Celestica Inc. (NYSE:CLS) Q1 2025 Earnings Conference Call April 25, 2025 8:00 AM ET

Company Participants

Matthew Pallotta - Head, Investor Relations and Senior Director, Finance
Rob Mionis - President and Chief Executive Officer
Mandeep Chawla - Chief Financial Officer

Conference Call Participants

David Vogt - UBS
Samik Chatterjee - JPMorgan
George Wang - Barclays
Ruben Roy - Stifel
Thanos Moschopoulos - BMO Capital Markets
Steven Fox - Fox Advisors
Paul Treiber - RBC Capital Markets
Robert Young - Canaccord Genuity
Todd Coupland - CIBC
Jesse Pytlak - Cormark Securities

Operator

Hello and thank you for standing by. My name is Bella and I will be your conference operator today. At this time, I would like to welcome everyone to Celestica Q1 2025 Financial Results and Conference Call.

All lines have been placed on mute to prevent any backward noise. After the speakers remark, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Matthew Pallotta.

You may begin.

Matthew Pallotta

Good morning and thank you for joining us on Celestica’s Q1 2025 earnings conference call. On the call today we have 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 forward-looking statements relating to the future performance of Celestica, which are based on management's current expectations, forecasts and assumptions.

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, as well as risk factors that may impact future performance and results of Celestica, please refer to our public filings available at www.sec.gov and www.sedarplus.ca, as well as the investor relations section on our website.

We undertake no obligation to update these forward-looking statements unless expressly required to do so by law. In addition, during the call, we will refer to various non-GAAP financial measures including adjusted operating margin, adjusted gross margin, adjusted return on invested capital, or adjusted ROIC, free cash flow, gross debt, the trailing 12-month adjusted EBITDA leverage ratio, adjusted earnings per share or adjusted EPS, and adjusted effective tax rate. We have included in our earnings release found in the investor relations section of our website, a reconciliation of non-GAAP financial measures to the most comparable GAAP measures. With respect to our Q2 2025 and 2025 annual outlook, our earnings release does not include a reconciliation of forward-looking non-GAAP measures to the most directly comparable GAAP measures on a forward-looking basis. As items that we exclude from our GAAP to calculate the comparable non-GAAP measure are dependent on future events that are not able to be reliably predicted by the management and are not part of our routine operating activities.

We are unable to provide such a reconciliation without unreasonable effort through the uncertainty and inherent difficulty in predicting the occurrence, the financial impact, and the periods in which the adjustments may be recognized. The occurrence, timing, and amount of any of the items excluded from GAAP to calculate non-GAAP could significantly impact our Q2 2025 and 2025 GAAP results. Unless otherwise specified, all references to dollars on this call are to U.S. dollars.

All per share information is based on diluted shares outstanding and all references to comparative figures are on a year-over-year comparison. Let me now turn the call over to Rob.

Rob Mionis

Thank you, Matt, and good morning, everyone. And thank you for joining us on today's call. We're off to a solid start in 2025.

Our strong performance in the first quarter saw us achieve revenues of $2.65% billion and adjusted EPS of $1.20% each, exceeding the high-end of our guidance ranges. Our adjusted operating margin of 7.1% marked our highest performance in the company's history. Both our CCS and ATS segments surpassed our outlook for the quarter.

Our CCS segment continues to benefit from very strong demand across our hyperscaler customers, in particular for our HPS networking switches. In our ATS segment, we are encouraged by the solid demand we are seeing in our capital equipment business, as well as signs of returning growth in our industrial business. Since our January call, the macro environment has become increasingly dynamic due to trade policy uncertainty.

While the environment remains fluid with frequent policy adjustments, recent announcements have provided near-term clarity. Notably, the U.S. administration has provided temporary exemptions for key data center IT hardware, including servers and networking switches, which comprise the majority of our CCS portfolio. We are closely collaborating with our customers as they evaluate the evolving policy landscape.

To-date, this has not translated into decisions to shift existing programs or new awards across our sites. Importantly, we are seeing resilient overall demand in our CCS portfolio with only minor adjustments in ATS. Our global manufacturing footprint offers a distinct advantage, providing ample capacity in the U.S. and Mexico for any future program adjustments.

We remain vigilant and prepared to adapt swiftly to policy changes. Before I provide you with our latest annual financial outlook and an update on our businesses, I would like to hand the call over to Mandeep, who will provide more details on our financial performance during the first quarter and our guidance for the second quarter of 2025. Mandeep, over to you.

Mandeep Chawla

Thank you, Rob. And good morning, everyone. First quarter revenue of $2.65% billion was up 20% above the high-end of our guidance range, driven primarily by strong demand from hyperscaler customers in our CCS segment.

Adjusted gross margins for the quarter was 11.0%, up 110 basis points, driven by higher volumes and a favorable mix. First quarter adjusted operating margin was 7.1%, up 120 basis points, driven by higher margin across both our CCS and ATS segments. Our adjusted earnings per share for the first quarter was $1.20%, exceeding the high-end of our guidance range and an increase of $0.37% or 45%. Our adjusted effective tax rate for the quarter was 20%.

Finally, our first quarter adjusted ROIC was 31.5%, a 770 basis points improvement driven by higher operating profit and effective working capital management. Moving on to our segment performance, ATS segment revenue totaled $807 million, up 5%, and above our guidance of being flat year-over-year. The higher revenue this quarter was primarily the result of significant growth in our capital equipment business.

Our ATS segment accounted for 30% of total company revenue. Our CCS segment revenue was $1.84% billion, up 28%, driven by very strong growth for networking switches in our communications and market. The CCS segment accounted for 70% of total revenue in the quarter.

Our communications end market revenues increased by 87% above our guidance of low-80s percentage growth, driven primarily by strong demand for our HPS networking products. Revenue in our enterprise end market was 39% lower, though better than our guidance of a mid-40s percentage decline. The lower revenues were due to the anticipated technology transition in an AI/ML compute program with one of our hyperscaler customers.

HPS revenue grew by 99% in the first quarter to just over $1 billion, accounting for 39% of total company revenue. This exceptional growth is being driven by continuing hyperscaler demand for our 400G networking switches, as well as the ramping of our 800G switch programs. Moving on to segment margins.

ACS segment margin for the first quarter was 5.0%, up 80 basis points, primarily driven by strong operating performance in our capital equipment business and, as anticipated, improved profitability in our A&D business. CCS segment margin in the quarter was 8.0%, an improvement of 120 basis points, driven by a higher mix of HPS revenues and strong operational performance. During the quarter, we had three customers that each accounted for at least 10% of total revenue, representing 28%, 13%, and 10% of revenue respectively.

Moving on to working capital. At the end of the first quarter, our inventory balance was $1.79% billion, a sequential increase of $28 million, and a year-over-year decrease of $163 million. We continue to effectively manage inventory levels, while supporting significant growth in customer demand.

Cash deposits were $472 million at the end of the quarter, down $40 million sequentially, and down $248 million year-over-year. Cash cycle days during the first quarter were 69. Turning our attention to cash flows.

Capital expenditures for the first quarter were $37 million, or approximately 1.4% of revenue, compared to 1.8% in the first quarter of 2024. We continue to anticipate capital expenditures to remain within the range of 1.5% to 2.0% of revenues for the full-year. During the quarter, we generated $94 million of free cash flow, $26 million higher than the prior year period.

Turning to the balance sheet and capital allocation. At the end of the first quarter, our cash balance was $303 million. Combined with $600 million in borrowing capacity under our revolver, we currently have approximately $900 million in total liquidity, which we believe is sufficient to meet our projected business needs.

Our gross debt at the end of the quarter was $887 million, and our net debt position was $584 million. Our gross debt to non-GAAP trailing 12-month adjusted EBITDA leverage ratio was 1.1% turns, up 0.1% turns sequentially, and flat versus the prior year period. As of March 31, we were in compliance with all financial covenants under our credit agreement.

During the first quarter, we repurchased 75 million of shares for cancellation under our normal course issuer bid. In addition, following the end of the quarter, we repurchased an additional 40 million of shares, bringing our total repurchases under the NCIB to $115 million year-to-date. We intend to continue being opportunistic on share buybacks for the remainder of 2025. Now let's turn to our guidance for the second quarter of 2025.

Please note that our guidance figures assume no material changes to tariffs or trade restrictions, compared to what is in effect today. Substantially, all tariffs paid by Celestica are expected to be recovered from our customers and are not expected to impact our non-GAAP-adjusted EBIT or non-GAAP-adjusted net earning dollars. These amounts are not anticipated to be material at this time.

Second quarter revenue is projected to be between $2.575% billion and $2.725% billion, representing growth of 11% at the midpoint. Adjusted earnings per share are anticipated to be between $1.17% and $1.27%, representing $0.27%, representing an increase of $.32 per year at the midpoint or 36%. Assuming the achievement of the midpoint of our revenue and adjusted EPS guidance ranges, our non-GAAP operating margin would be 7.2%, an increase of 90 basis points over the prior year period.

We expect our adjusted effective tax rate for the second quarter to be approximately 20%. Finally, let's turn to our end market outlook for the second quarter. In our ATS segment, we anticipate revenue to be approximately flat year-over-year, as demand-strengthening capital equipment and a recovery in industrial volumes are being offset by our previously announced decision not to renew a diluted margin program in our A&D business.

In our CCS segment, we project revenue in our communications end market to grow in the high-50s percentage range, fueled by ongoing demand strength for our networking switches, including accelerating ramps in our 800G programs. In our enterprise end market, we expect a low-40% decrease in revenue, driven primarily by a technology transition in an AI/ML compute program. With that, I will now turn the call back over to Rob to discuss our latest financial outlook for 2025 and to provide an update on our business.

Rob Mionis

Thank you, Mandeep. We are encouraged with a strong first quarter performance and the positive demand outlook our customers have shared with us for the remainder of 2025. As a result, we are raising our revenue outlook for the year from $10.7% billion to $10.85% billion, reflecting year-over-year growth of 12%. We are also raising our non-GAAP adjusted EPS outlook from $4.75% per share to $5 per share.

This improvement in profitability is reflective of strong revenue growth, operating leverage and improved mix. As with our quarterly guidance, these outlook figures assume no material changes to tariffs or trade restrictions, compared to those in effect today. As Mandeep noted, we expect that substantially all tariffs will be treated as a pass-through charge to our customers and that these amounts are not anticipated to be material at this time.

Our free cashflow outlook for the year continues to be $350 million. Despite the heightened uncertainty presented by tariffs and the overall macro backdrop, we continue to have confidence in our 2025 outlook. Our conviction reflects the durable secular demand we are seeing in our CCS segment, which is supported by a close collaboration and demand planning with our customers, new program awards and reaffirmations of 2025 CapEx plans from some of the leading hyperscalers.

Now moving on to additional color on our businesses. In our CCS segment, we now anticipate growth in the high-teens percentage range in 2025, compared to our outlook of mid-teens growth provided in January. The year-over-year growth we are seeing in CCS is primarily being driven by our hyperscaler customers, where demand is strong across numerous networking programs.

In our communications end market, we anticipate continued strength throughout the year as we ramp multiple 800G programs. We also continue to see healthy demand for our 400G programs for multiple customers. Additionally, we are encouraged by the solid traction we continue to see on new wins across networking and optical programs.

Recently, we were awarded a new program with a leading optical OEM to build high-speed optical transceivers out of our Thailand site. We see this as an opportunity to broaden our exposure to the pluggable transceiver segment, which is a natural complement to our market-leading portfolio in data center switching. We expect to begin ramping production in the second-half of this year.

In our switching business, we also continue to see very strong momentum on 1.6%T wins at this early stage in the cycle. Since we spoke last quarter, we are pleased to have secured multiple new awards for 1.6%T programs leveraging our HPS solutions, including our first with a major OEM customer. In our enterprise end market, we continue to expect our next generation AI/ML compute program with a large hyperscale customer to begin ramping mass production volumes in the third quarter, leading to our resumption of sequential growth in the second-half.

The market share gains we've achieved with hyperscale customers through awarded programs are expected to continue driven by our strong and expanding pipeline of opportunities. Moving on to our ATS segment, we are maintaining our 2025 outlook for revenues to be approximately flat on a year-over-year basis. In our industrial business, volumes are stabilizing after an extended period of declines.

Looking forward, our customer forecasts reflect solid growth due to our recovery in base demand across multiple submarkets, as well as new program ramps. However, we remain cautious on the extent of this growth. In A&D, base demand remains healthy, supported by new program ramps and recent customer wins.

While overall revenues will be lower this year, due to the strategic decision not to renew our dilutive margin program, this action positions us for higher profitability dollars and margin in A&D in 2025. In capital equipment, we continue to expect above market growth in 2025 on the back of strong customer demand and new program ramps. Overall, we continue to anticipate another year of solid financial performance for the company in 2025.

We remain confident in our ability to continue our strong momentum, despite the uncertainty presented by the current macro environment. Our portfolio continues to be supported by strong secular talents, which we believe are enduring and long-term in nature. Furthermore, we believe that Celestica is very well positioned to help our customers navigate the uncertainty of the current environment, supported by our globally diversified manufacturing network and our best-in-class supply chain operations teams.

We are a company that thrives in managing complexity, and we feel that these challenges will serve to further highlight the critical value we are able to provide. With that, I will now turn the call to the operator to begin the Q&A session. Thank you.

Operator

[Operator Instructions] Your first question comes from the line of David Vogt with UBS. Your line is now open. Please go ahead.

David Vogt

Great, thanks, guys. We appreciate all the details, particularly in a difficult macro backdrop. I'm going to ask a question on that as well.

So Rob or Mandeep, can you kind of share with us kind of the level of visibility that you're having with your customers, particularly in CCS, given the uncertainty. I know you touched on it in the prepared remarks, citing that you don't see a lot of changes, whether it's in terms of infrastructure deployments, end-to-end demand. But just can you give us a sense for how we're sitting here today in late April and what that visibility looks like.

And then I have a follow-up. Thanks.

Rob Mionis

So David, I'll start off and I'll see if Mandeep has anything to add. You know, typically in CCS, our hyperscaler customers provide a full-year, you know, output with respect to the CapEx plans and that's firmed up on a quarterly basis. That hasn't changed as a result of the tariff environment.

We continue to ramp a number of new programs with our hyperscale customers. We continue to win share with our hyperscaler customers. So that visibility, you know, pre-tariff and post-tariff environment really hasn't changed.

There was contingency, very strong demand across the board with our hyperscaler customers.

Mandeep Chawla

Yes, David, the other thing I would just add is, of course, there's what's happening this year and there's what's happening in the coming years. And so in addition to validating the forecast for ‘25, we've had conversations with our customers on new program ramps in terms of where we're ramping in for them, as well as the sign and the prototype work that happens. And we're happy to see that there's been no change in the activity this year in terms of design work for programs that are in one year and even two years out.

So resilience of hyperscalers continues to be strong.

David Vogt

Great. And then just as a quick follow-up along those lines, maybe on the enterprise side, obviously you're ramping or you're expecting the re-acceleration in the second-half with, I would imagine, an existing customer within enterprise and also a ramp with new customer, maybe a couple of customers. Can you kind of share with us kind of the magnitude or how you're thinking about that re-acceleration in the second-half of 2025, particularly in enterprise with those -- with the existing customer and new customer that you cite.

Thanks.

Rob Mionis

Yes, David. So in 2025, towards the back end of 2024 into the first-half of 2025, we mentioned on previous calls that one of our largest customers was going through an AI/ML compute transition. That transition is now starting to ramp in the third quarter, complement them into the fourth quarter, and then even more so into 2026.

So that new program is ramping, or will be ramping quite nicely here in the back half of the year. Also in enterprise, we have seen some program dynamics in our storage facility, which will be in a storage demand, which will be down on a year-over-year basis. So that's kind of suppressing some of the enterprise numbers that you're seeing.

Operator

Your next question comes from the line of Samik Chatterjee with JPMorgan. Please go ahead.

Samik Chatterjee

Hi, thanks for taking my questions. Maybe if I can start off with a question on tariffs and the reference you had to some minor adjustments from customers in ATS. Can you just outline for us what portion of your sort of customer footprint or revenue currently is under the purview of tariffs and you have to pass on price increases to customers at this point. And when you mentioned the minor adjustments from customers in ATS was that primarily a pull forward or some sort of delays if you can just flesh that out for me and I have a follow-up.

Thank you.

Rob Mionis

Sure Samik, I'll start off and I'll let Mandeep finish. So with an ATS, we haven't seen any slowdown in demand to-date as a result of the tariffs. But our customers in chatting with them, they have expressed some concern over the macroeconomic slowdown.

So as such, we have factored into some risk into our full-year outlook. You know, overall, within ATS, the tariff impact is somewhat muted, if you just go down by line item of business, with an A&D, the majority of our demand is covered by USMCA and the Americas. We do have some limited impact in our Kulim facility in Southeast Asia.

Within industrial, industrial largely runs a regional supply chain, so a lot of the product stays in region. Within capital equipment, the majority of the tools, 85%, 90% of the tools remain in Asia, so the impact has been minimal as well, and health tech impact has been minimal as well. The minor impact we have been saying is that we have seen where we're dual sourced some migration of product from our Asian facilities into our competitive Mexico facilities.

But on the flip side, we also have seen some increased share in all Mexican facilities. So net-net, ATS is pretty flat relative to prior reviews.

Samik Chatterjee

Got it, got it. And for my follow-up, if I can just ask you to unpack the guide for 2Q for CCS a bit. And as I look at the guide as it currently, sorry, I'm more specifically referring to communications within CCS.

And you're guiding to flat sequential revenues from 1Q to 2Q, despite what you had as a pretty big step up from 4Q to 1Q. And I think Mandeep in his prepared remarks had talked about sort of accelerating 800 gig ramps as well. So I'm just trying to match that up with the guidance here for more sequential revenue in communications, despite going through what is accelerating 800 gig ramp.

Thank you.

Mandeep Chawla

Yes. Hi, Samik, first of all, welcome to the call, and we're really happy to have you in JP Morgan along with us here. You know, right now we're continuing to see strong year-over-year growth in comms as you know.

It really is just the timing of programs. We're continuing to see very strong demand on the 400g side. 800g programs are ramping nicely.

Nothing that's off of our expectations. And so I wouldn't read too much into [Indiscernible] flat sequentially as much as continue to look at the year-over-year and just know that there are going to be some demand dynamics between the quarters, whether it comes to material availability, largely around material availability. But overall, we're seeing good growth in the second quarter and going into the next half.

Operator

Our next question comes from the line of George Wang with Barclays. Please go ahead. Your line is now open.

George Wang

Oh, hey, guys. Thanks for taking my question. I have two quick ones.

Just on the 1.6%T switch, you guys talked about additional wings since the last time we spoke. And also you mentioned the first OEM 1.6%T switching wings. And aside from that, can you also talk about availability of Tomahawk 6.

Earlier you guys talked about kind of the run it depends on the component availability. Just curious into 2026, do you have a reaffirm the deal in terms of 1.6% shipment. Or if there's any nuance in terms of the time line.

Thanks.

Rob Mionis

Thanks, George. Yes. Well, first, I'll start off in 2024, we just finished our strongest bookings year on record across the company.

CCS also posted some very, very strong numbers. And our sales pipeline is quite strong. In the first quarter, as I mentioned on the call, we did win another 1.6%T program with a major OEM.

In terms of silicon availability, we are starting to see samples in the first-half of this year. In terms of when that will turn into mass production, we're still thinking 1.6%T will be ramping on the majority of our programs in the back half of 2026. Also, I want to point out that we continue to gain share with our hyperscaler customers across the board and that share is in the areas of AI-compute networking and also RAC systems as well.

These next generation of products that we're producing are very complex in nature. And I feel there's very few folks out there that could produce at the rate that we can at scale consistently and for our customers' requirements. And for that reason, we're continuing to gain share.

Mandeep Chawla

Hey George, just on 1.6%T program, as you know, we're doing multiple programs now across a number of different customers and often silicon availability will be the gating factor. No concerns at this point, things are on track. But just as a result of facility development time, you're looking at probably more mass production towards the second-half '26.

George Wang

Okay. Great. Just a quick follow-up, if I can, for both Rob and Mandeep, I think the services component is underappreciated for CLS story, especially as you look out to '26, '27 with due to native customers, you guys talked about kind of adopting more full rack solution with a bit more higher-margin services/maintenance content. Can you kind of talk about any refresh your view just on driving some of higher-margin services component, especially you guys begin to do most or end-to-end full solution for -- across digital native and Tier 1 hyperscale.

Rob Mionis

Yes, George, thank you for bringing that up. We completed several quarters ago the acquisition of NCS Global, which is a services company, which was a great complement to what we're doing. NCS Global does everything from ITAT services to supporting our aftermarket services to prepare break-fix and things along those lines.

And as you pointed out, that is a higher offering a full life cycle solution that we support across with our customers. We're also continuing to grow that line of business. The growth in that business is very, very strong.

And based on some of the new awards that we have with our hyperscaler customers and digital natives, we'll be looking to expand that offering to support our customers in the future as well.

Operator

Question Mr. . Wang and your next question comes from the line of Ruben Roy with Stifel. Please go ahead.

Ruben Roy

Thank you very much. Mandeep, I wanted to start with the enterprise side and the first question, you talked about the ramps into year-end. Obviously, we have the full-year guide and congrats on continued improvement in profitability.

But how should we think about sort of the exit rate on margins as you have stronger enterprise exiting the year.

Mandeep Chawla

Yes. Hi, Ruben, good morning. Nice to talk to you.

Look, the margins that we're seeing right now, just even in the first-half of the year are stronger than what we had anticipated just three months ago. And so that's why when we raised the full-year guide to 7.2%. And that's up from what we had again talked about three months ago.

So what we're seeing is the strength that's happening right now from a mix perspective, which is largely driven by more HPS business, carrying through towards -- or through the rest of this year. And so we are going to -- we're on a very nice run rate right now in terms of HPS, and that's a large contributor. When you're thinking about the margin profile between enterprise and comms when you're thinking about it between hyperscalers and non-hyperscalers, there's not that much of a differentiation within the hyperscaler portfolio, specifically.

The other thing to you is that we are growing revenue in second-half versus first-half. And as a result, we will be seeing operating leverage manage, which we would hope that could fall to the bottom line.

Ruben Roy

Perfect. Thank you. And a quick follow-up for Rob on the optical transceiver win.

Can you talk about competitively sort of why you won, what the interface seeds is of the transceiver and sort of type of customer perhaps that you're dealing with for that win. Thank you.

Rob Mionis

Yes. Thanks, Ruben. So it's 800G optical transceiver.

It was a competitive win. We went up against several other OEMs and ODMs. . What we're doing is the complete transceivers of the PCBA, the chip onboard, the optical alignment and the entire mechanical assembly.

The volumes will scale over time, and they'll be significant. We're actually building some incremental infrastructure in Thailand to support these new volumes. And lastly, I would say that this win really provides additional optical proof points and white label opportunities for us with our hyperscaler customers as well.

Operator

Thank you for your question, Mr. . Roy. Your next question comes from the line of Thanos Moschopoulos with BMO Capital Markets.

Please go ahead.

Thanos Moschopoulos

Hi, good morning. Maybe a bit of a hypothetical question at this point. But can you comment qualitatively or quantitatively with respect to how quickly you could shift production to the U.S. and associated CapEx costs if tariffs were to come back.

Rob Mionis

Yes. I'll start off on that one. So in the U.S. and Mexico as well, Richardson and our facility in Monterrey, we do about $800 million a year in revenue, give or take out of those facilities without adding additional footprint square footage.

We could triple that revenue they, had several billion worth of revenue out of those, both those facilities without having the need for more space. And if we did actually need more space than we do have plenty of options. In terms of shifting production from one region to the next, it really depends on the complexity of the product that we are moving.

Some of the more complex products that we do for the hyperscalers would be more difficult, more RAC systems, things like that would be less difficult. What we're seeing with our customers if and when they ever decide to move, it will probably be more of a regional strategy well final assembly and integration will be done in the region where the product has moved and the more complex assembly will be done in centers of excellence, and we think we're well here to kind of support that emerging trend.

Mandeep Chawla

[Indiscernible] so that's where I'm talking about we do about $800 million of revenue in Richardson at a run rate towards the end of the year and $800 million right now in Monterrey. So being able to add $2 billion to $3 billion of revenue with the existing capacity can be done relatively quickly. But as Rob talked about, some programs can move quicker than others.

All of our large -- all of our conversations with our customers right now are on that TCOO basis, we're helping them understand the dynamics from a cost perspective. Labor cost is a major consideration, duties or major considerations, but the capabilities are very important to keep in mind. And so what we're seeing right now is customers reaffirming plans to grow Canadian regions outside of North America, because the capabilities are just established.

And so as a result, while we'll support our customers for any move, we think we have a very strategic footprint to help them. We think the reason we're not seeing these moves happen as of yet, because of the value that they're pinning on capabilities in certain regions. So please go ahead [Multiple Speakers].

Operator

All right, Thank you for that question, Mr. . Moschopoulos. Your next question comes from the line of Steven Fox with Fox Advisors.

Please go ahead.

Steven Fox

Hi, good morning. Can I just follow-up on that last answer, first off. And then I had a follow-up to my question.

You're saying $800 million of revenues in Richardson plus $800 million in Monterrey. And then secondly, Mandeep, can you just expand on what you mean by capabilities. Like what specific capabilities are you referring to outside of North America that are hard direct in the U.S. and Mexico.

Thanks and I had a follow-up.

Mandeep Chawla

I'll let Rob expand on this one. But what I was referring to was from a talent perspective, the engineering capabilities that you build over many, many years. It's one of the reasons that we have had business and new business awarded took places like Thailand, like Malaysia, or to expand here to reestablish that.

But there's also the supply chain capabilities that are intertwined with the site. And so a lot of time supply chains are regionalized, and it takes many, many years to move those to other countries.

Rob Mionis

The capabilities, Steven. The liquid cooling that we're doing on the AI/ML compute and on networking is very complex and it's very complex to do that at scale and the level of automation that we mastered in our talent facility is very unique -- and those are the capabilities that I think are very special to Thailand. Frankly, across the entire industry.

Some of the other capabilities in terms of assembling racks, things like that tend to be a little more easier to replicate and that those types of things we could move more quickly than not. Again, we do have the recipe to move these products. As Mandy mentioned, should we need to do that, but they are a little more complex in nature.

Steven Fox

And just clarifying the $800 million again, sorry, and then I want to ask one more.

Rob Mionis

Yes, no, you got it right, Steven. So we're getting $800 million of revenue this year in Monterrey, and we're ramping a number of programs already in Richardson. So our exit rate at the end, the year in Richardson will be about $800 million as well.

Operator

Thank you for that question.

Rob Mionis

Operator, if we could go back to Steven just to let him ask his next question.

Operator

All right. Your line is now open. Mr.

. Fox.

Steven Fox

Thanks for that, sorry to confuse things. Just on the semi cap market, I was wondering if you could provide more color. Underlying growth seems to be better now than maybe you talked about 90-days ago, but also new wins, so I’m wondering if you could just provide some more detail on that market.

Thanks again.

Rob Mionis

Sure, Steven. So capital [Indiscernible] will have a very good year this year. But the growth will be first-half loaded.

We saw strong growth exiting last year, and we're seeing strong growth in the front-half of this year. As we get into the back half of this year, we're seeing some program dynamics where the growth might flatten out a little bit. We are winning share with our newest customer, and those are very -- again, very complex products tend to be slower ramps and some of the program dynamics I just alluded to.

Steven Fox

Thank you.

Operator

Question comes from the line of Paul Treiber with RBC Capital Markets. Please go ahead.

Paul Treiber

Thanks very much and good morning. Just a couple of questions around price elasticity. So you mentioned now with the tariffs where they are, you have visibility to demand for the year.

Did you, during the period when tariffs were at an elevated level, did you get feedback from your customers that at those levels, it would be a challenge. And across your various segments, do you have a sense of the general price elasticity in in regards to the added cost of tariffs.

Rob Mionis

Good question, Paul. In the short period of time, when the reciprocal tariffs were announced, we did it along with our customers, and they did not show any wavering with respect to their commitment on their CapEx plans or the demand outlook for the foreseeable future. So I think they have a much longer-term view and strategic view of what they're trying to do in the AI data center space.

With some of our OEM customers, they have asked and we have developed as Mandeep alluded to earlier, these very complex total cost of ownership models depending on where tariffs may or may not settle in, we understand what's the most economical way to produce it. They also have alluded to the fact that they will, as many of the folks are doing across the industry prepared to put a line item on their pricing for surcharges and pass cost on to their end customers. And that's what we're seeing, not just in CCS, but also on ATs that it's largely going to be passed on to end users.

Hence some of the inflationary concerns that we see the economists talk about in the news every day.

Paul Treiber

And a quick follow-up on that is related to the pipeline -- has the -- you mentioned that the pipeline here is very strong. Over the last month or so, have you seen any changes one way or another in regards to your pipeline.

Rob Mionis

Well, no, we really haven’t bookings continue to be very strong very strong [Technical Difficulty] very strong. So today, we haven't seen any major changes as a result of tariffs. We have seen a little bit of maybe a delay of making some decisions.

But in the overall magnitude of our pipeline, I wouldn't call that material at all.

Mandeep Chawla

Yes. Paul just to be -- don't click on that one, which is if there is an area that we're seeing customers revisit their awards that they're considering giving within the industrial and it's going to be more around product types in that area. We're not seeing a production in any of the new wins across those vast majority of the rest of the portfolio.

Operator

Thank you for that question Mr. . Treiber. Your next question comes from the line of Mr.

. Robert Young with Canaccord Genuity. Please go ahead.

Robert Young

Hi, good morning. Just wanted to get your thoughts on the various ramps you've announced and how those impact your guidance, which in the back half of the year, it looks like it's a bit of a deceleration. So I'm trying to understand the timing of the resumption of the networking -- or sorry, the resumption of the AI/ML server and then the [Brock] (ph) program.

And then there's also the two new programs, the Brock programs that you announced last quarter, which I believe were in 2026. So can you just talk about those various ramps and how those interact with the guidance. It looks like it's going to decelerate in the second-half.

Mandeep Chawla

Yes. Hey Rob, look, we're looking at sequential growth as we go into the second-half. So the second-half revenue is up by a [$200 million] (ph) relative to the first-half.

We are seeing right now 1.6%T development on track. As I mentioned earlier, that's going to be more of a 2026 thing. We're ramping 800 gig programs right now.

We're going to see a continuing level of growth on the 800G side. 400G is the one that we continue to watch. We've been seeing very strong growth on 400G in the first-half of this year. And so that is an area we think that is going to be a further opportunity in the back half of the year.

But it actually is coming in stronger than what we had anticipated earlier on. And that's a really next opportunity we think in the back half. What I would say is that -- it is an incredibly uncertain environment, as you know.

And things are changing day by day. We are in a very close collaboration with our customers. The 10.85% is reflective in our [Indiscernible] customers and it's our high confidence.

It’s our risk-adjusted view. It's our high confidence view. We do have the plans where we could exceed that.

But we think right now, we're being prudent in balancing all of these various dynamics that are happening.

Robert Young

Okay. And then for my follow-up, the sequential margin improvement in ATS. I think it suggested the A&D program roll-off hasn't happened yet.

I'm curious, is that in the current margin structure. Or is there opportunity for ATS to deliver further margin structure in the second-half -- further margin improvement in the second-half.

Mandeep Chawla

Yes. So the margin-dilutive program that we did a strategic decision not to renew is reflective in our second quarter guidance and our closure outlook. That transition is actually happened in April already. So that is now in all of our numbers.

We're really pleased with the performance that we're seeing the improvement that we're seeing in ATS. We have some businesses that have performed very well for a period of time in capital equipment. We're seeing a return to growth in industrial as inventories have started to come down.

But on the A&D piece, specifically, there was a lot of heavy lifting that's happened over the last 12-months on the commercial side of the business. And so we have seen a noticeable improvement in profitability in our A&D business, compared to last year. As we go forward for the rest of this year, we do think that there's an opportunity for margin expansion still in ATS.

Operator

Thank you for that question Mr. . Robert Young. Your next question comes from the line of Todd Coupland with CIBC.

Your line is now open.

Todd Coupland

Oh, yes. Good morning, everyone. So I wanted to step back from all the detail around the bookings and just help us understand when we hear commentary around data center lease pauses from hyperscalers, questions around timing of builds, et cetera.

How should we interpret that relative to the types of bookings growth you are seeing. Give us a little bridge to that, that would be helpful. Thanks.

Rob Mionis

Thanks. Good morning, Todd. What we're hearing from our hyperscaler customers inside the data center is that they're continuing to want to invest in AI/ML-compute, networking and rack solutions. And we're not seeing any slowdown inside the data center.

We're -- because we're not actually involved in new data center builds or emerging very long-term plans, five, six years out, we haven't had those conversations with them, but the data centers that we're filling on our strong backlog has several years, I think, of life in it. The only, it’s the one hyperscaler that I've seen in the news anyway that's pulling back on a new data center build, but I haven't read anything publicly on a pullback from any of the other major hyperscalers. So I think to some extent, that's a little bit of a wait and see.

Todd Coupland

Thank you. My follow-up question is, with all the design wins that you've been talking about, would you expect additional 10% new customers to emerge from those lists, if so, talk about the product areas where that's going to be.

Rob Mionis

We're very happy that we actually have a new 10% customers, it's just a testament to the breadth of products that we're offering to these customers and other strong win rates. I do -- there is a potential actually for additional 10% customers as some of these programs that we won, especially in the 1.6%T fully integrated systems to emerge in the future. So that's certainly in our eyesight.

Again, I think that would be ’27 potentially time frame. But based on some of the backlog and some of the bookings that we have and our outlook, that certainly is something that could potentially happen.

Mandeep Chawla

Todd, maybe if we define using today's denominator 10% of the $1 billion, yes, we have the opportunity, as Rob talked about, with some of the wins that we've had to get another customer above $1 billion. But based on ramp cycles and design time, that's maybe more towards 2027. At the same time, we anticipate that our denominator is going to grow.

So we're figuring out to time whether or not billing dollars is 10%.

Operator

Thank you for that question, Mr. . Coupland. Your next question comes from the line of Jesse Pytlak with Cormark Securities.

Please go ahead.

Jesse Pytlak

Hey, good morning. Just wondering if you could give us a sense on the mix of 400G versus 800G switches this quarter. And then just some insight on how pricing has been trending for 400G.

Rob Mionis

Sure, I'll start off. I’ll let Mandeep. For the full-year, I'll answer the question, we do expect 800G to being north of 50% and 400G to be less than 50%. So 800G will be the majority of the product shipping out this year versus 400G.

That roll in '26 and '27, 800G will continue to gain share relative to 400G. But 400G has a very long tail, as well as prices come down and our customers find new use cases for that. So I would say 400G has a very long tail and 800G is ramping quite nicely.

Mandeep Chawla

Yes. Jesse, we're going to see a nice acceleration in 800G production as we go into the second and third quarter. As I mentioned earlier 400G has been a very nice resilient part of our portfolio.

We don't see one cannibalizing the other. But as 800G does ramp up there'll be a little bit maybe of a pullback on the 400G side. But overall, this year, in our networking business, on a full-year basis, round numbers, you may want to say half is 400G and how it's going to be 800G.

Jesse Pytlak

Understood. Thanks for that. And then just secondly, just kind of given the more dynamic macro environment.

Just wondering if this is maybe changing your thoughts or priorities or approach to potential M&A.

Mandeep Chawla

We continue to have a very healthy balance sheet. We're on track for generating $350 million this year. That's our high confidence view, we are targeting to do better than that.

And we hope we will. We are deploying the capital along the way as much as makes sense strategically, we're going to be opportunistic on share buyback. We're investing very heavily on the R&D side.

You'll notice in our CCS business, our R&D spend will be on track for about $100 million this year or even a little bit more. So we're actively investing organically. And then we still have a healthy balance sheet.

Our leverage is only just above 1 times right now gross leverage. We're looking at a number of different targets to accelerate our strategies they're both in CCS as well as in ATS. Admittedly though, it's a challenging environment right now to maybe get deals done.

And so we may see some cycles take longer than we normally would. But if the business is aligned with our strategy and if it will help accelerate our business, then we're very open to M&A for the right deal.

Operator

That concludes our Q&A session. I will now turn the call back over to Mr. . Rob Mionis for closing remarks.

Rob Mionis

Thank you, and thank you for your time and engagement today. We are pleased to report a strong beginning to 2025, demonstrating our resilience in a very fluid market. The upward revision of our full-year outlook supported by a robust backlog and the strength of our key customer relationships positions us well for continued success.

We value your ongoing support and anticipate providing further positive updates next quarter. Thank you again for joining us this morning. Have a wonderful day.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.