Fabrinet

Good day, ladies and gentlemen. Welcome to SAP Connect's Financial Results Conference call for the third quarter of fiscal year 2020. At this time, all participants are in a listening mode. Later, we will conduct a question and answer session, and instructions on how to participate will be provided at that time. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Daryl Tumajanian, Investor Relations.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the third quarter of fiscal year 2020, which ended March 27, 2020. With me on the call today are Seamus Grady, Chief Executive Officer, and Chava Spera, Chief Financial Officer. This call is being webcast and the replay will be available on the investor section of our website located at investor.fabrinet.com. Please refer to our website for important information, including our earnings press release and investor presentation, which includes our gap-to-non-gap reconciliation. I would like to remind you that today's discussion will contain forward-looking statements about the future financial performance of the company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. These statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise them in light of new information or future events, except as required by law. For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular, the section captioned Risk Factors in our Form 10Q filed on February 4, 2020. We will begin the call with remarks from Seamus and Chah, followed by time for questions. I would now like to turn the call over to Fabinet's CEO, Seamus Grady. Seamus?

Thank you, Gero, and good afternoon, everyone. Before I discuss the details of our results, I would like to tell you about how we are handling COVID-19. We are very fortunate that COVID-19 has not impacted our ability to keep our factories running globally. Needless to say, we greatly appreciate the extraordinary efforts of our employees and their families our suppliers and, of course, our customers for their continued dedication and hard work during this challenging time. We've taken great measures to ensure the safety of our employees and their families, and we're pleased to report that we're operating at 100% capacity and that our employees are well. Extreme flexibility, decisive response to the crisis, excellent leadership and teamwork, together with excellent partnerships with our customers and suppliers, helped us make immediate changes to our build schedules, and operating protocols to meet the volatile demands resulting from the crisis. We came to know about the COVID-19 issues from K6, our factory in China, in late January. The information received from our staff during the Chinese New Year was very disconcerting, as the virus was reported to be similar to the SARS virus of 2003. We immediately implemented all of the measures taken in our China factory across all of our factories starting the first week of February. we continued to enhance the measures as recommended by the CDC, the World Health Organization, local and federal governments of the regions where we operate, as well as based on our own research on the subject. The measures include monitoring body temperatures of all people entering the factories, cutting down on visitors, banning visitors from regions heavily hit by the virus, mandatory social distancing, frequent washing of hands, wearing face masks, stopping large group meetings, providing disinfectant in all areas of the factories and special training of staff on the symptoms and precautions to be taken in the factory and at home. We encouraged staff to work from home where possible and mandated that all vulnerable staff work from home. By mid-February, we started disinfecting all material coming in to ensure it was virus-free before it was issued to the manufacturing lines. Despite the challenges we faced, we demonstrated the flexibility inherent in our business model to produce financial results that were within our guidance range in our fiscal third quarter, with revenue of $411 million and non-GAAP net income of $0.92 per share. This nimbleness also enabled us to generate significant free cash flow. Looking at some of the details of the quarter, our high-level business mix was relatively consistent with our recent history. with 75% of revenue from optical communications and 25% from non-optical communications. Optical communications revenue of $309 million was down 4% from the second quarter, but up 3.5% from a year ago. Within optical communications, telecom revenue was $224 million, down 10% from the second quarter, but up 3% from a year ago, reflecting some inventory adjustments associated with certain next generation programs. Datacom revenue of $85 million rebounded nicely and was up 14% from the second quarter and up 5% from a year ago. By technology, silicon photonics-based optical communications revenue increased 5%, both from the second quarter and from a year ago, to $86 million and represented 21% of total revenue. Revenue from QSFP28 and QSFP56 transceivers increased. also continued to grow and was up 7% from the second quarter and 17% from a year ago at 51 million, or 12% of total revenue. By data rate, 100 gig programs grew 1% from the second quarter and 10% from a year ago to 161 million. Products rated at speeds of 400 gig and above declined 41% from the second quarter but grew 25% from a year ago to 29 million. Looking at our non-optical communications business, revenue of 103 million was essentially flat from the second quarter and up 2% from a year ago. Demand for industrial lasers was also flat sequentially with revenue of 46 million. During the third quarter, we reclassified certain revenue from other non-optical revenue to automotive to better represent the end market being served. As such, automotive revenue was 31 million and other revenue was 22 million. Excluding the impact of this reclassification, revenue from automotive and other non-optical revenue would have been consistent with the second quarter. Sensor revenue was 3 million. As we look to and beyond the fourth quarter, it's clear that there is extraordinary uncertainty ahead. In light of this, I wanted to share some thoughts on how the COVID-19 crisis could impact our business going forward. On the one hand, with work-from-home protocols in place around the world, demand for Internet bandwidth has grown substantially. Clearly, the next-generation telecom and datacom products we manufacture for our customers, which make up about three-quarters of our revenue, are critical to expanding network capacity. This will continue to be a positive driver for Fabernet. On the other hand, we could continue to see regional downward demand adjustments if outbreaks return. In addition, markets for other products we manufacture, such as industrial lasers and automotive, are likely to see reduced demand in a prolonged economic downturn. Our approach toward managing shifting customer demand remains unchanged. Our employee well-being remains our top priority and that means we will continue to follow intense safety protocols at all of our facilities. At the same time, the availability of parts and materials we need to manufacture are likely to face variability and we will continue to work closely with our customers and suppliers to identify solutions to satisfy our customers' demand. These supply chain constraints are the primary factor that has pressured our gross margin in the third quarter and will likely continue to do so in the foreseeable future until the COVID-19 impact settles down. Because of this, we now expect our gross margin to be in the range of 11.5% to 12% or slightly below our target range of 12% to 12.5% for the full year. and we could see this pressure continue into early fiscal 2021. Fortunately, our business model remains extremely resilient and agile. More than 90% of our costs are variable, with components and materials making up the greatest portion of our costs. Because of this, we are able to quickly adjust manufacturing costs to manage changing demand dynamics. As such, we believe we can maintain industry-leading gross margin levels despite the demand churn and material availability challenges. From an operating expense perspective, we continue to be a very lean organization and do not foresee meaningful expansion of operating expenses in the near future. From a balance sheet perspective, we remain very well capitalized with over $465 million in cash and investments and total deaths of approximately $55 million. In addition, we continue to generate significant cash flow and anticipate maintaining that position in the upcoming quarters. In summary, We're in a very dynamic business environment, and our within-guidance performance in the third quarter is a strong reflection of our resiliency and agility. This ability to quickly respond to shifting markets has been a part of Fabernet's core strategy since our inception, and its value becomes most apparent when the environment gets challenging. As such, we believe we are uniquely positioned to continue to thrive during and post the COVID-19 crisis. Now I'd like to turn the call over to Chaba for additional financial details and our fourth quarter guidance. Chaba.