Fabrinet

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 2026, which ended December 26, 2025. With me on the call today are Seamus Grady, Chairman and Chief Executive Officer, and Chapas Vera, 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-Q, filed on November 4, 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 Rady. Seamus?

SEAMUS RADY, Thank you, Gero. Good afternoon, everyone, and thanks for joining our call today. We had an excellent second quarter. Revenue and earnings significantly exceeded our guidance ranges, with multiple large key strategic programs across our business, all contributing to our strong performance. Second quarter revenue was $1.13 billion, a new record for the company, which represented growth of 36% from a year ago, and is the fastest year-over-year growth we've achieved since our IPO over 15 years ago. Our remarkable top line performance also represents 16% growth from the prior quarter. Non-GAAP EPS also set a new record at $3.36 per share, exceeding our guidance range despite stronger FX headwinds in the quarter. Looking at our performance in greater detail, optical communications revenue grew 29% from a year ago and 11% from the prior quarter. Telecom revenue reached a new record, increasing 59% from last year and 17% from Q1. Within Telecom, DCI revenue grew 42% from a year ago and 3% from Q1, as strong, longer-term growth trends remain firmly intact. Datacom revenue grew 2% sequentially, while the year-over-year decline narrowed to 7% as demand continues to strengthen. In non-optical communications, we delivered a very strong performance, with revenue surging 61% from a year ago and up 30% from last quarter, as high-performance computing revenue soared to $86 million in the quarter. We expect this strong sequential growth to continue in the near term, particularly as our second and third fully automated production lines get qualified. Automotive revenue grew 12% from a year ago, but was down slightly from Q1 as anticipated, while industrial laser revenue demonstrated respectable growth of 10% from a year ago and 4% from last quarter. We are confident that the same growth drivers that contributed to our success in Q2 will extend into Q3. This includes growth in all major areas of our business, with the possible exception of automotive. We are experiencing sustained telecom demand, including strong DCI module growth ongoing datacom momentum and continued growth in HPC as our business ramps. In addition, we continue to aggressively pursue new opportunities across all areas of our business. As our business scales, we remain focused on execution as well as strategic capacity expansion. Construction of building 10, which will be a 2 million square foot facility, is still on track for completion at the end of calendar 2026. We are making progress on completing about 250,000 square feet of that by the middle of the calendar year. At the same time, we are creating additional manufacturing space at our Pinehurst campus by converting office space into manufacturing space and relocating those offices into a new building on that campus. With this capacity expansion, we are well prepared to continue supporting our anticipated growth in 2026 and beyond. In summary, we delivered an impressive second quarter performance with numerous significant customer programs contributing to our outstanding results. We are well positioned to extend our track record of profitable growth and to meet the increasing level of demand we are experiencing in the third quarter and beyond. I'll now turn the call over to Chaba for more financial details on our second quarter results and our outlook for the third quarter. Chaba.

Thank you, Seamus, and good afternoon, everyone. We are extremely pleased with our performance in the second quarter of fiscal year 2026. Revenue exceeded our guidance range, reaching a record $1.13 billion, up 36% from a year ago and 16% from Q1. Strong execution produced non-GAAP EPS that also exceeded our guidance range at $3.36, which includes the negative impact of a $3 million or $0.09 per share FX revaluation loss. Turning to revenue performance by market in the second quarter, optical communications revenue was $833 million, up a strong 29% from a year ago and 11% from Q1. Within optical communications, telecom revenue grew to a record $554 million, surging 59% from a year ago and 17% from Q1. Within telecom, revenue from data center interconnect or DCI modules was $142 million. DCI module revenue delivered another strong year-over-year performance, increasing 42% and grew 3% from the first quarter. Datacom revenue was $278 million. While revenue declined 7% year-over-year, it increased 2% sequentially, and trends appear favorable for continued sequential growth. Turning to non-optical communications, revenue in this category was $300 million, up a sharp 61% from a year ago and 30% from Q1. This exceptional growth was primarily driven by high-performance computing products, which contributed $86 million to revenue in the quarter, compared with $15 million in Q1, the first quarter in which we broke out this category. We are confident that our first HPC program will continue to grow rapidly and is on track to be fully ramped over the next two quarters. Automotive revenue of $117 million was up 12% from a year ago, but was slightly down sequentially as anticipated. Industrial laser revenue grew 10% year over year and increased 4% sequentially, contributing $41 million to the non-optical communications category. 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. Gross margin in the second quarter was 12.4%, a 10 basis point improvement from Q1, and consistent with a year ago, despite foreign exchange headwinds. At the same time, a modest increase in operating expenses combined with strong top line growth continued to drive operating leverage. Operating margin reached 10.9% in second quarter, up 30 basis points from both Q1 and a year ago. Interest income was $9 million and was partially offset by a $3 million foreign exchange evaluation loss. The effective gap tax rate for the quarter was 5.9%. As a result, net income was $122 million, or $3.36 per diluted share. Turning to our balance sheet, We ended the second quarter with cash and short-term investments of $961 million, down $7 million from the end of Q1. Operating cash flow for the quarter was $46 million. Capital expenditures of $52 million continued to run above maintenance CapEx levels, reflecting construction of Building 10 and capacity enhancements at our Pinehurst campus. As a result, free cash flow was an outflow of $5 million for the quarter. Turning to our share repurchase program. During the second quarter, we repurchased just over 12,000 shares at an average price of $387 per share for a total cash outlay of $5 million. At the end of the second quarter, $169 million remained available under the program. Turning to our Q3 guidance. We are confident that the very strong growth trends we have been seeing across our business will continue in the third quarter. We expect revenue to grow sequentially in telecom, datacom, and HPC, while anticipating another modest sequential decline in automotive revenue. We expect total revenue to be in the range of $1.15 and $1.2 billion, representing approximately 35% year-over-year growth at the midpoint. While we anticipate that FX headwinds will persist in Q3, we expect to offset of that pressure through continuous strong operating leverage. As a result, we expect non-GAAP EPS to be in the range of $3.45 to $3.60, representing approximately 40% year-over-year growth at the midpoint. In summary, we delivered an excellent second quarter. With strong momentum across multiple areas of our business, we are well positioned to extend our track record of success into the third quarter. Operator, we are now ready to open the call for questions.