CLS Q3-2024 Earnings Call

Operator

Good afternoon, ladies and gentlemen, and welcome to the Celestica Q3 2024 Earnings Call and Virtual Investor Meeting Conference Call. [Operator Instructions].

This call is being recorded on Wednesday, October 23, 2024. I would now like to turn the conference over to Mr. Craig Oberg, Vice President of Corporate Development and Investor Relations. Please go ahead.

C

Craig Oberg

executive

Good evening, and thank you for joining us on Celestica's Third Quarter 2024 Earnings Conference Call and 2024 Virtual Investor Meeting. On the call today are Rob Mionis, President and Chief Executive Officer; Mandeep Chawla, Chief Financial Officer; Jason Phillips, President of our Connectivity & Cloud Solutions segment; and Todd Cooper, President of our Advanced Technology Solutions segment. Joining us on the Q&A portion of our call will be Stephen Dorwart, SVP of our Hyperscalers and Service Provider business.

Today's call will begin with a review of our third quarter financial results, our guidance for fourth quarter and our outlook for the full year followed by our virtual investor meeting. Afterwards, we will open up the lines for the Q&A portion of our call.

Please note that during the course of this conference call, we will make forward-looking statements, including statements related to anticipated trends in and their anticipated impact on our industry, our segments and their businesses and statements related to the performance of Celestica and our conversion to U.S. GAAP. While these forward-looking statements represent our current judgment, actual results could differ materially from the conclusion, forecast or projection in the forward-looking statements made today.

Certain material factors and assumptions are applied in drawing any such statement. For identification and discussion of such factors and assumptions, please refer to our public filings available at sedarplus.ca and sec.gov as well as our virtual investor meeting and earnings presentation available at celestica.com under the Investor Relations tab. We undertake no obligation to update these forward-looking statements unless expressly required to do so.

In addition, during this call, we will refer to various non-IFRS financial insurers, 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 and adjusted effective tax rate.

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 impact future performance and results of Celestica and reconciliations of non-IFRS financial measures to their most directly comparable IFRS measures are contained in our public filings and on our virtual investor meeting and earnings presentation available at celestica.com under the Investor Relations tab.

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. Unless otherwise specified, all references to comparative figures are a year-over-year comparison.

Let me now turn the call over to Rob.

R

Robert Mionis

executive

Thank you, Craig, and good evening, everyone, and thank you for joining us on today's call. In the third quarter, our strong momentum continued, achieving revenues of $2.5 billion and adjusted EPS of $1.04 above the high end of our guidance ranges. The outperformance was driven by continued strong demand in our CCS business, coupled with strong non-IFRS operating margin of 6.7%. Our CCS segment revenues increased 42% year-over-year driven by continued investment from our hyperscale customers on data center infrastructure, including very strong demand for our networking switches within our HPS portfolio. The solid revenue growth and improvements contributed to a healthy margin expansion as our CCS segment margins of 7.6% was up by 140 basis points versus last year.

In our ATS segment, revenues were 5% lower year-over-year driven by continued softness in our industrial business, where the demand environment remains dynamic across a number of our submarkets. Partly offsetting those declines was continued strength in our A&D and capital equipment businesses, which saw a growth of 15% and 31%, respectively, in the third quarter.

Overall, we are pleased with our strong performance this year. Looking ahead, we feel we are well positioned to continue to capitalize on a number of high-value opportunities across our portfolio and strengthen our competitive position in key end markets.

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

M

Mandeep Chawla

executive

Thank you, Rob. Third quarter revenue came in at $2.50 billion, up 22% and above the high end of our guidance range. The growth was supported by strong demand from hyperscaler customers in our CCS segment, partially offset by lower revenues in our ATS segment driven by the anticipated softness in our industrial business.

Third quarter non-IFRS operating margin of 6.7% was an improvement of 100 basis points, driven by improved mix and operating leverage from higher volumes in our CCS segment. Our third quarter adjusted earnings per share was $1.04, which exceeded the high end of our guidance range and was $0.39 higher. This once again marked our highest quarterly results in company history. Our third quarter adjusted effective tax rate was 21%.

Moving on to our segment performance. ATS segment revenues for the third quarter were $814 million, down 5%, slightly more than our expectations of a low single-digit decrease. The decrease in ATS segment revenue was driven by lower demand in our industrial business. The decline was partially offset by solid growth in our Aerospace and Defense and capital equipment businesses. ATS segment revenue accounted for 33% of total revenues in the third quarter.

Our third quarter CCS segment revenue of $1.69 billion was up by 42%, driven by very strong growth in both our enterprise and communications end markets. CCS segment revenue accounted for 67% of total company revenues in the third quarter. Revenue in our enterprise end market was up by 38%, above our expectation of a mid-30s percentage increase driven by stronger-than-expected demand due to program dynamics in our storage business. Revenue in our communications end market grew by 45%, which was better than our expectations of a low 30s percentage increase.

The growth in our communications end market was driven primarily by increased demand for our HPS networking switches. HPS revenues grew by 54%, reaching $761 million in the third quarter, which accounted for 30% of total company revenue. The very strong growth in our HPS portfolio was driven by hyperscaler customer demand for our 400G networking switches as well as ramping programs in 800G switches.

Turning to segment margins. ATS segment margin in the third quarter was 4.8%, down 10 basis points, driven primarily by lower operating leverage in our industrial end market, partially offset by improvement in capital equipment and A&D. CCS segment margin during the quarter was 7.6%, up 140 basis points, driven by greater operating leverage and improved mix.

During the third quarter, we had 2 customers that accounted for more than 10% of total revenue, representing 25% and 12% of sales for the quarter, respectively. We remain comfortable with the levels of customer concentration in our portfolio as we believe that we maintain appropriate loans of diversification across multiple programs with our largest customers.

Moving on to some additional financial metrics. IFRS net earnings for the third quarter were $92 million or $0.77 per share, up $0.10. Adjusted gross margin for the third quarter was 10.7%, up 90 basis points, driven by operating leverage and production efficiencies in our CCS segment. Our third quarter adjusted ROIC was 28.6%, an improvement of 7.1%, driven by higher operating profitability and strong working capital management.

Moving on to working capital. At the end of the third quarter, our inventory balance was $1.83 billion, down $26 million sequentially and down $434 million year-over-year. Cash deposits were $521 million at the end of the quarter, lower by $55 million sequentially and $354 million lower year-over-year. As expected, we continue to return some of our cash deposits back to customers as gross inventories move lower. Cash cycle days during the third quarter were 66, up 2 days sequentially and 6 days lower than the prior year period.

Moving on to our cash flow. Capital expenditures for the quarter were $46 million or approximately 1.8% of revenue compared with 1.3% in the third quarter of 2023. We expect our capital expenditures for 2024 to be approximately 1.75% in revenues in line with our previous outlook of between 1.5% and 2%. In the third quarter, we generated $75 million of adjusted free cash flow compared to $34 million in the prior year period. 2024 year-to-date, we have generated $203 million of adjusted free cash flow compared to $110 million during the first 3 quarters of 2023.

Now moving on to some additional key metrics. At the end of the third quarter, our cash balance was $399 million. In combination with our $750 million of borrowing capacity under our revolver, this provides us with approximately $1.1 billion in total liquidity which we believe is sufficient to meet our anticipated business needs. Our gross debt at the end of the third quarter was $746 million, leaving us with a net debt position of $347 million. Our gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.0 turns, down 0.1 turns both sequentially and compared to the prior year.

As of September 30, we were compliant with all financial covenants under our credit agreement. During the third quarter, we repurchased approximately 2.2 million shares for cancellation under normal course issuer bid at an average cost of approximately $44 per share for a total deployment of $100 million. This step-up in purchase as compared to recent quarters is reflective of our commitment to be active on an opportunistic basis when we feel there is a dislocation in our share price relative to our financial performance and outlook. Year-to-date, we have purchased a total of approximately 2.9 million shares at a cost of $127 million under the program.

Now turning to our guidance for the fourth quarter of 2024. Fourth quarter revenues are expected to be in the range of $2.425 billion to $2.575 billion which, if achieved, would represent growth of 17% at the midpoint. Fourth quarter adjusted earnings per share are expected to be in the range of $0.99 to $1.09 which, if achieved, would represent an improvement of $0.28 per share or 37% at the midpoint.

If the midpoint of our revenue and adjusted EPS guidance ranges are achieved, non-IFRS operating margin would be 6.7% which would represent an increase of 70 basis points compared to the same period last year. Our adjusted SG&A expense for the fourth quarter is expected to be in the range of $78 million to $80 million. We anticipate our adjusted effective tax rate for the fourth quarter to be approximately 21%.

Now turning to our end market outlook for the fourth quarter of 2024. In our ATS segment, we anticipate revenue to be flat year-over-year driven by continued growth in A&D and recovering demand in capital equipment, offset by continued softness in our Industrial business. In our CCS segment, we anticipate revenue in our communications end market to be up in the high 50s percentage range driven by continued demand strength for our networking switches, including accelerating ramps in our 800G programs.

In our enterprise end market, we expect revenues to decrease in the low double-digit percentage range. Consistent with our commentary last quarter, the anticipated decline is driven by a technology transition in a large sole-source AI/ML compute program with the next-generation program also sole-sourced expected to ramp in the latter half of 2025. We expect these declines will be partly offset by growth in our storage business.

Assuming the achievement of the midpoint of our fourth quarter guidance changes, we now anticipate revenue of $9.6 billion and adjusted EPS of $3.85 for the full year 2024. If these outlooks are achieved, they would represent growth of 21% and 58%, respectively.

Our 2024 non-IFRS operating margin is now expected to be 6.5%, which would represent a 90 basis point improvement. Finally, our adjusted free cash flow is now expected to be $275 million for the full year, up from our previous outlook of $250 million.

I'd also like to take this opportunity to remind everyone of our upcoming transition from foreign private issuer to U.S. domestic issuer reporting status as our shareholder base is now comprised of a majority of U.S.-based investors. Beginning January 1, 2025, our consolidated financial statements will be prepared in accordance with U.S. GAAP, and we will no longer report results under IFRS. Concurrent with the release of our Q4 and full year 2024 quarter financial results, we will include a reconciliation of the financial metrics provided as part of our guidance and outlook in IFRS and non-IFRS for the comparable U.S. GAAP and non-GAAP adjusted financial metrics. At this time, we do not expect any material differences in our Q4 2024 guidance and full year 2024 outlook had it been prepared under U.S. GAAP. Finally, this change does not impact our status as a Canadian domiciled company.

With that, I would like to turn the call back over to Rob to begin our 2024 Virtual Investor Meeting.

R

Robert Mionis

executive

Thank you, Mandeep. We're excited to have the opportunity to provide you with an update on the progress we have been making in the execution of our strategy and an overview of the opportunities we are pursuing in each of our markets. Before we get started, I'd like to briefly walk you through the agenda for the next portion of our call today.

First, I will provide a brief overview of our business, our operational footprint and discuss the key pillars of our company's strategy. Next, Jason Phillips, President of Connectivity and Cloud Solutions, will provide an overview of our CCS segment and discuss the evolving data center and IT hardware landscape. Following Jason, Todd Cooper, President of Investment Technology Solutions, will discuss our diversified market portfolio, including the macro outlook and long-term strategic priorities across each of our end markets. And finally, we will hand the floor back to our CFO, Mandeep Chawla, who will discuss our 2025 financial outlook, our capital allocation priorities and our plans to continue to maximize returns for our shareholders. Following this, we will open up the lines for Q&A, where Steve Dorwart, SVP of our Hyperscaler and Service Provider business, will also join us.

Now let's begin with an overview of our business today. Celestica is a global leader in electronic manufacturing services and supply chain solutions, serving the world's leading technology companies across a range of industries which are critical to the advancement of our global economy. We're much more than just a manufacturing partner. We're a strategic collaborator offering leading-edge products, best-in-class engineering support and trusted operational execution across a global network that spans 16 countries and are supported by 27,000 employees. We enable our customers to bring innovative products and services to market with speed, efficiency and uncompromising quality.

The evolution in our business continues to be reflected in our financial performance. Our consistently improving results in recent years have been driven by the successful execution of our strategy and the growing demand for our leading capabilities and product offerings. The achievement of our full year outlook for 2024 would represent the strongest non-IFRS operating margins and the highest adjusted earnings per share in the company's history. Today, Celestica strength extends far beyond traditional EMS. We believe that our differentiated value proposition leverages the best of both the EMS and ODM models, combining our sale and supply chain proficiency with advanced customization capabilities in both design and manufacturing.

We believe that as a North American-based Tier 1 EMS and ODM company, our offering stands out amongst our competitors in the marketplace. And importantly, it offers us a number of distinct strategic advantages that allow us to better serve our customers and positions us as a choice partner for complex, high reliability programs.

Our strategic plan is built on 4 key pillars which are intended to leverage our core strengths and capitalize on market opportunities that align with our competencies while delivering sustainable value to our shareholders. Firstly, we're committed to building a resilient, growth-oriented and diversified portfolio designed to withstand cyclical fluctuations. We've been discerning in choosing the markets that we compete in, and we remain selective in our approach to entering new markets. Our focus remains on opportunities that we believe are supported by strong secular tailwinds, offer attractive growth potential and provide structural benefits to our portfolio.

Secondly, we're committed to making the necessary investments to expand our capabilities and further enhance our offerings. While we have made a great deal of progress in this regard over the years, we are not resting on our past achievements. We continue to build out our ODM offering with investments in next-generation products based on multiyear road maps while adding to and enhancing our EMS engineering and services capabilities.

Thirdly, we remain dedicated to operational excellence across our global footprint. The Celestica operating system is designed to help ensure consistency in operational execution and to enable best-in-class performance, which is reflected by the numerous customer awards and high customer scorecard ratings that we receive each year. Quality and execution are central to our ethos and integral to everything that we do.

Lastly, our objective is to maximize total shareholder returns. We aim to achieve this by targeting long-term adjusted EPS growth of 10% or more while maintaining a disciplined approach to capital allocation.

Now I would like to hand the call over to Jason Phillips to provide a closer look at our CCS segment. Jason, over to you.

J

Jason Phillips

executive

Thank you, Rob, and good evening, everyone. I'm pleased to be here with you today to provide an update on some of the exciting projects we are working on in our Connectivity and Cloud Solutions business. I'd like to start with a look at where we are today.

2024 has been a year of tremendous growth for our business as we are on track to achieve $6.4 billion in revenue, which would represent an impressive 39% increase. Our growth has been driven by strong demand in all 3 of our core technologies, server and storage in our enterprise end market and networking within our communications end market, with each category expected to end the year up more than 25%. We'll talk more about our portfolio in each of those technologies in just a few minutes.

From a customer perspective, hyperscalers have been the primary growth driver in our business this year. In 2024, we are on track for $4.8 billion in revenue with hyperscalers, which now accounts for nearly 3/4 of our CCS portfolio. Looking at our CCS segment by solution, we've seen in recent years, strong and balanced growth across both our EMS and HPS portfolios. Our HPS business continues to account for a rising share of our portfolio, driven by strong demand in our market-leading Ethernet Switch business.

Lastly, we are supporting our customers by continuing to make investments in our services capabilities, which we view as an increasingly important part of our end-to-end life cycle solutions offering for the data center. Adding to our core strengths in R&D and engineering, our services offering has grown to include IT asset disposition, IT asset management and carbon credit services, creating a powerful platform for growth with our customers by helping to strengthen our relationships and drive higher attach rates.

As we look at the major market trends influencing our business, investments in artificial intelligence continue to be the driving force shaping the data center landscape. It remains our belief that the current wave of investment in AI infrastructure has a multiyear runway ahead of it.

Today, the lion's share of the investment in AI infrastructure is driven by the top 5 hyperscalers who are estimated to spend $133 billion this year on data center hardware across storage, networking and server technologies. Estimates suggest that annual hyperscaler spend on data center hardware will grow by more than $50 billion through 2027 or 40% to $186 million. The latest forecast based on discussions with our customers for 2025 are showing early support for these estimates. Today, we serve our hyperscaler customers across all 3 major hardware technology categories, and we are investing to stay at the leading edge of the technology curve. As we look ahead, feel we are well positioned to continue to capture a growing share of the spend from these key players in the coming years.

As we've seen, the hardware and infrastructure investments required to support the development of AI models are significant. And while hyperscalers are leading the AI investment cycle today, there is a growing wave of organizations which the market has termed digital native companies who are looking to harness the transformative potential of AI by ramping up their own infrastructure investments. We believe that these emerging players in the rapidly expanding AI ecosystem present high-margin growth opportunities of meaningful scale for solutions providers like Celestica.

Firstly, we are seeing opportunities with an emerging breed of specialized AI cloud providers, providing AI optimized infrastructure and services to support increasingly specific use cases, such as natural language processing, machine vision and data analytics. Others in this market are building high-powered AI compute infrastructure at scale, helping customers to scale their AI workloads more efficiently and at a lower cost.

Next, as large enterprise customers increasingly employ the use of AI models, we anticipate more spending on edge computing, bringing AI infrastructure closer to where data is created in order to reduce latency and enhanced data security.

Finally, we have seen a number of nations or sovereigns, make commitments to invest in large-scale data center projects as governments across the world are increasingly recognizing the strategic importance of domestic AI infrastructure. These government-led initiatives could be a meaningful contributor to growth in CapEx dollars within the AI data center ecosystem. We believe Celestica is well positioned to capitalize on these emerging opportunities. Our expertise in designing and manufacturing advanced hardware solutions, coupled with our comprehensive services portfolio, enables us to cater to the needs of this diverse set of customers.

Hardware Platform Solutions, or HPS, is Celestica's original design manufacturing offering where we innovate on product designs across all 3 major technologies in the data center, server, storage and networking. Our HPS business supports our customers on engagements ranging from joint design to highly customized hardware to off-the-shelf white box solutions, which can be further enabled with open source software.

In 2024, we anticipate that HPS will generate approximately $2.8 billion in revenues which would represent growth of more than 60%. However, this journey has been far from an overnight success. We've spent more than 10 years building our platform while innovating hundreds of patents and supporting 230 product launches. This year, we will be investing nearly $80 million into R&D, and we expect that number to grow next year.

R&D is a core competency for Celestica. In addition to innovating with our own proprietary product designs, we also play an important role as an extension of our customers' R&D teams. We believe that our capabilities and breadth of offerings in this area are a critical factor that differentiates us from both our North American EMS and ODM peers. Our investments over the last decade plus in this platform reflect our strong commitment to making ODM a central and enduring element of our business. Our HPS portfolio is margin accretive to our CCS segment and enables relationships that are more deeply entrenched with our customers and ecosystem partners compared to traditional EMS engagements.

In networking, our switch products support a range of customers and use cases, from 1G switches for OEMs designed for the campus to 800G switches for hyperscalers used to facilitate AI workloads in the data center. Today, the majority of our HPS portfolio is made up of networking switches which are exclusively for Ethernet. We were an early leader in 400G, and we are early to market with our 800G solutions, which are being well received by our customers in preparation for the next upgrade cycle we are already investing in designs for 1.6G.

Our growing team of nearly 150 software engineers in gen AI continues to support customers with enablement of proprietary open source solutions for network operating systems, which we believe customers will continue to gravitate to over time. We also have the capability to offer a ready-to-use operating system, production hardened by our engineering team, or to integrate existing third-party software and optimize performance for each.

In AI/ML compute, we are committing R&D to advance cooling system designs to support the increasing power demands of AI silicon, which we'll talk more about in a few minutes. And in storage, we have proprietary designs for high availability, next-generation controllers and expansion systems, which we are able to integrate with our offering as part of our RAC solutions. We feel that our distinctive ODM offering will continue to drive new wins and remain a key growth driver in our CCS segment over the long term.

Next, I'd like to do a deeper dive into our business and the market outlook across each of our technologies. Celestica's communications business is a cornerstone of our portfolio. Today, Celestica is the world's largest ODM provider of Ethernet switches with $2.4 billion of our portfolio expected to come from HPS networking solutions in 2024. Our portfolio is geared towards high bandwidth applications with the majority of our HPS networking revenues now coming from switches 400G and higher. Our focus on high bandwidth solutions is reflected in our leading market share in the 400G switch segment. Third-party data suggests that we have the market's largest installed base as measured by deliveries of 400G ports over the past 5 years.

As leading data center operators begin their transition to 800G, we will be enabling all of our hyperscaler customers who use our 400G switches in the separate cycle. We believe that being early to market with our 800G solutions as is poised to build on our existing leadership position as ramps accelerate.

The rapid expansion of cloud data centers coupled with the increasing demand for more powerful computing to support AI applications is driving exceptional levels of investment in networking infrastructure. Market forecasts predict that the Ethernet switch market for bandwidth of 400G and higher will grow at a remarkable 52% compound annual growth rate over the next 3 years. It is critical to our success to continue to be a first mover and remain at the leading edge of each successive technology transition, and we are making the necessary investments to do so.

To this end, we're pleased to have an initial win with a large hyperscaler customer for a 1.6 terabyte switching program exemplifying our leadership and innovation. We anticipate that this win will be the first of many for the next generation in switching technology and expect to see revenues from this program begin ramping in mid-2026.

With each generation of upgrades to higher bandwidths, the engineering challenges related to signal integrity, power and thermal management involve a step function increase in complexity relative to previous generations, making a high-performance product that is early to market that much more challenging to deliver. This is a dynamic that we believe plays to Celestica's strength in R&D, and we are confident we are up to the task. To this end, we are exploring brand-new innovations, including advanced designs in the areas of cooling and signal integrity. We feel that Celestica has proven capabilities and our commitment to continued innovation will allow us to remain a leader in this market through future upgrade cycles.

Celestica's server business has had another strong year, driven by AI/ML compute, which comprises the vast majority of our portfolio. With more than 20 years of experience supporting OEM customers and high-performance servers, we possess the engineering expertise and scale manufacturing capabilities to build compute platforms designed around the latest generation of AI silicon from various vendors.

Today, we are concentrated primarily on designs using custom ASIC silicon. We have a proven history supporting multiple generations of these platforms for one of the world's leading hyperscalers. We believe our engineering support is a key differentiator. We specialize in highly customized designs with demanding complexity and technical requirements. Our expertise spans a wide range of areas, critical with this hardware from power density and form factor optimization to specialized testing capabilities and fully integrated RAC scale solutions.

Thermal management is a critical area where Celestica has a strong history of proof points that currently support programs utilizing both air cooling and single-phase liquid cooling techniques. However, with the rapid advancement in AI silicon, power usage and thermal output are increasing dramatically. And as a result, the requirements for cooling solutions are fast evolving.

Celestica is looking to position itself to be a leader with the next generation of cooling systems. Our HPS team has developed proof-of-concept designs for pump to face cooling systems, and we are exploring advanced techniques for improving heat transfer between high-powered silicon and cold plates which are applicable to both single and dual phase cooling systems.

We are also actively developing prototypes for liquid immersion solutions. We will look to leverage these advanced capabilities to support our customers on successive generations of their AI/ML server programs as well as to incorporate our thermal management systems in the future HPS designs for AI/ML servers and full RAC solutions.

In 2024, the AI server market is expected to reach approximately $100 billion and this figure is projected to grow to over $250 billion by 2027. The top 5 hyperscalers account for nearly 70% of spending today, driven by their substantial investments in the back-end infrastructure required to train the latest generations of AI models. And while they are expected to continue to comprise the majority of the AI server market in the coming years, we anticipate that digital native companies will claim a larger share of spend over time.

We are also seeing custom ASIC platforms play an increasingly important role in AI infrastructure, particularly for hyperscalers and specialized AI cloud providers. As AI applications become increasingly specialized and models grow larger, the benefits of custom silicon platforms become more pronounced, offering potential advantages such as power efficiency, optimized performance and cost effectiveness. We continue to be very optimistic on the potential for growth within the custom ASIC segment of the AI server market. Celestica is pursuing a multifaceted strategy to capture these growth opportunities and diversify our AI/ML compute business.

Firstly, we are actively pursuing programs with new server customers, including digital native companies. To this end, we are pleased to formally announce a strategic relationship with a growing AI player, Grok, who have developed an innovative new proprietary silicon platform, the language processing unit, which specializes in accelerated inferencing. We're proud to be supporting Grok with the manufacturing of their AI/ML servers and full RAC solutions with programs expected to begin ramping in early 2025.

Our hyperscaler customers also remain pivotal to our AI/ML server growth plans. We've already secured the next generation of liquid cooled custom ASIC-based server programs with our largest hyperscaler customer expect to ramp up in mid-2025 as well as additional programs that are expected to ramp in 2026 and beyond.

We are also in discussions with a number of other hyperscaler customers regarding potential engagements for both custom ASIC and merchant silicon platforms with expected start dates ranging from late 2025 to as far out as 2027. Finally, we are investing in our own HPS designs for full system RAC scale solutions for AI/ML compute. While we are initially collaborating with AMD, our platform will be capable of supporting both merchant silicon and custom ASICs.

We see a growing need within the marketplace for modular solutions that can be customized to accommodate a diverse range of AI silicon options. By leveraging our engineering expertise in cooling systems, power management and RAC integration and orchestration, along with our existing HPS solutions for switching and storage, we believe that we will be able to create an attractive offering that can satisfy the needs of hyperscale, AI cloud and enterprise customers alike.

Moving on to our storage portfolio. With nearly 30 years of history in the storage market, we're able to leverage our expertise to deliver high-performance storage products for the data center as well as enterprise. The demand for storage products has yet to experience a significant step-up in the manner which we have seen recently in the server and switching markets. However, with the surge in AI workloads, we believe the market for storage products will continue to trend towards high-performance and high-density storage technologies.

Our storage business will continue to play an important role in the plans for both our EMS and ODM offerings as our engineering expertise and proprietary designs can be seamlessly integrated into our RAC scale solutions. To support our ability to capture this opportunity, we continue to invest in the development of next-generation storage solutions with industry-leading density, power efficiency and thermal management, leveraging the latest technology in high-capacity drives and buses.

To wrap up, we continue to see investment in AI reshaping the IT hardware landscape over the coming years, driving innovative changes in technology and impressive growth. As a leading player in both EMS and ODM offerings across the data center, we believe this presents us with a tremendous opportunity to build on our recent successes and to grow along with it.

With that, I'd like to turn it over to Todd Cooper to talk to you about our ATS segment.

T

Todd Cooper

executive

Thank you, Jason, and good evening to all of you joining us on the call. As you can see on the screen, our ATS segment is expected to deliver approximately $3.2 billion of revenue this year. As part of Celestica's overall strategy, we remain committed to growing our presence in diversified markets which we believe offers a number of strategic advantages and synergies with the rest of our business. Among these are diversification, exposure to markets with strong structural tailwinds, and a competitive environment that is limited by strict regulatory hurdles and capability requirements.

Despite facing demand headwinds in certain markets this year, we have demonstrated resilience by achieving an anticipated 11% average annual revenue growth rate over the past 3 years. This speaks to the attractiveness and durability of our ATS portfolio over the long term. In 2025, we expect to see our ATS segment revenues grow in the low single digits percentage range. We will discuss the end market dynamics driving this growth shortly.

Overall, our strategic priority for the ATS segment is to achieve greater scale in select markets in an effort to drive a more optimal mix within our portfolio. Obtaining this balance will allow us to reap greater benefits of diversification, reduce volatility and better weather cyclical market downturns. We are optimistic about the growth road map that we have laid out for each of our ATS businesses, and continue to have confidence in our ability to maintain our long-term target revenue growth rate of 10% or more for the ATS portfolio.

So now let's move on and assess the outlook and growth opportunities in each of our end markets, starting with Industrial and smart energy. Our industrial and smart energy portfolio, which is expected to achieve $1.3 billion in revenue this year is broadly diversified across markets such as energy storage, energy generation, EV charging telematics, factory automation and on vehicle.

The key value drivers in our industrial and smart energy portfolio include our strong manufacturing presence close to home, including our expanded manufacturing presence at our Monterrey, Mexico site as well as our expertise in new product introductions, which we have leveraged to support a number of early-stage customers as well as larger, more established companies working with new technologies.

After a year of soft demand driven by macro uncertainties and customer inventory burn down, we are seeing signs of market stabilization. We remain cautiously optimistic on returning to growth in 2025 with demand expected to strengthen in the back half of next year. Over the long term, we continue to see many attractive opportunities supported by favorable trends in the submarkets. In fact, industry forecast suggests that base demand in our smart energy markets, including EV charging, energy storage and energy generation are expected to grow at an average of 13% annually through 2027, driven by government spending on green energy infrastructure and supported by bills such as the Inflation Reduction Act. We are also seeing solid opportunities in battery energy storage systems, supporting both utility scale and residential applications.

Let's move on to A&D. Today, our A&D business is comprised of approximately 60% commercial aerospace and 40% defense and is on track to reach approximately $900 million of revenue in 2024. We serve major aircraft, subsystem and component OEMs as well as defense contractors from our sites in Malaysia, Europe and North America. We view ourselves as the leading A&D supplier within the EMS industry, supported by over 2 decades of developing our key capabilities and proof points with our customers.

Breaking it down by segment. In commercial aerospace, the general demand backdrop remains stable with growth in our base business expected to normalize after several strong years of being bolstered by recovery from the pandemic. Looking at our commercial portfolio in 2025, we have made the decision not to renew an expiring program that is breakeven and profitability. At the same time, we have recently won a high-margin licensing program with this same customer. As a result, in 2025, we expect A&D revenue to be approximately $100 million lower year-over-year, but with higher operating profit dollars and margins.

In Defense, we are seeing strong traction with new opportunities driven by demand from European and Western governments, which are expected to drive robust growth. We are also leveraging our engineering capabilities to pursue growth opportunities in emerging submarkets, including space, unmanned aerial vehicles and electric vertical takeoff and landing aircraft.

Let's next move to capital equipment. After a challenging 2023 in capital equipment, we have seen demand begin to recover and we have revenues of approximately $700 million in 2024, up 16%. Our capital equipment of business supports the world's leading wafer fabrication equipment OEMs through our network of sites in Malaysia, South Korea and the U.S. We believe that our extensive capabilities and depth of experience position us as a leading EMS provider in this market. This is evidenced by our strong share gains over the past several years, including our newest logo, ASML Holdings, with whom we have begun ramping critical lithography programs.

In 2025, we expect growth to be supported by these ramping programs in lithography as well as continued recovery in base market demand driven primarily by memory.

Further, we continue to make investments in our footprint and capabilities to better service our customers on leading-edge technologies in memory, logic, lithography and AI devices. We've added new clean room capacity over the last 12 months in all of our capital equipment sites globally as well as additional technical personnel to support demand for both domestic U.S. and Asia production. We believe that our domestic capacity and strategic footprint within Asia will be critical differentiators in the years ahead as geopolitical considerations, increasing government restrictions on the semiconductor industry and the need for localization continue to intensify.

And finally, let's move to our HealthTech business. In our HealthTech business, we anticipate revenues of approximately $300 million in 2024. Today, we serve customers across a number of critical technologies leveraging our high reliability manufacturing capabilities at FDA registered and ISO certified facilities. Looking ahead to 2025, our business is expected to see modest growth as we ramp new programs and shift our mix towards finished devices while continuing to expand our HealthTech engineering offerings. Our long-term growth plans in HealthTech are primarily focused on the fast-growing diabetes care, imaging, diagnostics and surgical instrument markets.

To support this growth, we have made investments in our product level engineering capabilities, enabling us to support our customers end to end from full box build to finished products to testing and regulatory certification. We also continue to invest in our advanced manufacturing competence, most recently, adding to our automation capabilities at our Galway, Ireland site.

With that, I would now like to turn the floor back over to Mandeep who will discuss our financial outlook for 2025 and our capital allocation priorities.

M

Mandeep Chawla

executive

Thank you, Todd. Since completing our strategic transformation in 2020, Celestica has made significant progress on our path towards achieving the level of financial performance we have in 2024, which, as Rob mentioned, is on track to be another record year. If I look back at the past 5 years, showcases our track record of consistent growth and improvements in profitability.

Assuming the achievement of our 2024 outlook, we will have added nearly $4 billion in revenue over the last 4 years, amounting to a 14% CAGR since 2020. At $9.6 billion in revenue, we are on track to close 2024 up 21%, during the period where the majority of our EMS industry peers are seeing revenue decline.

Profitability also continues to improve as our portfolio's mix has shifted towards higher-margin ODM business and high complexity engagements in our CCS segment. Our outlook for 2024, if achieved, will have seen non-IFRS operating margins rise by 300 basis points and adjusted EPS nearly 4x higher compared to 2020.

Our ability to efficiently manage our working capital during this period of strong growth has seen us generate positive adjusted free cash flow in each quarter for over 5 years. We believe our performance speaks to our disciplined financial strategy, the resilience of our portfolio across both of our segments and the strength of our team.

Looking ahead at our early estimates for 2025. We anticipate revenue of $10.4 billion, which would represent growth of 8% compared to our 2024 outlook. Our CCS segment is expected to see growth in the low double-digit percentage range driven primarily by the ramping of the energy programs with hyperscalers and new wins in AI/ML compute.

In our ATS segment, we anticipate low single-digit percentage growth as our industrial and capital equipment businesses are expected to experience a recovery in demand, partly offset by lower revenues in our A&D business due to a decision not to renew an expiring program with an aim to improve overall profitability. Non-IFRS operating margin is expected to come in at 6.7%, which would be 20 basis points of margin expansion compared to our 2024 outlook, driven by operating leverage and improved profitability in both segments.

Our outlook of adjusted EPS of $4.42 is 15% higher compared to our 2024 outlook, ahead of our long-term target CAGR of 10% or more. Capital expenditures are expected to remain between 1.5% and 2.0% of revenue within our historical range. Finally, we are anticipating adjusted free cash flow of $325 million, which would represent growth of 18% over our 2024 outlook.

Our current outlook for 2025 represents our high confidence view based on current discussions with our customers. These conversations are active and ongoing. And so we look forward to providing you with an update in January.

Beyond 2025, we are encouraged by these discussions, which are supported by significant new wins and third-party forecasts for growth in our underlying market. As such, we currently expect the momentum we are seeing to continue into 2026 and the medium term.

Moving on to our capital allocation priorities. Our overall framework for capital allocation remains consistent. Over the long term, we aim to return 50% of our adjusted free cash flow to shareholders and reinvest 50% back into the business. Since the beginning of 2014, we have reduced our share of [ gaining ] by 36%. In that time, we returned close to $1 billion in capital to our shareholders through buybacks. We will continue to deploy capital towards buybacks on an opportunistic basis. In addition, we remain focused on opportunities to reinvest back into the business through R&D, strategic investments in our manufacturing footprint and capability and M&A.

With respect to M&A, we evaluate potential targets on a continuous basis. As always, we continue to apply a strict filter to our evaluation process for any acquisition. From a strategic perspective, we target acquisitions, which will allow us to enhance our capabilities and accelerate our scale in selected markets. Our financial hurdles require that our targets be adjusted EPS accretive in the first year and have a return on investment above our cost of capital by the second year or sooner.

Given our conservative level of leverage and strong adjusted free cash flow generation, we have the financial capacity and the appetite to execute on accretive acquisition if the opportunity presents itself.

Finally, I'd like to discuss our financial performance and our current valuation relative to our EMS peers. In recent periods, Celestica has consistently delivered very strong financial performance that is diverged meaningfully from that of our peers in the EMS industry.

On a trailing 4-quarter basis, as of the end of the third quarter, we have delivered revenue growth of 18% compared to an average of a 12% decline for our EMS peer group. In addition, our non-IFRS operating margin has expanded by 90 basis points and our adjusted EPS is up 60% over the same period.

We believe our operating performance over the last 12 months has exceeded our peer group, and our outlook through 2025 continues to be very strong. However, our 12-month forward price earnings multiple remains in line with or below the EMS peer group average. In our view, Celestica's consistent strong financial performance is not accurately reflected in our valuation, and presents an opportunity for greater shareholder returns.

With that, I'd now like to turn the call back over to Rob for his closing remarks.

R

Robert Mionis

executive

As we conclude our investor meeting, I want to emphasize that our business has a great deal of momentum in our favor. Over the past several years, we have accumulated a track record of delivering strong financial performance and consistent operational execution. We've also proven our ability to evolve having organically built a leading ODM offering. We will continue to execute on our strategic road map, which will position us to capitalize on the significant growth opportunities that lie ahead and ultimately deliver value for our shareholders.

Thank you for your time and continued support. That concludes our presentation today, and we are now ready to move into Q&A. As a reminder, joining Mandeep and I for Q&A will be Jason Phillips, Todd Cooper, and Steve Dorwart.

Operator, I will now turn the call over to you.

Operator

[Operator Instructions]. Your first question comes from the line of Daniel Chan from TD Cowen.

D

Daniel Chan

analyst

A couple of questions on the communications side. Meta put out designs of its new data center networks last week, and that included some Cisco equipment in the new networks. Can you just talk about the potential wallet share dynamics with Cisco coming in as an additional supplier?

R

Robert Mionis

executive

Steve, do you want to take that?

S

Stephen Dorwart

executive

Sure. Thanks, Dan. And I think when you think about hyperscalers and how they make the decision, it tends to be a balancing what's the best solution for a particular application. And what is the product availability to meet those deployment objectives which is why we continue to invest in R&D and work closely with key technology providers, to ensure that our platforms are timely and relevant to our target customers in the target markets.

I believe as a result of the pandemic and the period of constraints that follow, many of our customers realize the need to have a backup plan or a secondary source. We've seen some of our customers qualify off the shelf for OEM solutions as that backup plan rather than creating another custom platform or solution. But fundamentally, we see this category of companies still believes that they can -- that optimized hardware can be a competitive differentiator for them. They still want to pay for what they need and only what they need, and they want to be able to implement new innovations at their own speed. Therefore, we haven't really seen a meaningful shift in any hyperscaler behaviors, which plays to our strategy and our strengths.

J

Jason Phillips

executive

Hi, Dan. This is Jason. I would just add to that as well. In terms of how we compete, we believe as a North American-based ODM that has been delivering system and RAC-level solutions across all the core technologies in the data center, that we're in an advantaged position. And while we talk about our HPS portfolio and offering and equated to an ODM offering, I would highlight that not all ODM's value propositions and capabilities are equal.

When we look at what we're doing in the HPS space, in particular, you heard it from Steve and in our prepared remarks, there's a lot of focus on customization for what I would say this customization for optimization, not just at a solution level, a design level, but also at a supply chain level. I mean, we're anticipating geographic requirements are changing rapidly. We've been accounting for that as we've been developing our engineering centers of excellence as well as our manufacturing sites and accounting for that as well as customization of the model. You heard Steve talk about our customers are looking to -- for a specific offering, and that's what they want. They don't necessarily want more than that. That's another area of strength for us as well.

D

Daniel Chan

analyst

That's very helpful. The other opportunity I wanted to dive into a little bit was on the back-end networks. That seems to be a large opportunity for Ethernet vendors like yourselves. So good to see you guys are leading that charge in 400G as well as it sounds like in 800G. How are your discussions with customers going about the back-end opportunity? Are you guys winning share there? Or are you seeing some share shifts between the different vendors?

R

Robert Mionis

executive

Steve, do you want to start with that one?

S

Stephen Dorwart

executive

Apologies. Yes, we see future solutions really continuing the trend towards Ethernet for both scale-up and scale-out applications. Leading innovations and speed and density are causing this, and we see further improvements coming in this technology with things such as ultra Ethernet for the scale AI applications. Overall, we see a significant increase in Ethernet connectivity and bandwidth to support many of the AI/ML systems, including those that are based around both merchant and custom ASICs, our proprietary ASICs.

At the same time, we see just generally AI/ML is generating a lot more data, requiring a lot more networking required to move that data. And further, hyperscalers are adjusting their network architectures from centralized to more distributed architectures to optimize for latency or security or probably more importantly, lately, the availability of power. And so this is requiring more and more and differentiated connectivity solutions, which we're well positioned to support. And we anticipate seeing continued strong demand for these products going forward.

R

Robert Mionis

executive

Yes. And then, I would just add as well in the spirit of the growing Ethernet networking opportunity. We've talked about pivoting and taking our road maps and pivoting from data center into the campus and the edge, and we've been rounding out our road maps to be applicable there. And we're seeing a lot of, I'd say, traction and uptake as we build out our capability, not just our road maps, but also our software capabilities, our open source software in sonic areas like that, that are also creating more opportunities on the networking side for us as well.

Operator

And your next question comes from the line of Robert Young from Canaccord Genuity.

R

Robert Young

analyst

Would love to dig into this Grok win. Why was Celestica chosen? Was a manufacturing partner in the silicon influential? Is there any HPS revenue attached to this and this -- you called it a strategic relationship. Is it a single source? Or are there multiple vendors there? Couple crammed into one.

R

Robert Mionis

executive

Steve, do you want to start with that one?

S

Stephen Dorwart

executive

Sure, sure. So we see the Grok point as mentioned earlier, is a significant win for us and another important proof point for us entering the AI/ML compute space. Certainly, the industry-leading position that we've established on the networking side has helped us to be credible in this space as a lot of the underlying competencies and technologies that we develop in support of those programs are portable or transferable to this type of product.

The initial engagement includes manufacturing predominantly where, today, they have a source that's been providing some of the early preproduction prototype systems. We will enter with that current generation of product, but the plan is to have an increased level of design participation or involvement going forward in future generations of the products, which start nearly immediately. So very happy to have that win, and I think it will really help us build competency and credibility for the future.

R

Robert Young

analyst

But was it built with your own go-to-market? Or was it done with a partner?

S

Stephen Dorwart

executive

I'm sorry, I missed the first part of that.

R

Robert Young

analyst

Sorry. Was this done with your own go-to-market effort or were you brought to this relationship with maybe the silicon manufacturer or things like that?

S

Stephen Dorwart

executive

Good question. Yes, good question. So it really was our own go-to-market. And we have a strategy, a comprehensive strategy for us to participate in the increased level of AI/ML compute spend across various market segmentations. And so this specialty data center operator is one of the categories that we've selected and that we have aligned ourselves with in terms of our offerings.

However, we have built very strong relationships with some of the key ecosystem technology providers. And oftentimes, we get endorsements or leads or, in some cases, co-marketing efforts that go on with these companies that ultimately result in award decisions from these customers.

R

Robert Young

analyst

Okay. And then maybe second question would just be around, can you just give an update on the pace and the win rate of the 800 gig programs? Are you still converting all of the 400 gig? Is it happening faster than you expected? And is there any ASP difference that you can call out? Then I'll pass the line.

S

Stephen Dorwart

executive

Yes. So certainly, thinking about 800 gig is the continuation of next generation of the 400-gig wins that we've had. We're very happy with the outcome of several different sourcing initiatives with our customers that have resulted in us winning the 800 gig for next-generation products. We have over half a dozen products that we're currently working on today. Many of those will lead to future iterations of those same products for specific applications or architectures. And so we think it's a very significant position to be in here with 800 gig with other potential customers and opportunities still in front of us.

But most of those projects, well, all of those projects are very much on track. We have some pressure from customers to accelerate, which is natural. And I think that we're continuing to see strong demand on those products. From an ASP perspective, certainly, the silicon that underlies these designs is going to be more expensive. And our focus is really on value-based pricing and not having pricing specifically tied to the value of a particular part or component. But from a revenue perspective, it will certainly improve the top line on a comparable volume.

M

Mandeep Chawla

executive

Rob, it's Mandeep here, so just to add on. ASPs are going up, especially as you go from 400G to 800G, there is that uplift. I think the way to understand it as it impacts our business is we look at it on a portfolio basis. As you know, we do also do 1G and 100G switches and 25G switches. And so from a portfolio perspective, when we look at the year-over-year change in ASPs between below 100, 400, 800, we're seeing probably around a low to mid-single-digit increase on the average ASP. And so of course, you'd apply that to the switching business. But it really comes down to the mix in the portfolio.

R

Robert Mionis

executive

And Rob, I would just comment on the demand piece as well. You touched on the 400G to 800G transition and demand being strong. In some of our remarks today, you've heard the networking requirements. We expect when you look at a data center rack today, 15% to 20% of it's going to comprise of networking, we expect in the next 2 to 3 years, but that's going to triple. And so the AI infrastructure investment cycle and the workload is going to drive up the networking requirements. And with that, we're just seeing very strong demand for 400G remain in 2025 and beyond, while we see some very strong demand for 800G picking up in 2025.

In terms of 800G wins, another point to call out, in particular, we've had -- I'd say, outside of the hyperscalers, we've had some enterprise customers that have come back and we've started having discussions on 800G again. We had some competitors that were very aggressive with price to get in early on and performance has been a challenge, and we're now circling back to those customers and having fruitful conversations, which I think represent another growth opportunity for us.

Operator

And your next question comes from the line of Matt Sheerin from Stifel.

M

Matthew Sheerin

analyst

Thanks for all the information so far. I have a question regarding the guidance for CCS for next year, low double digits. How should we think about growth in the communications segment versus enterprise, particularly with the headwinds that you talked about with servers? Should we expect enterprise to be down for the year and which would imply communications up 20% plus. So how should we think about that?

M

Mandeep Chawla

executive

Matt, it's Mandeep here. Yes, I think you're getting close to it. We continue to have a really strong outlook on enterprise overall on service side, in particular, but as you know, we are in the process right now of seeing a technology transition with our largest customer. And so because of that timing delay, we will see some lower revenue in the first half of 2025 before it starts ramping again in the back half of '25. And then we really do see that growth continuing because we've already now been winning programs for new server programs, which are actually set to begin ramping in early 2026.

So the overall growth trajectory for enterprise continues to be very strong. But because of that timing of that transition, which we've talked about for a couple of quarters now, we do expect enterprise to be down next year. And that's going to be more than offset, though, by very strong double-digit growth, to your point, above 20% in the communications side, led by increasing levels of deliveries on 800G switches primarily going into next year.

M

Matthew Sheerin

analyst

Okay. Great. And then just on the Enterprise business. Clearly, in communications, you have a moat, right, with that ODM strategy and your own design. But you can argue that within the enterprise and server business, you've got at least 2 very strong North American competitors and all acquiring different technologies like liquid cooling and power management. And then you've got the ODMs also spreading out in terms of their geographic diversification, et cetera. So I guess the question is, should we expect some incremental pricing pressure in that business? And what's your strategy around that and taking share versus being more disciplined?

J

Jason Phillips

executive

Matt, this is Jason. And maybe I'll start with what I would describe as our competitive differentiation and advantage in the compute, specifically AI/ML and what I described as proprietary compute. First, I'd start with, we've been involved in highly complex custom AI/ML systems and RAC-level solutions now for 4 product program generations at scale. So that's a long time and identasize the keyword at scale. It takes years to become confident in this area. And then I'd say it takes years on top of that to become proficient in that space. So while competitors will be looking to get in to do it at scale, it's not easy. It takes time. And we've been making a tremendous amount of investments in that area, both on the engineering as well as the manufacturing side to do that.

In terms of some of the announcements, I mean, there's been a flurry of announcements around reference designs, around partnerships. I would say that we were there at one point in time in our past, but we're well down the road and beyond that, innovating at a what I would describe as system level. So at the system and the RAC level, we're working with our ecosystem partners to optimize performance at a system level, ultimately to enable our customers. So instead of taking what an ecosystem partner says a certain spec of their solution or component can drive, we're asking them we want you to solve for a system level that's performing at this. What can you do to get us there?

So I think our innovation at a system and a RAC level and the amount of investment we've been making and the time that we've been making it at is a competitive differentiator for us today and moving forward. And I would say that the word is getting out in the industry, we've been fairly quiet about it. We just stayed focused on enabling our customers but that growing -- the capability at scale, I'd say, is growing.

And then on the cooling side, we've talked about it in some of our prepared remarks, I mean, we're well down the path there. We've been working on a pump 2-phase POC for quite some time. We've got a lot of interest from customers. We're excited about where that can go at a system level, but also at a RAC level and leveraging our networking -- industry-leading networking position there as well.

M

Matthew Sheerin

analyst

Okay. Great. And just on the pricing side, are you seeing more pricing pressure or expecting that?

R

Robert Mionis

executive

Steve, do you want to take that one?

S

Stephen Dorwart

executive

Yes. So I think it's a natural part of the process that our customers are looking for us to drive competitive pricing as well as innovation. But really where we differentiate is on that innovation side. We add a lot of value to our customers by getting involved very early in the product realization process, all the way from design through NPI and launch into product manufacturing.

And as you mentioned earlier or characterize these headwinds, we really see this as normal technology transitions and some of it is the nonlinear nature of data center deployments. And we're not really overly concerned as we've recently secured the next generation of AI/ML products from some of our existing customers as well as the introduction of some new customers such as Grok. And so further, where we see our customers have made decisions to dual source, and this is where we get some of the direct competitive comparisons, we typically enter those engagements as the lead partner engaging very early in the process, as I mentioned.

And typically maintain exclusivity or near exclusivity for a period of time until the product has really stabilized and ourselves and the customer agree that it's lower risk to bring on a second source. So we continue to see the AI/ML compute systems as another strong area of growth for us going forward.

R

Robert Mionis

executive

And I would just add to that. In terms of the areas where we are dual-sourced on programs, as Steve had mentioned, I would say our performance has allowed us to maintain the majority share there and we remain focused on staying at the top of our customer scorecards.

Operator

And your next question comes from the line of Thanos Moschopoulos from BMO Capital Markets.

T

Thanos Moschopoulos

analyst

Starting off with a question for Mandeep, which is you're guiding for a 6.7% margin in 2025, which is the same as you had in Q3 and as you're guiding for Q4. Any particular puts and takes to think about in terms of why you wouldn't be seeing some margin improvements with operating leverage next year?

M

Mandeep Chawla

executive

Yes, Thanos, good to hear from you. Look, we're happy with the 6.7% we had in the third quarter. It's the highest in the company's history. Really nice to see CCS perform at the levels that they did. Can we expect CCS to perform at that exact number every quarter from now until the end of 2025? Maybe. But at the same time, we're taking into account that there are mix impacts along the way.

We are expecting margin improvement in overall ATS as we get some better operating leverage. We talked about some of the portfolio actions that have been taken on a program low within A&D. And so we do expect some improving level of margin, but it's going to be more back-end loaded overall.

So we think right now, the 6.7% is something that we're highly confident in. And we're really happy to see the flow to the bottom line to drive 15% EPS growth right now. And again, we just want to kind of -- I'd say, reiterate 2 things. One is it's our high confidence view, what we're giving right now for 2025. And in addition, it's October as well. And so we do look forward as we get some firmer customer forecasts over the coming months to give an update in January.

T

Thanos Moschopoulos

analyst

Great. And then a question probably for Jason, which is, if I look at your mix within CCS of the non-hyperscaler business, I guess, predominantly the OEM business, it seems like that's relatively flat or will be down a little bit in '24 versus '23. Anything to call out there? Is that just reflective of your focus from really the higher-margin hyperscale or HPS opportunities or anything to call out?

J

Jason Phillips

executive

Yes, it's a great question, Thanos. I'm pleased with, one, the growth of the overall business, but also the diversification inside the overall portfolio. We've seen some really strong diversification inside the hyperscaler business. And then additionally, we've got our portfolio solutions and services businesses, which we spent a lot of time investing in creating capability and building out the front end, and we're starting to see real fruit from those efforts now. So portfolio solutions, again, is leveraging our HPS platforms as they are, oftentimes enabled with open source software like Sonic.

And on that business, I'm expecting that business to triple over the next 3 years. And we've recently just secured a major win with a large retailer that you would know by name as an example of one of the proof points and the success that we're having in that business. And we're establishing a number of channel partnerships there. So I feel good about the growth prospects there and the extent of the value proposition that those customers leverage from us.

And then when we look at our services business, with the recent acquisition of NCS Global, we've really bolstered our overall IT asset disposition capability, which is going to help us help our customers manage their assets throughout their product life cycle. When you look at the amount of infrastructure that is being deployed now, the upgrade cycles that are going to be happening, we're very well positioned to help service their services needs as well as their IT asset disposition requirements. And when I look over the next 3 years, I expect our ITAD business to triple as well. So overall, pleased with the progress and excited about what 2025 brings.

Operator

Your next question comes from the line of Steven Fox from Fox Advisors.

S

Steven Fox

analyst

I had 2 questions. First off, on the ATS prospects, top line prospects for getting back to 10% revenue growth. Can you just sort of walk through the risks and opportunities there? This is the second year being below it, understanding the track record of growth. Like where does -- you see the churn in that business to get back on that type of trajectory. And then I had a follow-up.

T

Todd Cooper

executive

Okay. Steven, Todd Cooper here. I'd say from an ATS point of view, we are focused on getting back to the 10% year-over-year growth. We have been impacted, I think, and I've read a number of your reports, and I think you covered it quite well. But in our industrial segment, which is the largest of the 4 ATS segments, we've really been impacted over the last year by what I'll call, a bubble of customer inventory that was really created coming at COVID and the extreme material constraints that happened in '21, '22, first half of '23, left a lot of our customers with just a significant amount of inventory they had to burn through that's been -- we've been partnering with our customers. They've been working through that inventory over the last 12 months. We see the industrial market broadly beginning to stabilize. And with a path to return to growth next year.

I say all of that, again, in context of our largest segment, with the one caveat that EV chargers -- maybe two caveats, EV chargers and factory automation, which comprise our -- part of our industrial segment. We think they're still sitting on elevated levels of inventory really driven by the high expectations for those businesses versus the reality of their demand. We see positive demand not negative, but we think in those 2 areas of industrial will likely be the second half of next year before they return to more normal demand.

So I'd say that's probably been the largest detractor. Capital equipment has been strong this year, candidly stronger than we expected. We're seeing another strong year ahead in '25 and even '26 beyond that. If you look at the UBS report that came out in September with most analysts still, and many of our customers, still projecting $1 trillion semiconductor market by 2030, which would imply $150 billion to $170 billion of semiconductor equipment versus the $96 billion level we're at today.

And then in HealthTech, our smallest, and I'll pause after that. In HealthTech, which is our smallest segment, we've actually won a number of large finished product programs in diabetes and imaging and diagnostics. Because they're finished products, they take 2 to 3 years to ramp. We're in the early stages of those ramps, and I fully expect that our HealthTech business will double based on, again, this already won and ramping business over the next 3 to 4 years.

S

Steven Fox

analyst

Great. That's really helpful. And then just as a follow-up. If I think about just stepping back, big picture on the CCS business, it seems like the Holy Grail is to be doing as much as you can on the RAC that you showed on Slide 11. And you've sort of alluded to different ways that you're going about sort of leveraging different component wins into more system wins, et cetera. Can you sort of give us a perspective on that vision and the vision for services? Like how much does that sort of contribute to growth now versus what it could be? And what kind of work do you have to do to really, where possible, gain more share of wallet at like big customers?

J

Jason Phillips

executive

Thanks, Steven, this is Jason. Yes. So I mean, ultimately, that is the goal is to enable our customers, which is with as many of the systems in the rack as possible. We made a very conscious decision back in 2009 when we started in HPS and ODM to focus at a system level and we had a very strong storage position then. We continue to today doing business with 4 of the top 6 and now taking what I'd call our enterprise-class storage solutions into the hyperscaler market, which has got some exciting potential.

And then we developed networking in this industry-leading networking position now focused very much on the high end of the data center. 400G was our big breakthrough. We've now moved into 800G, secured all the wins in 800 where we had 400G engagements, and we just announced a big 1.6 terabit win with, what I would say, an exponential amount of interest from 800 to 1.6 that continues to grow. And so we've got an industry-leading position there on the merchant side of silicon.

And then AI/ML compute where we've just announced, in addition to having what I call an industry-leading custom ASIC AI/ML position. We are developing a modular HPS AI/ML platform that will be able to support both merchant and custom silicon types, and we're very excited about the prospects there. We just recently announced a partnership with AMD, where we're going to prove that out on MI 325.

So you can see our progression from 2009 to where we are. We remain focused at innovating at a system level and enabling our customers with optimized solutions for their applications and for their software and that naturally progresses and translates into RAC-level solutions where we're doing, I'd say, more RAC-level orchestration and it's different than just system integration. It's RAC-level orchestration for our customers. So again, we're going to remain focused on enabling them. We've been making significant investments since 2009, we're approaching $0.5 billion of R&D investment as we approach the end of 2024. And all that is culminating into a robust portfolio of system and RAC-level solutions.

Operator

And your next question comes from the line of Jesse Pytlak from Cormark.

J

Jesse Pytlak

analyst

Just coming back to the digital natives. Are a lot of the discussions that you're having with this group, are they kind of like the Grok win where it sounds like starting off manufacturing and then the idea is eventually to move into design? Or are you having designed discussions with some of these parties already?

R

Robert Mionis

executive

Steve, why don't you take that one?

S

Stephen Dorwart

executive

Sure. Yes. I think it's really both. In many cases, when we look at these kinds of opportunities, one of the key decision criteria when we're assessing the strategic fit of these companies as a potential customer is really about the opportunity to have more design involvement and to have a broader offering or have them need the broader offering that we can provide. So it's not unusual to start the relationship on current generation product. It helps kind of as a pipe cleaner. It allows us to get familiar with each other and familiar with the products and some real-time experience that's applicable into next generation. So it's not uncommon to start out that way.

However, we have others where they look at the portfolio of platform solutions that we have. They look at ways that they can potentially iterate and customize and in some cases, use as is in their infrastructure or in their racks. And so that often leads to a fair amount of HPS participation right from the beginning.

J

Jesse Pytlak

analyst

That's helpful. And if you could, can you maybe just characterize like their aggressiveness in terms of spending? Like are they ready to really open the wallet? Or are they still trying to solidify their planning?

S

Stephen Dorwart

executive

Yes, it varies. I hate to give the depends answer, but it kind of depends on where they are in their development. In some cases, these are emerging companies, they have some niche kinds of technologies and have a market that's very interested in those kinds of solutions and offerings. And so it does vary a bit from customer to customer, but it's again part of our criteria, and we look at the kinds of companies that we think we can really bring differentiated value to and that we want to align with.

T

Todd Cooper

executive

And Jesse, I would just add to that, with these companies, there's a willingness to leverage a broader portion of the value proposition that we can deliver right away. Sometimes, it takes time to build up that relationship with customers where they take more advantage of the value proposition that we can help enable them with. I'd say with this customer class, there's a greater willingness right out of the gate to get scaling as quickly as possible and leverage many of the services that we offer.

Operator

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

P

Paul Treiber

analyst

Just a high-level question on customer mix and diversification within CCS. You did speak about the opportunity with digital natives. But the large Tier 1 hyperscalers are still and probably will be a large portion of the market. How do you see your opportunity with other large Tier 1 hyperscalers? And what's the strategy to drive in and capture more share with those?

R

Robert Mionis

executive

Paul, maybe I'll start and then Steve can add some color here. So we continue to do business with the top 5 hyperscalers. And I would say, I'm very pleased with the amount of diversification, as I mentioned a bit earlier, that's taken place there. Outside of our largest customer, we've seen tremendous growth with our other hyperscaler customers. And we've got, I'd say, very promising discussions ongoing in terms of building upon that growth. So strong diversification. Unfortunately, we can't provide too much color there in terms of the details, but pleased with the progress we're making there.

S

Stephen Dorwart

executive

I would just add to that, that I mentioned earlier a comprehensive strategy to participate across many of these growing markets, specifically those being driven by AI and ML applications. So from the hyperscalers with cloud services, the specialized clouds, the large enterprise and even working with OEMs and working through channels to address some of the SMB opportunities. So we have a strategy to go broad process.

When we think about the hyperscalers, they tend to be the drivers or the pioneers of new technologies. And oftentimes, those technologies have a long life after the hyperscalers have moved on to the next thing. So it's always part of the strategy to look at opportunities, to leverage the investments that we've made, the scale that we've achieved and the relationships that we have with the ecosystem partners to have compelling solutions across that broad market.

P

Paul Treiber

analyst

And then a follow-up question. I mean, you've discussed pricing. And looking at this market, how are hyperscalers at this point? Are they taking price into consideration as one of the top priorities yet? Do you expect that, that would happen at some point in the future where they may become more price sensitive than maybe what they have been in the last 12, 18, 24 months or so?

R

Robert Mionis

executive

Steve?

S

Stephen Dorwart

executive

Yes. Thanks for that question. I think that -- as I mentioned before, when we think about pricing and the hyperscalers and their approach to pricing there's always a component of pricing availability and performance and kind of ease of doing business or the criteria, I think, they usually assess their suppliers based on. And oftentimes, with leading-edge new technologies, that performance and availability is a key driver, followed closely by pricing.

And so as we think about just the pricing piece of that, as I mentioned before, it's really about moving to a more value-based pricing and finding more areas or opportunities for us to add value into the overall system. So there's a number of make-versus-buy decisions that occur within something as complex as the RAC. There's combi modules, there's mix. There's other subsystems, CPU modules and power and fan complexes, those kinds of things. And so we look at the ways that we can add value across the entire RAC or the entire system, which contributes to stronger pricing.

We also like to look at ways to gain control of key commodities. So sometimes our hyperscale customers like to have source control and stay closely aligned to some of the key commodities. But we're always finding ways to become more competitive there. And with some commodities, when you think about it, the only companies that buy more volume than hyperscalers are companies that are aggregating the demand of several end users like ourselves. And so we're always looking for ways and working diligently to find these kinds of opportunities to ensure that our pricing remains competitive, and our solutions are compelling.

Operator

And your next question comes from the line of Todd Coupland from CIBC.

T

Thomas Ingham

analyst

I was wondering if you could bridge the gap. You talked about roughly 30% growth in CCS end markets, yet when we look at hyperscaler CapEx for 2025, it's more or less low double-digit growth. And I'm just wondering, why is it that low? And are you basically implying in your views that, that growth rate is actually going to accelerate in 2025? Some commentary on the market would be appreciated.

M

Mandeep Chawla

executive

Todd. Mandeep here. It's nice to talk to you. Yes, sorry if it wasn't clear, but let me just clarify our revenue outlook overall. So the $10.4 billion is 8% overall for the company. Again, it's our high confidence view. We're seeing right now low double-digit growth in CCS. And we're seeing low single-digit growth in ATS. I know you didn't ask it, but this is around on the ATS side, good level of growth across the portfolio. We're expecting everyone to grow. We are seeing the impact of that program decision that we've made in A&D offsetting some of the growth. And then some of the growth that we're expecting in industrial is more back-end loaded.

On the CCS side, as I talked a little bit earlier on, the enterprise, because of the program transitions, we do expect to see some level of decline next year. That's going to be more than offset on the communications side. Communications will be probably up above 20%, 20% to 25%. So overall, we're really pleased with the growth.

To your point on the hyperscaler CapEx, it is one thing that we are watching. Consensus numbers are only one thing and then, of course, taking market share is another. But right now, hyperscaler CapEx in 2024 is going to be -- is very, very strong as everyone knows. I think consensus is somewhere in the mid-30 percentage range. Consensus right now for hyperscaler CapEx next year is in the low double digits. And so that's reflected in our outlook right now.

The one thing I will say when we talk about the high confidence, though, is we have very good open forecast conversations with our customers, which go -- with our hyperscaler customers which go out about 12 months. And so we have some pretty robust forecast right now for Q1, 2 and 3. What we don't have is very robust forecast yet for the fourth quarter. And so that's one of the areas that we're really working on over the coming months to shore that up. So that's why when we come back in January, we're hoping we can give an update in that regard.

T

Thomas Ingham

analyst

I guess, my follow-up on that is, and again, this is more of a market question. We hear companies like Snowflake say there isn't one Fortune 500 company in production with Gen AI applications. What do you think about that? Like it seems like the market adoption still has a ways to go, and there's going to be digestion period. So I guess from our perspective, it seems like some of that is baked into the hyperscaler CapEx for next year. Just wondering at a corporate level, what you think about that as well.

J

Jason Phillips

executive

Todd, yes, this is Jason. I guess, one comment I would make on the CapEx numbers. It's important to recognize that inside of those numbers include everything that makes the data center work, including power, property, plant, equipment, all of that, right? So that -- there's a lot that goes into that bucket. And so when we look at our growth rates and where the hyperscalers are deploying their CapEx, I'd say we feel very good about our level of growth. Steve, I don't know if there's anything you'd want to add to that.

S

Stephen Dorwart

executive

No, I think it's well said unless there's follow-on questions.

M

Mandeep Chawla

executive

Todd, I'll just add on to reiterate. We talked about 2025 already, it's our high confidence view. We're really encouraged right now that we are already winning programs, which are set to ramp starting in 2026. We've won new AI server programs with our largest customer, which are not in our 2025 forecast, which are going to ramp in early 2026. We continue to see we will be seeing the impact of the 1.6T program. We believe that's the first in the industry, which is going to be ramping in 2026. And we're having very active discussions with a number of hyperscalers on programs that could begin in '25, that began in '26 and even programs that begin in '27. And so of course, we have to take this 1 year at a time. But the conversations with our customers at the program level are very encouraging.

Operator

There are no further questions at this time. I will now hand the call back to Mr. Rob Mionis for any closing remarks.

R

Robert Mionis

executive

Thank you, operator, and thank you all for joining us this evening. Overall, I'm pleased with the execution of our strategy and that it continues to yield results. I'm also quite encouraged that our momentum is continuing into 2025 and beyond. Frankly, the products that we have in development right now give us the confidence in our outlook and our future is certainly quite bright. We look forward to updating you in January, and have a good evening.

Operator

Thank you. And this concludes today's call. Thank you for participating. You may all disconnect.

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