Celestica (CLS) Q3 2025 earnings review
AI Supercycle Ignites Massive Beat, Raise, and Blockbuster 2026 Outlook
Celestica delivered a powerful demonstration of its position at the heart of the AI infrastructure buildout, smashing Q3 estimates with revenue accelerating to 28% YoY growth and adjusted EPS soaring 52%. The performance was driven by explosive demand from hyperscale customers for networking hardware, with the high-margin HPS segment growing 79% YoY. Management raised the full-year 2025 outlook for the third consecutive quarter and, more importantly, introduced a blockbuster 2026 forecast for $16.0 billion in revenue (+31% YoY) and $8.20 in adjusted EPS (+39% YoY). This provides rare multi-year visibility and signals that the AI-driven growth cycle has significant runway, overwhelming softness in the legacy ATS segment.
🐂 Bull Case
The new FY2026 guidance for 31% revenue and 39% adjusted EPS growth is a significant vote of confidence, providing a clear growth trajectory powered by ramping 800G/1.6T switch programs and new AI compute platforms.
The CCS segment grew an incredible 43% in Q3, driven by an 82% surge in the Communications end market. This confirms that hyperscaler investment in AI networking is not only strong but accelerating.
The shift towards high-value Hardware Platform Solutions (HPS), now 44% of total revenue, continues to drive record profitability. Adjusted operating margin reached a new high of 7.6% and is guided to expand further to 7.8% in FY26.
🐻 Bear Case
The Advanced Technology Solutions (ATS) segment revenue fell 4% YoY, reversing two quarters of growth. This portfolio 'reshaping' creates a drag on overall growth and carries execution risk.
Three customers accounted for a combined 59% of total revenue in the quarter (30%, 15%, and 14%). This heavy reliance on a few hyperscalers creates significant concentration risk if their spending priorities shift.
The Enterprise end market declined 24% due to a technology transition in an AI program. While management guides for a Q4 recovery, it remains a 'show-me' story and a point of weakness in the near term.
⚖️ Verdict: 🟢🟢
Very Bullish. The sheer force of the AI-driven momentum, evidenced by the accelerating top-line growth and the extraordinary FY26 guidance, far outweighs the concerns. Celestica has firmly established itself as a critical enabler of the AI revolution, and the new long-term outlook suggests a sustained period of high growth and profitability is ahead. The weakness in the ATS segment is minor by comparison.
Key Themes
Hyperscaler Demand for Networking Reaches Fever Pitch
The core driver for Celestica's outperformance is the insatiable demand from hyperscalers for high-bandwidth networking. The Communications end market revenue grew 82% YoY, propelled by accelerating ramps of 800G data center switch programs. The Hardware Platform Solutions (HPS) business, which houses these products, grew 79% YoY to $1.4 billion and now represents 44% of total company sales, cementing its role as the primary growth and margin engine.
FY26 Guidance Provides Powerful Multi-Year Visibility
Management introduced a very strong FY2026 outlook, projecting revenue of $16.0 billion (+31% growth) and adjusted EPS of $8.20 (+39% growth). This forecast is underpinned by continued strength in 800G networking, the initial ramps of next-generation 1.6T programs, and full production of a custom ASIC AI/ML compute platform. This guidance provides investors with a clear, multi-year growth narrative that extends well beyond the current fiscal year.
Positive Mix Shift Drives Record Profitability
Celestica achieved a record non-GAAP operating margin of 7.6%, up 80 basis points YoY. The consistent margin expansion is a direct result of the favorable sales mix shifting towards higher-value HPS products. The CCS segment margin hit 8.3%, and with HPS expected to continue leading growth, the path to the guided 7.8% operating margin in FY26 appears well-supported.
ATS Segment Growth Reverses
Contradicting the overwhelmingly positive company narrative, the ATS segment reported a 4% YoY revenue decline, a sharp reversal from the 7% growth seen last quarter. Management attributed the decline to 'portfolio reshaping in our A&D business' and softness in capital equipment. With guidance for another decline in Q4, this segment is a clear laggard and a drag on overall corporate growth.
Trade Policy Remains an External Risk
Management's guidance explicitly assumes 'no material changes to tariffs or trade restrictions'. While the company highlights its diversified global footprint as a key mitigant, any significant shift in trade policy, particularly between the U.S. and Asia, remains a key external risk to the outlook.
Technology Leadership in Next-Gen Platforms
Celestica continues to invest heavily in R&D to maintain its lead in complex hardware. The earnings call detailed progress on 1.6T networking switches using Broadcom's Tomahawk 6 silicon, advanced liquid cooling solutions (direct-to-chip), and full rack-scale system integration for custom AI ASICs. This technical expertise serves as a key competitive moat, enabling design wins for the most demanding AI infrastructure.
Enterprise AI Compute Ramp is Critical for H2
The Enterprise end market was down 24% YoY due to a technology transition in an AI/ML compute program with a hyperscaler. Management is guiding for a return to growth in Q4 as the next-generation program ramps. The successful execution of this ramp is critical to meeting second-half expectations and diversifying the CCS growth drivers beyond networking.
Other KPIs
Accelerating. Grew 79% YoY, up from 82% growth in Q2. HPS now constitutes 44% of total company revenue, up from 32% a year ago. This rapid mix shift toward higher-value, design-led products is the primary driver of Celestica's margin expansion and strategic repositioning as a key AI enabler.
Stable. The company generated $302 million in free cash flow year-to-date while funding rapid growth. The full-year outlook was raised from $400 million to $425 million, demonstrating strong working capital discipline and confidence in continued cash generation.
The gross debt to trailing 12-month adjusted EBITDA ratio improved to a very healthy 0.8x. With approximately $1.1 billion in available liquidity, the company has ample financial flexibility to fund its aggressive growth plans, including CapEx forecasted to be between 2.0% and 2.5% of revenue in 2026.
Guidance
Accelerating. The midpoint of $3.45B implies 36% YoY growth, a significant acceleration from Q3's 28% growth rate. This reflects continued strong demand for 800G switches and the beginning of the recovery in the Enterprise segment.
Accelerating. The initial FY26 forecast implies 31% YoY growth over the new FY25 guidance of $12.2B. This represents an acceleration from the 26% growth expected for FY25, signaling management's high confidence in the durability of the AI infrastructure cycle.
Decelerating but strong. This implies 39% YoY growth from the FY25 guide of $5.90. While this is a deceleration from FY25's expected 52% growth, it is off a much larger base and still represents exceptionally strong earnings compounding.
The outlook highlights the ongoing divergence between the two segments. The AI-fueled CCS business is expected to grow another ~40%, while the ATS segment's recovery is projected to be modest as reshaping activities continue to offset base demand.
Key Questions
ATS Profitability vs. Reshaping
Could you quantify the margin impact of the A&D program exit in the ATS segment? As you continue 'reshaping', what is the target long-term growth and margin profile you are aiming for in this segment?
Sustainability of CCS Growth
Your CCS business is on track for ~40% growth in FY25 and guided for another ~40% in FY26. How do you view the sustainability of this growth rate into 2027 and beyond, particularly as upgrade cycles to 1.6T mature?
Margin Profile of New Digital Native Win
Regarding the new rack-scale AI system win with a digital native customer ramping in 2027, will this program be margin accretive or dilutive to the CCS segment, especially considering the potential for consigned components?
Competitive Landscape for 1.6T
You noted you were first to have a working 1.6T prototype. As this market ramps in 2026, how do you see the competitive landscape evolving compared to the 800G cycle, and what is your expected market share?