Celestica Inc

TSX:CLS

Earnings Call Analysis

Robust Q2 Performance with Raised Annual Outlook

In the second quarter, Celestica achieved record revenues of $2.39 billion, up 23% year-over-year, supported by exceptional growth in the CCS segment, which saw a 51% increase in revenues. The adjusted EPS was $0.91, marking the highest in company history. The non-IFRS operating margin improved to 6.3%, driven by higher volumes and improved mix. While the ATS segment faced a revenue decline of 11%, the overall performance led the company to raise its annual revenue outlook to $9.45 billion, with an adjusted EPS forecast of $3.62. Looking ahead, third-quarter revenues are expected to be between $2.325 billion and $2.475 billion, reflecting a 17% growth.

Strong Second Quarter Performance

In the second quarter of 2024, the company achieved record results with revenues reaching $2.39 billion, up 23% from the previous year. This growth was powered by robust performance in the CCS segment, which saw revenues surge by 51%, driven by increased demand in both enterprise and communications markets. Adjusted earnings per share (EPS) hit $0.91, significantly surpassing guidance and marking the highest quarterly result in company history.

CCS Segment Success

The CCS segment was the star performer, with revenues amounting to $1.62 billion. This growth was attributed to strong demand for AI/ML compute programs and accelerated demand for HPS networking products, driven by investments from hyperscaler customers. Notably, revenue in the communications end market rose by 64%, surpassing expectations.

Challenges in ATS Segment

Conversely, the ATS segment saw a challenging quarter with revenues falling by 11% year-over-year to $768 million, primarily due to softness in the industrial business. However, this was somewhat offset by growth in A&D and capital equipment sub-segments. Despite this decline, the ATS segment demonstrated resilience with a 12% year-over-year growth in non-industrial categories.

Margin Insights

The company’s non-IFRS operating margin improved to 6.3%, up 80 basis points compared to the previous year. The CCS segment’s margin rose to 7.2%, thanks to operating leverage and an improved product mix, while the ATS segment’s margin slightly declined to 4.6% due to reduced operating leverage at select sites.

Financial Health and Cash Flow

The company continued to showcase its strong financial health, generating $63 million in adjusted free cash flow for the quarter, and $129 million year-to-date. Adjusted gross margin improved to 10.6% due to better production efficiencies. The inventory levels were reduced significantly, helping to maintain a healthy cash conversion cycle.

Guidance for the Third Quarter

Looking ahead, the company expects Q3 2024 revenues to be between $2.325 billion and $2.475 billion, which would represent a 17% growth if the midpoint is achieved. Adjusted EPS is projected to range from $0.86 to $0.96, with an expected non-IFRS operating margin of 6.3%. The guidance reflects ongoing strength in the communications and enterprise end markets, driven by hyperscaler investments.

Annual Outlook Raised

Given the strong performance in the first half of the year, the company has raised its annual outlook for 2024. Revenues are now anticipated to hit $9.45 billion, with an adjusted EPS of $3.62, representing growth of 19% and 49% respectively compared to 2023. The non-IFRS operating margin for the full year is expected to improve to 6.3%.

Segment Outlook for the Second Half of 2024

For the ATS segment, the company expects a sequentially higher revenue performance in the second half of the year, driven by a recovery in the wafer fab equipment market and continued strength in the A&D and capital equipment businesses. The CCS segment is expected to maintain robust growth, with hyperscaler customer revenue projected to surpass $4.6 billion.

Long-term Growth Prospects

The company is upbeat about its long-term growth prospects, particularly in the AI/ML compute and HPS networking product lines. They anticipate solid demand driving growth well into 2025, with next-generation technology transitions indicating a strong outlook for future revenue and profitability.

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the Celestica Q2 2024 Earnings Call. [Operator Instructions] This call is being recorded on Thursday, July 25, 2024.

I would now like to turn the conference over to Craig Oberg, Vice President of Investor Relations and Corporate Development. Please go ahead...

[Craig Oberg, executive]

Good morning, and thanks for joining us on Celestica's Second Quarter 2024 Earnings Conference Call. On the call today are 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 statements related to the future performance of Celestica that contain forward-looking information. 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 statements. For identification and discussion of such factors and assumptions, please refer to our public filings available at sedarplus.ca and sec.gov. 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-IFRS financial measures, including non-IFRS operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, adjusted free cash flow, gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS, adjusted SG&A expense, adjusted effective tax rate and non-IFRS operating earnings.

Additional information about material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information as well as risk factors that may project future performance results of Celestica and reconciliations of such non-IFRS financial measures to their most directly comparable IFRS measures are contained in our public filings. 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 Mionis, executive]

Thank you, Craig, and good morning, everyone, and thank you for joining us on the call today. In the second quarter, our strong momentum continued, achieving revenues of $2.39 billion and adjusted EPS of $0.91, both of which exceeded the high end of our guidance ranges. Our non-IFRS operating margin was 6.3%, which was above the midpoint of our revenue and adjusted EPS guidance ranges. We also continue to generate solid adjusted free cash flow, which came in at $63 million during the quarter, including out year-to-date total to $129 million.

Our CCS segment saw a 51% year-to-year increase in revenues in the second quarter and achieved segment margin of 7.2%, which is 120 basis points higher compared to the prior year period. The top line growth and margin expansion continue to be supported by large scale investments in data center infrastructure from our hyperscaler customers, including very strong demand for our HPS offering.

In our ATS segment, revenues, as anticipated, were lower year-to-year, primarily driven by continued softness in our industrial business. Despite this demand softness, we remain encouraged by the strength in other parts of our ATS portfolio. In particular, we saw solid double-digit revenue growth in both our A&D and capital equipment businesses in the second quarter. Overall, we are pleased with our solid performance in the first half of the year. Looking ahead, we feel we are very well positioned to continue to capitalize on a number of high-value opportunities across our portfolio and strengthen our leadership position in key end markets.

I would now like to turn the call over to Mandeep who will provide a detailed review on our second quarter performance and our guidance for the third quarter of 2024. Mandeep, over to you.

[Mandeep Chawla, executive]

Thank you, Rob, and good morning, everyone. Second quarter revenue came in at $2.39 billion above the high end of our guidance range and up 23% year-over-year. The increase is supported by stronger-than-expected growth in our CCS segment partially offset by demand softness in our ATS segment. Second quarter non-IFRS operating margin of 6.3% was an improvement of 80 basis points over the prior year period. This expansion was driven by meaningfully higher profitability in our CCS segment due to operating leverage driven by higher volumes and improved mix.

Our second quarter adjusted earnings per share was $0.91, which exceeded the high end of our guidance range and was $0.36 higher year-over-year. This marked our highest quarterly result in company history. Our second quarter adjusted effective tax rate was 20%, in line with our guidance. As anticipated, our adjusted effective tax rate included the in-quarter impact of global minimum tax, which was enacted in Canada during the quarter.

Moving on to our segment performance. ATS segment revenue for the second quarter were $768 million, down 11% year-over-year, slightly more than our expectation of a high single-digit percentage decrease. Decline in ATS segment revenue was driven by continued demand softness in our industrial business, partially offset by year-to-year growth in our A&D and capital equipment businesses. Our ATS segment revenues other than our industrial business grew 12% year-to-year in the second quarter. ATS segment revenue accounted for 32% of total revenues in the second quarter.

Our second quarter CCS segment revenue of $1.62 billion was 51% higher compared to the prior year period driven by very strong growth in both our enterprise and communications end market. CCS segment revenues accounted for 68% of total company revenues in the second quarter. Revenue in our enterprise end market was up by 37% year-over-year in the second quarter, above our expectation of a low 20 percentage increase driven by strong demand for AI/ML compute programs.

Revenue in our communications end market was higher by 64% compared to the prior year period, which was better than our expectation of a mid-40s percentage increase. The growth in our communications end market was driven by accelerating demand for HPS networking products from our hyperscaler customers, primarily in support of their investments in AI/ML infrastructure. HPS revenue was $686 million in the second quarter, accounting for 29% of total company revenues and was up 94% year-over-year. The very strong growth in our HPS portfolio was driven by an acceleration in demand for networking products from hyperscaler customers, including 800G switch programs.

Turning to segment margin. ATS segment margin in the second quarter was 4.6%, down 20 basis points compared to the prior year period, driven primarily by a reduction in operating leverage at select sites. CCS segment margin during the quarter was 7.2%, up 120 basis points year-over-year as a result of operating leverage and improved mix. During the second quarter, we had 2 customers that accounted for more than 10% of total revenues, representing 32% and 12% of sales for the quarter. We continue to remain comfortable with the current level of concentration in our portfolio, supported by our diversification across multiple programs with our largest customers.

Moving on to some additional financial metrics. IFRS net earnings for the second quarter were $100 million or $0.83 per share compared to $56 million or $0.46 per share in the prior year period. Adjusted gross margin for the second quarter was 10.6%, up 90 basis points year-over-year due to improved mix, production efficiencies and operating leverage. Our adjusted ROIC for the second quarter was 26.7%, an improvement of 6.7% compared to the prior year quarter, driven by higher profitability and effective working capital management.

Moving on to working capital. At the end of the second quarter, our inventory balance was $1.85 billion, down $106 million sequentially and down $493 million year-over-year. Cash deposits were $576 million at the end of the quarter, lower by $143 million sequentially and down $233 million compared to the prior year period. As anticipated, we are returning some of our cash deposits from certain customers as gross inventory amounts reduced. Cash cycle days were 64 during the first quarter, down 5 days sequentially and 9 days lower than the prior year period.

Moving on to our cash flows. Capital expenditures for the quarter were $37 million or approximately 1.5% of revenue compared with 1.7% in the second quarter of 2023. We now expect our capital expenditures for 2024 to be between 1.5% and 2% of revenues slightly below our previous outlook of between 1.75% and 2.25% due to the higher-than-anticipated annual revenue outlook. In the second quarter, we generated $63 million of adjusted free cash flow compared to $67 million in the prior year period. We have generated $129 million of adjusted free cash flow year-to-date in 2024 compared to $76 million during the same period in 2023. We are pleased with our strong cash conversion and consistency in generating positive free cash flow on a quarterly basis, while also making the necessary investments to support our growth.

Moving on to some additional key metrics. At the end of the second quarter, our cash balance was $434 million, in combination with our borrowing capacity under our revolver. This provides us with approximately $1.2 billion in total liquidity, which we believe is sufficient to meet our anticipated business needs. Our gross debt at the end of the second quarter was $750 million, leaving us with a net debt position of $316 million.

Our gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.1 turns, up 0.1 turn sequentially and down 0.1 turn compared to the same period last year. During the quarter, we amended and upsized our credit facility, increasing our revolver capacity from $600 million to $750 million and entering into a new Term Loan A and B loans for a total of $750 million. The proceeds from the new term loans were used to pay down the outstanding balance on and terminate the previous term loans and repay the outstanding amounts under the revolver.

As of June 30, 2024, we were compliant with all financial covenants under our credit agreement. During the second quarter, we repurchased approximately 200,000 shares for cancellation under our normal course issuer bid at a cost of $10 million. Year-to-date, we have repurchased a total of approximately 700,000 shares at a cost of $27 million under the program. We will continue to be opportunistic towards share repurchases for the remainder of 2024.

Now turning to our guidance for the third quarter of 2024. Third quarter revenues are expected to be in the range of $2.325 billion to $2.475 billion which -- if the mix point of this range is achieved would represent growth of 17% compared to the prior year period. Third quarter adjusted earnings per share are expected to be in the range of $0.86 to $0.96, which if the midpoint is achieved, would represent an improvement of $0.26 per share or 40% compared to the prior year period. If the midpoint of our revenue and adjusted EPS guidance ranges are achieved, non-IFRS operating margin would be 6.3% which would represent an increase of 60 basis points compared to the third quarter of 2023. Our adjusted SG&A expense for the third quarter is expected to be in the range of $73 million to $75 million. And we anticipate our adjusted effective tax rate to be approximately 20% for the third quarter.

Now turning to our end market outlook for the third quarter of 2024. In our ATS segment, we anticipate revenue to be down in the low single-digit percentage range year-over-year, driven by softer demand in our industrial business, partly offset by continuing growth in A&D and capital equipment. We anticipate revenues in our communications end market to be up in the low 30s percentage range year-over-year, driven primarily by continued strong demand for HPS networking products. Finally, in our enterprise end market, we expect revenue to be up in the mid-30s percentage range year-over-year, driven by program ramps in our storage business and continued demand for server programs in support of AI/ML compute.

I'll now turn the call back over to Rob for a discussion of our end markets and to provide an update to our annual outlook for the overall business.

[Robert Mionis, executive]

Thank you, Mandeep. Based on our strong performance in the first half of the year and improving visibility across a number of our businesses for the second half of the year, we are pleased to be raising our annual outlook for 2024. For the full year, we now anticipate revenue of $9.45 billion and adjusted EPS of $3.62, which would represent growth of 19% and 49%, respectively, compared to 2023. Our non-IFRS operating margin is now expected to be 6.3% which would represent a 70 basis points improvement compared to 2023. And finally, our outlook for adjusted free cash flow of $250 million for 2024 remains unchanged.

Now moving on to the outlook for our businesses. Beginning with our ATS segment. As anticipated, our ATS segment revenues declined in the first half of 2024 compared to 2023, primarily due to softer demand in our industrial business. For the full year, we now anticipate our ATS segment revenues to be down in the mid-single-digit range compared to 2023 and compared to our prior outlook of approximately flat. We continue to anticipate the second half of the year to be sequentially higher compared to the first half.

In our industrial business, we continue to experience softer demand on a year-to-year basis, driven primarily by macroeconomic conditions and excess channel inventory. We expect the overall demand environment to gradually improve in the second half of the year. In our A&D business, we continue to see solid growth, supported by strength in commercial aviation and ramping new wins in defense programs. We expect that the strong demand environment will persist for the remainder of 2024.

The outlook for our capital equipment business continues to improve, as we are seeing encouraging signs that a recovery is materializing. Across our portfolio, we continue to anticipate solid growth in the second half of the year supported by strong demand and the ramping of new programs. The recovery in the wafer fab equipment market is being primarily supported by stronger memory demand across both DRAM and NAND. Our latest market forecast and discussions with our customers lead us to believe that the growth will continue into 2025 and a medium-term outlook for the wafer fab equipment market remains positive supported by growing demand for advanced processes used in AI and machine learning and the continued growth in application for semiconductors within products across a number of sectors.

Now turning to our CCS segment. Our CCS segment saw a very strong growth in the second quarter, with revenues up 51% compared to the same period in 2023 driven by solid demand in both our enterprise and communications end markets. The broad-based strength across both our end markets continues to be supported by demand from our hyperscaler customers, which grew by 93% in the first half of 2024, compared to the same period in 2023. The strength we are seeing in our hyperscaler portfolio is broad-based as our growth is being driven by solid demand across multiple technologies, programs and customers.

We expect solid demand to support continued year-to-year growth in the second half. In 2024 we anticipate revenues from our programs with hyperscaler customers will surpass $4.6 billion and will account for more than 70% of our CCS segment revenues. As we enter the second half of the year, we are seeing a mix shift within our CCS portfolio driven largely by the changing needs of our hyperscaler customers. We anticipate incremental growth in networking driven by healthy demand for our market-leading 400G switch products and ramping programs in the 800G switch as well as growth in storage.

We expect that this strength will more than offset a slight reduction in AI/ML compute, driven by technology transitions in certain sole-source programs. We expect to ramp new AI/ML next-generation compute programs in 2025. Overall, the demand backdrop for our CCS segment continues to be highly favorable. And as a result, we now expect revenues to be up in the mid-30s percentage range in 2024.

Our total company outlook for the second half of 2024 is very positive. And we remain focused on executing to serve our customers across our end markets, and we remain confident that our ability to system deliver strong financial results along with prudent capital allocation will enable us to drive long-term value for our shareholders.

With that, I would now like to turn the call over to the operator for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Thanos Moschopoulos.

[Thanos Moschopoulos, analyst]

To begin, can you update us on where you are from a capacity perspective? Remind us the time and new capacity coming line? And just in terms of where you are right now, whether you're bumping up against some constraints or what that dynamic looks like in terms of -- how much more capacity you still have at the moment?

[Robert Mionis, executive]

Yes, we had 2 capacity expansions going on, one in Malaysia. We actually opened doors officially in Malaysia on March 1, that's Kulim we call it, and products transitioning and the building is ramping. So we have plenty of capacity in Southeast Asia. In our Thailand facility, the project is actually going according to plan and we're hoping for a new business in Q1 of 2025, between now and then we feel like we have ample capacity to support all our customers. Also in North America, we still have ample capacity in that region and Texas facility as well.

[Thanos Moschopoulos, analyst]

And in response to the strong demand you're seeing, is there any change to your CapEx plans as you look out over the next few months? Or are you maintaining your prior plans on that front?

[Robert Mionis, executive]

Right now, we're maintaining our current plans. We don't anticipate any major investments moving forward. But we're always keeping a very close eye on it. It's a very fine line of making sure that we have full factories, but not too full that we're turning away demand and so far, we've been able to ride that very tight line and keep utilization high and our operations and volume productivity very high.

[Mandeep Chawla, executive]

As you know. we've been operating between the 1.5% and 2% of revenue CapEx range for a number years now, and that continues to be the right range, I would say, as you look forward over the next 3 or 4 years. The vast majority of that is actually targeted towards growth CapEx. Our maintenance is less than 50 basis points and so it gives us a lot of discretion on how we allocate those dollars to meet the immediate needs, but also long-term needs. So to Rob's point, the CapEx spending that we've been having will likely continue at those levels going forward.

[Thanos Moschopoulos, analyst]

Great. Last one for me. Just regarding the program transitions on the server business. How should we think about that from a timing perspective? So it seems that Q3 enterprise will be down sequentially. Does that dynamic continue as far into Q4? Or at what point would you expect sequential growth to resume in the enterprise as the new programs start to ramp up?

[Robert Mionis, executive]

Good question, Thanos. This is the benefit of having a diverse portfolio across all of CCS, but within NFI specifically within AI compute, what we're seeing now is this technology transition on the single-source program. It will start plateauing and decreasing towards the back end of the year with the new product ramping mid 2025, I would say.

The benefit of a diverse portfolio is we're actually seeing accelerated demand for our HPS networking products and those are actually filling in nicely in the back half of the year and expect it to also fill in through all of 2025 as use cases for our networking products increase across all of our hyperscale customers. What we're seeing now is a move towards more distributed regional data centers due to power constraints. And when you have that, you actually have an increased requirement for networking products.

[Operator]

Next question is from Matthew Sheerin.

[Matthew Sheerin, analyst]

It's Matt Sheerin from Stifel. Just regarding the commentary on the strength that you're seeing in communications and the Switch business, it sounds like there's a refresh of 400 gig because I know that there was a digestion period last year. So the question here is how long do you see that strength holding up? And then in terms of 800 gig, obviously, pretty early. But where would you say in terms of the innings, if you will, in terms of the opportunity over the next few quarters for 800-gig?

[Robert Mionis, executive]

Matt, yes, 400G is actually continues to be very strong through all of 2024 and also into 2025. 800G really starts picking up as we exit the year and also into 2025 and beyond. We're also seeing an acceleration of 1.6%. Again, that probably won't ramp until the out years, but we're actually seeing an acceleration of moving to that node, and we think we're very well positioned to capture more than our fair share of that program as well.

[Matthew Sheerin, analyst]

Okay. And then you talked about very strong margins in CCS, 7.6%. And how much of that was driven by the mix of the higher percentage of HPS and communications? And can you remind us the difference in the margin profile of the server business versus the comms business?

[Mandeep Chawla, executive]

Matt, Mandeep here. We don't break out margins between the end markets, but a couple of things that we have talked about before. One is margins with the hyperscalers in totality are accretive to our margins in CCS. And then margins in HPS are also accretive to overall CCS. And so the dynamic that you're seeing right now with hyperscalers continuing to grow and with our HPS revenue also continuing to grow, that's helping pull margins up right now. And so we do think that we continue to have a nice mix in the portfolio and opportunities for more operating leverage as we go forward.

[Matthew Sheerin, analyst]

Okay. Great. And just lastly, regarding that inventory reduction you're seeing, is that mostly on the ATS side and the fact that component lead times are short? Or is there some dynamics going on in the CCS business in terms of consigned inventory and that sort of thing? Because I would think that you'd be staging inventory for some of these ramps.

[Robert Mionis, executive]

Yes. It's actually -- we're seeing nice progressions in both ATS and CCS. From a macro perspective, lead times are starting to stabilize, still a little bit elevated, but passives and semis are not that different from each other and they're both below 20 weeks. And so what that has done is it's allowed us to just level load our planning process a little bit better. We have been seeing, I think, 5 quarters in a row now of gross inventory reduction. It's allowed us to return some deposits to customers. And despite doing that, another quarter of strong free cash flow. And so both ATS and CCS are turning their inventory nicely.

[Operator]

And next question is from Steven Fox of Fox Advisors.

[Steven Fox, analyst]

I guess just following up on the first couple of questions. Is there a way to maybe isolate the impact to year-over-year improvements in margins from mix versus operating leverage a little bit further at the corporate level and also the CCS level? And then I have a follow-up.

[Mandeep Chawla, executive]

We purposely don't start breaking out margins at that level because it's sometimes impacted by program dynamics in which sites programs fall into. What I can tell you is that building on what Rob had talked about earlier, we are having very nice levels of utilization in Southeast Asia, in particular, at the moment. The majority of our HPS programs are being built in a select number of sites, and those sites are with high levels of utilization are quite profitable. And so it's a combination of both operating leverage and pricing that we have within the HPS programs that are leading to the strong profitability.

But overall, and we've talked about this before in some different discussions with the outside community. HPS margins are accretive to overall CCS, they're not 20%, though. It's not 20% operating margins. And so that's why sometimes whether it's operating leverage or mix of HPS programs, it can often be one or the other, but get to the same results.

[Steven Fox, analyst]

Great. That's helpful. And then just on the ATS business, the end market dynamics you talked about just generally are consistent with what we're hearing from some others. But like 2 questions off of that. One is the industrial confidence that inventories are sort of washing out soon and what kind of growth they can return to? And then secondly, I think you've talked about new programs in health care as well. Can you sort of talk about how those are ramping and the impact on growth there?

[Robert Mionis, executive]

Sure, Steven. Yes. So across our ATS, we're actually seeing some very nice growth with the exception of our industrial business, ATS actually grew 12% year-over-year in the second quarter. So it's really isolated to industrial. Now within industrial, we're seeing softness in energy, namely EV chargers and also broad industrial markets back to the automation largely, and it's being driven by excess channel inventory. As the year gets long, we actually are seeing that channel inventory being consumed, and we're seeing an uptick in demand as we exit the year, and we're expecting our Industrial business to return to growth in 2025.

Again, outside of industrial, we're seeing some -- very nice growth with capital equipment, and it's actually improving. Our outlook is improving on a quarter-to-quarter basis. And A&D continues to have very strong demand, and we see that demand at least lasting through the end of this year.

[Steven Fox, analyst]

And just the health care, please select the new program?

[Robert Mionis, executive]

Thank you for reminding. So within health care this year is largely flattish, but it's really being driven by some programs that are building end of life. And were those new programs starting to ramp in the first half of next year. So it's really program dynamics more than anything else. But we do have some one business, some ramps that are just starting right now which we expect to pay dividends in 2025.

[Operator]

Our next question is from Daniel Chan of TD Cowen.

[Daniel Chan, analyst]

Rob, you mentioned last year that in the next generation of your AI compute servers has potential to have more Celestica IP in them. Is it fair to assume that these next-generation servers that you're transitioning to next year could carry a higher ASP and higher margins as well?

[Robert Mionis, executive]

Yes. Typically, what happens on HPS products. As these products -- server products transition from high-value EMS into HPS, they will carry higher margins because they have higher value add. If they stay EMS and during the technology transition mode, what we see is early in the life cycle of new product introduction, the ASPs are higher and as the volumes pick up and over time, the ASPs tend to come down and normalize over a little bit. And that has been true and continues to be true as in all product life cycle pricing. But again, as products transition from EMS to HPS, the margins will increase because of the higher value add.

[Daniel Chan, analyst]

And then maybe switching over to the communications side, do you have visibility on whether the mix of white box versus OEM networking equipment will be different going forward in these newer AI data centers versus what they had in the non-AI data centers?

Yes. Just wondering if you -- with your discussions with the hyperscale customers , whether do you have any visibility on whether they're looking to change the mix of white box networking equipment, like the ones that you make versus choosing an OEM supplier in these next-generation AI data centers?

[Robert Mionis, executive]

Yes, hyperscaler customers are continuing to embrace and adopt disaggregated model and continuing to buy more from folks like ourselves then switching to an OEM model. There's also a new class of customers that are emerging. We're calling them digital natives. And those class of customers have the capability to build and operate their own data centers, and they're also adopting an open architecture disaggregated model. And we're very excited about this new class of customers because they are actually a new source of growth for us with respect to our white box and all the technologies that we provide to the data center.

[Daniel Chan, analyst]

Great. And then maybe just one more. The storage strength that you're seeing, are those related to AI data center build-outs as well? Or are those more traditional cloud data center type deployments?

[Robert Mionis, executive]

Yes. It's hard to discern, Dan. We think that it's due to the AI build-out. But everyone of our hyperscalers has a different storage architecture. Some are going embedded, some are going external. So what we're seeing here is more of a program dynamics, but we think the overall trend is -- AI is driving the need for more data and more data driving the need for more storage, hence, we're seeing an uptick in demand.

[Operator]

And your next question comes from the line of Paul Treiber of RBC Capital Markets.

[Paul Treiber, analyst]

Just wanted to speak about the breadth of the programs that you have going on, particularly the large customers, specifically, can you just speak to or give examples of the magnitude of -- or the extent of the breadth there? And then could you also speak to the second 10%-plus customer in terms of what segment that customer is in and the historical relationship with that customer?

[Robert Mionis, executive]

Yes, I'll talk about the second one first. So the second 10% customer is also a hyperscaler. In fact, across all of our hyperscalers, we've experienced some significant growth. We've been doing business with this hyperscaler for decades. So a very long period of time. And this customer plus all our customers, we provide them and have the capability to provide them with a full suite of solutions, so everything from networking to compute to storage devices. What they're buying from us varies at different points in time, but we certainly have the capability to provide a full suite of products to all of our hyperscalers.

[Paul Treiber, analyst]

And the second question is just on the AL/ML compute program transitions. Is that -- you mentioned sole-source, is that primarily one customer, one program? Or is it several transitions -- either several customers or several programs at a customer at the same time. And related to that, could you speak to just the overall breadth of your AL compute business?

[Robert Mionis, executive]

Yes. So it's one customer several programs. And again, those will be [indiscernible] as customer continues to reach of innovation and introduces new products. With respect to our AI compute customer base right now, we have one very large customer on that.

[Mandeep Chawla, executive]

Yes. And then to the question, Paul, right now, as Rob has talked about it before, it's high-value EMS across a number of different programs. Our HPS road maps have compute in there as well. We're starting to gain some nice traction. And so we do see opportunities as we go into '25 and beyond for our HPS portfolio to not only continue to provide very leading-edge networking here, but we're also now moving more meaningfully into the server side as well into the compute side.

[Robert Mionis, executive]

And lastly, I would also add as the AI/ML compute market continues to grow, especially in custom silicon application. This really plays to our strength and given our strong track record that we have with our largest customer, we feel we're on a shortlist of players who can serve this market, especially as it pertains to -- not just high-value EMS, but JDM and HPS solutions that we could migrate to. So as such, we continue to explore a lot of additional opportunities and we have a lot of confidence that, that portfolio will continue to grow within [indiscernible].

[Paul Treiber, analyst]

You mentioned that the next generation in '25, it sounds like you've already won it. So there's good visibility there. But typically, what's the visibility you get in terms of the duration of these programs and how early are they awarded? And then could you give us a sense of like the pipeline per se for expanding your AI/ML compute business into other customers?

[Robert Mionis, executive]

Yes. We typically get about a year of visibility I would say as programs transition from one technology for the next. So we have pretty good visibility when it comes to the transitions certainly with our largest customer, that visibility is a bit extended because we constantly share technology road maps. And then the funnel for additional AI compute programs is quite large, actually, we're engaged with a number of different customers across a number of different opportunities as they are working to develop custom silicon solutions. And again, for me, it's just a matter of time before we win several of these opportunities and add them to our backlog.

[Operator]

And your next question comes from Jesse Pytlak of Cormark Securities.

[Jesse Pytlak, analyst]

There's some concerns over investment in AI infrastructure by some of your hyperscale customers. Can you maybe speak to the sense of urgency you're seeing from these customers for their build-outs and how that might compare to what it was 6 to 12 months ago?

[Robert Mionis, executive]

Yes. When we talk to our customers, they feel that we're at the early innings of what they're calling a transformative era. And they also view that the risk of underinvesting is much higher than the risk of overinvesting. And so they're actually making the hard decisions within their individual businesses to make sure they preserve the investment in spending on the appropriate technologies to further the AI revolution, if you will.

[Mandeep Chawla, executive]

Jesse, adding to Rob's comment. I know there's a lot of conversations around what does hyperscaler AI/ML spend look like going into next year and the year after. And that information is not as widely discussed as any of us would like. But I think what we can talk about are the programs that we are winning and the programs that we are ramping. We typically have up to a year of visibility on when revenue is going to start to materialize. And we are not seeing a slowdown right now, if anything, we're seeing an acceleration on our new wins. And it's nice because we're seeing it across a diverse set of technologies and across a diverse set of customers. And so right now, based on the bookings that we've been having, it definitely positions us for a strong '25.

[Robert Mionis, executive]

The last thing I add is, when we look at customer CapEx spending, which we do all the time, the second and third question, we ask ourselves is within that -- within those broad numbers? What actually are they buying and who are they buying it from and we feel, based on those 2 questions that we're very well positioned to participate in future growth.

[Jesse Pytlak, analyst]

Got it and then just tariffs and trade restrictions have been in the news headlines the past couple of weeks. Can you maybe just speak a little bit to the conversations that you're having with your customers on these topics? And then just thinking about your footprint and your customers' needs, what would the opportunity be like to win more programs if some of these restrictions get enacted?

[Robert Mionis, executive]

The beginning part broke out Jesse, are you talking about China restrictions?

[Jesse Pytlak, analyst]

Yes, that's correct.

[Robert Mionis, executive]

Okay. Yes. We've been keeping a very close eye on that, stepping back, it has not been new news that advanced chips and semiconductor capital equipment, advanced equipment has been restricted for a while there is some noise out there that those restrictions will increase with respect to a new class of chips and we're keeping close eyes on that.

But based on where our factories are and where our design centers are and our ability to be able to ramp those centers up, we feel comfortable that we're going to be able to move in a very agile way depending on what happens or what doesn't happen in the future. We have ample capacity in all our regions with respect to Southeast Asia, Mexico, Europe and North America. We operate in 15 countries. So based on our vast footprint and our scale, we think we could actually move pretty quickly such something unanticipated happen.

[Operator]

And your next question comes from Todd Coupland of CIBC.

[Thomas Ingham, analyst]

I'm just wondering if you're able to put any context around the new servers, the custom chip-based servers, relative to the business you've seen thus far, do you view it as an incremental step-up from a volume point of view? And any way to give us some color on that?

[Robert Mionis, executive]

Yes. Todd. From a volume perspective, we do see that the next generation of AI compute servers will be, I'd say, comparable to a bit higher than the current generation of AI compute services. Obviously, they'll be more powerful, but at the same time, the demand continues to increase. So the volumes that we're anticipating, I would say, would be a touch higher. That being said, these technology transitions, they -- there's a little bit of a gap in between one going down and the other one going up. So it's not an instant transition. But for our earlier Q&A, we are filling in that gap with HPS networking products.

[Mandeep Chawla, executive]

Yes, Todd, we're having discussions with customers right now on programs that are going out until 2027. And we're seeing, based on demand, not only the chip next-generation technology on the chip, the volume levels that are at today's levels are higher. And again, that's on programs that project to '27.

[Operator]

[Operator Instructions] And there are no further questions at this time. I'd now like to turn the call back over to Rob Mionis for closing comments.

[Robert Mionis, executive]

And thank you all for joining us this morning. I'm pleased that we posted another solid quarter, and the strong momentum is giving us confidence to increase the outlook for 2024. I'm also pleased by continued strong execution and encouraged with our strong market position, especially with new products like 800G and strong and growing market.

Thank you again for joining today's call, and Mandeep and I look forward to updating you next quarter.

[Operator]

Ladies and gentlemen, this concludes today's conference. We thank you for participating and ask that please disconnect your lines.