The arithmetic of the raise
Second-quarter revenue at Celestica rose to $4.70 billion from $2.89 billion a year earlier and adjusted earnings per share to $2.54 from $1.39, both above the top of the company's own guidance range. The growth comes from one segment: Connectivity and Cloud Solutions rose 84 percent to $3.81 billion while Advanced Technology Solutions rose 8 percent to $0.89 billion. Hardware platform sales grew 58 percent to about $1.9 billion.[1]
The change in the full-year outlook contains two separate moves, and their proportions differ. The revenue outlook was raised to $20.5 billion from $19.0 billion, which works out at about 8 percent. The adjusted earnings per share outlook was raised to $11.30 from $10.15, about 11 percent. Celestica is adding proportionally more to earnings than it is adding to revenue.[1]
The assumption the margin is carrying
The figure that makes that difference meaningful is the adjusted operating margin: 8.2 percent. At that level roughly eight cents of every incremental revenue dollar becomes adjusted operating profit. Put a 62 percent growth rate next to an 8.2 percent margin and the picture points to a business whose scarce input is volume and supply allocation rather than technology. Hardware platform sales rising 58 percent to about $1.9 billion supports the same reading.[1]
Lifting earnings faster than revenue carries the assumption that the incremental revenue arrives at a margin above the current 8.2 percent. That assumption is defensible: fixed costs spread as volume rises and the hardware platform share increases. There is another route to the same result, though — earnings per share can rise with no change in operating margin, through interest expense, the tax rate or the share count. The disclosed figures do not separate those two routes.[1]
One quarter will separate them
The wait for that separation is short. Celestica guides to third-quarter revenue between $5.25 billion and $5.55 billion and adjusted earnings per share between $2.88 and $3.08. If the third-quarter adjusted operating margin prints above 8.2 percent, the assumption behind the raise sits on the operating side. If the margin holds flat and earnings still come in at the top of the range, the line producing the difference is below the operating line.[1]