 1% sequentially. In Q1 2021, our life-cycle solutions revenue accounted for 59% of total revenues, up from 52% in Q4 of 2020. We continue to expect life-cycle solutions to account for a growing portion of our total consolidated revenues and act as a driver of non-IFRS operating margin improvement. Currently, we also expect our life-cycle solutions portfolio to grow in the double-digit percentage range in 2021 compared to a high single-digit percentage range outlook in January.With 2021 off to a strong start, we remain as focused as ever on executing our strategy, which is diversifying our end markets, delivering higher value solutions to our customers, expanding our life cycle solutions capabilities and flawlessly performing for our customers. We believe this strategy will lead to sustainable revenue growth and expanding operating margins over the long term.I would like to thank our employees for their incredible efforts and dedication to the company. Our global team's commitment, resiliency and adaptability during these challenging times is commendable. Our people are the key driver to our success, and their performance instills on us great confidence that we will continue to deliver strong results and execute on our plan for the remainder of the year and beyond. We look forward to updating you on our progress over the coming quarters.With that, I would now like to turn the call over to the operator to begin our Q&A.

[Operator]

[Operator Instructions] Your first question comes from the line of Robert Young with Canaccord.

[Robert Young, Director]

I'd like to start in the semiconductor space. Just wondering if you think about that business and the puts and takes around all of the chip shortage news that we're hearing today. I mean, I assume that, that's more of a positive driver for your business, given the potential for capacity expansion in the semi-capital equipment business relative to any shortages that chips might have driving your business? And maybe some comments there would be helpful.

[Robert Andrew Mionis, President, CEO & Director]

Rob, yes, that's correct. As you've been reading, the semiconductor -- semi-cap space has been quite strong for us and for the entire industry. We're expecting this year, year-over-year growth and also sequential growth. And we also feel that we'll grow faster than the market this year because of the new vertical investments that we've been making in our semi-cap space. With respect to the inverse of that, the takes, if you will. On the shortage side, I think we've managed it very well in Q1, as we highlighted in the script revenue that was gated by material with $12 million, which is, frankly, fairly low. We got ahead of it. We do think that's going to increase as time moves forward, but it's more about tempering the upside than constraining the output. So net net, I think it's a positive for us, and we're looking forward to a really strong capital equipment year this year and probably likely into next year and beyond based on the forecast that our customers are giving us.

[Robert Young, Director]

Okay. That's great color. The HPS growth that you saw, I'm curious about the broader drivers, when you see a bump in demand like that within the . What is just driving that exactly? Is that engineering work that's converting into a bigger manufacturing ramp? Or is that just an expansion of the demand in the products that you've built like it seems to me that like a quick jump in demand there would be less likely than other parts of the business. Help me with that.

[Robert Andrew Mionis, President, CEO & Director]

Yes, good question. What we've seen in the HPS business, it's been a very robust and growing market, and it's been really fueled for us by a broader adoption of our product set, both within the data center and across a larger set of customers. So frankly, we're gaining market share. We do business with 8 to 10 service providers and been growing share with them. And hyperscale growth as a percent of total IT spend has been increasing. And as a result of that, we've been growing not just with the market, but also faster than the market because we -- our products being used again by a broader set of customers. And within the data center we're finding new uses for our products based on the offering that we have. And then lastly, our operations team has just been doing a phenomenal job being able to meet higher levels of output-based on the relationships we have with ecosystem partners and silicon providers as well.

[Robert Young, Director]

Okay. Great. And then as that Cisco revenue now is you're replacing it, is it the HPS business that you're using to backfill the capacity from Cisco? And then I'll pass on.

[Robert Andrew Mionis, President, CEO & Director]

Yes, exactly. And I would say largely so regarding Cisco transition, frankly, we couldn't have plan it any better. As I mentioned in the call, we've met all our backfill targets with a richer mix of programs aka Hardware Platform Solutions. And frankly, it's a lot more aligned to our strategy and capabilities. And on top of that, we've had strong demand from our base business. And when we look at the utilization in Thailand, where the Cisco business has performed, it's quite strong, and it's driven by a solid mix of HPS products.

[Operator]

Our next question comes from the line of Thanos Moschopoulos with the BMO Capital markets.

[Thanos Moschopoulos, VP & Analyst]

Rob, with destruct to the component shortages, is that impacting some segments more than others? Or is it just fairly across the board?

[Robert Andrew Mionis, President, CEO & Director]

It's impacting the segments that have higher growth rates than us. So the segments that have higher growth rates, our HPS segment, capital equipment segment, a little bit industrial. Those are the segments that are impacting more. But again, I would count it as it's kind of tempering the upside versus constraining the base demand. It's a very strong demand environment in these segments, and customers are trying to accelerate their demand, and it's being paced by some of the component shortages. Now that being said, frankly, we're all over it. We have good order coverage with our suppliers, and the teams are working it very hard.

[Unknown Executive]

Yes , is to explain what Rob was mentioning, because of the planning that the team had done, we have been able to largely get ahead of the retral constraints. When Rob talking about tempering the upside, the challenge right now is drop in orders when customers want a 6-year product within the quarter, there's just not enough time to secure the material. So we factored it into our guidance, but it's really tempering maybe additional upside.

[Thanos Moschopoulos, VP & Analyst]

Okay. And then you mentioned that the cash cycle days should improve, which I thought is interesting dynamic given the shortages. Is that a function of your end market mix? Or what's driving the dynamic?

[Unknown Executive]

Yes. So cash cycle days, the metric itself is just abnormally high in the first quarter. What we're seeing is a function of the formula. It's a 2-point average, and we have a lower level of revenue. And then just with Cisco coming out as well. But as we go through the year, the metric is going to get back more in line with what you would have historically expected from us? But even with the inventory growth that we have been seeing or, frankly, the reduction that we have not yet seen, it is all factored into our outlook, and we still feel comfortable on being to generate over $100 million of cash even with the current supply chain environment.

[Thanos Moschopoulos, VP & Analyst]

Great. And then finally, can you comment on the semi equipment margins, and how they're tracking currently versus what do you consider kind of be your target margin for that second?

[Unknown Executive]

Yes. So what I would say is that the semiconductor business itself is performing very well right now. So it is in line with our expectations, and we believe that as there continues to be stronger demand in the semiconductor space, that there is an opportunity still for some trigger margin expansion. On the display side of the business, as we commented, we're expecting the demand to start picking up towards the end of the year. And so there's an opportunity for the margins to improve in that business. And so overall, what I would say is that as capital equipment continues to grow, we do still believe that there's some opportunity for further margin expansion.

[Operator]

Your next question comes from the line of Ruplu Bhattacharya with Bank of America.

[Ruplu Bhattacharya, Vice President]

Rob, the communications revenues came in better than expected. I think you had guided a decline of high single digits, but it was down only 2%. So can you just drill into the different end markets within communications, which one outperformed your expectations? And then on the enterprise side, I think revenue came in a little bit lower than what you had guided, but also you're guiding down 30% year-on-year. So if you can just kind of highlight some of the things going on in the enterprise side as well.

[Robert Andrew Mionis, President, CEO & Director]

Sure, Ruplu. So on the comm side, the strength that we've seen is really in our networking business. We also saw some demand strength with existing programs, which is a mix of HPS and EMS. But broadly speaking, the communications upside was driven by HPS. Again, it was offset by the and some demand dynamics, but on nonfiscal revenue was really driven by networking and our HPS business. On the enterprise side, what we've seen is broad demand softness, market softness in HPD and and tougher comps. And we've had a number of ramping programs in 2020, where demand has normalized this year.And operator, there's some noise in the background. Maybe you could figure it out yourself, who needs to go on mute.

[Ruplu Bhattacharya, Vice President]

Okay. Thanks for the details on that, Rob. And just to drill a little bit into the component shortages. I mean, which components are you seeing shortages on, I mean, specifically? And the inventory, you end up $60 million sequentially. Was that -- some of that -- are you using the strength of your balance sheet to keep some of the raw materials on hand? And do you expect the inventory to be up sequentially in the June quarter?

[Robert Andrew Mionis, President, CEO & Director]

I. I'll take the first part and pass the second part to Mandeep. So in terms of the shorts, right now, it's largely in the semiconductor side, semiconductor lead times by our measure have increased by 50% over the last 6 months, which is, frankly, outstanding. The are operating at max capacity, while negative on our shortages, a very strong positive on our semi-cap business. But on the passive side, lead times are also starting to increase. It's been about a 20% increase in lead times in the past over the last 6 months. And I do believe they will get more constrained as time moves on, them capacitors, , resistors. So I do think that will get more constrained as we get further into the year as well. And over to Mandeep on the inventory.

[Operator]

Your next question comes from the line of Paul Steep with Scotia Capital.

[Robert Andrew Mionis, President, CEO & Director]

One second, I think Mandeep was on mute, let me ask that one.

[Mandeep Chawla, Chief Financial Officer]

Hang on Paul, we'll take your question. Just to wrap up your question on inventory. The inventory dollars are relatively flat on a year-over-year basis. 2 dynamics happening. #1 is we are building inventory of HPS because of the continuing growth that we're seeing, we are expecting HPS to grow sequentially as we go through the year. The other thing as well is that because of the supply chain environment, we were able to work very closely with our customers to secure material and line up to their orders. And one of the things you'll see is our deposits also increased quite a bit. So they're paying for some of that. In terms of performance as we go through the year, the turns are expected to improve. And so Q1 is expected to be the low point when it comes to inventory turn. Paul, I'll turn it over to you for questions.

[Paul Steep, Analyst]

Just a couple of quick ones. First one, maybe for Rob and a little bit higher level here. If you step back and maybe walk us through, can you highlight out either in ATS or CCS, with the new programs you've been winning sort of consistently in some of the segments over the last year, 1.5 years, what's changed with customers? Is there anything meaningfully changing in terms of either your approach to the market in terms of profitability profile? Or in terms of how customers are contracting in committing that we want to look at?

[Robert Andrew Mionis, President, CEO & Director]

Good question. On the ATS side, we've been investing in engineering capabilities across all those segments. And a big change in the margin profile of our ATS business today and also moving forward is the dramatic increase in what we call engineering light engagement. So we're not just EMS provider in our ATS segment. We're actually an engineering partner as well. So that's been a continuing shift in our strategy in our contracting processes. And similarly, on the CCS side, we call that HPS, that's nothing new, if you will. We've always had a strong HPS business and based on the products that we've designed and some secular tailwinds that we've been seeing. Our HPS business has frankly, picking off and largely fueled by engineering capability and the solutions that we're providing to our customers. Hopefully, that addressed your question.

[Paul Steep, Analyst]

Great. And then maybe the second one for Mandeep, the classic capital deployment question. Just to check-in. I think last quarter, you were very specific about the tangible book value, and how you were approaching the buyback. Any change in view on how you're sort of looking at capital deployment now that you've gone net cash positive? And then I got one very fast cleanup.

[Mandeep Chawla, Chief Financial Officer]

Yes, of course, Paul. So we're continuing to be opportunistic. We're really pleased with the strength of the balance sheet. As we continue to generate free cash flow, our priority will be to continue to delever. Again, we paid down $30 million this past quarter, and we have an opportunity to pay down more as we go through the year. And it really serves us in 2 ways. One is we are very focused on EPS expansion year-over-year. And so that is helping lower our interest expense. And then it just continues to give us a healthier and healthier balance sheet, which gives us high levels of flexibility to act when we need to act. When it comes to share buybacks, we will continue to be opportunistic on it. When the shares are trading at very low values, we will be in the market to buy. However, we aren't feeling that, that's the first priority. And so we watch it. We will utilize the program whenever we need to. But if -- but our first priority right now is to be -- continue to look at delever.

[Paul Steep, Analyst]

Got it. And last cleanup one for either of you. Just with the life cycle guidance going from double-digit versus single-digit last quarter. What's the underlying assumption that has to be true to reach that guide? Or maybe put another way, is all of what you need to hit those numbers already in hand today?

[Mandeep Chawla, Chief Financial Officer]

Yes. So Paul, it's, of course, the combination of the 2. So it is HPS and ATS. So ATS, we are reiterating our growth expectations of 10%. And we're starting to see that, as you can see in our guidance in the second quarter, just a very strong reportage across a number of segments. And then on the HPS side, we have increased our growth expectations to be double digit, which frankly means 10% and more. And so when you put the 2 together, it brings life-cycle solutions to have a robust growth profile. On the ATS side, I would say that the outlook for capital equipment is strong at this point. And we do have new program ramps that are driving a lot of the growth in HealthTech as well as in industrial. And then on the HPS side, similarly, we have firm outlook from our customers. In some cases, we have firm POs. In other cases, we get the deals as we come along. But I would say that the outlook for HPS is stronger today than it was even 3 months ago.

[Operator]

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

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

I was wondering you could speak to the linearity or the expected linearity of growth in HPS over the year, is there any -- I mean, the 46% Q1 is quite strong? And then the outlook for a 10% or more for the remainder of the year, does show the acceleration. Like how should we think about it between Q2 and Q4?

[Mandeep Chawla, Chief Financial Officer]

Yes. Paul, so we're really pleased with the growth that we're seeing right now in HPS. As you'll recall, the growth last year really went into overdrive starting in the second quarter. And so we are going to start to see some tougher comps. We wouldn't expect necessarily 46% growth in the next couple of quarters. That being said, what we are comfortable with at this point is that we would be seeing sequential growth. And so $200 million in the first quarter. We are expecting more than that in the second quarter. But overall, just very good overall performance. And then when you look at it on a full year basis, it will be stronger than last year, of course. But we do need to moderate expectations because we just have various tough comps when you go to Q2 and Q4 of last year.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

And then digging a bit more further into that, like the underlying demand drivers remain impact. So ultimately, is it -- do you see sequential growth through the year and the demand in the pipeline from hyperscales and others continue to build in that business?

[Mandeep Chawla, Chief Financial Officer]

Yes. I mean, Rob touched on it a little bit, which is we're doing business right now with 8 of the top 10 hyperscalers. And the 8 that we're doing it with actually represent the vast majority of hyperscaler CapEx. And then when you look at the hyperscaler concentration as the total -- in terms of total hardware spend, hyperscalers are continuing to take more and more share of the overall market. And so we're participating in that upside with them. We are concentrated in only a couple of customers because of wins that have been happening in the business over the last year to 2 years, there are a number of programs ramping. And so we do have a diverse set of product offerings that our customers are buying. And we also have a diverse set of customer logos ahead of the growth that we are anticipating is with a lot of new program mix .

[Robert Andrew Mionis, President, CEO & Director]

I would also add, Paul, that in this segment, particularly because of the demand strength is so strong, our growth is really going to be, again, tempered by or governed by our ability to get components. But given the nature of the demand, the design nature of the demand, I would also say that it's not perishable. So again, we're expecting good strong sequential growth throughout the year. We do have some tough comps, but good strong sequential growth. And because of the strong demand environment, it'll probably be more paced by component availability than anything else.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

That's a good help, a good point. Just shifting over to the health care business. Could you speak to the breadth of momentum in that business? I think the Canadian ventilator started to ramped up, I think, last quarter. But how do you see outside of that contract in terms of other opportunities and the breadth of the momentum there?

[Robert Andrew Mionis, President, CEO & Director]

Good question. So HealthTech business continues to exhibit strong growth, very strong growth in Q1 on a year-over-year basis or also sequentially. I would say about half the growth we're experiencing is kind of COVID-related demand and there is a PPE point of care, patient monitoring imaging devices. And some of that growth that we're seeing in the first half of the year will probably temper a bit in the back half of the year. But the other half of the growth we're seeing is really driven by new program wins. And I would say they're not directly related to COVID. They're in the areas of surgical instruments, medical hardware, patient monitoring. So when you put those together, we're expecting a rather strong year from our HealthTech business all in those areas.

[Paul Michael Treiber, Director of Canadian Technology & Analyst]

And then just lastly for me, just on the A&D business, how do you balance between profitability in light of lower utilization of demand in the near-term versus trying to sustain investments in that business because I do think it's a long-term growth opportunity. How do you sort of balance those 2 here?

[Robert Andrew Mionis, President, CEO & Director]

Yes. That is the question that we talk about. The answer is we're trying to grow where the -- in our A&D business where the markets are more favorable and that being in our defense business. So as we mentioned on the call, we are expecting some revenue growth in the back half of the year. It's majority in the defense space and it's majority driven by some of the wins that we had last year that are starting to ramp in the back half of this year. We're also expecting some slight early signs of recovery in the bizapp market. That being said, we do have several sites in the network that are at critical mass, and we're keeping them at that level, so we don't lose capability until the market does recover. But it has been dragging on our ATS segment, but again, despite that, our ATS segment seems to -- is definitely stronger on a margin perspective, largely fueled by the other verticals that we mentioned in the semi-cap HealthTech industrial.

[Operator]

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

[Todd Adair Coupland]

Yes. Good morning, everyone. I wanted to ask about market conditions post the Cisco engagement. With that decision, did it have a noticeable impact on overall pricing in the market with respect to not only yourselves, but the overall market, Cisco has traditionally been very aggressive with their suppliers. But with you a major Tier 1 supplier pushing back, are you seeing a bit of the power ship back to someone like yourself to drive better pricing? Is there a better tone in the market as a result of that decision?

[Robert Andrew Mionis, President, CEO & Director]

I think the -- in core EMS, so in the non-commoditized space, I think pricing usually is reflective of how utilized people's factories are. In some cases, where effective utilization is low, some EMS players might make a decision to bring in lower-margin work to keep the utilization up and the inverse is true. So I think the pricing environment is a reflection of the demand environment, with the demand environment being generally robust across most of EMS, I think pricing has been more disciplined. Again, our strategy is to shift away from the lower value ramp stuff into the higher value-add stuff. So there's higher entry, sticking relationships, and the margins tend to be higher because of the higher value add. And that strategy, I think, has proven out for us, and we'll continue to deal results for us.

[Todd Adair Coupland]

And post Cisco, are you happy with the CCS mix? Or do you anticipate you'll need to have a regular sort of upgrading of the mix as you look forward over the next 2 or 3 years?

[Robert Andrew Mionis, President, CEO & Director]

Right now, we're very happy with. The CCS mix market conditions always change, so it's -- we always take a look at it, but the mix within CCS is very good. In the EMS business, it's in the higher value-add areas. And HPS business is growing nicely. And even in the MS space, we're working with those customers to kind of move up the value chain and to introduce HPS solutions into those customers as well.

[Todd Adair Coupland]

And then my last question is, you have the mixes that you have, you have excess capital on the balance sheet for growth. Are there any other verticals where do you think you should expand either in ATS or CCS? Just talk about what might make sense over the next 2 or 3 years?

[Robert Andrew Mionis, President, CEO & Director]

Yes. I think that goes back to our potential M&A strategy. When you were thinking about capabilities, we always take a look at -- does it make sense for us to invest organically and build those capabilities? Or is there a sort of more accretive path to buy them. We usually default because of the risk factor to developing those capabilities in-house. And we've been making investments within many of the verticals within capital equipment. We've been working on vertical integration and in areas such as well, well paint and cleaning. Within our HealthTech business, we've been adding engineering capability. Within our industrial business, we've been adding engineering and design capability as well. In terms of broad new spaces, we're always looking at it, but at this stage of the game, I don't think there's anything material to announce or to share with the community.

[Operator]

Your next question comes from the line of Jim Suva with Citigroup Investment.

[James Dickey Suva, Research Analyst]

I have 2 questions, and so you can ask them in the order you want. Can you give us a little bit of insights or updates on your cloud efforts? I know in the past, it's been a bit of a hidden gem in the company of Celestica, about your cloud doing so well, maybe -- I don't know how much details you can give, but any updates on that? And then secondarily, while a full year guidance is hard to do, there are some moving parts this year for the year-over-year comparisons with the disengagement, which I believe, if my memory is right, is around $500 million. Can you correct me if I'm right or wrong on that? And if so, do you think consensus for this year, which is around $5.5 billion or down 5% year-over-year, is that calibrated and correctly adjusting for some things? Or I just want to make sure since there's some moving parts that were kind of calibrated generally freckle or any color or direction.

[Robert Andrew Mionis, President, CEO & Director]

Jim. I'll handle the first one, and I'll ask Mandeep to talk about Cisco. But in terms of our cloud business, we have several sources of growth. As we mentioned on other calls, a comprehensive road map is really around all the core technologies in the data center. So within switching, which has been a key driver of growth this year. is one of the key drivers. We have very strong positions with market leaders in other speeds as well, also the healthy business. Edge is also a source of growth. We've seen strong data center cloud offering, including HPS solutions. And that's been a driver for us as data center workloads move to the edge. We're seeing some strength from some of our comms, customers on the wired side given some expansion from 4G to 5G. And we're also developing some edge programs in the service space that are resonating with some original customers. And we're working with them to make sure that they have the right solutions and the requirements. And lastly, on compute, listen, that's a healthy business as well as the data centers continue to expand AI and ML applications. So -- and we also have healthy positions with our enterprise and service provider as well. So across, again, all the key technologies and the data center are -- we have very good positions. That's been a driver of growth. And it's a very sticky business also because with each successful development cycle and product launch that we have with our cloud providers, there's an increased resistance for our partner to change given the criticality of the products to our customers. So success is beating success, and that's been a key driver of our growth as well. And the second, I'll turn it over to Mandeep.

[Mandeep Chawla, Chief Financial Officer]

Yes. Jim, so I'll stop short of providing full year revenue guidance, but I will double-click on the pieces. And so as you hit on it, there are parts of the business that are growing quite nicely. So our life-cycle solutions revenue at the end of last year, it was just under $3 million. And again, we're targeting 10% or more growth in that overall portfolio, which is our HPS and ATS businesses. So $300 million or more growth than anticipated from there. On the Cisco piece, about $520 million of revenue is coming out year-over-year. And so you can -- that's the #1 thing that's offsetting the growth in life-cycle solution. What I will say is we gave remarks on our growth for the non-Cisco portfolio, so essentially the company ex Cisco. We grew in the first quarter of 7%. The midpoint of our guidance implies 3% growth in the second quarter, and we are targeting growth in Q3 and in Q4 on a year-over-year basis for the non-Cisco portfolio.

[Operator]

Your next question comes from the line of Matt Sheerin with Stifel.

[Matthew John Sheerin, MD & Senior Equity Research Analyst]

I wanted to just ask -- just a question regarding your enterprise segment, which is down by double digits. It sounds like your outlook, Rob, is more cautious on that group. I know there's some tough comps you're up against. But we are hearing signs of on-prem infrastructure spending gradually improving, particularly as companies get back as projects that were pushed out get renewed. Are you seeing that? Or are you just continuing to hear cautious commentary from your own customers?

[Robert Andrew Mionis, President, CEO & Director]

Based on the mix of programs that we have, and we're hearing a cautious mix, we've had -- last year was a particularly strong year for us. So a lot of the comps that we think are very -- are really tough, at least for us on the storage side. And also the same on the service side. So that's kind of a key driver of some of the year-over-year comps, the year lower guidance, if you will. And the mix of products that we have. And this, in our view, there's general softness in HDD and external storage as well.

[Matthew John Sheerin, MD & Senior Equity Research Analyst]

Okay. And just another inventory question. Regarding your outlook, I think you said that you expected your inventory turns actually to be -- to improve as you get through the year, even though inventory levels are higher, is that correct?

[Mandeep Chawla, Chief Financial Officer]

That's right, Matt. So we expect that our first quarter revenue is going to be our lowest quarter of revenue in the year. And a lot of the inventory that we have on hand, some of it was very strategically brought in to support some of the growth that we're seeing. And so we expect that our inventory turns will be improving sequentially.Operator, we can take the next question. Operator?

[Robert Andrew Mionis, President, CEO & Director]

Operator, next question. Operator?

[Operator]

Your last and final question comes from the line of Daniel Chan with TD Securities.

[Daniel Chan, Research Analyst]

I just want to drill into the semi-cap opportunity a little bit more. I'm just wondering, like we've seen a number of fabs announced expanded CapEx and then also some of the suppliers take forecasts up. To what extent has that flowed through to you? Just trying to get a sense for the opportunity for even more upside to what you've been seeing. So I'm just kind of curious whether you're seeing some of those orders really accelerate? Or do you think there's more to go?

[Robert Andrew Mionis, President, CEO & Director]

No, it's -- hi, Dan, it's Rob. It's a very strong semi-cap environment right now. We're the largest or one of the largest in our space and have leading positions with all the major equipment manufacturers that do outsourcing. So it's been a direct flow-through from the fabs to them right to us. And again, this year, a large portion of our growth is not just by a rising card, but it's really by new programs or share gains, and all of those new programs are based on the investments that we made during the down cycle and some new verticals and some capacity adds as well. So we think we're going to be a direct beneficiary of what we're seeing going on in the MFADS as well.

[Daniel Chan, Research Analyst]

Okay, that's helpful. And then on the communications side, as you gain as our customers in HPS continue to gain share, and you guys gained wallet share. I'm just curious whether that has any direct impact on some of the relationships that you have with some of your larger customers? Obviously, you've disengaged with Cisco, but you've got another large network or communications provider there as you gaining all share, does that change the conversation a little bit?

[Robert Andrew Mionis, President, CEO & Director]

Not materially. I mean, I think our -- between our cloud providers and our traditional OEMs, I think they view us as an enabler to their success versus anything else. And they're pulling on solutions that we offer, both offer in our HPS business in one way or another. So the conversations have been healthy on both sides. I think they're seeing the value in having someone like Celestica actually designing that product for them and also provide other value-added services. So I think the model, I think this whole pandemic has kind of shifted that model and accelerated that model moving forward. So it's been a that benefit on all lines of business.

[Operator]

Ladies and gentlemen, that concludes our Q&A portion of the call today, and I will now turn the call back over to Rob for closing remarks.

[Robert Andrew Mionis, President, CEO & Director]

Thank you, operator. We're off to a strong start in 2021 after a strong finish to 2020. We feel our efforts to diversify our portfolio, our yielding results of life-cycle solutions, representing 59% of the company's revenue. The revenue of the company's non Cisco business grew 7% year-over-year. And additionally, our operating margins continue to expand. And in Q1 '21, we posted our fifth consecutive sequential quarter of year-over-year non-IFRS margin expansion. We're excited about our efforts to transform our business are yielding results. In May, we will be hosting another roundtable discussion for our investors. This time, we will focus in on our capital equipment segment. So please stay tuned for more details. I'd like to thank our global team for remaining vigilant in keeping themselves and each other safe. And thank you all for joining today's call. I look forward to updating you as we progress throughout the year.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.