Q1 2021 Fabrinet Earnings Call
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Good afternoon.
To Fabrinets financial results conference call for the first quarter of fiscal year 2021.
At this time all participants are in a listen only mode. Later, we'll 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 say on the Colbert your host Garo Toomajanian Investor Relations.
Thank you operator, and good afternoon, everyone. Thank you for joining us on todays conference call to discuss Fabrinets financial and operating results for the first quarter and fiscal year 2021, which ended September 25, 2020 with me on the call today are Seamus Grady Chief Executive Officer, and Travis Tara.
Chief Financial Officer this.
This call is being webcast and a replay will be available on the investors section of our website located at the Investor Duck Fabrinet Dot com.
Please refer to our website for important information, including our earnings press release and Investor presentation, We conclude our GAAP to non-GAAP reconciliation.
Well I'd like to remind you that 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. 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 filings in particular the section captioned risk factors in our form 10-K filed on August 18 2020.
We will begin the call with remarks from Seamus in Java, followed by time for questions.
Now I'd like to turn the call over to permanent CEO chemistry.
Thank you Carl and good afternoon, everyone.
We had an excellent first quarter with results that surpassed our expectations and reinforces our longer term optimism.
Revenue in the first quarter was a record 436.6 million and was above the high end of our guidance range, driven primarily by stronger than expected performance in telecom and automotive.
With a constant focus on efficiency improvements gross margin increased to 12% within our target range.
In addition, we continue to effectively manage operating costs.
As a result, we also outperformed on the bottom line delivering non-GAAP net income of one dollar and five cents per diluted share.
Our business also produced healthy cash flows even as we continue to make growth investments.
Operating cash flow was 34.5 million and free cash flow was 21.9 million.
Looking at some of the details of the quarter optical communications revenue was 344 million up 9% from the fourth quarter.
Telecom revenue of 261 million grew faster than anticipated at 14% from the fourth quarter.
This sequential increase of more than 30 million telecom revenue far offset the expected decline in Datacom revenue, which was down 4% from the fourth quarter and 83 million.
As anticipated inventory issues that we experienced at one telecom customer now appear to be behind us we.
We also continue to make progress on the transfer of an optical transport system program at Cisco, which is on track to ramp in the quarters ahead.
In fact, we ended the quarter on a very high no. When we were awarded discourse Dms partner of the year at their annual supplier appreciation event.
Silicon Photonics based optical communications products represented 25% of total revenue in the first quarter, historically, driven primarily by telecom.
Revenue from Qsfptwenty, eight and QSS P. 56, Transceivers also continued to grow and was a record 59 million up 8% from the Port Walker.
As reflected in our strong telecom performance, we continue to see strong growth.
After data rates.
Revenue from 100 gig programs was stable at 150 million on revenue from 400 gig on a book grew 62% sequentially to 17.
Looking at our non optical communications business, our performance was better than expected with revenue, increasing 3 million sequentially to 93 million.
Industrial laser revenue declined as expected and was 34 million sequential decrease of 16%, reflecting broader demand trends.
This was more than offset by automotive revenue, which increased sequentially to 35 million a record level.
The sequential revenue increase of 28% in automotive.
Was driven by the combination of growth from new automotive programs and by an anticipated return to growth from traditional automotive programs.
Sensor revenue was stable at 2 million in the first quarter and other revenue increased 2 million to 21 million.
Looking to the second quarter, we expect to see similar business trends to the first quarter.
We anticipate the telecom will continue to grow at a healthy pace driven by newer programs and faster data rates there.
It should largely offset the decline that we anticipate in Datacom revenue based on current demand signals.
In non optical communications, we expect continued softness in industry lasers, but are optimistic that automotive revenue growth will continue and largely offset those declines.
It's also worth mentioning that this near term softness in the industrial laser market does not affect our optimism that the industrial laser industry will look to increase outsourcing for the years ahead in fact intense competitive pressure, but even serve as a catalyst and we remain very well positioned to benefit from this industry transition begins to take place.
We continue to pursue a multifaceted growth strategy. This strategy includes leveraging the growth of the industries, we serve combined with investing in facilities and technologies that enable us to further penetrate existing customers and win new customers. Both in the markets. We currently serve and in new markets.
Our first quarter results demonstrate that we are benefiting from the successful execution of this strategy what do we have no control over a broader market trends, we remain focused on what we can control including investments in next generation manufacturing technologies, and then capacity expansion as well as capitalizing on our early success pursuing.
System level business and exploring opportunities in new markets that are advanced process is concerned.
As we execute on our strategy. We believe we are very well positioned to deliver superior returns for all our stakeholders inside.
In summary, we're off to a positive start in fiscal 2021.
Our strategy is working as trends from newer programs offsets the softness we see in certain markets.
We are optimistic that we can continue to leverage our strong reputation in the market to further advance our position as a leading manufacturer of the most complex products.
I would like to turn the call over to Java.
Additional financial details on our guidance for the second quarter fiscal 2021 job.
Thank you Jamie and good afternoon, everyone.
I'd like to provide you with more details on our financial results for the first quarter.
Our guidance for the second quarter.
2021.
Very pleased with our financial results that exceeded our guidance changes for the first quarter.
Revenue of 436.6 million more than 6 million above the high end of our guidance range and a new record.
Non-GAAP net income also a record at.
39.2 million.
One dollar and five cents per share.
Five cents more than the high end of our guidance range largely due until our revenue upside and gross margin improvement.
On a GAAP basis, net income was 33.1 million or 88 cents per diluted share.
Now turning to the details of our PML.
Unless otherwise noted.
Okay metrics I defer to be 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.
Gross margin myself or so.
From 11.8% in the prior quarter.
This improvement was primarily a result of the strong focus on manufacturing efficiencies and continuous cost reduction efforts.
Operating expense during the quarter itself point fivemillion or.
2.9% of revenue.
These produced operating income of 39.9 million well.
9.1% of revenue.
Taxes in the first quarter and 1.7 million.
And our normalized effective tax rate was 4.5%.
Turning to the balance sheet and cash flow statement.
At the end of the first quarter cash.
Cash and investments.
Half a billion dollars for the first time at 530.8 million.
An increase of 8.3 million from last quarter.
Operating cash flow was an inflow of 34.5 million and its capex felt point sixmillion free cash flow by 71.9 million in the first quarter.
We did not repurchase shares during the first quarter due to the smaller open window. After hours you ran blackout.
At the end of the quarter.
800 million remaining in our share repurchase program.
Do you expect to implement a tenbfive one plan in the second quarter, that's going to enable us to purchase shares even during blackout periods.
These programs complement opportunistic open market purchases, that's your main subject to blackout periods.
Our primary topic the location.
Continues to be a risk mitigation investment the long term growth and returning value to shareholders through share repurchases.
Our strong balance sheet, we expect to be active in all these areas in fiscal 2021.
I would know like to dawn.
Our guidance for the second quarter or fiscal year 2021.
He believed that trends we experienced in the first quarter continue in the second quarter.
In optical communications, we expect strong telecom revenue.
Even by healthy demand from higher data rate products combined with our newer programs.
It should more than offset export restrictions even had been at any end customers of our customers.
You expect Datacom softness to continue 11, you're down sequentially based on current Q2 forecast.
Do you believe the telecom sensing offset this weakness for total optical communications revenue that is roughly flat with Q1.
In non optical communications you believe the near term that's from the industrial laser market to continue in Q2.
On the other hand, you anticipate growing demand from new technologies like Lider, another traditional automotive programs continuing to improve.
These out about this trend should offset most but not all of the softness on the laser industry.
Therefore, we anticipate our non optical communications revenue to be slightly down sequentially.
You expect total revenue in the second quarter to be between 490 to 440 Nineth.
From a profitability perspective, you are optimistic that we can drive efficiencies and MPC paid that nothing can be will be roughly flat to dollar exports the worst quarterly results.
Yeah, I expect he has to be in the range of one dollar.
Got it and seven cents per diluted share.
In summary, number yet, but he is our execution in the first quarter and our financial results that exceeded our guidance ranges, yeah relative to successful better use growth initiatives and our financial performance and they look for about two continuing to deliver profitable growth.
Execute on our strategy.
Operator, we are.
Now ready to open the call for questions.
[noise]. Thank you.
Ladies and gentlemen, if you have a question. Please press Star then one on your telephone.
Your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
Please stand by while we compile the culinary roster.
And our first question comes from the line of John market with Stifel.
Thanks, very much Seamus I was wondering if you could talk a little bit about some of the trends in Datacom, obviously see very good.
Telecom strikes here.
But just wanted to get your take on maybe where we are in sort of this this downward trend on the datacom side, and maybe looking out maybe a little bit longer term to see you know what your expectations are for that portion of the business turning around a little bit.
Yes, Hi, John you know.
Unlike maybe some of the prior slowdowns that we so we're a lot of the slowdown previously was driven by pricing.
Dot pricing seems to have stabilized. So that's the that's the good news the current softness appears to be a demand driven primarily demand driven or we do remain optimistic.
As demand for for data bandwidth and capacity will continue to grow so over the longer term, we remain optimistic but a that the downturn. We see right now is let's say more volume driven and price driven.
At the same time, you know our broad portfolio of customer programs in multiple end markets means that the growth in other areas can offset much of the data comes off as we see so we don't see it as a as a.
Not necessarily it's pretty significant issue, but it is more volume driven I would say than than price driven.
Okay. Okay, and then if we move over to the guidance on the telecom side I'm. Just curious you know with all the puts and takes that we've heard from some of your customers and all that even some of the systems level customers in the industry.
Yeah, how much you know as you're looking out I don't know if it's possible, but can you sort of parse maybe what you're seeing from new program demand coming audio revenue that maybe wouldn't have had a couple of quarters ago versus you know sort of what the underlying demand is yet and we're just trying to think really to look more out into next calendar year.
To to get a sense for maybe how that the telecom business continues to perform.
So were you know I would say quite happy with the progress we're making on the on the telecom side on the growth. We're seeing there. We we have in the past we had.
We had a metric for new business, which we have we we used to call revenue from new business, historically, which reference new customers really since the beginning of 2014, which is really too long ago. So given that many of these programs are now entering their six here we were no longer a talk about that metric.
We're looking at to see if there's other measures that might make more sense, but you know that the new business that we see we continue to increase both the daughters and as a percentage of total revenue and that's both new business from new customers and new programs from existing customers.
Most of the growth the majority of the growth would come from new business with existing customers, but the you know the pipeline I would say is quite strong quite robust and as we've talked about in some of our prior meetings. You know we're going after again, both new customers, but also new programs from existing customers and also looking to expand uptake.
Hoped away vertically into is the system space with some of the customers, who for whom we're providing component level services today, we're looking to expand that and we've had some success in that regard so so.
So we feel we you know we feel quite positive I would say about the pipeline and about the new business wins, we can see.
Got it and then maybe lastly Talbot.
I may have missed it but did you give any of the 10% customer commentary in the quarter I guess I was hopping between a couple of calls so I apologize if I missed that.
John This is John Webb.
No we are only providing 10% customers at the end of the year. So we haven't provided that we continue to stick to our process and provide that.
You bet.
Got it thank you very much.
Uh huh.
Thank you John.
Thank you and our next question comes from the line of Alex Anderson with Needham and company.
Thank you very much.
So I guess I joined.
You need on that one.
Hi, so anyway.
I was hoping we could talk a little bit about you know they and systems.
Systems companies coming in if you could give us some sense.
Where you are on bringing up a cisco what the timeline might be one do you think.
That gets to kind of run rate revenues.
And to what extent you know you think a you're now at one rate relative to a in Panera and where you are on any additional systems companies.
So.
Since I can so first of all yeah, we did announce the Cisco or.
When we announced the Cisco when lets say, we said that we expected Cisco to be a 10% customer. Therefore 21, we think we're still on track for that.
We remain quite optimistic about that under both the the pace of the ramp.
We think we should be ramped up.
Primarily I would say largely run to the end of the calendar year, we should be we should be largely at the run rate by the end of the calendar year.
Again, you know the let's say the 10% nature of the customer you know, we we talked with that at the end of the year, but we're we're quite happy that we feel we're on pace, there and should be NRG ramps up towards the end of the year.
Infant era.
We did the Berlin transfer with Infinera, that's no that's now behind US and of course for in prior quarters Infinera had talked about an inventory correction, which which now seems to be a in the past and we're back to the normal run rate. So I would say we're at the run rate right now with Infinera and then there's other system to other companies works, we're certainly targeting.
What's up with its too early to talk about at this stage. We were very much targeting you know not a huge number of customers. We don't need a huge number of customers. We just need to a small number of significant wins like we have been able to accomplish so far with both isn't around Cisco. So were very firmly targeting one or two more of those.
So looking at the Cisco <unk> situation is it fair to say a little bit in the fourth quarter, but not not a material number and then ramping gradually in the first quarter and then hitting your kind of run rate as you exit.
Fourth quarter fourth quarter fiscal year, but not yet a full quarters worth so the first full quarter would be then the third quarter. That's that's is that the right process.
Yes, I think that'd be that'd be fair yeah.
Perfect and then going back to the Datacom side for a second if I could.
It's surprising that didn't come has been reasonably strong from most of the numbers that have been printed.
Hey, John I know you don't tied to any specific but obviously, we saw some pretty good numbers out of the rest of the day at the same time that you guys are printing.
And there has been other positive commentary around datacom. So.
Is that a function you think of maybe some share shift within your customer base to people, who may not be in your customer base is it potentially associated with some of the pipe GE stuff.
Taking a little longer term to ramp up what you think is the behind that softness has is the driver.
I think it's probably more program you know program transition related Stan and share shift, we certainly haven't haven't lost any customers or any any programs.
You know, sometimes it might be some share shift going on let's say between our customers to like you say programs that were not necessarily producing but it's more likely to be programs shifts within our customers where they are transitioning from one program to another and maybe are ramping down an order program and haven't fully run top and your program.
So we are definitely you'd said that that was going to be the case in the third quarter calendar, but they you thought it would rebound in the fourth quarter now you're saying that you expect it to continue to be weak is that because of the delay in the ramp and therefore, you should anticipate non seasonal benefit a as it ramps up.
Yeah normally seasonally weak March quarter.
Yes, hopefully I mean, we were still optimistic about that but you know what that transition that we talked about previously.
Is is continuing there.
You know we.
I think that's probably a fair way to look at it. It's it's the transition is lasting a little bit longer than we'd like that a customer would like but.
We still feel optimistic about its no longer term.
So any sense of what's driving that trend that transition this differential.
Then I'll cede the floor.
Alex This is John so what we have seen in the last I would say two quarters that you mentioned, we also had a transition of one of our particular customer have you thought it was going to be done largely this quarter to a franchisee share shift you started to see the higher day rates of Transceivers picking up actually.
So that that's going to be one of the drivers why 100 G. Still remains very strong you started to see if you Miss a few weeks to six is coming up on double D. Transceivers are starting to come into the pipeline. So this might be a knock on effect of bringing up the new products and then somewhat tapering off the 100 yen and.
Same time, bringing up the higher data rate products. So that's just a common denominator youre seeing across many customers rather than any particular share or or shift.
I see thank you very much that was very helpful.
Thanks.
As a reminder, ladies and gentlemen, I have a question. Please press star one on your telephone once again, if you have a question. Please press star one on your telephone.
Our next question comes from the line of Dave Kang with B. Riley.
Hi, This is Danny on for Dave are going off the question about Cisco and engineer I was wondering if you could provide any additional color around demand and around any ramp.
From engineered.
In addition to Cisco Thank you.
I'm, sorry, we can't provide any outlook on our on demand from specific customers. We just.
We don't want to be speaking for customers on these on these calls so I'm afraid I can't provide that information.
Okay got it that's fair and well I guess, a industrial question would be are there any verticals that you're particularly excited about you mentioned, the autos and telecom earlier what.
What's giving you the confidence in these two sectors and how should we think about that going forward.
I think there's a few areas. So there's there's you mentioned automotive for us.
Traditional automotive came back quite quite strong actually in the quarter little bit unexpectedly, but maybe for us more and more exciting is the new automotive the spend especially lighter we've had some we've had some good a good solid wins in that space and that that area is growing for us and it's a really good fit for us in addition.
The industry laser business, even though that whole sector is somewhat down.
Very much under penetrated from an outsourcing perspective, so we feel very very positive about that sector longer term.
Third would be the system business and vertically integrating into moving up the value chain for our customers. We've had some really good success there and.
We'd be very selective.
As we pursue that business, we're not just chasing revenue, we're chasing high quality revenue from high quality customers and so far we've been very successful I would say quite fortunate in that regard.
And then the fourth area is that if you like the broader area of of precision sensors generally focused on.
Some of the markets, we serve traditionally but also medical and some other markets. So.
We feel we have a really good that's a mix of segments and sectors.
Enough in common for us to be very effective asset into a very very good job for customers, but also to provide good good diversification for us. So we're quite optimistic I would say about our longer term growth prospects and I think it's showing through you know if you look at our growth over the last time, but that's why it's been it's been quite robust in the face of.
Several headwinds like like Cubism y way and whatnot. So so we remain we remain quite optimistic.
Great. Thank you for the color.
You're welcome.
And we have a follow up question from the line of Alex Anderson with Needham.
[laughter].
Okay. Thanks.
So I wanted to talk a little bit about the industrial laser business.
The.
Prime or what are your customers, obviously reported this morning and.
They had a very steep decline in the trailing period, but offered sequential flat.
Numbers, and saying that they believed that that business is finally bottomed.
And I know that you've been picking up some share.
As well so.
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Trying to understand how do I look at the industry at laser business, which normally seasonally stronger than the first half of the year next year as well.
So is it.
Is there something beyond the current.
Obvious customer that is also seeing some weakness to cause it to.
A conservative guide sequentially into the upcoming quarter.
No I think it's more to do with you know that that's industry generally we're currently.
You know, we don't produce all of the products. If you like for all of the customers. So we're really at the other women.
The demand in the marketplace for the customers products for the products. We do produce the strategy is more around deeper outsourcing penetration those those companies. We believe who are not yet that's heavily outsourced will need to outsource more and more that's where we really want to capitalize so there there's kind of a short term versus the answer Alex in the long term versus the short term we're not too.
At the window of what happens in that marketplace, but longer term, we feel we feel very positive about the industry laser if you like segment for us generates really good fit for us so for any of the customers we have and that's because we've done a very very good job for them and we think we can continue to to expand on the outsourcing.
We can expand our relationships with those companies as they.
Increasingly outsource.
I see thank you.
Thank you Alex.
Thank you.
I have another follow up question from the line of John Marchetti with Stifel.
Thanks, very much Seamus I know you don't have any real direct exposure to why way, but you know with some of the key customers certainly indicating that that revenue stream is continuing to to weaken as we look out over the next several quarters. How do you think about that market for you or or that shared that that represents particular.
As we look out into next calendar year, how quickly maybe can some of that get reallocated, particularly with your production lines does it require a tremendous amount of rework to go for Y way say to a different.
Systems level vendor.
Just trying to think of maybe how we think about that as as a headwind. This we're looking more into the calendar 21.
Thanks, John Yes, a couple of parts to the answer I think first of all the impact to us last quarter and I'd say the quarter. Just ended was was I would say negligible. If you can appreciate the the sanctions and everything else can pretty late in the quarter. There for the quarter was pretty much sense, and we were able to pull in the chip most of what was needed by.
I think the 14th September was the date there so that was a very minimal impact.
In Q1, our Q2 guidance incorporates.
Headwind of about 25 to 30 million.
From customers impacted by the war with sanctions. So that's that's incorporated into our Q2 guidance.
In other words were it not for the sanctions we'd be guiding you know 20 to 25 to 30 million above our outlook today. So let's say you know it's a it's a not insignificant impact it's a sizable impact.
But we've been able to overcome that headwind on still guide guidance.
As regards you know how quickly our customers can convert over and how quickly we can convert over production lines that converting the production lines is is I don't want to minimize the impact, but it's quite small the the pacing item, we believe will be more to do with those.
Those other non while way customers getting the qualification stone.
In a timely manner, you know they have to they have to quantify.
The products.
That can take time, sometimes so we don't anticipate any great delays.
On our part and in some cases, our customers you know have been adding capacity.
You go to produce these products.
And I think our customers remain quite optimistic about the products to have this some really excellent products. So that will be I would say that transition over the next couple of quarters as our customers transition over to nonwoven customers and we're ready to support them. We will do whatever it takes to make sure. They are successful there, but I don't think there's any hugely gating item, we're pacing item from our side, it's more to do with.
The end customer just quantifying the did the products.
So it makes sense John.
Absolutely. Thanks, so much weakness.
Okay. Thank you.
Operator, if you're still on the line.
And I'm sure we have another follow up question from the line of Alex Anderson with Needham.
Thank you all right. Thank you very much.
So.
Two questions both on kind of the progress front, one is what's going on with your Israel prototyping facility and second one.
Is could you give us an update on where you are on the production.
Spansion.
And plant.
Sure So first of all it.
In Israel we.
We have we have a lot of I would say very exciting activity going on in Israel right now.
With a high level of it with the facility up and running you know we have a high level of interest from customers and that's both existing Israeli based customers of ours, but also a lot of.
Interest from new customers, new new to prominent customers we've won some business.
You know, it's not huge in terms of revenue, but it's hugely important in terms of bringing on new business and new customers.
Of course, Onyx as you know driving revenue is not necessarily the focus of new product introduction facility. The focus of Npis, more and winning new programs and new customer relationships with with quick turn.
Prototyping and other late design stage services as the as the neighborhood if you like of growth and in that context, Yes. I think the goal then of course is still very much ultimately to drive volume manufacturing to Tyler I would say in that context, we're very happy with the progress there and really have a lot of activity and a lot of interest and have won some business there.
The second part of your question to doing it well just before we get off of that those new customers to fabrinet altogether.
Summary, yes, some are new customers to prominent and they are in the I would say in the the.
Communication space, but also in other non communications areas, such as you know new automotive medical.
Defense and aerospace and other other segments that are that are.
I would say new and exciting for farmers. So, yes, plenty plenty of opportunity there. It's it really is a very very busy.
A hotbed of technology and activity.
Perfect.
And on the capacity expansion progress in Thailand.
Yes. So obviously, we were very happy I would say and excited to have a solution for.
We are increasing capacity at the at our main competition pine Hurst for for the customers, who who want to expand there we.
We started the expansion in the fourth quarter and it would take several quarters until its completed because you know unlike let's say a new a new building in a sense is more straightforward because you just build the building, whereas with a move like this on a on an already busy campus does not have.
Moving around that has to happen before it comes into full effect, but.
We were I would say the project is underway and at the same time, we continue to attract new customers to the January campus and were seeing much increased production volumes, there and you know evaluating what our what our next expansion as steps might be.
Okay. Thank you very much.
Thanks, Alex.
Thank you.
No for the questions.
Now I will turn the call back over to CEO, James Grady for any further remarks.
Thank you operator, thank you all for joining our call today, we're pleased to have exceeded our guidance on reported record revenue and net income in the first quarter. Our strategy is working and we look forward to sharing more success with you as we look ahead as well as meeting with some of you virtually at the Needham Conference in November and the MKM Conference in December.
Thank you and goodbye.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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