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spk08: Good afternoon. Welcome to Fibonacci Financial Results conference call for the second quarter of fiscal year 2023. At this time, all participants are in 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 Tomoginia, Vice President of Investor Relations. You may begin.
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 2023, which ended December 30, 2022. With me on the call today are Seamus Grady, Chief Executive Officer, and Chavez Ferra, 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 10Q filed on November 8, 2022. We will begin the call with remarks from Seamus and Chauva, followed by time for questions. I would now like to turn the call over to FabriNet's CEO, Seamus Grady. Seamus?
spk06: Thank you, Gero. Good afternoon, everyone, and thank you for joining us on our call today. We had a strong second quarter with revenue above our guidance range at $668.7 million. This new quarterly record was an increase of 18% from a year ago and 2% from the first quarter. After adjusting for the 14-week period in Q1, revenue would have grown 5% sequentially. Supply constraints continue to act as a revenue headwind. While we continue to see pockets of relief in some areas, we have also seen increasing supply constraints in other areas. In aggregate, the revenue impact of supply constraints during the second quarter was approximately $20 million, a little smaller than anticipated. That said, we continue to face supply issues with certain commodity components. While these supply constraints could worsen before they get better, we continue to anticipate a better supply environment later this calendar year. Our team executed very well in the second quarter, delivering non-GAAP operating margins of 10.9%, setting a new quarterly performance record. Including the impact of an $0.11 foreign currency loss, non-GAAP EPS of $1.90 was in the upper end of our guidance. and would have been well above the range were it not for the foreign exchange impact. Looking at the quarter in more detail, both optical and non-optical communications saw quarterly and year-over-year revenue increases to new record levels. Within optical communications, telecom demand continues to be strong, but revenue decreased slightly sequentially, primarily due to recent component shortages. On the other hand, In Datacom, we reached a new quarterly revenue record and also experienced our fastest sequential growth in 10 years. Turning to non-optical communications, we had another record quarter for automotive revenue, as supply improvements from the first quarter continued, driving strong growth in newer automotive programs. This growth in automotive more than offset declines in industrial laser revenue in the quarter. Investing in our long-term growth remains a top priority for Fabernet. As you know, our recently opened Building 9 provides us with significant capacity to continue to scale our business over the next several years, and we continue to ramp new programs for our customers in this state-of-the-art 1 million square foot facility. Looking ahead to the third quarter, we remain optimistic that the industries we serve can remain relatively resilient despite broader global economic trends. And this is reflected in healthy demand trends that we continue to see across our business. As I noted earlier, the supply environment is still challenging. Even though we continue to successfully mitigate the impact of supply shortages, we do expect greater revenue impact for supply headwinds in the third quarter than in Q2. And this is reflected in the guidance that Chaba will detail in a moment. Our business model remains very agile, flexible, and resilient. Over the years, our ability to respond quickly to changing market dynamics has helped us to optimize our business in the face of changes in supply or demand. As such, we're confident that we can continue to operate very effectively in a dynamic global environment to the benefit of all our stakeholders. In summary, we delivered strong second quarter results with revenue above guidance and record operating margins. While the supply environment remains volatile, our demonstrated ability to execute reinforces our optimism that we remain well-positioned to continue producing strong financial results as we look ahead. Now I'd like to turn the call over to Chaba for additional financial details on our second quarter and our guidance for the third quarter of fiscal 2023. Chaba.
spk03: Thank you, Seamus, and good afternoon, everyone. We delivered record revenue in the second quarter that was above our guidance. Revenue was $668.7 million, which was up 18% from a year ago and up 2% from the first quarter, which you will recall was a 14-week quarter with an extra $20 million revenue contribution. Adjusting for this extra week, sequential revenue growth would have been 5%. After delivering record operating margin in Q1, we again reached a new high point with non-GAAP operating margin of 10.9% in the second quarter. Our foreign currency hedging program continues to dampen the impact of FX fluctuation on operating margins. But our bottom line results are negatively impacted by foreign exchange evaluation loss of $3.9 million, or 11 cents per share in the second quarter. As a result, non-GAAP earnings per share was $1.90 in the upper half of our guidance range. Without this 11 cents foreign exchange loss, non-GET EPS would have been well above our guidance. Looking at the revenue in more detail, optical communications revenue was $506.1 million, up both sequentially and from a year ago to a new record. Within optical, telecom revenue was $392.9 million, which was up 11% from a year ago, but a decline of 3% from the first quarter, primarily due to increased supply constraints for certain commodity semiconductors used in this product. Datacom revenue, on the other hand, was very strong at $113.2 million. This record Datacom revenue was up 15% from a year ago and 22% from Q1 due to combination of continued positive demand trends and better component availability for these products. By technology, silicon photonics revenue was $123.4 million. an 11% sequential decrease due to the same supply constraint that impacted telecom revenue. The impacted telecom products are also primarily newer, faster speed-rated products, and as a result, revenue from products rated at 400 gig or more also declined 11% sequentially to $173.6 million. I want to emphasize that we believe demand for this product remains robust, and that this decline was primarily supply-related. Revenue from 100 gig products, on the other hand, was the highest we have seen in over two years at $153.4 million, up 10% both from a year ago and from Q1. Non-optical communications revenue was also another record at $162.6 million and represented 24% of total revenue. As in Q1, growth in non-optical communications was driven primarily by automotive revenue, which was a record $94.8 million, more than double from a year ago and up 9% from Q1. In addition to a better supply environment for this product, we also benefited from continued demand strength for newer automotive products. Industrial laser revenue was $30.9 million, down 13% sequentially. Other non-optical communications revenue increased from a year ago and from last quarter to $36.8 million. As I discussed 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 the investor relations section of our website. Our execution was very strong in the second quarter, as reflected in our gross margins, which tied our prior record of 13%. Tailwinds from foreign exchange hedges contributed approximately 20 basis points to this performance. And based on current FX levels, we anticipate that these tailwinds could turn into mild headwinds over the next few quarters. Operating expenses in the quarter were $13.7 million. or 2.1% of revenue. This produced record operating income of $73.1 million, or 10.9% of revenue. As I indicated in my introduction, a strong Thai baht and weaker U.S. dollar resulted in a foreign exchange loss of $3.9 million, or 11 cents per share, primarily due to asset and liability evaluations at the end of the quarter. Thanks to our strong balance sheet, we continue to benefit from a higher interest rate environment, with net interest income of $2 million, or approximately 5 cents per diluted share, which partially offset FX losses. Non-GAAP net income was $70 million, or $1.90 per diluted share. On a GAAP basis, net income was $1.71 per diluted share. Effective tax rates was 1.7% in the second quarter, and we continue to anticipate an effective tax rate in the low to mid-single digits for the year. Turning to the balance sheet and cash flow statements. At the end of the second quarter, cash, cash equivalents, restricted cash, and short-term investments were $527.6 million, up $27.7 million from the end of the first quarter. Operating cash flow was $44.5 million. With CapEx of $13.4 million, pre-cash flow was $31.1 million. We will continue to execute on our plan to return surplus cash to shareholders, though buyback activity was low during the quarter. Approximately $94.9 million remains in our share repurchase authorization. On an operational note, Earlier in the third quarter, we made a decision to exit our business in the UK. Unlike our new product introduction facilities at Fabernet West and Fabernet Israel, our UK operation has not become a meaningful on-ramp to volume manufacturing in Thailand. Since the UK facility also operates at a relatively small scale, serving mostly local customers, we estimate that the impact on non-GAAP financial results will be immaterial. We expect the rundown to be substantially completed by the end of the fiscal year, during which we will help ensure a smooth transition for our customers. We expect to incur restructuring costs of approximately $3.5 million, which will be excluded from our non-GAAP results. Now, I will turn to our guidance for the third quarter. We remain optimistic about the long-term demand trends across our business. and our ability to manage supply constraints as effectively as possible. At the same time, our general supply environment has improved. The availability of certain components worsened in Q2, impacting telecom revenue. From what we are currently seeing, we expect these constraints to be even tighter in Q3. Therefore, our guidance assumes a supply chain headwind of 30 to 35 million dollars. which is about $10 to $15 million greater than what we saw in Q2. With these incremental supply constraints and typical Q3 seasonality in mind, we anticipate revenue in the range of $640 to $660 million. We anticipate non-GAAP net income to be in the range of $1.86 to $1.93 per diluted share. In summary, we had a strong second quarter performance with record revenue and margins. While the supply environment is gradually improving, a small number of components continue to constrain our ability to meet customer demand. Nevertheless, we remain confident in our ability to continue to execute well in Q3 and over the long term. Operator, we are now ready to open the call for questions.
spk08: Thank you. Ladies and gentlemen, to ask the question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Sameek Chatterjee with JP Morgan. Your line is open.
spk02: Hi. Thanks for taking the question. I have a couple. Maybe if we can start with the telecom and the supply constraints you're seeing there. Wondering if you can give us a bit more details about the kind of components you're seeing sort of the more worsening constraints on because it seems like it's a bit counter to what investor expectations are at this point for a more broader sort of easing of the supply chain. So definitely we would be curious about sort of where you're seeing these incremental changes constraints and is it more about not really buying from those sort of broker market or just sort of the part not being available or the supplier not being able to ship to it? And I have a follow-up. Thank you.
spk06: Yeah. Hi, Soneek. Yeah, it's an unusual situation. I mean, overall, we're seeing the supply situation begin to improve in certain areas with certain suppliers, you know, who have been, let's say, problematic historically for the last several quarters. but we've also seen some new suppliers pop up. And because the majority of our business is telecom, it's about 75% telecom, 25% datacom, the shortages that we're seeing are in about the same proportion. The devices, the specific devices or components that we see in short supply, they're to support very specific products used in certain telecom transceivers where demand continues to be healthy, but we still have a couple of outlier components. So I know it's a bit of a mixed message. Overall, we see things improving, and we especially see things improving, as you said before, in the second half of this year. But last quarter, we did have some. In this quarter, again, we continue to have some component charges that are specific to telecom.
spk02: For a follow-up, maybe if you can spend a bit more time on the datacom side, I understand you still supply constraint there, but We've seen a lot more sort of pullback in the big customers and their capex sort of their overall spending plan. So when you think about sort of the current sort of pipeline there, are you seeing any softening of the pipeline outside of the supply constraints that you are still sort of navigating when you sort of look three to six months out? Are you seeing any softening of the demand pipeline?
spk06: Well, I mean, as you know, Samik, we guide one quarter at a time, so we don't comment really on six months out in our guidance. What we... We haven't seen any particular softening. You know, we're still primarily supply-constrained on the Datacom side. Obviously, we grew very nicely in the quarter, and our Datacom business, you know, remains quite strong. So we, you know, we're primarily supply-constrained on the Datacom side, and our business there continues to grow nicely. You know, we had some good, strong results for 100-gig products. 400-gig remains strong. Again, somewhat supply-constrained, but the demand remains strong for, you know, across the product categories that we serve in the Datacom side of the business. Okay. Thank you. Thanks. Thank you, Samik.
spk08: Thank you. Please stand by for our next question. Our next question comes from the line of Alex Henderson with Needleman Company. Your line is open.
spk01: Great. Thanks. I'm definitely... equally puzzled on the supply side because we had expected it to improve, not erode here. There's clearly a semiconductor company or two from the United States that are cited frequently as the source of a lot of the consternation in the supply chain. Is it that typical source that is now improving and we're seeing a shift to a different geography, perhaps the COVID lockdowns or other issues shifting it to a different geography? Where's the nexus of this particular supply chain located?
spk06: It's really twofold. Some of it is, again, we've called out a slightly higher supply headwind number in Q3. I think we've called it 30, 35 million. versus 20 million of about actual MQ2. Some of that is, it's a combination of really two areas. One is supply constraints that are COVID-related, I would say, in China. So some of the suppliers who, you know, had gone through some lockdowns and whatnot in China, we are seeing a slight, not huge, but a slight headwind due to component-related supply constraints coming out of China this quarter. And then secondly, we have a couple of, some of the, and again, I really don't want to get into naming specific suppliers, but some of the component manufacturers who historically, certainly for the last several quarters, have been problematic, have really improved. And we are actually back to more normal lead times with many of the suppliers who historically were problematic. But unfortunately, one or two new ones have popped up. And I think they'll go through the same cycle as the other ones they'll increase capacity they'll improve output and you know they'll get things improved but we are seeing that supply headwind this quarter so i understand alex it's a kind of a confusing message on the one hand we have we have certain commodities where things have improved things have stabilized and we're back to more normal lead times but unfortunately we have as i say some of these new new component suppliers who've cropped up as problematic coupled with a certain amount of supply headwind coming out of china because of covid
spk01: So if I'm looking at the guide for the upcoming quarter, could you give us any granularity on the assumptions between Datacom and Telecom sequential growth or year-over-year growth or sequentially, any way you want to phrase it?
spk06: Do you mean in terms of the component headwinds?
spk01: No, in terms of the aggregate, what are you assuming in terms of the revenue growth by segment?
spk06: Yeah, go ahead, Shabba.
spk03: Hi, Alex. We typically don't break this out in our guidance, but as you can see, we are calling out a slight downward trend on a quarter-on-quarter basis. So, there has been this primarily supply-related, as we have discussed. So, we will expect telecom to be moderating slightly, and also Datacom, while it has been very strong in the last quarter, it's going to probably moderate slightly quarter-on-quarter basis. But both segments continue to be strong from demand perspective. Nevertheless, the incremental headwinds are mostly concentrated around these two segments. Overall demand side seems to be strong and robust, but our ability to fill that demand is really constrained around the material. So in both cases, I think we would expect slight moderation of flat quarter on quarter in these two segments.
spk01: The $30 to $35 million, is that all in the optical piece? And is it evenly split between the two categories?
spk03: Yes, it's primarily around optical communication. Our automotive and laser segment have been somewhat stable in the last two quarters. There has been significant improvement on the supply side in those segments. The 30 to 35 is mostly around optical communication and split around as a proportion of the range. Probably 75% is telecom, about 25% is datacom related.
spk01: Great. Thank you so much. I'll see the floor.
spk03: Thanks, Alex.
spk08: Thank you. Please stand by for our next question. Our next question comes from the line of Farhad Najam with Luz Capital. Your line is open.
spk05: Hey, thanks for taking my question. So for the needling or specifics on the headwinds on components, if I look at your sub-100 gig revenue, it's growing pretty nicely in the quarter. even 100 gigs. So is the 75% of the $30 million headwinds mostly on 400 gigs and above speeds?
spk03: That is correct, Fahad. So in the last quarter, it was mostly in the higher data rates. And in the last quarter, it was mostly in the higher data rates.
spk05: I don't know if it was my end, but I couldn't make out what you said, Chavo. Can you please repeat again?
spk03: I'm sorry. So, yes, the impact was in last quarter and this quarter mostly in our 400 gig and above product segments in the higher data rate segments. So both in Q2 and Q3, the expected headwinds are mostly going to be in that area, in that space. Again, these are very specific components impacting a handful of products in that range.
spk05: All right. My next question was, I know in the past you've said that 400 gigs VR was at the highest percentage of your revenue. One, does this component headwind impact 400 gigs VR modules versus line cards or systems? And second is, can you also update us on their 400 gigs VR revenue?
spk06: So far, yeah, 400 VR, we're quite happy with the progress we've made there. We We think we're a leader in our industry in supporting form of DR. So we're very happy with, you know, let's say our penetration rate in form of DR and our ability to grow our business with our customers in form of DR. Yeah, the shortages we talked about, you know, as Chavis said, they break out approximately. So first of all, let's say the automotive and the laser business, I don't want to say the shortages are behind us because it's too early to declare a victory, but certainly they've become much more predictable and the improvements we made, especially in automotive, in the prior quarter seem to have continued in Q3. So the shortages we've called out in Q3 are primarily related to optical communications. And that breaks out 75% telecom, approximately 25% datacom. 400 ZR, depending on the application, but a lot of our 400 ZR business is categorized in our telecom number. So yeah, 400 ZR would be impacted. But, you know, again, we wouldn't be prepared to break out, you know, the split between 400 ZR and other types of products that we make. But, again, the DCI, data center interconnect products, would be categorized in our telecom business. So they would be included in that 75% number.
spk05: Got it. If I could also ask you, you had previously mentioned that you had one prominent customer for 400 gig ZR. I think you met. Most recently said it was true. Any color on how many customers are now ramping 400 gigs VR volume?
spk06: We have more than two. We have two who are, I would say, ramping nicely. We have another couple of customers who are still in the earlier stages, new product introduction stages. But we have more than More than two customers, I would say more than two less than five, but it's, you know, we, we feel we have a very good, very good selection of customers there. And, you know, we're very happy with, with the growth in that business.
spk05: Appreciate the answer. Thank you. Thank you.
spk08: Thank you. Please stand by for our next question. Our next question comes from the line of Tim Savage. Oh, with Northland Capital Markets. Your line is open.
spk04: Hi, good afternoon and a nice quarter. I have a question on your kind of non-speed rated portion of your business, which is at least the way I'm looking at the numbers, up pretty nicely, both sequentially and year over year. Something like 45% year over year. And I think historically we might associate that with kind of optical telecom, Rotem, and amplifiers. But, you know, currently I think you've got something else to add to the mix in terms of the pond business. So that's a long way for me of looking for an update on, you know, the recent relationship with DZS. To what extent was that a major contributor to that growth in, you know, non-speed-rated business or sub-100 gig, however you want to call it? and what is your current assessment there in terms of getting up to kind of an initial full run rate, and has your perception of the opportunity at DZS, you know, changed at all over the last little while? Thanks.
spk06: So, Tim, I'll let Trevor go through the specifics in a moment, but, you know, overall in relation to DZS, you know, we're very happy with the relationship, very happy with the pace at which the business is moving, and we're just looking forward to doing a doing a very good job for DZS. They're a great company and we're very happy to be participating in their supply chain. Certainly in terms of transfer activity, we're nicely along and we've completed the bulk of the transfers, I would say, and we're really looking to start ramping to volume now. So we're probably a little bit ahead of, even though the total revenue, let's say last quarter was not so huge from DZS, But we're happy with the progress we're making on the transfers and really looking forward to ramping that over the next few quarters. As you rightly point out, the non-speed rated business, it's an eclectic mix of several types of products. And maybe I'll let Shabba talk to the details of that.
spk03: Hi, Tim. This is Shabba. Again, on the non-speed rated business, we don't break it out. So it is a combination of lower than 100 products and non-speed data rate amplifier or other type of business. And we also have some other category there. So what we have seen, particularly on year-on-year basis, I think it's mostly a supply-related situation, have improved significantly if you look at year-on-year basis. So the growth is really in the amplifier space. that I would say if I look back a year ago, probably that area was in the year ago. And since then, I think the supply situation has significantly improved in that space. So again, the growth is indeed coming from on the road on an amplifier space. And the other category of the below sub-100 products remain stable. That's pretty much the color I can offer in this area.
spk04: well if i can follow up on that briefly since you kind of pointed to the year-on-year compare as you know being driven by rotam and amplifiers does that imply that there's some other driver of the sequential compare i'll leave it there thank you uh i i think it's the on the
spk03: What we see is really the supply environment have been again, I think it's overall the team has been over the last year. This business have been probably harder hit in the early part of the last couple of quarters. So the situation has been somewhat improving, but I would want to speak on behalf of our customers, how these businesses breaks out on a sequential basis. We do see supply constraints improving and the demand seems to be robust again, both sequentially and year on year basis.
spk04: Okay, thanks.
spk06: Thank you, Jim.
spk08: Thanks. Thank you. Please stand by for our next question. We have a follow-up from Ilana Fahad in the jam. Ilana, it's open.
spk05: Thanks for taking my question again. I wanted to clarify because a number of investors couldn't understand the response to my earlier question. So more explicitly, the telecom component shortages that you're seeing on the 400 gig, are they more on the VR side versus non-VR? Can you clarify?
spk06: I think, Fahad, what I said was we're not going to break that out any further than we have already. We're not going to specify whether it's VR or other products. Approximately of the 30 to 35 million, we've called out approximately 75% of that is telecom products. And I was just pointing out that telecom includes obviously pure telecom products, but also our DCI, our data center interconnect products, which would include 400 ZR.
spk05: Got it. Thank you for the clarification.
spk06: Thank you for that.
spk08: Thank you. I'm sure no further questions in the queue. I will now like to turn the call back over to Seamus for closing remarks.
spk06: Thank you. Thank you for joining our call today. We delivered strong second quarter results. As we look ahead, we remain confident that we can continue to perform well based on strong broad-based demand and our demonstrated ability to execute through all kinds of market conditions. We look forward to speaking with you again soon and seeing those of you who will be attending the OFC conference in San Diego next month. Goodbye.
spk08: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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