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spk05: Good afternoon. Welcome to the FRAB and NETS results conference call for the first quarter of fiscal year 2022. At this time, all participants are in listen-only mode. If you have any questions at this session, 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, Gara Tsema-Germanian, Investor Relations.
spk00: 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 first quarter of fiscal year 2022, which ended September 24, 2021. With me on the call today are Seamus Grady, Chief Executive Officer, and Chabas Farah, Chief Financial Officer. This call is being webcast and a replay will be available on the investor section of our website located at investor.fabrinet.com. During this call, we will present both GAAP and non-GAAP financial measures. Please refer to the investor section of our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation. In addition, 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 10-K, filed on August 17, 2021. 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 Fabernet's CEO, Seamus Grady. Seamus?
spk04: SEAMUS GRADY Thank you, Gaurav. Good afternoon, everyone, and thank you for joining us on today's conference call. We had a strong start to fiscal 2022 with top and bottom line results for the first quarter that exceeded our expectations. Demand trends remain robust across our business, which contributed to revenue reaching $543.3 million, more than $13 million above the high end of our guidance. We continue to execute very effectively with revenue upside falling to the bottom line as reflected in our non-GAAP net income of $1.45 per share, which was also above our guidance range. From a revenue perspective, we had a particularly strong quarter for optical communications, which grew 10% from the fourth quarter and 24% from a year ago. As Chaba will detail in a moment, strong optical communications demand was evident in both telecom and Datacom. We continued to execute well despite the component supply constraints that we and many others continue to experience. During our last call, we estimated that we would see a $25 to $30 million revenue headwind in the first quarter from these constraints. We are pleased to report that the actual impact was at the lower end of that range. Our ability to overcome many of these component shortages was most evident in our record optical communications results. Component shortages in the automotive market's extremely lean supply chain resulted in a moderate decline in automotive revenue from the fourth quarter. As we look to the second quarter, we are optimistic about continued strong demand across our business and are anticipating healthy overall growth despite persisting supply chain headwinds. Operationally, I'm very happy to announce that our COVID-19 vaccination program for employees in Thailand has been a great success and that at this point, 99% or virtually all of our employees in Thailand are now fully vaccinated. I'm also pleased that we were successful in delivering first quarter margins within our target ranges, despite these additional COVID-19 related costs in the quarter. At our Chanbury campus, construction of our second building is progressing well. This building will add approximately 1 million square feet or 50% to our global footprint, substantially increasing our manufacturing capacity. We are on track for construction to be completed around the end of the fiscal year. This schedule is extremely timely since, based on continued customer demand, we now anticipate that our first building in Chanbury will be effectively fully occupied when our second Chanbury building opens for business. In summary, After a very strong first quarter, we are optimistic that Q2 will represent another strong quarter for revenue and profitability. Demand trends remain strong and we are excited that our second building in Chambury will be coming online just at the right time to enable us to continue meeting anticipated demand and extend our business momentum in the years ahead. Now I'd like to turn the call over to Chabba for additional financial details on our first quarter and our guidance for the second quarter of fiscal 2022. Chabba.
spk02: Thank you, Seamus, and good afternoon, everyone. We are off to a great start for the fiscal year with record revenue and non-GAAP profitability in the first quarter. Revenue of $543.3 million was well above our guidance and represented an increase of 7% from the fourth quarter and 24% from a year ago. As we continue to execute very efficiently, our top-line outperformance fell to the bottom line with non-GAAP earnings of $1.45 per diluted share, which also exceeded our guidance. This result includes approximately 5 cents per share in foreign exchange gains offsetting the expenses related to our vaccination program that we incurred in Q1. Looking at the quarter in more detail, optical communications revenue was $427.3 million. up 10% from the fourth quarter and made up 79% of total revenue. Within optical communications, telecom revenue increased 9% from the last quarter to $338.6 million, a new record, and datacom revenue of $88.7 million increased 15% from Q4. By technology, Silicon Photonics products reached a record $135.1 million, or 25% of total revenue, and was up 23% from the fourth quarter. Revenue from products rated at speed of 400 gig or higher was $173.3 million, up 30% from the fourth quarter and 149% from a year ago. Revenue from 100 products increased modestly from Q4 to $135.6 million. Based on continued strong demand, we are expecting to see strong sequential growth in optical communications in the second quarter. Non-optical communications revenue was $116 million, or 21 percent of total revenue, representing a 25 percent increase from a year ago, but a decrease of 5 percent from the fourth quarter. While, as Seamus noted, the overall impact of component shortages was at the lower end of our expectations for the quarter, these constraints were more apparent for non-optical products, especially in automotive. With the majority of our sensor revenue serving automotive applications, we are now reclassifying automotive revenue and other non-optical communications revenue to include historical sensor revenue, which has represented less than 1% of quarterly revenue for the past two years. On this combined basis, automotive revenue was $48.2 million, a decrease of 8% from last quarter. While we don't intend to break this out in the future, for more direct comparison purposes, automotive revenue excluding sensors declined 8% sequentially. Industrial laser revenue was $37.5 billion, a decline of 9% from Q4 but stable when viewed on a trailing 12-month basis. Other non-optical communications revenue was $30.3 million, up 7% from the fourth quarter. This category now includes a portion of revenue that was previously classified as sensors. Now turning to the details of our P&L. Unless otherwise noted, profitability metrics are on a non-GAAP basis. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release and investor presentation, which you can find on our website. Cross-margin was 12.1 percent, down 20 basis points from Q4, consistent with our expectation, considering the expenses related to our vaccination program and annual merit increases. Operating expenses in the quarter were 13.2 million, or 2.4 percent of revenue. resulting in operating income of 52.5 million, or 9.7 percent of revenue. Effective tax rate was 1.3 percent in the first quarter, and we continue to anticipate that our tax rate in the fiscal year 2022 will be approximately 3 percent. Non-GAAP net income was a record at 54.2 million, or $1.45 per diluted share. On a GAAP basis, net income was $1.20 per diluted share. Turning to the balance sheet and cash flow statement. At the end of the first quarter, cash, restricted cash and investments were $528.6 million, compared to $548.1 million at the end of the fourth quarter. Operating cash flow was $39 million, with capex of $34.6 million Free cash flow was $4.4 million in the quarter. We did not repurchase any shares during the first quarter. We remain committed to return surplus cash to shareholders through a 10b-5-1 share repurchase plan combined with opportunistic open market share buybacks. Currently, we have $81.2 million in our share repurchase authorization. Now I would like to turn to our guidance for the second quarter of fiscal year 2022. After a strong start to the year, we are optimistic that our momentum will continue in the second quarter. We expect strong top-line growth despite similar revenue headwinds from component shortages that we experienced in the first quarter. We estimate that the ongoing supply cost change will again impact our second quarter revenue by approximately $25 to $30 million. With that backdrop, for the second quarter, we anticipate revenue in the range of $540 to $560 million. From a profitability perspective, We anticipate non-GAAP net income to be in the range of $1.42 to $1.49 per diluted share. In summary, we are off to a great start to the year, and we are optimistic that strong demand trends and execution will combine again to produce even stronger results in the second quarter. Operator, we are now ready to open the call for questions.
spk05: Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touch-tone telephone. Again, if you would like to ask a question, please press star then 1. One moment, please. Our first question comes from Alex Henderson of Needham. Your line is open.
spk01: Thanks. Can you hear me okay?
spk04: Yep. We can hear you fine, Alex.
spk01: Perfect. So, congratulations. Nice quarter. outstanding results in a tough environment. There's been a very strong order rate across almost every company that has reported results so far that has any hardware or systems related characteristics to it. So I assume that you're getting an extension of the visibility well beyond the current quarter and well beyond traditional metrics. Can you talk to whether that's, in fact, the case? And if so, what kind of commentary are you hearing from these companies?
spk04: Yes. So we see the demand, you know, continuing to be quite strong. We have, I would say, longer visibility than the normal. Normally we have about 13 weeks rolling forecast, obviously. We have much longer visibility, visibility much further out these days with component supply constraints that we're all experiencing. So we do have visibility further out. We still just guide, you know, one quarter at a time, Alex, but the demand signals we're seeing do remain quite strong across our business.
spk01: So is it multiple quarters into next year that you have visibility to at this point? I'm not asking for your guidance, but rather... your sense of visibility. I mean, Arista just got off of their call a moment ago. They're talking about increasing their orders by $2 billion commitment to purchase and commitments, which is 4x their prior order rate, and have visibility all the way through 22. I assume that you're seeing some characteristics like that. Is that accurate or no?
spk04: Yeah, it depends on, I would say, the customers, and it depends on the specific commodities within the customer. I mean, in some cases we have visibility out, I would say, close to a year at this stage. But it's really for the purpose of positioning component supply. We're not using it to forecast revenue or anything like that, but certainly for the purpose of securing component supply, yeah, we have visibility out to three, four quarters, which we normally would not have.
spk01: In the Q2 guide, can you give us any more granularity on the – revenue growth expectation for telecom versus datacom? You know, what's going on in that context?
spk02: Hi, Alex. This is Chava. So what we mentioned in our prepared remarks, we are anticipating telecom and datacom to continue to be strong. So again, sequentially, we are guiding up at midpoints at about 550 million. So We do anticipate strong telecom and data to continue.
spk01: So no granularity between the two or any difference between the rates of growth?
spk02: We are usually not providing guidance and breaking that down from guidance perspective, but we do anticipate both of them to continue to grow.
spk01: Okay. And then I wanted to talk a little bit about the bot, looking at a chart of it that is at almost five-year lows. I think the last time it was at this level was back in July of 2017, which is a long time ago. Obviously, it's come off very hard since February, almost in a straight line. So how does that impact your numbers? Obviously, in the current quarter, it's a benefit. But, you know, I would think that given your costs, your entire bot – that should help your competitive position considerably or help your margins. How are you planning on benefiting from that?
spk02: Yeah, so as I mentioned on the prepared remarks, we had a $0.05 per share gain in the current quarter. That's the sheer fact of the revaluation of the balance sheet items. So as you know, we are continuing with our FX and currency hedging programs. So we usually hedged out three quarters ahead. So we are entering the quarter with 100% hedged position. and then next quarter with 50% and 25% ahead. So obviously, if BAT stays in the current levels, we would see the benefits in our Q3 and Q4. It's definitely a tailwind and makes our position more competitive as most of our cost bases in Thailand and Tibet. So we do anticipate a tailwind from this, assuming the curve stays in the same way.
spk01: Clearly, Shabba, I'm not... not asking what your hedging policy is. The hedging policy hasn't changed. My question is, if we have the exchange rate stay at this level for an extended period of time, which is, you know, nobody wants to forecast currency, so we're assuming a flat at this level, how will you handle that benefit? Will it be something that you use to go after competitive wins? And in this environment where things are sold out, will you use it to and allow yourself some more pricing power on buying supplies and therefore drive share gains? Or alternatively, will you feed some of it back into the margins? How should we think about your strategy relative to this level of bots?
spk02: So first of all, most of our material spending are still in U.S. dollars. So our labor and overhead spending is predominantly in baht. So there is not much you can leverage there ahead. Obviously, we are not going to increase pay ahead just to offset. So basically, what you should anticipate is some of this will obviously fall to the bottom line as we are realizing the gains from this forward contract in the next couple of quarters. So That's definitely something you should anticipate in the gross margins and falling to the bottom line.
spk01: Perfect. And one last question. Can you talk about the facility coming online? I think you made some comments that it was coming online at the end of the year. Can you remind us what portion of capacity is coming on?
spk04: Yeah, so the current new building, Building Ace, is – As we know, it's finished and is ramping up and will be, I would say, fully occupied by the end of the fiscal year, at which point the new building, Building 9, will be coming online. And that's about a million square feet, just over a million square feet of space. So timing-wise, we think we've got the timing right. I think a little bit of good planning and a lot of luck on our part. Building 8 has been filling up, maybe a little bit ahead of our expectations, which is great news. and building nine will be coming online just at the right time. So about the end of the fiscal year, so middle of the calendar year next year, we should be up and running in building nine and effectively at or about full capacity in building eight.
spk01: Okay, one last question and I'll see the floor. Can you talk a little bit about systems? I'm not asking about any particular customer, but broadly are you winning additional new systems customers? What's the pipeline look like? How did... How should we be thinking about systems performance in the current period and current environment? Thanks.
spk04: Yes, we've had some success in that regard and where we're most effective, Alex, is where we have a lot of the contents already, so it kind of bottoms up vertical integration where we're building the content. System build on its own without the content isn't very exciting. for us, but where we have the content, it's very compelling both for us and for our customer, our target customer. We have a couple of, I would say, additional network system companies that we're talking with and working with, but nothing to announce at this point. But the pipeline is, I would say, strong, and it's a question of how and when we can convert that pipeline into reality. And as we've seen in the past, when we have success, in the complete network system space. It can be quite significant and profound in terms of the impact on revenue. So there's a few more companies that we're continuing to work with, but nothing to communicate at this point.
spk01: Great. Thanks for a great quarter.
spk04: Thanks, Alex. We appreciate it.
spk05: Thank you. Again, if you'd like to ask a question, please press star then 1 on your text phone telephone. Again, to ask a question, please press star then 1. Our next question comes from Samit Chatterjee of J.P. Morgan. Your line is open. Hi. Can you hear me?
spk04: Yes, we can hear you. Yes, we can.
spk06: Great. This is Angela Jin on for Samit Chatterjee. Congratulations on the strong quarter. Great to see. Thank you. So I have a first question more on the supply chain. So we would really appreciate any details you could provide about where the exact bottleneck might be. I know you mentioned that component costs were rising, but could you drill down a little bit more into that? Would appreciate any color. Thanks.
spk04: So the component constraints are pretty pervasive. It's not any one commodity in particular. It's pretty pervasive across the supply base. From our perspective, costs go up, but we pass those costs on to our customers. Unfortunately, our customers have to bear the cost of the unfavorable variances. And we are seeing some sizable variances coming through from the supply base. But again, we have to pass those costs on to our customers. But it's not any one commodity, Angela. It's spread across several commodities, and it's also across all industries. If anything, I think maybe optical is a little bit less prone to it than automotive. We have a small amount of automotive business, let's call it traditional automotive business. That supply chain tends to run quite lean anyway. So we're maybe hit a little bit worse on the automotive side, with maybe a little bit more wiggle room in the optical space. But it's still affecting every customer, every product. And I'm afraid I don't have any great wisdom or any great insight as to when it's going to improve. We see it continuing for the foreseeable future, and it certainly From our perspective, we have not seen it improve. It's continuing. We had about 25. I think we sized it last quarter at about 25 to 30 million in potential headwind for the quarter. It came in at the low end of that range, and I think we've baked in about the same 25 to 30 million headwind into this quarter. So it's continuing, and it's maybe stabilized a little bit, but it certainly has not improved.
spk06: Right. I appreciate the commentary. And then just last question. On the optical communication side, I mean, these are really impressive numbers. Would love to hear more about, you know, what exactly might have driven that. And if you see those trends continuing, I mean, I can see like the 400 gig ramp and silicon photonics must be driving part of it. But any additional detail there would be appreciated. Thank you.
spk04: Yeah, I think you kind of hit the nail on the head. The 400 gig and silicon photonics and also, you know, with 400 DR starting to take off, we certainly feel good about the communications business. And again, both across telecom and datacom. But yeah, it's a good time right now with that transition from, let's say, 100 and 200 gig to 400 gig. We're right in the middle of that And 100 gig remains strong as well. So we have 400 gig ramping, 100 gig remains strong, and then 400 CR is starting to come on as well. So overall, the demand segments we're seeing are quite strong, and we're quite optimistic about that.
spk06: Great. Thank you.
spk04: Thank you.
spk05: Our next question comes from Fahad Nazim of MKM Partners. Your line is open.
spk03: Thank you for taking my call. I apologize. I missed much of your prepared remarks, the number of earnings going on today. So if I'm asking you to repeat, I apologize. But can you help us understand in terms of the strength you saw in the quarter and the trends you're seeing in intra-data center silicon photonics versus telecom silicon photonics? And then I will follow up on 400 gigs a year.
spk04: So, you know, we classify, let's say, intradata center silicon photonics in our telecom revenue. It's not in our datacom number. Now, within our telecom number, we don't really break out, let's say, traditional telecom versus silicon photonics-based intradata center products. So we don't really break that out. But, you know, what I would say is, overall, the demand trends we're seeing are quite strong across the board in both telecom and datacom Um, and it's, you know, it is encouraging as, as we look out, it is encouraging to see those demands. Um, but you know, for the granularity or breaking out between, let's say traditional telecom and silicon tonics based intraday central products, we, we don't really break that out.
spk03: Got it. And then on, on the 400 gigs, we are not sure if it is still materials for you to call it out individually. But if it is, I would love to hear what 400GB VR revenue is looking like. But if you can't answer that, can you answer us, are you seeing more than one supplier for 400GB VR? Are there more than one customer now beginning to deploy 400GB VR? Is it still predominantly a single vendor story?
spk04: No, it's multiple vendors, I would say. And you're correct, we aren't breaking up 400 ZR at this point, but we are starting to see some exciting activity at a handful of customers. And we're at various stages of ramping production with those customers. Overall, it's still relatively small. It wouldn't be meaningful overall, but certainly the projections we're seeing for 400 ZR look very encouraging. And we're optimistic that we'll continue to see 400 ZR ramp and become more meaningful over time. We have, you know, I would say three or four customers in 400CR. The reason I say three or four is one of the customers is maybe a little bit behind in the development cycle, but certainly we have three, I would say, strong customers with solid demand and a fourth one coming on as well. So we have multiple customers in that space.
spk03: Got it. Seamus, if I could ask you one One of your lead customers announced a next-generation 1.2 terabit product that probably will likely ship sometime at the end of 2022 or early 2023, but it involves a unique CMI-8 pluggable. Can you speak to the revenue opportunity you see in terms of emergence of these new MSAs and new pluggables? How much do you think that is kind of becoming an incremental growth opportunity for you with this large customer?
spk04: I'm not sure which customer or product you're referring to, Fahad.
spk03: Cisco announced a new form factor pluggable called CMI8, and I was just wondering how much of an incremental upside opportunity would that be because it's a new form factor. So whenever you have a new form factor, how do you How should we think about the introduction of new form factors as a revenue opportunity? Is that something incremental? Is it because it's a new form factor? Is it, you know, because beyond just the, you know, it's a faster, more higher capacity subsystem?
spk04: Yeah, so, you know, in terms of pluggables, you know, certainly it's a big, big part of our business, obviously, you know, manufacturing pluggables. We're kind of form factor, I would say, agnostic. We don't mind what the form factor is. We're really more interested in the content and the technology within the pluggable and making sure that we're making as much as we can of the content that goes into the pluggable and also making the pluggable. Without talking about any customer in particular, because we generally don't until we're certain what they've announced themselves, any move to new form factors that gets more you know, more demand for pluggables we're always excited about. But I don't really have a, I'm afraid, a comment on the specific example you talked about.
spk03: I appreciate the answer. Thank you. No problem. Thank you, Pat.
spk05: Thank you. I'm showing no further questions at this time. I will turn the call back over to Seamus Grady before we close the remarks.
spk04: Thank you, operator. We're pleased with our excellent start to the fiscal year with results that exceeded our guidance ranges. We're optimistic that we'll be able to deliver another strong quarter in Q2, and we look forward to speaking with you again. Thank you and goodbye.
spk05: Thank you. Ladies and gentlemen, this does conclude this conference. Thank you all for participating. You may now disconnect. Have a great day.
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