Fabrinet

Good afternoon. Welcome to Sabrinet's Financial Results Conference call for the first quarter of fiscal year 2026. 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 Tumajinian, VP of 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 first quarter of fiscal year 2026, which ended September 26, 2025. With me on the call today are Seamus Grady, Chairman and 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, as well as additional details of our revenue breakdown. 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 19, 2025. 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 Fabrinet's Chairman and CEO, Seamus Grady. Seamus?

SEAMUS GRADY Thank you, Garo. Good afternoon, everyone, and thanks for joining our call today. We had an exceptional start to fiscal 2026, with record revenue and earnings that exceeded our guidance ranges and demonstrated our continued business momentum. First quarter revenue was $978 million, an impressive increase of 22% from a year ago and an increase of 8% from Q4. Non-GAAP earnings were also outstanding at $2.92 per share, with our revenue upside flowing directly to the bottom line. In addition to these terrific first quarter results, we're very optimistic that this strong momentum will extend into the second quarter with numerous revenue drivers contributing to our growth. Now let's look at the quarter in more detail. Starting with optical communications, telecom revenue hit a new record, increasing 59% from a year ago and 15% from Q4, driven primarily by data center interconnect products. Within telecom, DCI revenue nearly doubled from a year ago to 14% of company revenue. Datacom revenue declined sequentially as predicted, but by a smaller amount than we anticipated. This was the result of a smaller sequential decline than expected at our biggest Datacom customer, as well as larger contributions from other Datacom customers where we are gaining traction. While we believe certain component constraints will persist into the second quarter, we remain optimistic about overall demand trends in Datacom. Within non-optical communications, we are excited to introduce a new revenue category for high-performance computing products. In Q1, we qualified and started to ramp our first HPC program, which contributed $15 million to revenue. We believe this program will scale considerably over the coming quarters and become a significant driver to our overall growth. Automotive revenue was down slightly from Q4, as anticipated, and industrial laser revenue was flat. With numerous growth drivers supporting our confidence, construction of Building 10, which will total 2 million square feet, remains on track for completion by the end of calendar 2026. We have accelerated the construction of a portion of Building 10, which we expect to be completed in mid-2026, in order to help ensure that we will have ample capacity to support our rapid growth. As we look to the second quarter, we are very optimistic that we can deliver another outstanding quarter with continued growth in telecom driven by DCI expansion, strong datacom demand, and the rapid scaling of our HPC program. In summary, we are off to an excellent start in fiscal year 2026 with record first quarter results that exceeded our guidance ranges. With multiple growth drivers across our business producing increased business momentum we are well positioned to deliver an outstanding second quarter. Now I'd like to turn the call over to Csaba for more financial details on our first quarter results and our outlook for the second quarter. Csaba.

Thank you, Seamus, and good afternoon, everyone. Fiscal year 2026 is off to an excellent start with revenue and EPS that were above our guidance ranges. Revenue in the first quarter was a new record, $978 million. representing impressive growth of 22% from a year ago and 8% from Q4. Non-GAAP EPS was also a record, $2.92, including the impact of a $2 million or $0.06 per share FX revaluation loss. Looking at revenue performance by market for the first quarter, optical communications revenue was $747 million, up 19% from a year ago and 8% from Q4. Within optical communications, telecom revenue grew to a record $412 million, surging 59% from a year ago and 15% from Q4. This impressive growth was driven primarily by continuous strong demand trends for data center interconnect products. In the first quarter, DCI revenue was $138 million, representing remarkable growth of 92% from a year ago and 29% from Q4. Datacom revenue declined by a smaller amount than expected, totaling $273 million, down 17% from a year ago and 1% from Q4. While they continue to experience longer lead times for one critical component in particular, overall demand trends within Datacom remain strong. Non-optical communications revenue was $231 million, up 30% from a year ago and 5% from Q4. This increase was driven primarily by high-performance computing revenue of $15 million. We expect this new revenue category to drive even greater growth in Q2. Automotive revenue of $122 million was up 19% from a year ago, but down 5% from Q4. Industrial laser revenue of $40 million was up 12% from a year ago and flat sequentially. As I discussed the details of our P&L, all expense and profitability metrics will be presented on a non-GAAP basis unless otherwise noted. First quarter gross margin of 12.3% was down 30 basis points from Q4, but was in line with expectations as we absorbed FX headwinds in addition to the seasonal impact of annual merit increases. This small sequential decrease in gross margin was partially offset by our continuous operating leverage. Operating expenses were $16 million, or 1.7% of revenue, resulting in an operating margin of 10.6%, a 10 basis point decline from the fourth quarter. Interest income was $9 million in Q1 and was partially offset by a $2 million foreign exchange revaluation loss. Effective gap tax rate was 5.4%, consistent with expectations. Non-gap net income was $105 million, or $2.92 per diluted share. Turning to our balance sheet, we ended the first quarter with cash and short-term investments of $969 million, up $35 million from the end of Q4. Operating cash flow in the quarter was $103 million, Capital expenditures of $45 million remained above maintenance capex levels as construction of building then progresses, including the acceleration of a portion of the facility. In the first quarter, our share repurchase program was not as active as in recent quarters. We repurchased 970 shares at an average price of $276 per share for a total cash outlay of $268,000. As of the end of the first quarter, $174 million remained available for repurchases. Now, turning to our Q2 guidance. We expect our strong business momentum to extend in the second quarter, with multiple growth drivers across our business. We expect revenue to be up sequentially in all of major markets we serve, except automotive, which we expect to be flat to slightly down. Most notably, we anticipate particularly strong growth in HPC as that program continues to ramp quickly. As a result, we anticipate second quarter revenue to be in the range of $1.05 to $1.1 billion, representing remarkable growth of 29% from a year ago at the midpoint. From profitability standpoint, we expect to maintain operating leverage. with revenue growth outpacing operating expenses this quarter. However, some of these gains may be partially offset by foreign exchange headwinds. Therefore, we anticipate earnings per diluted share to be between $3.15 and $3.30. In summary, we are extremely excited about our robust start to the fiscal year. We are optimistic that we can continue to build on this momentum in the second quarter as they benefit from multiple growth drivers across our business. Operator, we are now ready to open the call for questions.

Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. In fairness to all, we ask that you please limit yourself to one question and one follow-up before re-queuing for additional questions. Please stand by while we compile our Q&A roster. Our first question will come from the line of Carl Ackerman with P&B Perry Bosch. Your line is open. Please go ahead.

Thank you. Congrats on the quarter, gentlemen. For my first question, what is embedded in your December quarter outlook for Datacom? And as you address that, what are your assumptions on having access to necessary 200 gig per lane email laser capacity to support that growth?

Thank you, Carl. We're not really going to comment on individual components for individual customers at this stage. I think what we would say is we're in the very early stages, really, of a generational transition to photonics that we've seen going on for some time. Fibonacci is really ideally positioned to continue to capitalize on this transition. We manage a lot of complexity for our customers. And as we've seen, growth doesn't always happen in a straight line. But for any company, I think the best predictor of future performance is past performance. And if you look at our, over any time horizon, you care to look at our 10-year history, the revenue, we had compounded annual revenue growth of 16%. We compounded the earnings 21% over that same 10-year horizon. Last year, revenue grew 19%. Last quarter, our revenue grew 22%. And as Chaba said, at the midpoint of our guidance for this quarter, we're projecting to grow 29%. So, you know, really, Carl, our objective is to make sure we have enough, if you like, irons in the fire and enough customer opportunities in front of us that we can continue to deliver that kind of outsized growth. You know, we're quite excited about this period that we find ourselves in the middle of. We think we're ideally positioned and we're gonna continue to keep pushing ahead, winning those opportunities and executing on them so that we continue to grow in the future the way we have done so in the past.

Yep, yep, thank you for that, Seamus. If I may address, if I may ask one more. You refer to your HPC program as your first HPC program in your prepared remarks. When you know this business will scale considerably, does that take into account any other customer engagements or discussions for other HPC programs with new or existing customers? Thank you.

Yeah, I think, you know, HPC for us, we decided to break it out as a separate category for a couple of reasons, really. One is a practical one. It doesn't fit neatly into any of the other categories that we have, so it's not telecom related. It's not data comm, it's data center, but it's not communications. So we decided to call it, you know, to break it out into its own category. And of course, the other reason we decided to do it was we're, you know, we're quite optimistic about this segment or category as an area for us to really expand and continue to grow. You know, it's early days, but our initial foray into this category is going very well. It takes a little bit of time to get off the ground. Again, these are complex products. There's a qualification process that has to be gone through. We're working with our customer, making sure we have a very efficient, highly automated process in place. And that's going very well. The customer is very happy. The business is growing nicely. And we really just got the business kicked off last quarter. We got the qualification bills done and really just started to ship products towards the tail end of the quarter. And we'll continue to see that category grow for us nicely over the next while. There are certainly other opportunities that we're pursuing there in that area, but it's early days yet. But yeah, we would be optimistic that at some point in the future, we will have more than one customer in that category. We will have multiple growth vectors like we have in all of the markets we serve. So yeah, we think it's the first customer, but we hope not the only one. There's others we're working on.

Thank you.

Thank you. One moment for our next question. Our next question will come from the line of Sameet Chatterjee with JPMorgan. Your line is open. Please go ahead.

Thank you. If I can maybe start with a question on asking you to compare the ramps of the HPC customer vis-a-vis the new telecom customer that you were going to ramp on in this corridor. Our impression going into this quarter was that the HPC customer would ramp faster than the new telecom customer. But just looking at the results, it seems to have been like a lot more skewed towards the new telecom customer. But anything to share on that front, how those two ramps are going relative to your own expectations and how much of a contribution are you getting from the new telecom customer that's ramping and how you're thinking about that ramp?

Yeah, I think they're ramping differently. I would say they're very different products. You know, if you look at the high performance compute product, it's an existing product that's already up and running with very high demand. And, you know, we're one of a number of suppliers producing the product. So we're just getting going with that. The telecom, the new telecom program that you mentioned, you know, that's a new product. So, you know, now they both end up growing at a certain trajectory, but you know, the other one is a new product. So the product has to grow in the market and then obviously we grow as that product grows, as that product grows in the market. The HPC product, I think, you know, it gets off to a fairly slow, a reasonably slow start because it's quite a complex product and there's a lot to be bedded down in terms of automation, et cetera. But we're, you know, we're pretty confident that we should see some very strong growth in that in the short to medium term. So they're both strong growth drivers for us none of these products grow in a straight line. And part of what we provide for our customers is that flexibility to manage a slow, steady growth if it's a new product, maybe slightly more steep when we're maybe transferring from another supplier. Or as we've seen in the past, when you have completely outsized growth, we can also cope with that. So we take the good with the bad. None of these programs, like I say, none of them grow in a straight line. So we're You know, we're just focused on making sure we execute in a very strong way for our customers, you know, excellent delivery, excellent quality, and at a very competitive cost. So that's our focus.

And for my follow-up, you're guiding roughly to a hundred million sort of give or take increase in revenue quarter to quarter growth. roughly ballpark i mean if i were to sort of look at the your commentary it seems like the vast majority comes from the hpc ramp is is it possible to just rank order for us in terms of how should we think about the big drivers into that 100 million increase quarter yeah i would say it's possible but not advisable for us to do that um um you know obviously we have a plan at the start of the quarter we have a plan right now we're at call it the

coming up on the midpoint of the quarter. So we have a fair idea of how we think the quarter will shake out. And we still have some very strong growth drivers. We have the HPC program that we talked about. We have the new telecom product that we're ramping. We have DCI generally, which is very strong for us. Datacom was also quite strong, stronger than we had thought going into the quarter. We did a little bit better than we thought we would do. And then there's a lot of other growth drivers that were working very hard to secure and to win. So lots of opportunities. And it's really a case of there's certainly no shortage of demand right now. We're not in any way demand constrained. It's a case of just executing and making sure we capture everything that's out there and deliver on it for our customers. So yeah, I think HPC will be a significant growth driver, but the others will as well. DCI, the new programs in telecom, and then other projects that we're working on in datacom as well. They would be the three main areas. Thank you. Thank you so much.

Thank you. One moment for our next question. Our next question comes from the line of Mike Genovese with Rosenblatt Securities, Inc. Your line is open. Please go ahead.

Thanks. When you look at the telecom growth sequentially, about 15%, $60 million-ish, how many customers were really a significant driver of that sequential growth?

Well, there's a number of customers, Mike, behind that. I mean, if you look at what's in our telecom, it's traditional telecom and also DCI, if you had to kind of break it into two broad areas. both of which are growing nicely for us. So there's a good mix of customers. It didn't come from any one customer or any one product. It's a mix of DCI, traditional telecom, and also some of the new wins that we've been working on. So it's fairly broad-based and nicely spread between customers.

Great. And then on Datacom, you mentioned other customers besides the main transceiver one, could you talk both about, you know, the kind of Datacom customers and products that are contributing to revenue now, and as well as, you know, any upcoming projects that you hope to win, you know, if there's anything likely, what kind of customers and products should we be looking at?

So there's really a few that we've talked about, you know, in the past. I guess our biggest driver of of Datacom revenue is our big customer there in the Datacom space. We continue to do very, very well with them. They're launching new products and we're supplying those for them. But we're also working on several other opportunities in that space. So one is Hyperscale Direct, where we would be supplying to hyperscalers with the product directly. That's not our design. It would be the hyperscalers design. So we're working on that. And the other one would be some of the merchant transceiver manufacturers that we're also working on, where in some cases, you have to convince the customer to outsource and also to outsource to Fabrinet. So it's a double sell. But we're working on all of those. Nothing to announce yet at this stage. These things take time. I mean, typically in our business, you know, Mike, it can take from when you engage with the customer who has a real opportunity until you're shipping something, it's generally an 18-month kind of gestation period. So it does take time. It might look like these are quick wins and that everything is always up and to the right, but I can tell you there's an awful lot of work that goes on behind the scenes to win these opportunities. So several, I would say several irons in the fire on all of those fronts that I mentioned. but nothing specific to report at this stage. And we generally won't report on particular customers until we get to the end of the fiscal year and we talk about our 10% customers. Outside of that, we generally tend to steer clear of giving too much specifics on the individual customer opportunities we're pursuing.

All right, but just quickly, on the revenue that you have now outside of the biggest customer, is that mostly the merchant type of stuff or is it something else?

It's mostly merchant outside of the biggest customer. Yeah, it would be mostly merchant, let's say non-NVIDIA transceiver business and other Datacom products that we're making. Thanks so much. Thanks, Mike.

Thank you, and one moment for our next question. Our next question comes from the line of George Nodder with Wolf Research. Your line is open. Please go ahead.

Hi. Thanks a lot. I was just curious on the share repurchase. I noticed you didn't buy many shares back for this quarter. I'm just curious if there was something to that. Is it just capital going into the manufacturing expansion, or some other thing that's driving your decisions there. And then separately, I would just love to drill down into the manufacturing building plan expansion a little bit more deeply. From memory, I think the expansion was several hundred thousand square feet. Can you just remind us kind of what the update there is? Is it as you envisioned three months ago, or has there been any change to that? Thanks a lot.

Hi, I'll take the share purchase questions, George. So our buyback last quarter was driven by our 10B5 plan, which is, as you know, automated and depending on price tiers that is set up initially. And that plan is going in place for one year, so we haven't changed on that. With regards to overall capital allocation strategy, as you have pointed out, our main focus still remains in investing in our future growth. That obviously includes working capital as well as building 10 capacity additions. So we did have an outsized capital spent in last quarter, but that has nothing to do with the share repurchase activities. Again, repurchase was done by the 10b5 plan. and we remain committed to return the surplus cash we generate to shareholders through a 10b-5 in an open market. We were not active in the open market. Nevertheless, we still have a 10b-5 in place, which we continue to.

This is a follow-on there. I'm sorry. Did I hear you say you intend to change that going forward? Is that right? I think we're having trouble hearing you. Guys, can you hear me? Hello?

We can hear you. Can you hear me? I think we're having trouble hearing you. Yeah, I can hear you. Yeah, Chaba, could you repeat your answer, Chaba?

I'm sorry. My line must have dropped, so sorry about it. So our sharing purchase was driven by a 10b5 plan. Last quarter, we didn't participate in the open market last quarter. So the repurchases were triggered through the 10b-5 plan. Our capital allocation strategy remains around, our priority remains to invest in our future growth, so including working capital and capex investment. So our capex throughout the quarter was higher than our maintenance capex level driven by our building 10. which we are pulling in a portion of the building, which will be a 2 million square feet facility and should add in approximately about $2.4 billion revenue, give or take, for the future. And we are, as communicated earlier, we are pulling a portion of that building in into our June quarter to have that space available.

Got it. So I assume that that incremental space that you're expecting is the same as you were looking to do three months ago. I guess that's my question.

That's correct.

Thank you.

Thank you. And one moment for our next question. Our next question is going to come from the line of Ryan Koontz with Needham and Company. Your line is open. Please go ahead.

Great. Thank you. I want to ask about DCI in particular and Obviously, that's getting boosted here, shift from cloud to AI infrastructure, higher attach rates for ZR. And my question for you is, from your discussions with customers, there's this concept of the distributed cluster due to power requirements. And do you think that the distributed cluster due to power grids is already affecting your demand for ZR, or do you think that's still to come?

I'm not sure, Ryan. I think... you know, for us, we honestly don't spend too much time trying to figure out the reasons for the demand. When the demand is so strong, we generally focus most of our energy on just trying to fulfill it. But, you know, I think you may have a point as that need rolls out and continues to go, I think it should drive the need for more DCI, more 400 ZR and 800 ZR. So, But the exact reasons behind the strong growth we don't spend too much time thinking about. We're too busy just trying to make sure we have everything in place and lined up to meet the demand.

Yeah, fair. Great execution. And on the non-DCI telecom, I know you might have touched on it briefly earlier, but as you think about that growth, it was up several 10 million sequentially. Is that mostly share or do you have any new wins in the mix there for the non-DCI telecom?

It's A little bit of both. So we've been continuing to, you know, chip away at our competitors and continuing to win business. It's, you know, primarily, I think, ramping, you know, ramping existing programs that we've won that are kind of becoming existing programs at this point. But it's mostly newer programs that are ramping, newer programs that we've won in recent times that we're ramping.

Helpful. Thanks so much.

Thank you, Ryan.

Thank you, and as a reminder, if you would like to ask a question at this time, please press star 11 on your telephone. One moment for our next question. Our next question comes from the line of Tim Savageau with Northland Capital Markets. Your line is open. Please go ahead.

Hey, good afternoon, and congrats on the results. Thank you, Tim. And I think it was a couple quarters ago, Seamus, where you made a reference to, you talked about the 19% growth. in fiscal 25 and made a reference to the potential for accelerating growth in 26 and didn't have you quite there, but pretty close. Now, you're guiding to 25% growth in the first half of the year. That certainly would represent acceleration. Is that, you know, in your mind? It looks like a reasonable baseline for the year, but I wonder if you have any thoughts on maintaining or even accelerating that growth rate.

Yeah, I think as you rightly point out, you know, yeah, we had last year we grew 19%. Last quarter, 22%. This quarter at the midpoint, as Chavis mentioned, we're projected to grow 29%. You know, we're just going to focus on executing. The demand is strong. I wouldn't want to put a number on what the growth would be for the full year because we don't guide for a full year. We only guide one quarter at a time. But yeah, certainly we're quite optimistic about that. in front of us you know we're we're it's a it's an unusual time demand is very strong and it's it looks to be robust it looks to be sustainable and it's across multiple product categories and customers so uh you know our focus is on execution and hopefully delivering another quarter and hopefully another year of outsize outsize growth it's a it's an exciting time we're um We're very positive about the trends we're seeing because, you know, as fast as we can build the products, the customers need them. The demand is very strong across all the segments, all the sectors that we service. So we hope it continues on for a long time.

Great. And I'm going to take another crack at this kind of the composition of the sequential guide. I think you did in your prepared comments mentioned, you know, DCI, Datacom, and HPC. I don't know if there was any rhyme or reason to that ordering, but should that be, could that be interpreted as kind of the relative demand drivers, maybe on an absolute dollar basis, or is that just an alphabetical list?

Yeah, Datacom, DCI, HPC, it's just alphabetical, Tim. I'm joking. There's no particular order to that. I wouldn't read too much into that. It's just, you know, it's probably more likely that sequentially, as we think through the numbers, you know, we kind of tend to focus on telecom first because that's where the, if you like, the origin of the company, then Datacom has become a much bigger part of our revenue and then HPC is more recent. So it's probably more to do with It's the sequence in which each of the categories has grown, frankly. But all three of those look to be very strong. DCI, it's been a fantastic set of products for us and customers. Of course, Datacom is great for everybody, and then HPC. So I wouldn't read too much into the ordering of those, Tim.

Fair enough. And last one for me. I know you commented on it, but I guess you mentioned some of the component shortages are still there. Can you say whether that's improving at all or looks to be, and is that part of your maybe fairly strong guidance for Datacom in December?

Yeah, I mean, I think these issues always have a way of resolving themselves or of getting resolved. You know, there are times when you look out to the future and if you're kind of hosed in terms of component supply. But you have to make certain assumptions and take certain actions. And, you know, generally our customers and our own team working with the supply base generally do a very, very good job of making sure we get what we need in the end, even if in the beginning it doesn't look like we're going to get what we need. So I think it is improving, you know, the certain component categories that are just in, you know, extremely tight supply. But, you know, fortunately, we have some pretty, you know, blue chip type customers who tend to get their share and sometimes their unfair share of the available components. So it's not something we're overly concerned about. And we do think it will right itself as the component supply increases. component suppliers ramp up additional capacity. It does take time to add capacity, especially for these complex components. So I think it will improve, Tim, but there's probably another quarter or two of tight supply, but in the end, I think we'll get what we need.

Thanks very much.

Thank you, Tim.

Thank you. And I would now like to turn the conference back over to Seamus Grady for closing remarks.

Thank you for joining our call today. We're excited by our first quarter performance with record results that exceeded our guidance ranges. We're also optimistic that we can deliver an even stronger second quarter with multiple growth drivers as we continue to expand our market leadership. We look forward to speaking with you in the future and to seeing those of you who will be attending the JP Morgan Tech Conference in Asia and the Needham Conference in November, as well as the Barclays and Northland conferences in December. Goodbye.

This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone, have a great day.