Matthew Sheerin

Matthew Sheerin asked about gross margin expectations for the upcoming year given the business mix. He also inquired about the status of the ramp with Hyve's second major customer and the pipeline for adding new customers.

Answer

CFO Marshall Witt did not provide specific gross margin guidance but stated that operating margins are expected to stabilize after Q1, with normal seasonality leading to improvement in Q4. On the Hyve business, he confirmed continued strong performance from the second major customer and noted they are working to expand services with them, while also expressing optimism about opportunities to expand the overall Hyve customer base in the coming years.

Inquired about the details of relationships with hyperscale customers, including cross-selling opportunities, and the inventory outlook for the second half of the fiscal year.

Answer

The company is winning new business with its largest hyperscaler and is developing 100G to 1.6T silicon photonics solutions for a second one, leveraging a past acquisition. The strategy is to offer complex, integrated engineering solutions. Inventory is expected to remain in the 55-60 day range, trending towards the lower end in the second half of the year.

Matthew Sheerin asked for more detail on the "deepening relationship" with Jabil's largest hyperscale customer, the potential size of the new photonics opportunity with a second hyperscaler, and the inventory outlook for the second half of fiscal 2025.

Answer

CEO Mike Dastoor explained that the deepening relationship involves winning new business with their existing top customer. For the second hyperscaler, the opportunity is in silicon photonics, currently focused on 100-400G products with plans to quote 800G and explore 1.6T. He also confirmed the strategy is to cross-sell Jabil's broader engineering and integration platform. CFO Greg Hebard added that net inventory days are expected to remain in the 55-60 day range, likely trending toward the lower end in the second half of the year.

Asked for confirmation that the exit of a major networking customer is complete and whether this provides more leverage with other customers. Also questioned the drivers behind the growth forecast for the renewable energy business despite industry headwinds.

Answer

Management confirmed the disengagement from the legacy networking customer is complete, with the associated revenue and balance sheet items fully removed from FY25 forecasts. They clarified that such exits happen after price negotiations fail, reflecting their discipline on margins and returns. The modest growth in renewables is attributed to new wins in HVAC and battery storage, opportunities related to the IRA, and benefits from market consolidation, not from a forecasted rebound in the solar market.

Matthew Sheerin of Stifel inquired about Gauzy's path to EBITDA breakeven in Q4 and the expected revenue ramp for the automotive division, including the company's capacity to meet new demand.

Answer

Eyal Peso, an executive at Gauzy, confirmed the company is on track for Q4 EBITDA breakeven. He explained that adding a second shift, rather than hiring more staff, addresses labor constraints in the Aeronautics division while protecting profitability. For the Automotive division, he stated that significant revenue from major contracts with Ferrari and a large European OEM will begin to materialize in the second half of 2025. He assured that current capacity is sufficient for this ramp-up, as it involves different production needs than the Aeronautics business.

Matthew Sheerin of Stifel inquired about the specifics of the Q4 components guidance, seeking clarity on the expected performance of Asia versus Western markets. He also asked about the current book-to-bill ratio across regions and the outlook for gross margin recovery.

Answer

CEO Sean Kerins clarified that the Q4 outlook anticipates flattish performance in Asia and modest sequential declines in the West. He confirmed the global book-to-bill ratio is still below 1.0, though it is advancing, with Asia leading. Kerins explained that a significant gross margin recovery is contingent on the return of the mass market, which is difficult to time due to persistent excess inventory throughout the supply chain.

Matthew Sheerin of Stifel inquired about the dynamics behind the Q4 guidance, particularly the drivers for the expected lower gross margin, and asked for more detail on the impact of on-prem software partner consolidation.

Answer

CFO Glynis Bryan confirmed that Q4 revenue is expected to see very low single-digit sequential growth and that the gross margin will be lower, driven by both the SADA impact and product mix. President and CEO Joyce Mullen elaborated that the on-prem software issue was a reclassification due to a partner consolidation, moving revenue from a gross recognition basis (software) to a net fee basis (services), which was a one-time benefit in Q3. Bryan specified this partner change was the primary driver for the software revenue decline in the EMEA region.

Matthew Sheerin from Stifel asked about the strength in the data center segment, requesting details on the revenue mix from hyperscalers and AI, customer concentration, and visibility into 2025. He also inquired about the financial impact and timeline for the Syracuse facility expansion.

Answer

CEO Thomas Edman reported that approximately 85% of the data center computing business is tied to hyperscalers and Generative AI, with concentration among 4-5 major customers. He noted solid visibility through Q1 2025 but found it difficult to forecast beyond that. CFO Daniel Boehle added that the Syracuse expansion is primarily a fiscal 2026 story with minimal P&L impact expected in the upcoming year.

Matthew Sheerin asked for more details on the semiconductor business weakness, specifically regarding inventory days in the channel for MOSFETs and the expected timeline for normalization. He also inquired about the current pricing environment and whether Littelfuse is seeing any pressure.

Answer

President and CEO Dave Heinzmann clarified that the power semiconductor business has less distribution exposure and that channel inventories are not the primary issue. Instead, he believes industrial end customers may have an inventory overhang of both components and finished goods. Regarding pricing, Heinzmann stated that previous price increases have been resilient and 'sticky.' He described the current environment as a return to normal, with typical price-down dynamics in electronics and industrial, while in transportation, they are actively taking pricing actions to improve profitability.

Matthew Sheerin of Stifel questioned the December quarter guidance for flattish sequential growth, particularly for the EMEA region, which is typically seasonally weaker. He also asked for drivers behind the low gross margin and why Avnet's inventory reduction has appeared to lag some competitors.

Answer

CEO Phil Gallagher explained that the flattish guidance for EMEA is based on coming off a very low sales base in the September quarter. CFO Ken Jacobson attributed the gross margin pressure primarily to the sales mix shift towards Asia and Farnell's performance, stating he expects margins to be flat to slightly up in the next quarter. Regarding inventory, Jacobson noted that the reported increase was largely due to foreign currency changes and end-of-quarter timing. Gallagher added that the excess inventory is concentrated with about a half-dozen suppliers and that the company is also taking some strategic, opportunistic inventory positions.

Matthew Sheerin asked for more detail on client device growth, specifically the performance mix between public and corporate sectors and whether the prospect of AI PCs is causing customers to delay purchases. He also questioned the drivers behind the Q4 gross margin guidance being down year-over-year.

Answer

CEO Christine Leahy clarified that client device growth was strong across almost all end markets, including Corporate, with Small Business being the main exception due to cash preservation. CFO Albert Miralles added that growth is driven by refreshing aging fleets, not yet by AI PCs, which Leahy sees as a future accelerant. For Q4 margin, Miralles cited continued softness in higher-margin solutions and a more modest mix of netted down revenues compared to the outsized Q4 of last year.

An analyst from Stifel, on behalf of Matt Sheerin, asked for color on the Data and Devices business excluding the AI opportunity, specifically regarding the recovery in traditional datacom applications.

Answer

CEO Terrence Curtin clarified that outside of AI, the traditional cloud infrastructure business is returning to growth, expected to be in the mid-single-digit range in the coming year. This marks a positive shift after a period where investment dollars were heavily skewed towards AI. He noted that the enterprise market remains sideways, and TE does not have significant exposure to telecom networks.

Matthew Sheerin asked about the drivers of the strong gross margin, questioning if business mix, such as a higher contribution from engineering services or the aerospace sector, was a significant factor beyond operational efficiencies.

Answer

President and CEO Todd Kelsey explained that improved contribution margin from a mix of services and customers, along with productivity gains, offset fixed cost deleveraging. He clarified that profitability is more dependent on the mix within customers rather than between sectors. EVP and COO Oliver Mihm added that higher-margin engineering solutions revenue is expected to increase as the fiscal year progresses. The engineering business is 'greater than $100 million' annually.

Matthew Sheerin from Stifel asked for a breakdown of the low double-digit CCS growth guidance for 2025 between the Communications and Enterprise segments. He also questioned the competitive landscape and potential pricing pressure in the AI server business against strong North American and ODM rivals.

Answer

CFO Mandeep Chawla confirmed that the Enterprise segment is expected to be down in 2025 due to a program transition, implying Communications growth will be above 20%. President of CCS Jason Phillips addressed competition by highlighting Celestica's multi-generational experience at scale in complex custom AI/ML systems and its innovation at the system and rack level, which he believes is a key differentiator. SVP Stephen Dorwart added that while pricing is always a factor, Celestica differentiates on innovation and value, often securing lead partner status in dual-source situations.