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Presentation

Operator: Good morning, ladies and gentlemen, and welcome to the Celestica Q2 2024 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Thursday, July 25, 2024. I would now like to turn the conference over to Craig Oberg, Vice President of Investor Relations and Corporate Development. Please go ahead.

Craig Oberg: Good morning, and thank you for joining us on Celestica’s second quarter 2024 earnings conference call. On the call today are Rob Mionis, President and Chief Executive Officer, and Mandeep Chawla, Chief Financial Officer. Please note that during the course of this call, we will make statements related to the future performance of Celestica that contain forward-looking information. While these forward-looking statements represent our current judgment, actual results could differ materially from a conclusion, forecast or projection in the forward-looking statements made today. Certain material factors and assumptions are applied in drawing any such statement. For identification and discussion of such factors and assumptions, please refer to our public filings available at sedarplus.ca and sec.gov.

We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during this call, we will refer to various non-IFRS financial measures, including non-IFRS operating margin, adjusted gross margin, adjusted return on invested capital or adjusted ROIC, adjusted free cash flow, gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS, adjusted SG&A expense, adjusted effective tax rate and non-IFRS operating earnings. Additional information about material factors that could cause actual results to differ materially from a conclusion, forecast or projection in the forward-looking information as well as risk factors that may project future performance results of Celestica and reconciliations of such non-IFRS financial measures to their most directly comparable IFRS measures are contained in our public filings.

Unless otherwise specified, all references to dollars on this call are to US dollars and per share information is based on diluted shares outstanding. Let me now turn the call over to Rob.

Rob Mionis: Thank you, Craig, and good morning, everyone, and thank you for joining us on the call today. In the second quarter, our strong momentum continued, achieving revenues of $2.39 billion and adjusted EPS of $0.91, both of which exceeded the high-end of our guidance ranges. Our non-IFRS operating margin was 6.3%, which was above the midpoint of our revenue and adjusted EPS guidance ranges. We also continued to generate solid adjusted free cash flow, which came in at $63 million during the quarter, bringing our year-to-date total to $129 million. Our CCS segment saw a 51% year-to-year increase in revenues in the second quarter and achieved segment margin of 7.2%, which is 120 basis points higher compared to the prior-year period.

The top-line growth and margin expansion continued to be supported by large-scale investments in data center infrastructure from our hyperscale customers, including very strong demand for our HPS offering. In our ATS segment, revenues, as anticipated, were lower year-to-year, primarily driven by continued softness in our industrial business. Despite this demand softness, we remain encouraged by the strength in other parts of our ATS portfolio, in particular, we saw solid double-digit revenue growth in both our A&D and capital equipment businesses in the second quarter. Overall, we are pleased with our solid performance in the first half of the year. Looking ahead, we feel we are very well-positioned to continue to capitalize on a number of high-value opportunities across our portfolio and strengthen our leadership position in key end markets.

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

Mandeep Chawla: Thank you, Rob, and good morning, everyone. Second quarter revenue came in at $2.39 billion, above the high-end of our guidance range and up 23% year-over-year. The increase was supported by stronger-than-expected growth in our CCS segment, partially offset by demand softness in our ATS segment. Second quarter non-IFRS operating margin of 6.3% was an improvement of 80 basis points over the prior-year period. This expansion was driven by meaningfully higher profitability in our CCS segment due to operating leverage, driven by higher volumes and improved mix. Our second quarter adjusted earnings per share was $0.91, which exceeded the high-end of our guidance range and was $0.36 higher year-over-year. This marked our highest quarterly result in company history.

Our second quarter adjusted effective tax rate was 20%, in-line with our guidance. As anticipated, our adjusted effective tax rate included the in-quarter impact of global minimum tax, which was enacted in Canada during the quarter. Moving on to our segment performance. ATS segment revenue for the second quarter were $768 million, down 11% year-over-year, slightly more than our expectation of a high single-digit percentage decrease. Decline in ATS segment revenue was driven by continued demand softness in our industrial business, partially offset by year-to-year growth in our A&D and capital equipment businesses. Our ATS segment revenues, other than our industrial business, grew 12% year-to-year in the second quarter. ATS segment revenue accounted for 32% of total revenues in the second quarter.

Our second quarter CCS segment revenue of $1.62 billion was 51% higher compared to the prior-year period, driven by very strong growth in both our enterprise and communications end market. CCS segment revenues accounted for 68% of total company revenues in the second quarter. Revenue in our enterprise end market was up by 37% year-over-year in the second quarter, above our expectations of a low 20 percentage increase, driven by strong demand for AI/ML compute programs. Revenue in our communications end market was higher by 64% compared to the prior-year period, which was better than our expectation of mid-40% increase. The growth in our communications end market was driven by accelerating demand for HPS networking products from our hyperscaler customers, primarily in support of their investments in AI/ML infrastructure.

HPS revenue was $686 million in the second quarter, accounting for 29% of total company revenues and was up 94% year-over-year. The very strong growth in our HPS portfolio was driven by an acceleration in demand for networking products from hyperscaler customers, including 800G switch programs. Turning to segment margin. ATS segment margin in the second quarter was 4.6%, down 20 basis points compared to the prior-year period, driven primarily by a reduction in operating leverage at select sites. CCS segment margin during the quarter was 7.2%, up 120 basis points year-over-year as a result of operating leverage and improved mix. During the second quarter, we had two customers that accounted for more than 10% of total revenues, representing 32% and 12% of sales for the quarter.

We continue to remain comfortable with the current level of concentration in our portfolio, supported by our diversification across multiple programs with our largest customers. Moving on to some additional financial metrics. IFRS net earnings for the second quarter were $100 million or $0.83 per share, compared to $56 million or $0.46 per share in the prior-year period. Adjusted gross margin for the second quarter was 10.6%, up 90 basis points year-over-year due to improved mix, production efficiencies and operating leverage. Our adjusted ROIC for the second quarter was 26.7%, an improvement of 6.7% compared to the prior-year quarter, driven by higher profitability and effective working capital management. Moving on to working capital. At the end of the second quarter, our inventory balance was $1.85 billion, down $106 million sequentially and down $493 million year-over-year.

Cash deposits were $576 million at the end of the quarter, lower by $143 million sequentially and down $233 million compared to the prior-year period. As anticipated, we are returning some of our cash deposits from certain customers as gross inventory amounts reduce. Cash cycle days were 64 during the first quarter, down 5 days sequentially and 9 days lower than the prior-year period. Moving on to our cash flows. Capital expenditures for the quarter were $37 million or approximately 1.5% of revenue compared with 1.7% in the second quarter of 2023. We now expect our capital expenditures for 2024 to be between 1.5% and 2% of revenues, slightly below our previous outlook of between 1.75% and 2.25% due to the higher-than-anticipated annual revenue outlook.

In the second quarter, we generated $63 million of adjusted free cash flow compared to $67 million in the prior-year period. We have generated $129 million of adjusted free cash flow year-to-date in 2024 compared to $76 million during the same period in 2023. We are pleased with our strong cash conversion and consistency in generating positive free cash flow on quarterly basis, while also making the necessary investments to support our growth. Moving on to some additional key metrics. At the end of the second quarter, our cash balance was $434 million. In combination with our borrowing capacity under our revolver, this provides us with approximately $1.2 billion in total liquidity, which we believe is sufficient to meet our anticipated business needs.

Our gross debt at the end of the second quarter was $750 million, leaving us with a net debt position of $316 million. Our gross debt to non-IFRS trailing 12-month adjusted EBITDA leverage ratio was 1.1 turns, up 0.1 turns sequentially and down 0.1 turn compared to the same period last year. During the quarter, we amended and upsized our credit facility, increasing our revolver capacity from $600 million to $750 million, and entering into a new term loan A and B loans for a total of $750 million The proceeds from the new term loans were used to pay down the outstanding balances on and terminate the previous term loans and repay the outstanding amounts under the revolver. As of June 30, 2024, we were compliant with all financial covenant under our credit agreement.

During the second quarter, we repurchased approximately 200,000 shares for cancellation under our normal course issuer bid at a cost of $10 million. Year-to-date, we have repurchased a total of approximately 700,000 shares at a cost of $27 million under the program. We will continue to be opportunistic towards share repurchases for the remainder of 2024. Now turning to our guidance for the third quarter of 2024. Third quarter revenues are expected to be in the range of $2.325 billion to $2.475 billion, which, if the midpoint of this range is achieved, would represent growth of 17% compared to the prior-year period. Third quarter adjusted earnings per share are expected to be in the range of $0.86 to $0.96, which, if the midpoint is achieved, would represent an improvement of $0.26 per share or 40% compared to the prior-year period.

If the midpoint of our revenue and adjusted EPS guidance ranges are achieved, non-IFRS operating margin would be 6.3%, which would represent an increase of 60 basis points compared to the third quarter of 2023. Our adjusted SG&A expense for the third quarter is expected to be in the range of $73 million to $75 million. And we anticipate our adjusted effective tax rate to be approximately 20% for the third quarter. Now turning to our end market outlook for the third quarter of 2024. In our ATS segment, we anticipate revenue to be down in the low single-digit percentage range year-over-year, driven by softer demand in our industrial business, partly offset by continuing growth in A&D and capital equipment. We anticipate revenues in our communications end market to be up in the low-30%s range year-over-year, driven primarily by continued strong demand for HPS networking products.

Finally, in our enterprise end market, we expect revenue to be up in the mid-30%s range year-over-year, driven by program ramps in our storage business and continued demand for server programs in support of AI/ML compute. I’ll now turn the call back over to Rob for a discussion of our end markets and to provide an update to our annual outlook for the overall business.

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

For the full year, we now anticipate our ATS segment revenues to be down in the mid single-digit range compared to 2023 and compared to our prior outlook of approximately flat. We continue to anticipate the second half of the year to be sequentially higher compared to the first half. In our industrial business, we continue to experience softer demand on a year-to-year basis, driven primarily by macroeconomic conditions and excess channel inventory. We expect the overall demand environment to gradually improve in the second half of the year. In our A&D business, we continue to see solid growth, supported by strength in commercial aviation and ramping new wins in defense programs. We expect that this strong demand environment will persist for the remainder of 2024.

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

Now turning to our CCS segment. Our CCS segment saw a very strong growth in the second quarter with revenues up 51% compared to the same period in 2023, driven by solid demand in both our enterprise and communications end markets. The broad-based strength across most our end markets continues to be supported by demand from our hyperscale customers, which grew by 93% in the first half of 2024 compared to the same period in 2023. The strength we are seeing in our hyperscaler portfolio is broad based as our growth is being driven by solid demand across multiple technologies, programs and customers. We expect solid demand to support continued year-to-year growth in the second half. In 2024, we anticipate that revenues from our programs with hyperscaler customers will surpass $4.6 billion and will account for more than 70% of our CCS segment revenues.

As we enter the second half of the year, we are seeing a mix shift within our CCS portfolio, driven largely by the changing needs of our hyperscaler customers. We anticipate incremental growth in networking, driven by healthy demand for our market leading 400G switch products, and ramping programs in the 800G switch, as well as growth in storage. We expect that this strength will more than offset a slight reduction in AI/ML compute, driven by technology transitions in certain sole-sourced programs. We expect to ramp new AI/ML next-generation compute programs in 2025. Overall, the demand backdrop for our CCS segment continues to be highly favorable. And as a result, we now expect revenues to be up in the mid-30%s range in 2024. Our total company outlook for the second half of 2024 is very positive and we remain focused on executing to serve our customers across our end markets.

And we remain confident that our ability to consistently deliver strong financial results, along with prudent capital allocation will enable us to drive long-term value for our shareholders. With that, I would now like to turn the call over to the operator for questions. Thank you.

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Thanos Moschopoulos. Please go ahead. Your line is open.

Thanos Moschopoulos: Hi, good morning, and congrats on the quarter. To begin, can you update us on where you are from a capacity perspective? Remind us the timing of the new capacity coming online and just in terms of where you are right now, whether you’re bumping up against some constraints, or what the dynamic looks like in terms of how much more capacity you still have at the moment?

Rob Mionis: Hi, Thanos, good morning. Yes, we have two capacity expansions going on. One, in Malaysia. We actually opened doors officially in Malaysia on March 1, that’s Kulim 2 we call it, and products transitioning and the building is ramping. So, we have plenty of capacity in Southeast Asia. In our Thailand facility, the project is actually going according to plan and we’re open for new business in Q1 of 2025. Between now and then we feel like we have ample capacity to support all our customers. Also in North America, we still have ample capacity in our Richardson, Texas facility as well.

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

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

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

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

Rob Mionis: Good question, Thanos. This is the benefit of having a diverse portfolio across all of CCS, but within enterprise specifically within AI compute, what we’re seeing now is this technology transition on the single-sourced program, it will start plateauing and decreasing towards the back end of the year with the new product ramping mid-2025, I would say. The benefit of a diverse portfolio is we’re actually seeing accelerated demand for our HPS networking products and those are actually filling in nicely in the back half of the year and expected to also fill in through all of 2025 as use cases for our networking products increase. Across all of our hyperscaler customers, what we’re seeing now is a move towards more distributed regional data centers due to power constraints. And when you have that, you actually have increased requirement for networking products.

Thanos Moschopoulos: Great. I’ll pass the line. Thanks.

Rob Mionis: Thank you, Thanos.

Operator: Next question is from Matthew Sheerin. Please go ahead. Your line is open.

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

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

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

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

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

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

Matthew Sheerin: Okay, great. Thanks so much, Mandeep.

Mandeep Chawla: Thank you, Matt.

Operator: Thank you. And next question is from Steven Fox of Fox Advisors. Please go ahead. Your line is open.

Steven Fox: Hi, good morning. I guess just following up on the first couple of questions, is there a way to maybe isolate the impact to year-over-year improvements on margins from mix versus operating leverage a little bit further at the corporate level and also the CCS level? And then, I had a follow-up.

Mandeep Chawla: First of all, welcome, Steven, to the first call.

Steven Fox: Thank you.

Mandeep Chawla: And it’s really nice to have you on. Look, we purposely don’t start breaking out margins at that level, because it’s sometimes impacted by program dynamics in which sites programs fall into. What I can tell you is this, building on what Rob had talked about earlier, we are having very nice levels of utilization in Southeast Asia in particular at the moment. The majority of our HPS programs are being built in a select number of sites, and those sites are — with high levels of utilization are quite profitable. And so, it’s a combination of both operating leverage and pricing that we have within the HPS programs that are leading to the strong profitability. But overall, and we’ve talked about this before in some different discussions with the outside community, HPS margins are accretive to overall CCS.

They’re not 20% though. It’s not 20% operating margins. And so, that’s why sometimes whether it’s operating leverage or mix of HPS programs, it can often be one or the other, but gets to the same result.

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

Rob Mionis: Sure, Steven. Yeah, so across our ATS, we’re actually seeing some very nice growth with the exception of our industrial business. ATS actually grew 12% year-over-year in the second quarter. So, it’s really isolated to industrial. Now, within industrial, we’re seeing softness in energy, namely EV chargers and also broad industrial markets, factory automation largely, and it’s being driven by excess channel inventory. As the year gets long, we actually are seeing that channel inventory is being consumed and we’re seeing an uptick in demand as we exit the year and we’re expecting our industrial business to return to growth in 2025. Again, outside of industrial, we’re seeing some very nice growth with capital equipment and it’s actually improving. Our outlook is improving on a quarter-to-quarter basis. And A&D continues to have very strong demand and we see that demand at least lasting through the end of this year.

Steven Fox: And just the healthcare piece like the new programs?

Rob Mionis: Yeah, I mean, healthcare, thank you for reminding me. So, within healthcare, this year is largely flattish, but it’s really being driven by some programs that are going end of life and with those new programs starting to ramp in the first half of next year. So, it’s really program dynamics more than anything else, but we do have some one business, some ramps that are just starting right now, which we expect to pay dividends in 2025.

Steven Fox: Got it. Thank you very much.

Operator: Thank you. Our next question is from Daniel Chan of TD Cowen. Please go ahead. Your line is open.

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

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

Daniel Chan: That’s helpful. Thank you. And then maybe switching over to the communication side, do you have visibility on whether the mix of white box versus OEM networking equipment will be different going forward in these newer AI data centers versus what they had in the non-AI data centers? Thank you.

Mandeep Chawla: Dan, sorry, can you repeat that last part?

Rob Mionis: Yeah.

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

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

Daniel Chan: Great. Thank you. And then maybe just one more. The storage strength that you’re seeing, are those related to AI data center buildouts as well or are those more traditional cloud data center type deployments? Thank you.

Rob Mionis: Yeah, it’s hard to discern, Dan. We think that it’s due to the AI buildout, but every one of our hyperscalers has a different storage architecture, some are going embedded, some are going external. So, what we’re seeing here is more of program dynamics, but we think the overall trend is — AI is driving the need for more data and more data driving the need for more storage, hence we are seeing an uptick in demand.

Daniel Chan: Okay. Thanks, Rob.

Daniel Chan: Okay.

Operator: And your next question comes from the line of Paul Treiber of RBC Capital Markets. Please go ahead. Your line is open.

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

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

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

Rob Mionis: Yeah. So, it’s one customer, several programs. And again, those will be [Technical Difficulty] as customer continues to [Technical Difficulty] innovation and introduces new products. With respect to our AI compute customer base, right now we have one very large customer on that.

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

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

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

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

Paul Treiber: Okay. Thanks for taking the questions.

Operator: And your next question comes from Jesse Pytlak of Cormark Securities. Please go ahead. Your line is open.

Jesse Pytlak: Hey, good morning. There are some concerns over overinvestment in AI infrastructure by some of your hyperscaler customers. Can you maybe speak to the sense of urgency you’re seeing from these customers for their buildouts and how that might compare to what it was six to 12 months ago?

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

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

Jesse Pytlak: Thanks. That’s helpful. And then just…

Rob Mionis: The last thing I’ll add is when we look at customer CapEx spending, which we do all the time, the second and third question we ask ourselves is within those broad numbers, what actually are they buying and who are they buying it from. And we feel based on those two questions that we are very well positioned to participate in future growth.

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

Rob Mionis: The beginning part broke out, Jesse. You’re talking about China restrictions?

Jesse Pytlak: Yes, that’s correct.

Rob Mionis: US? Okay. Yeah, we’ve been keeping a very close eye on that. Stepping back, it has not been new news that advanced chips and semiconductor capital equipment, advanced equipment has been restricted. For a while, there is some noise out there that those restrictions will increase with respect to a new class of chips. And we’re keeping close eyes on that. But based on where our factories are and where our design centers are and our ability to be able to ramp those centers up, we feel comfortable that we’re going to be able to move in a very agile way depending on what happens or what doesn’t happen in the future. We have ample capacity in all our regions with respect to Southeast Asia, Mexico, Europe and North America. We operate in 16 countries. So, based on our vast footprint and our scale, we think we could actually move pretty quickly such something unanticipated happen.

Jesse Pytlak: Thank you. I’ll pass the line.

Operator: And your next question comes from Todd Coupland of CIBC. Please go ahead. Your line is open.

Todd Coupland: Thanks, and good morning, everyone. I was just wondering if you’re able to put any context around the new servers, the custom chip-based servers relative to the business you’ve seen thus far. Do you view it as an incremental step up from a volume point of view? Any way to give us some color on that?

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

Mandeep Chawla: Yeah, Todd, we’re having discussions with customers right now on programs that are going out into 2027. And we’re seeing, based on demand, not only the chip, next-generation technology on the chip, volume levels that are at today’s levels or higher. And again, that’s on programs that stretch out to ’27. Todd, I don’t know if you have a follow-up or not.

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

Rob Mionis: Thank you. And thank you all for joining us this morning. I’m pleased that we posted another solid quarter and the strong momentum is giving us confidence to increase the outlook for 2024. I’m also pleased by continued strong execution and encouraged with our strong market position, especially with new products like 800G in strong and growing markets. Thank you again for joining today’s call, and Mandeep and I look forward to updating you next quarter.

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