Switching & AI/ML should drive sustainable growth into CY27 mitigating margin concerns

Research evidence excerpt

Switching & AI/ML should drive sustainable growth into CY27 mitigating margin concerns

to 8.71% in CY27 driving EPS growth 10 points faster than our revenue growth

forecast yielding an updated CY27 EPS est of $19.65.

Finally, based on investor conversations, we believe the market was expecting a guide of

$30B+ for CY27 revenue this early in the year with investor upside cases sitting around

$34B and adjusted EPS of roughly $20. Therefore, even though the gross margin debate

is not likely to go away, the implied demand strength in CY27 against what is still likely a

constrained supply backdrop likely minimizes gross margin concern in our view.

FigureSource:Company1: Celesticadata, UBSraisedestimates,its andCY26VisibleguideAlphadriven by strong demand in both Enterprise and CommunicationsCelestica

AI/ML drove 'CCS' revenue up ~84% YoY, above our ~68% est.

Strength in 800G HPS switches and an acceleration in an AI/ML next gen program drove

'CCS' revenue to $3,810M vs our $3,474M estimate (VA Cons $3,534M) or 84% YoY

growth. While difficult to quantify, we estimate revenue was held back by supply

constraints primarily in switching with the company shipping below demand, increasing

visibility into future quarters in our view. Not surprisingly, we believe Broadcom

networking silicon, notably Tomahawk, is the primary gating factor to revenue

recognition. By segment:

'Enterprise' revenue was up 167% YoY to $1,157M, ~16% above our forecast,

driven by next gen AI/ML compute programs, above our 130% estimate and an

acceleration compared to ~101% growth in Q1:26 as supply chain constraints last

quarter were resolved as we expected. Recently, Alphabet/Google management

raised its CY26 CapEx outlook by $15B to $195-205B and also noted CY27

spending will "increase significantly".