10-Q: Celestica Soars on Strong Q3, AI & Cloud Drive Growth

Celestica Inc. reported significantly better-than-expected third-quarter 2025 results, driven by robust demand in its Connectivity & Cloud Solutions segment, particularly in AI and data center networking.

Summary

• Total revenue for Q3 2025 increased 28% to $3.19 billion compared to Q3 2024, and YTD 2025 revenue increased 23% to $8.74 billion.
• Net earnings for Q3 2025 surged 199% to $267.8 million, with diluted EPS rising 208% to $2.31.
• Gross profit increased 60% to $416.1 million in Q3 2025, with gross margin improving to 13.0% from 10.4% in Q3 2024.
• The Connectivity & Cloud Solutions (CCS) segment revenue grew 43% in Q3 2025, primarily due to an 82% increase in the Communications end market, driven by data center networking demand and switch programs.
• Hardware Platform Solutions (HPS) revenue increased 79% in Q3 2025 to approximately $1.4 billion, accounting for 44% of total revenue, due to accelerating volumes in hyperscaler networking switch programs.
• The Advanced Technology Solutions (ATS) segment revenue decreased 4% in Q3 2025, mainly due to the discontinuation of a margin-dilutive program in the Aerospace and Defense business.
• Enterprise end market revenue within CCS decreased 24% in Q3 2025, attributed to a technology transition in an AI/ML compute program with a hyperscaler customer.
• Selling, General and Administrative (SG&A) expenses decreased 58% in Q3 2025, primarily due to favorable Total Return Swap (TRS) fair value adjustments.
• Net cash provided by operating activities for YTD 2025 increased to $408.9 million, and non-GAAP free cash flow rose to $302.4 million.
• The company intends to file a notice for a new Normal Course Issuer Bid (NCIB) in Q4 2025, allowing for the repurchase of up to 5% of its public float.
• Capital spending for 2025 is estimated to be approximately 1.5% of revenue.

Sentiment

Score: 9

Explanation: The company delivered exceptional Q3 2025 results, significantly surpassing revenue and EPS guidance, driven by robust demand in its high-growth Connectivity & Cloud Solutions segment, particularly in AI/ML and data center infrastructure. The substantial increases in net earnings, diluted EPS, gross margin, and adjusted ROIC demonstrate strong operational execution and profitability. The planned new Normal Course Issuer Bid further enhances shareholder value. While there are some declines in the ATS segment and Enterprise end market, the overall trajectory and strategic positioning in critical technology markets are highly positive.

Positives

• Strong overall revenue growth of 28% in Q3 2025 and 23% YTD 2025, significantly exceeding guidance.
• Exceptional growth in the Connectivity & Cloud Solutions (CCS) segment, with Q3 2025 revenue up 43% and Communications end market revenue up 82%.
• Hardware Platform Solutions (HPS) revenue surged 79% in Q3 2025, now representing 44% of total revenue, driven by accelerating volumes in hyperscaler networking switch programs.
• Net earnings increased by 199% in Q3 2025 to $267.8 million, and diluted EPS grew 208% to $2.31.
• Gross margin improved to 13.0% in Q3 2025 from 10.4% in Q3 2024, driven by operating leverage and a more favorable mix.
• Adjusted operating margin (non-GAAP) for Q3 2025 reached 7.6%, exceeding the mid-point of guidance.
• Favorable Total Return Swap (TRS) fair value adjustments contributed significantly to gross profit and reduced SG&A expenses.
• ATS segment margin increased to 5.5% in Q3 2025, primarily due to improved profitability in the Aerospace and Defense business, aided by the discontinuation of a margin-dilutive program.
• Strong cash flow from operating activities of $408.9 million and non-GAAP free cash flow of $302.4 million for YTD 2025.
• Intention to launch a new Normal Course Issuer Bid (NCIB) in Q4 2025, signaling confidence and commitment to shareholder returns.
• The company was in compliance with all restrictive and financial covenants under its Credit Facility as of September 30, 2025.

Negatives

• ATS segment revenue decreased 4% in Q3 2025 compared to Q3 2024, primarily due to the discontinuation of a margin-dilutive program.
• Enterprise end market revenue decreased 24% in Q3 2025 and 34% YTD 2025, driven by a technology transition in an AI/ML compute program with a hyperscaler customer.
• Cash and cash equivalents decreased to $305.9 million as of September 30, 2025, from $423.3 million at December 31, 2024.
• Working capital requirements increased in YTD 2025, primarily due to increases in accounts receivable and inventory balances.
• Higher income tax expense in Q3 and YTD 2025, partly due to Pillar Two global minimum tax legislation.
• Research and development (R&D) expenses increased in Q3 and YTD 2025 to support the growth of the HPS business.

Risks

• Geopolitical and trade tensions, including U.S. technology/data export controls, could adversely affect business, results of operations, and financial condition, particularly for the Capital Equipment business and CCS segment.
• Disruptions in global supply chains, including increased costs for components, materials, labor, energy, and transportation, could negatively impact operating results.
• Uncertainty in the global economy, including inflation and potential recession, may impact demand for products and services and increase operating costs.
• High customer concentration, with the top 10 customers representing 80% of total revenue for Q3 2025, and three CCS customers individually accounting for 10% or more.
• The rapid pace of technological changes, including AI-related technologies, and customer outsourcing or transfers of business among competitors, may impact financial performance.
• Ongoing tax disputes in Romania (approximately $7 million) and Thailand (approximately $12 million) could result in significant additional tax liabilities, interest, and penalties.
• Risk of tax incentives expiring or being retracted if conditions are not met, potentially increasing tax expense.
• Outstanding indebtedness and mandatory prepayment provisions of the Credit Facility require a portion of cash flow for debt service, potentially limiting future investments or responses to unexpected capital requirements.
• No assurance that outstanding obligations under the Credit Facility can be repaid or refinanced on favorable terms at maturity.
• Exposure to equity price risk related to the Total Return Swap (TRS) Agreement, as its value fluctuates with the company's common share price.
• Interest rate risk on unhedged portions of borrowings under the Credit Facility, which could increase interest expense if rates rise.
• Credit risk of counterparty non-performance from customers, suppliers, and financial institutions.
• Customer-initiated transfers of manufacturing operations between facilities could increase costs and cause disruptions.

Future Outlook

Management updated its annual financial outlook for 2025, anticipating continued growth in AI/machine learning programs and data center infrastructure. Capital spending for 2025 is estimated to be approximately 1.5% of revenue. The company intends to file a notice for a new Normal Course Issuer Bid (NCIB) in Q4 2025, which, if accepted, would permit repurchasing up to 5% of its public float.

Management Comments

• We believe that a new NCIB is in the best interests of Celestica and our shareholders.
• Management believes that the ultimate resolution of all such pending legal matters will not have a material adverse impact on our financial performance, financial position or liquidity.
• Management believes that our originally-filed tax return positions are in compliance with applicable Romanian and Thailand tax laws and regulations, and continue to vigorously defend our position through all necessary appeals or other judicial processes.
• We continue to believe that our current and projected sources of liquidity will be sufficient to fund our anticipated liquidity needs for the next twelve months and beyond.

Industry Context

The company operates within the dynamic electronics manufacturing services (EMS) and original design manufacturer (ODM) industries. Its strong performance in the Connectivity & Cloud Solutions (CCS) segment, particularly in data center networking and Hardware Platform Solutions (HPS) for hyperscaler customers, aligns with the significant industry trend of increasing investment in artificial intelligence (AI) and cloud infrastructure. The decline in the Enterprise end market due to a technology transition highlights the rapid evolution and competitive pressures within these high-growth technology sectors, requiring continuous adaptation and innovation.

Comparison to Industry Standards

• The reported revenue growth of 28% in Q3 2025 and 23% YTD 2025, along with a 199% increase in net earnings for Q3 2025, likely positions the company above many industry peers, especially given current macroeconomic uncertainties.
• The improved gross margin of 13.0% in Q3 2025 and adjusted ROIC of 37.5% demonstrate strong operational efficiency and effective capital deployment, which are key competitive advantages in the EMS sector.
• The company's strategic focus and significant growth in AI/ML and hyperscaler customer programs indicate a successful alignment with high-growth segments of the technology industry, potentially outperforming more generalized EMS providers.

Corporate Governance

Legal Proceedings

• Romanian tax authorities issued a final assessment of approximately 31 million Romanian leu (approximately $7 million) for additional income and value-added taxes for 2014-2018. The company paid the amount in 2021 to advance to the appeals phase and is vigorously defending its position.
• Thailand tax authorities issued an assessment letter seeking approximately 403 million Thai baht (approximately $12 million) for additional value-added taxes and surcharges for 2019. The company is vigorously defending its position, with a bank guarantee issued for the maximum potential liability.

Stakeholder Impact

• Shareholders are positively impacted by strong financial performance, significant EPS growth, improved profitability metrics, and the announced intention to launch a new share repurchase program.
• Employees are impacted by stock-based compensation plans, including the newly approved 2025 LTIP, and restructuring activities which include employee terminations.
• Customers in the Connectivity & Cloud Solutions segment, particularly hyperscalers, are driving significant revenue growth, while one hyperscaler customer in the Enterprise segment is undergoing a technology transition impacting revenue.
• Suppliers face potential impacts from supply chain constraints and the company's credit risk management policies.
• Creditors benefit from the company's compliance with all restrictive and financial covenants under its Credit Facility, indicating sound financial health and debt management.

Next Steps

• File a notice of intention with the Toronto Stock Exchange (TSX) to commence a new Normal Course Issuer Bid (NCIB) in Q4 2025.
• Continue to assess the impacts of the U.S. One Big Beautiful Bill Act on the annual effective tax rate.
• Vigorously defend tax positions in Romania and Thailand through all necessary appeals or other judicial processes.
• Monitor the scope, timing, and duration of trade actions by the U.S. and other governments on the business.
• Continue to monitor tensions in the Middle East and assess potential impacts on transportation routes.
• Assess liquidity position and potential sources of supplemental liquidity to fund anticipated needs.
• Fund estimated capital expenditures for 2025 (approximately 1.5% of revenue) from cash on hand and financing arrangements.
• Fund Common Share repurchases (for NCIBs and SBC plans) and SBC cash settlements from cash on hand, Revolver borrowings, or a combination.

Key Dates

Recommendation

The company delivered exceptional Q3 2025 results, significantly surpassing revenue and EPS guidance, driven by robust demand in its high-growth Connectivity & Cloud Solutions segment, particularly in AI/ML and data center infrastructure. The substantial increases in net earnings, diluted EPS, gross margin, and adjusted ROIC demonstrate strong operational execution and profitability. The planned new Normal Course Issuer Bid signals management's confidence and commitment to returning capital to shareholders. While there are some segment-specific challenges and ongoing geopolitical/tax risks, the overall trajectory and strategic positioning in critical technology markets make this a compelling investment opportunity.

Keywords

Electronics Manufacturing Services, EMS, ODM, Advanced Technology Solutions, ATS, Connectivity & Cloud Solutions, CCS, AI, Machine Learning, ML, Hyperscaler, Data Center, Networking, Switch Programs, Aerospace and Defense, Industrial, HealthTech, Capital Equipment, Financial Results, Q3 2025, Earnings, Revenue, Gross Margin, EPS, Cash Flow, Share Repurchase, NCIB, Total Return Swap, TRS, Supply Chain, Geopolitical Risk, Tax Contingencies