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spk01: Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the second quarter of fiscal year 2022. 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, Gero Tumajanian, 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 second quarter of fiscal year 2022, which ended December 24, 2021. Thank you for calling. We'll be on the call today with 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-Q filed on November 2, 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 Faberna's CEO, Seamus Grady. Seamus.
spk03: Thank you, Garo. Good afternoon, everyone, and thank you for joining us on today's conference call. We are very pleased with our results for the second quarter of fiscal 2022. Revenue was $566.6 million and non-GAAP net income was $1.50 per share, both above the top end of our guidance ranges. I am particularly pleased with our team's ability to continue to manage through ongoing industry-wide supply constraints, and we are confident that we can continue to deliver strong performance levels as we look ahead. Looking at the quarter in more detail, revenue headwinds from supply chain constraints were within our expected range of $25 to $30 million. I'm impressed with our team's ability to navigate these constraints to drive continued growth. By end market, we had another strong quarter for optical communications. Both telecom and datacom revenue increased sequentially and year over year. Non-optical communications revenue was essentially flat from the first quarter, with newer programs offsetting small declines in industrial laser and automotive, where supply chain constraints primarily impacted traditional automotive products. Looking forward, we don't see signs of any meaningful relief from component shortages in the near term, but we continue to mitigate these impacts to the best of our ability. To support our growth well into the future, the expansion underway at our Chanbury facility remains on track for completion at the end of our fiscal year. Given the strong demand trends we are seeing, the opening of our new one million square foot building will be well timed to meet customer needs for additional space. In summary, we're very pleased with our execution, which helped produce another record quarter for the company. With continued strong demand trends and effective supply management, we're optimistic we'll be able to deliver another strong performance in Q3. Now I'd like to turn the call over to Csaba for additional financial details on our second quarter and our guidance for the third quarter of fiscal 2022. Csaba.
spk04: Thank you, Seamus, and good afternoon, everyone. We are very excited to report another quarter with record revenue and non-GAAP profitability that exceeded our guidance ranges. Revenue of $566.6 million increased 4% from the first quarter and 25% from a year ago. Revenue upside drove strong non-GAAP earnings of $1.50 per diluted share. Looking at revenue in a little more detail, optical communications represented 80% of total revenue at $450.8 million, up 5% from the first quarter. Within optical communications, we saw growth in both telecom and datacom revenue to record levels. Telecom revenue increased 4% from the first quarter to $352.7 million, and datacom revenue increased 11% sequentially to $98.1 million. By technology, silicon photonics products increased 16% sequentially to $157 million, or 28% of total revenue, a new record. Revenue from products rated at speed of 400 gig or higher grew 8% from the prior quarter to $187.5 million. Revenue from 100 gig products increased 3% from Q1 to $139.8 million. Non-optical communications revenue was $115.9 million, essentially flat from the first quarter. Within non-optical, automotive revenue was $47 million, down 3% from last quarter, and industrial laser revenue of $35.6 million decreased 5%. Other non-optical communications revenue increased 10% from the first quarter to $33.3 million, with contribution to growth from our new product introduction facilities in Santa Clara and Israel. As I turn to the details of our P&L, expense and profitability metrics provided are on a non-GAAP basis, unless otherwise noted. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release and investor presentation, which you can find in our investor relations sections of our website. Operationally, we continue to run very efficiently. Gross margin was 12.5%, up 40 basis points from Q1, and at the upper end of our target range. Operating expenses in the quarter were $12.1 million, or 2.1 percent of revenue. This resulted in operating income of $58.7 million. Non-GAAP operating margin was a record 10.4 percent. While we continue to expect positive operating leverage trends, in the near term, we anticipate returning to operating margins in the 9.5 to 10 percent range. Effective tax rate was 2.4% in the second quarter, and we continue to anticipate that our tax rate for the fiscal year will be approximately 3%. Non-GAAP net income was a record at $56.2 million, or $1.50 per diluted share. On a GAAP basis, net income was $1.30 per diluted share. Turning to the balance sheet and cash flow statement. At the end of the second quarter, cash, restricted cash, and investments were $520.2 million, down $8.4 million from the end of the first quarter. Operating cash flow was $18.6 million. With capex of $17.3 million, free cash flow was $1.3 million in the quarter. Cash balances at the end of the quarter also reflect the repurchase of 38.3 thousand shares at an average price of $115.82 for a total cash outlay of $4.2 million. As a result, $76.7 million remain in our share repurchase authorization. Now I will turn to our guidance for the third quarter of fiscal year 2022. Based on continuous strong demand largely across the board, We are expecting revenue from both optical and non-optical communications to be flat to up in the third quarter. This includes the impact of slightly higher supply chain headwinds, which we estimate will be $30 to $35 million in the third quarter. For the third quarter, we anticipate revenue to be in the range of $560 and $580 million. We anticipate non-GAAP net income to be in the range of $1.48 to $1.55 per diluted share. In summary, we are very pleased with our results for the second quarter. We are optimistic that increased demand levels and strong execution will again produce a strong performance in the third quarter. Operator, we are now ready to open the call for questions.
spk01: Thank you. As a reminder, to ask a question, please press star 1 on your telephone. Again, that's star 1 on your telephone to ask a question. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Alex Henderson of Needham. Your line is open.
spk02: Hey, guys. Nice quarter. Thanks for the print. So when you talk about your headwind of $30 to $35 million, I'm looking at the supply chain all the way up and down from the systems to the components to the contract manufacturer, and it seems pretty clear to me that that may be what you're seeing in terms of orders in-house, but the systems companies are running backlogs of 30% to 50% of a full year's product sales. Obviously, they're not passing that on through. Can you talk a little bit about how we measure the $30 million to $35 million versus the implied orders? growth up the chain that is so much significantly larger than what you're talking about? I mean, 30% to 50% of a full year's backlog will eventually find its way into your revenues, right?
spk03: Hi, Alex. Yeah, I think kind of a message around, you know, the demand remains quite strong, so to a certain extent it's kind of a mixed message, but you know, the demand, as you rightly point out, is very strong, which is good news, but that increased demand is putting increased pressure on, you know, the limited component supplies that are out there. You know, what we've been seeing, we've heard some people say that the demand, I'm sorry, that the supply constraints are set to ease. We haven't seen the evidence of that thus far. If anything, you know, it is tightening. As you can see in our guidance, we've increased the amount of the impact due to component constraints And that's really driven by a couple of factors. One is, like I said, the demand is very robust. So that's putting increased pressure on the limited supply of components that are out there. And secondly, any surplus components that were out there in the broader supply chain, in the distribution market, or in the broker market, that's drying up now. So we're really dealing directly with manufacturers at this point. And like I say, demand is quite strong, and any surplus parts or alternate parts that were in the supply chain, they've been shaken out at this point. So we do see it continuing to be a pressure point for some time to come.
spk02: Just going back to the question, Seamus, so the question really is, when you talk about $30 to $35 million, that's firm orders for the current quarter. That doesn't reflect anything that might be in the backlog on the systems basis at the OEMs that are ultimately the end users of the product. Is that a fair way to think about it, so that there's actually a much larger pent-up demand than what's captured by the $30 to $35 million?
spk03: Yeah, I think that's a fair way to look at it. That $30 to $35 million, that's the headwind that we see on our ability to deliver the demand, the commitment for this quarter. it doesn't look at beyond this quarter. So, yeah, I think your statement is very fair. The demand is very strong, and the demand continues to be very strong from the broader customer base.
spk02: If I could, on a somewhat different subject, the Thai bot has been giving you a nice advantage to your cost structure for a while now as a result of it really kind of falling off the table recently. And if I look at the income statement, you've had much better than expected gross margins and much better than expected OPEX hitting double-digit operating margins, which is certainly at the upper end of your traditional band. How do we think about that aspect of it? I mean, the bot seems to have stabilized in this range after coming down pretty much over the summer. into the fall. Do we look at it as able to get a little bit of upside to the revenues? Was your ability to buy parts, and that helped you on the gross margins? And is the 2.1 down from 2.3, 2.4, you know, is that the sustainable level at this point on OPEX? Thanks. Hi, Alex.
spk04: This is Ceava. So let me take it one by one. So indeed, the Thai baht has been somewhat stable in the last six months. So we did start to see the pickup in our cost structure, both in COGS and OPEX in the last quarter. So as you know, we have our hedging program in place. So that kind of gives us a pretty stable impact going forward. So I anticipate that it's going to be somewhat stable in the next six months. Secondly, our cost structure and bot spending is primarily on our labor and overhead side. So in terms of material, we are really buying in US dollars mostly. So there is no impact or whatsoever or no, we cannot use the leverage of the big bot to buy in advance. So that's definitely impacting our COGS and OPEX line from labor perspective. In terms of operating expense, yes, it was down sequentially. Obviously, this was also part Tybot has playing that. So we also had some seasonality tailwinds in the OPEX structure. So in the longer term, we anticipated to be returning to the 2.5% to 3% range going forward. So I think that's pretty much, I think I summarized all your questions.
spk02: All right, and then just below the line, you had a pretty, a little bit of an unusual swing where all of the interest income and interest and forex all going negative. Can you give us any sense of what you think that's going to look like in the March quarter, you know, if you aggregate them all?
spk04: We typically not, we are typically not guiding below the line numbers, so it's always a function of the exchange rate and the FIBOT assets that we have on hand, so that's basically what you would see. I would expect and anticipate a neutral line in there going forward.
spk02: All right. All right. I'll see you at the floor. Thanks. You're welcome.
spk01: Thanks. Thank you again. To ask a question, please press star 1 on your touchtone telephone. Our next question comes from Sameek Chatterjee of JP Morgan. Your line is open.
spk05: Great. Thank you. Hey, guys. Quick question. So first on a clarification, I think you mentioned you expect the operating margins, which, by the way, congrats on the strong gross margin and operating margin this quarter. You expect them to sort of come back in a bit, and you said longer term. But I just want to clarify, are you saying those come back more in line with your historical levels from the third quarter itself? Or maybe if you can just clarify that comment for me first.
spk04: Hi, Samik. This is Ceva. So, yes, we indeed had a record low 2.1% OPEX. So it's primarily due to, obviously, one of the factors is in the operating leverage that we see on the strong top-line growth, as well as I indicated earlier, we had some seasonal tailwinds as well. So when it comes to a longer term, we are anticipating it to be somewhere around 2.5% to 3% range going forward. So I think historically we've been running into that range. So if I set aside the exchange rate and seasonality, we anticipate to stay in the 2.5% to 3% range going forward.
spk05: Got it, got it. Okay, so that leads me to my question essentially on the gross margin. I mean, you had a really strong gross margin this quarter. That is despite all the supply headwinds you're navigating through. How should we think about sustainability of these kind of gross margins, particularly as the volume leverage seems to be quite well assured as you'll continue to benefit from the strong demand as you've talked about?
spk04: So, yes, indeed we had a very strong 12.5% gross margin quarter. So, we feel pretty good about sustainability. So, we have always said that our target range is somewhere between 12 to 12.5%. So, When it comes to operating leverage, our fixed cost base is not that high, so I think we would see more benefit on the OPEX line and operating margin line as we grow organically. That's what we have been seeing over the last couple of quarters. So with regards to gross margin, we anticipate to hold and maintain our target range of 12% to 12.5% as we look ahead. We continue to execute very efficiently and As you may remember, we had some one-time headwinds in the last quarter, so sequentially we obviously grew this quarter, and we continue to expect to stay in our target range, 12 to 12.5.
spk05: I don't know if you guys will allow me to squeeze in one more here, but as we look at the first three quarters here, particularly with your guidance for March, you're doing above 20% year-on-year growth. which is a step function up from the 15% growth that you did in fiscal 21, clearly looks like we are sort of going through a high point in the cycle in terms of optical. So maybe if you can share your thoughts, particularly as you now think about the capacity expansion and the capacity coming through as well, how sustainable are these sort of 20% plus growth levels in terms of what you're hearing from your customers?
spk03: Yeah, I think it's a It's a tough one to answer accurately, Sumik. I think, you know, if you look at the last couple of years, we have had this, you know, you're right, this outsized growth, a lot of which is driven by the, if you like, the underlying growth in the business is quite strong. I think we're, you know, we're servicing the right customers and building the best products with really good growth for those customers. But also we've had some large wins and we've been able to deliver outsized growth the last couple of years. You know, if you look back last year, we had the big win from Cisco and the prior year we had the big win from Infinera, the Corian business from Infinera. So we have had, you know, the underlying growth has been very strong and then we supplemented that with these large complete network system wins. We've been able to do that without negatively impacting our gross margin. So we're very focused on just continuing on that path, you know, winning the right products, from our customers, making sure that we're building, that we're always working on the next generation products and also continuing to work on these larger opportunities. They don't come along easily. They take a long time to secure, but we continue to work very hard on those. So, you know, obviously we're not going to give multi-year growth projections, but we feel good about the trajectory that we're on. We have our, you know, our new capacity expansion coming online at the end of the fiscal year to the kind of, you know, June, July timeframe we should be. opening our new facility in Chambury, which is an additional 1 million square feet. So, you know, it's an exciting time. We feel good about the products we're making for our customers, the customers we have, and the business wins we've been able to secure, and also these large expansions that we've been able to secure with our customers. So, you know, we feel good about the growth path that we're on. Thank you. Thanks. Thanks a lot.
spk01: Thank you, Samik. Thank you. At this time, I'd like to turn the call back over to Seamus Grady for any closing remarks. Sir? Thank you.
spk03: Thank you for joining our call today. We delivered a very strong second quarter reflecting the combination of strong demand trends and effective navigation of component charges. With both of these trends continuing into the third quarter, we're optimistic that we can again deliver excellent financial results in Q3. We look forward to speaking with you again. Goodbye.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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