Fabrinet

Good day, ladies and gentlemen. Welcome to Fabrinet's Financial Results Conference call for the fourth quarter of fiscal year 2020. At this time, all participants are in a listen-only 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, Gaurav 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 fourth quarter of fiscal year 2020, which ended June 26, 2020. With me on the call today are Seamus Grady, Chief Executive Officer, and Chavez Ferra, 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 include 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 May 5, 2020. We will begin the call with remarks from Seamus and Chaba, followed by time for questions. I would now like to turn the call over to Fabulous CEO, Seamus Grady. Seamus?

SEAMUS GRADY Thank you, Garo, and good afternoon, everyone. During the fourth quarter, we demonstrated the flexibility of our business model as we generated financial results that exceeded our guidance ranges, while we continued to strictly observe enhanced measures to monitor and mitigate the potential impact of COVID-19 on our employees, customers, and operations. I'm very proud of our team and I'm grateful for their efforts in helping us achieve these excellent results. Revenue in the fourth quarter was $405 million or $5 million above the high end of our guidance range, driven by less severe supply constraints than contemplated in our guidance, coupled with stronger than expected telecom demand at the end of the quarter. From a profitability perspective, as we anticipated, our fourth quarter gross margin fell short of our target $12 to 12.5%, but improved from the third quarter at 11.8%. Continued efficiency gains more than offset the slight headwind that we continue to see from efforts to mitigate the potential for COVID-19 infection. That said, we remain fully committed to returning to our target gross margin range of 12 to 12.5% and expect to do so during fiscal 2021. From an operating perspective, we continue to run a very tight ship with SG&A expenses coming in just under 3% of revenue in the quarter. We continue to expect SG&A expenses to be a lever for operating margin improvement over the longer term. As a result, revenue upside in the fourth quarter largely fell to the bottom line, resulting in non-gap net income of $0.96 per share. In the fourth quarter, we produced a substantial 46 million in operating cash flow and 31 million in free cash flow. We anticipate that cash flows will remain very healthy as we look ahead. For the full fiscal year, we produced record revenues of over 1.64 billion and non-GAAP net income of $3.73 per share. Total operating cash flow for the year was a record 151 million and free cash flow was 108 million. Looking at some of the details, the quarter played out much as anticipated, with sequential revenue growth in both telecom and datacom, while the industrial laser and automotive markets showed sequential declines. As a result of these dynamics, optical communications grew to 78% of total revenue, with 22% coming from non-optical communications. Optical communications revenue of $315 million also represented slight growth from the third quarter. This includes the anticipated impact of an inventory correction at one of our customers, as we discussed on last quarter's call. Within optical communications, telecom revenue was $229 million, up more than $5 million from Q3, and datacom revenue was $86 million, up $1 million sequentially. We believe the inventory issues that impacted our telecom business in Q4 will be largely over in the fiscal first quarter, which, when combined with the increasing demand we saw at the end of the fourth quarter, should contribute to strong telecom growth in the first quarter. By technology, silicon photonics-based optical communications revenue increased 4% from the third quarter to $90 million, or 22% of total revenue. revenue from QSFP28 and QSFP56 transceivers also continued to grow and was up 6% from the third quarter and 18% from a year ago at 54 million, or 13% of total revenue. By data rate, revenue from 100 gig programs of 159 million was down slightly from 161 million in the third quarter, while products rated at speeds of 400 gig and above grew by nearly 50% sequentially to 43 million. We expect revenue from 100 gig products to remain strong, while those at 400 gig and faster data rates should continue to trend upward. Looking at our non-optical communications business, revenue of 90 million moderated, as expected, from 103 million in the third quarter, due primarily to anticipated sequential declines in revenue from the industrial laser and automotive markets. Industrial laser revenue was 41 million compared to 46 million in the third quarter, and automotive revenue was 27 million compared to 31 million in the third quarter. Sensor revenue was 3 million in the fourth quarter, consistent with the prior quarter, and other revenue was 19 million, representing a 3 million sequential decrease. As we look to non-optical communications drivers in the first quarter, we expect to see continued softness in industrial lasers and automotive, reflecting broader market conditions. However, we remain optimistic about opportunities in these markets over the longer term, as the COVID-19 impact settles down. We also believe that current ramps of new automotive products, such as LiDAR sensors from Velodyne, will soon begin to offset some of the weakness in the traditional automotive market. As we look ahead, our new product introduction, or NPI capabilities, will continue to be an important factor for winning new business. By partnering with customers during the design process, we can provide quick turnaround prototyping services, help them improve design for manufacturability, and enable them to accelerate time to market before we begin volume manufacturing. We provide these NPI services in Thailand, as well as closer to our US customers in Silicon Valley, and now also in Israel. Our Israel operation is up and running as well as being fully ISO 9001 qualified, and we completed our first revenue shipments to customers in the fourth quarter. We're seeing good traction with new customers in Israel and are excited about this additional on-ramp to volume manufacturing in Thailand, which we expect to replicate the success we've seen at Fibernet West in Silicon Valley. All in all, We remain optimistic about the markets we serve, and in particular, the demand trends that we see for the products we are producing for our customers, despite the COVID-19 headwinds. Our optimism is also reflected in our increased customer penetration and diversity, as measured by the number of customers contributing more than 10% to our total revenue, which we disclose annually. We had three 10% customers in fiscal 2020, compared to just one in 2019, increasing the diversity of our major revenue sources. Lumentum represented 19% of revenue, and revenue from Acacia and Infinera each increased in 2020 to represent just over 10% of revenue for the year. Our top 10 customers overall represented 79% of revenue. Our ability to quickly transfer and ramp complete network systems was illustrated by our successful transfer of Infinera's network systems products in 2020. We expect further evidence of the success of our proven transfer capabilities to be demonstrated with the transfer of Cisco products currently underway at our Chanbury campus. This program remains on track to ramp at the end of the calendar year. We continue to monitor the increasing demand from existing customers for additional capacity and consequently have begun the next capacity expansion of our Pinehurst campus. We have begun the process of relocating some existing office space in order to expand our manufacturing footprint at Pinehurst, enabling existing customers to further expand capacity at that site. We expect this expansion to add approximately 100,000 square feet of manufacturing space at Pinehurst, an increase of 10% from our current manufacturing footprint at this campus. Even with these investments in growing our business, we anticipate generating significant free cash flow again in fiscal 2021. When combined with a record cash balance of nearly 500 million at the end of fiscal 2020, we are very favorably capitalized entering the new fiscal year. As such, our board has increased our share repurchase authorization up to 100 million. This expanded buyback program reflects our commitment to returning value to shareholders while continuing to invest in our long-term growth. In summary, we delivered a strong fourth quarter with revenue that was above our guidance, and we are confident that we can deliver an even stronger performance in the first quarter. We ended the fiscal year with three 10% customers and record cash balances that, in combination with our expectation that we will continue to generate significant cash flows, are enabling us to step up our share repurchase activity. and return additional value to our shareholders. We entered fiscal 2021 with investments already underway to expand our manufacturing footprint in support of growing demand and with our new facility in Israel now contributing to our growth. While we remain vigilant in keeping our employees safe, we are very proud of the excellent results we delivered in fiscal 2020. Our track record demonstrates that our strategy is working and we are more optimistic than ever about the future. Now I'd like to turn the call over to Chaba for additional financial details and our guidance for the first quarter of fiscal 2021. Chaba.