Celestica (CLS) Earnings Analysis | Revenue +62%, Full-Year Guidance Raised to $20.5 Billion [FY2026 Q2 Japanese Commentary]

Entering July 2026, the market continues to debate how long AI data center investment will last. The fastest way to see the answer is through the earnings of contract manufacturers who are actually assembling servers and switches. Celestica's stock price closed at $318.24 on July 27, up 4.25% from the previous day. Earnings were announced after the market closed, and the stock was bought up to $343.50 (+7.94%) in after-hours trading.

On the same day, the company raised its full-year 2026 revenue guidance from $19 billion to $20.5 billion (approximately 3.362 trillion yen) and its adjusted EPS guidance from $10.15 to $11.30. This upward revision is more important than the quarterly figures themselves. Below, we will examine what is happening based on the contents of the 10-Q.

Summary of this earnings report (3 lines)

・Revenue +62%, record-high adjusted operating margin of 8.2% (Revenue $4.699 billion / Adjusted operating profit $386 million / Operating margin of 7.4% in the same period last year) — A quarter where revenue growth outpaced expense growth, and operating leverage effectively kicked in.

・Enterprise business grew by 167%, driving the entire company ($1.157 billion / $433 million in the same period last year) — The ramp-up of AI/ML computing infrastructure programs for a single hyperscaler has pushed the revenue mix to a new level.

・Capital expenditure of $493 million, with free cash flow limited to $285 million (Operating CF $767 million / Net capital expenditure of $482 million after deducting asset sale proceeds) — More than 60% of earned cash is being reinvested in capacity expansion, a structure that remains as fixed costs if the demand premise collapses.

Company Overview

In short, it is a contract manufacturer based in Toronto, Canada, that handles everything from design to assembly of AI servers and network switches. It has production bases and design centers in North America, Asia, and Europe, and its reporting segments are divided into Connectivity & Cloud Solutions (CCS) and Advanced Technology Solutions (ATS).

Connectivity & Cloud Solutions consists of two end markets: communications and enterprise, with customers primarily being data center operators such as cloud providers and hyperscalers. Advanced Technology Solutions is a decentralized business that bundles aerospace and defense, industrial, health tech, and capital equipment, and its revenue share this quarter has fallen to 19%.

Three key points for this quarter

Point 1: Expense growth was limited relative to revenue growth, and operating leverage was effective

Revenue was $4.699 billion (approximately 770.6 billion yen), and GAAP net income was $369 million (approximately 60.5 billion yen), up 75%. What should be noted is the expense side. Selling, general, and administrative (SG&A) expenses were 1.2% of revenue, down from 1.3% in the same period last year. Even looking at adjusted SG&A expenses, which adjust for stock-based compensation, it was 2.2% of revenue, an improvement of 0.8 points from 3.0% in the same period last year.

Dilution from stock-based compensation is also minor at this point. The weighted average diluted shares outstanding were 116.2 million, an increase of only 0.3% from 115.9 million in the same period last year. The company uses a method of paying withholding taxes on vested shares in cash, and the payment amount for the first half was $326 million (approximately 53.5 billion yen). It is accurate to understand that they are suppressing dilution with cash rather than share count.

On the other hand, gross margin was 12.3%, down from 12.8% in the same period last year. This is because the revenue growth was skewed toward Connectivity & Cloud Solutions, resulting in thinner margins at the gross profit level. Even so, the reason the adjusted operating margin rose from 7.4% in the same period last year is that the efficiency of SG&A expenses outweighed the decline in gross margin. This is the framework of this earnings report.

Point 2: Rapid expansion of enterprise and shrinking Advanced Technology Solutions

Revenue for Connectivity & Cloud Solutions was $3.81 billion, up 84% year-over-year, accounting for 81% of total company revenue (72% in the same period last year). By breakdown, communications was up 62% and enterprise was up 167%. The 10-Q explains that the growth in enterprise is due to the ramp-up of AI/ML computing infrastructure programs for hyperscaler customers and increased demand for storage projects.

The product group with a high ratio of in-house design, called Hardware Platform Solutions (HPS), had revenue of approximately $1.9 billion (approximately 311.6 billion yen) this quarter, up 58%, accounting for 41% of total company revenue. As this area with thin gross margins grows, the total company gross margin decreases.

In contrast, Advanced Technology Solutions remained at $888 million, up only 8%, and its share of total revenue fell from 28% in the same period last year to 19%. It is impossible to overlook the fact that the business expected to act as a diversifier is becoming relatively smaller and smaller.

Point 3: Earning power compared to peers and the reality of working capital

Contract manufacturing is a low-margin, high-volume industry. I will compare them using standardized criteria. The GAAP operating margin for the trailing 12 months is 8.78% for Celestica, 5.40% for Flex, and 5.49% for Sanmina (all based on the 12 months up to each company's most recent reported quarter as of July 27, 2026; Celestica's is calculated from $15.59 billion in revenue and $1.37 billion in operating profit, reflecting the current quarter). Because of its higher proportion of proprietary designs, Celestica earns about 60% more profit per dollar of revenue than its peers.

However, Celestica's GAAP operating profit includes valuation gains and losses from total return swaps linked to its own stock price. Excluding this impact, the adjusted operating margin for the quarter was 8.2%, an improvement from 7.4% in the same period last year. Because the quarterly non-GAAP figure and the 12-month GAAP figure above use different criteria, they cannot be compared directly. Whether using standardized comparisons or non-standardized reference values, the fact remains that Celestica is positioned above its peers. The adjusted return on invested capital also improved significantly in the first half to 52.5%, up from 33.3% in the same period last year.

Another metric to watch in contract manufacturing is the number of days cash is tied up. The cash conversion cycle is 47 days, a 19-day reduction from 66 days in the same period last year. However, looking at the breakdown, while days sales outstanding shrank from 70 to 63 days, days payable outstanding increased by 19 days, from 54 to 73 days. In other words, most of the improvement is not because the company's own collections have become faster, but because payments to suppliers have been pushed back. In the first half, $879 million in accounts receivable were sold, a sharp increase from approximately $10 million in the same period last year. The company is absorbing the working capital burden associated with growth through payment terms and receivables factoring.

Biggest risk: Over 60% of revenue comes from three customers, and that demand is the premise for $1 billion in capital expenditure

The core risks can be narrowed down to two.

The first is customer concentration. The top 10 companies account for 83% of revenue (78% in the same period last year), and there are three customers that each account for more than 10% (32%, 17%, and 14%). All of these are Connectivity & Cloud Solutions customers, and these three companies alone account for 63% of revenue. If the largest customer were to transfer its programs to another company, it is estimated that 30% of quarterly revenue would disappear at once. Contract manufacturing is an industry where the cost for customers to switch suppliers is relatively low, and this structure has worsened rather than improved since last year.

The second is the capital expenditure based on that demand. The company plans approximately $1 billion in capital expenditure for the full year 2026, and invested $493 million (approximately 80.9 billion yen) in the first half alone. This is about seven times the pace of the $69 million in the same period last year. The 10-Q clearly states that "if demand, product mix, yields, or utilization rates differ from expectations, the added capacity may become idle and returns may fall below expectations." The first and second risks are linked; if even one of the three companies slows down its investment plan, the decline in utilization and the increase in fixed costs will take effect simultaneously.

The monitoring indicator is days payable outstanding. It is currently 73 days, and I view 60 days as the threshold. The 13-day deviation means, by simple calculation, that suppliers are effectively financing an amount equivalent to approximately 14% of the quarterly cost of goods sold. If this number begins to return toward 60 days, it can be interpreted as a sign that growth is slowing and bargaining power with suppliers is weakening.

Regarding tax matters, the company is contesting additional tax assessments of approximately $7 million in Romania and approximately $12 million in Thailand, and tax incentives in Thailand will expire sequentially from 2027 to 2029. However, given the scale of the amounts, these are not factors that will move the stock price, and the impact is expected to be limited to a gradual increase in the effective tax rate.

Author's View

My judgment is Buy. However, this is conditional on the price being $340 or less.

First, the stock price has not kept pace with growth. Dividing the July 27 closing price by the company's guidance for adjusted EPS gives a forward P/E ratio of 28.2x. Since the growth from the full-year 2025 adjusted EPS of $6.05 is +87%, the simple ratio of the forward P/E divided by this growth rate is 0.32x. This figure uses one year of growth, including acquisitions and a surge in demand, and differs from the standard PEG ratio, which uses medium- to long-term growth rates. Please view this only as a rough guide to "how much the stock price has not priced in the growth rate." Peer company Flex has a forward P/E of 25.6x and Sanmina has 17.0x, but both companies have operating margins in the 5% range for the trailing 12 months. We are in a situation where a company with a 60% higher profit margin is trading at almost the same forward P/E as its peers.

Second, the financials can support the investment. The enterprise value (EV) is approximately $36.8 billion (approximately 6.0352 trillion yen), calculated by adding $740 million (approximately 121.4 billion yen) in interest-bearing debt to the market capitalization of $36.62 billion and subtracting $536 million (approximately 87.9 billion yen) in cash. The EV/revenue ratio against the company's full-year revenue guidance is 1.80x (based on my estimates). Comparing trailing 12-month results, Celestica's EV/revenue is 2.36x, Flex's is 1.54x, and Sanmina's is 0.90x. The interest-bearing debt consists only of Term Loan A (due April 2031, $250 million, floating rate) and Term Loan B (due June 2031, floating rate); there are no corporate bonds or convertible bonds. Of this, $390 million is subject to interest rate fluctuations because interest rate swaps have not been implemented. Annual interest and fees after interest rate swaps are expected to be approximately $46 million (approximately 7.5 billion yen), and the interest coverage ratio is approximately 31x against the annualized adjusted operating profit of $1.423 billion for the first half. Free cash flow for the first half remained positive at $285 million (approximately 46.7 billion yen), and the plan to fund $1 billion in capital expenditure with operating cash flow is not unreasonable.

Third, regarding the quality of earnings, attention should be paid to the GAAP side. GAAP EPS of $3.17 includes a valuation gain of $0.90 per share (pre-tax) from total return swaps linked to the company's own stock price. If the stock price falls, this gain will swing to the loss side. Adjusted EPS of $2.54 is a figure excluding this valuation gain, stock-based compensation, amortization of intangible assets, and restructuring costs, and is calculated by the company based on 116.2 million diluted shares and an adjusted effective tax rate of 20%. In this case, the adjusted figure is more conservative.

Measured against quantitative criteria for investment decisions, the two conditions of +62% revenue growth (benchmark is +15% or more) and improvement in adjusted operating margin are met. On the valuation side, the basis was that the forward P/E of 28.2x remains at almost the same level as peer company Flex's 25.6x.

Future Business Outlook

Confidence: High — Expansion of orders for AI servers and switches

Hardware Platform Solutions already account for 41% of total company revenue this quarter, with quarterly revenue exceeding the high end of guidance at $4.45 billion. The full-year outlook has been raised by $1.5 billion in revenue and $1.15 in adjusted EPS. Since the company raised these figures itself, it is highly likely that demand for the next 1-2 quarters is not a "dream" but something close to a certainty.

Confidence: Medium ── Further Improvement in Profit Margins

The improvement in profit margins this quarter is the result of efficiency gains in SG&A expenses outweighing the decline in gross margins. However, the adjusted SG&A-to-revenue ratio has already fallen to 2.2%, leaving limited room for further cuts. As long as gross margins continue to decline, whether the adjusted operating margin can reach the 10% range depends on product mix and is not guaranteed at this time.

Confidence: Low ── Re-growth of Advanced Technology Solutions

The revenue growth rate for Advanced Technology Solutions remained at +4% in the first half, and its share of total revenue fell to 19%. Recovery in aerospace, defense, and industrial sectors depends on the external environment, and there is still a long way to go before it can become an alternative engine to AI demand. This is not a stock to invest in for diversification benefits.

Summary

Finally, I will organize the positioning of this stock using a perspective not used in the main text. Celestica is a "high-margin contract manufacturer with extremely high sensitivity to AI capital expenditure." It is not protected by high barriers to entry like semiconductor design firms, nor is it protected by long-term contracts like power infrastructure companies. The only things protecting it are customer relationships and execution capability, which means the ups and downs of the demand cycle are reflected directly in its performance.

That is precisely why the concentration of 63% of revenue among the top three customers should be considered a condition that will always accompany holding this stock. With that in mind, I judge that a price where you can buy a company with an operating margin 60% higher than its peers at a forward P/E of 28.2x, which is on par with peers, is reasonable. My overall judgment is "Buy," but only at $340 or below.

The three scenarios are as follows. The bull scenario is $407, applying a 36x P/E to an adjusted EPS of $11.30. The base scenario is $339-$373, applying a 30-33x P/E to the same EPS. Compared to the forward P/E of 25.6x for peer Flex, I believe that its roughly 60% higher operating margin over the last 12 months and significantly higher return on invested capital justify a 20-30% premium. The bear scenario is $153, in a case where the second half falls to $3.80 due to a slowdown in AI capex against a first-half adjusted EPS of $4.70, resulting in a full-year total of only $8.50, with the P/E contracting to 18x. The July 27 closing price of $318.24 is below the lower end of the base scenario, and the $343.50 reached in after-hours trading is already within the base scenario range. I do not recommend chasing the stock.

Related Article Links

・Celestica (CLS) Previous Individual Analysis Article：

・Celestica (CLS) Second Previous Individual Analysis Article：

・Cross-sectional Analysis of 5 AI Data Center Component and Contract Manufacturing Stocks (Summary article including CLS)：

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