Q2 2021 Fabrinet Earnings Call
Welcome to the Southern that's financial results conference call for the second 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 them each day.
The court it I would now like to turn the call over to your host garett too much out of them.
Thank you operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss baronets financial and operating results for the second quarter of fiscal year 2021, which ended December 24.
<unk> 2020.
With me on the call today are Seamus Grady, Chief Executive Officer, and Travis Ferrar, Chief Financial Officer. This call is being webcast and a replay will be available on the investors section of our website located at the Investor Dot fiber net dot com.
Please refer to our website for important information, including our earnings press release, and Investor presentation, which include our GAAP to non-GAAP reconciliation.
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 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 three 2020.
We will begin the call with remarks from Seamus and Charva, followed by the time for questions I would now like to turn the call over to fabricate CEO of Seamus Grady Seamus.
Thank you Garo and good afternoon, everyone.
We had another record quarter with Q2 results that exceeded our guidance and supports our longer term optimism.
In fact based on our current outlook, we are positioned to deliver another record quarter in Q3 with strength across all key areas of our business.
Revenue in the second quarter was a record $453 $8 million representing year over year as well as the sequential growth.
We remain focused on driving efficiencies, which helps generate margins that are at their highest levels in over a year as a result.
<unk> also increased year over year and sequentially to a record $1.10.
On today's call I will focus my comments on the broader teams that drove our strong performance and support our outlook of Java will provide more details on our financial results and guidance.
Our second quarter played out largely as anticipated combined with an unexpected positive surprises from motorboat of programs, which represented the most significant driver of upside in the quarter.
In fact automotive revenue grew more than 30 per cent from the first quarter from more than doubled from a year ago.
We continue to see the recovery from traditional automotive customers and even stronger growth from new automotive programs, such as lighter, which are beginning to contribute to our growth in a more meaningful way.
We're optimistic that this momentum in the automotive space will continue into the third quarter.
Revenue from industrial lasers was approximately flash on the slightly better than expected.
We expect industrial laser revenue to improve the third quarter and we remain optimistic about the longer term potential for increased outsourcing from this market.
In optical communications, we had anticipated the continued telecom strength would offset continuing softness from datacom products that are deployed inside of the data center.
In fact, we saw modest growth in optical communications revenue in the second quarter.
Data from revenue did moderate as we anticipated.
However, this was more than offset by stronger telecom revenue.
We are optimistic that Datacom revenue will show an improvement in the third quarter and the both Datacom and telecom revenue should increase sequentially.
Part of our telecom growth was driven by our optical transport systems program of Cisco, which we have discussed on past calls.
This transfer has been progressing very well and is ahead of plan.
We had been anticipating that the transfer would be largely complete by the end of our fourth quarter and we now believe we are nearly a full quarter ahead of expectations.
This faster ramp will also contribute to our anticipated growth in optical communications revenue in the third quarter.
Due to the combination of the earlier Cisco ramp growth from new automotive customers and continuing optimism as we execute the strategy.
We're advancing our plans to expand our manufacturing footprint.
We recently broke ground on a new 1 million square foot building of a campus in Chonburi, Thailand.
This is twice the size of our originally contemplated expansion, reflecting confidence in our ability to further scale our business over the longer term.
This expansion will roughly triple our footprint in Chonburi and will increase our global footprint by approximately 50% to 3 million square feet.
Providing us with considerable capacity to serve our anticipated growth.
We expect the construction to take approximately one and a half years, which means we could start to see revenue from this facility and approximately two years.
To summarize.
We are very pleased that our second quarter represented record revenue and earnings with the results that once again exceeded our guidance.
Our continued focus on efficiency has produced improvements in gross margin and operating margin in the quarter.
As we continue to expand on our market leadership, we are optimistic the Q3 will be another record breaking quarter for the company.
And we believe the growth from new products and programs will continue to demonstrate the success of our growth strategy as we look ahead.
Now I'd like to turn the call over to childhood for additional financial details and our guidance from the third quarter of fiscal 2021 channel.
Thank you Seamus and good afternoon, everyone.
We've been excited to deliver a record performance that exceeded our guidance ranges and then you have $453 8 million was nearly $14 million above the high end of our guidance range. This was our strongest revenue beat in two years and the new record.
Optical communications was $327 8 million or 77% of total revenue of 1% from Q1, non optical communications revenue of $106 million or 23% of total revenue and increased 14% from Q1.
Median optical communications Datacom revenue was $273 2 million up 5% from last quarter.
Data Comm revenue was $74 6 million down 10% sequentially.
While the data com revenue declined as expected in the pleased to see growth in telecom more than offset this in Q2.
We're also optimistic the Dana cauldron of any of your return to growth in the third quarter.
Silicon Photonics revenue was $101 8 million down 6% from a very strong Q1, but up 24% from a year ago.
Revenue from hundreds of these products to a lot of decline and foster the database products so of any significant growth.
Revenue of $128 2 million was down 50% from Q1 <unk>.
Revenue from 100 gig and foster of about $104 2 million up 50 per cent from last quarter and more than doubled from a year ago.
Looking at our non optical communications business automotive has grown to become the largest category in the record revenue of 47 million in the second quarter after the 4% sequentially and more than 100% from a year ago.
Seamus mentioned, new ultimately of programs, which include either so strong growth and the continued to be optimistic in this market.
Industrial laser revenue was $33 7 million down about the percentage point from Q1.
Samsung and then you must stable of $2 8 million and other non optical communications revenue was up 5% of $22 5 million.
Now turning to the details of our P&L.
Unless otherwise noted profitability metrics out of on a non-GAAP basis index.
Conciliation of GAAP to non-GAAP measures is included in our earnings press release, and Investor presentation Mitchell can find an hour of that site.
Gross margin lift up one 1% up from 12% in the prior quarter.
This improvement was the result of our ongoing focus on manufacturing efficiencies and cost reductions off.
Operating expenses in the quarter, <unk> 8 million or two 8% of revenue.
This produced record operating income of $41 9 million or nine 2% of revenue.
Actually in the second quarter of about $1 million and our normalized effective tax rate of 3% due to tax incentives of our chonburi facility, which represents a growing portion of our profit. We now expect our effective tax rate to be out of all of 4% for the year.
Non-GAAP net income was also a record at $41 5 million or $1 <unk> per share.
On a GAAP basis, net income was $35 4 million or <unk> 94 per diluted share.
Turning to the balance sheet and cash flow statement.
At the end of the second one of our cash restricted cash and investments at $488 6 million.
Operating cash flow was an inflow of $6 8 million a decrease from the prior quarter, primarily due to increased working capital in support of our strong revenue growth.
Net capex of $10 1 million free cash flow was an outflow of $3 3 million in the second quarter.
As Seamus mentioned, we have already broken ground on the new building at our Jamba. The countless the expect incremental capex of approximately 50 million pool of an estimated one in the half year construction period.
Of the investment is in alignment with our EBITDA location strategy to invest in our longer term growth.
During the quarter, we repurchased approximately 100 day in 2000 shares at an average price of $69 64.
The total cash outlay of $7 1 million.
These repurchases are also consistent with our EBITDA location strategy.
At the end of the quarter, we had 93 million remaining in our share repurchase program.
I would now like to turn to our guidance for the third quarter of fiscal year, 'twenty and 'twenty one.
We are optimistic that the positive trends, we had been experiencing will continue in the third quarter and the expected revenue growth across all the key categories.
We expect optical communications to grow sequentially.
Net income growth is being driven by continued demand at higher data rate products combined with the earlier in the unexpected ramping of our physical transfer program.
We also believe the data content, becoming more positive and we anticipate modest growth in this area.
In non optical communications. The also anticipates you've mentioned on the road.
Expense trends, we have seen the new automotive programs will continue in the third quarter.
Also anticipate the industrial laser revenue to increase sequentially as well.
The I expect total revenue in the third quarter to be between 455 and $475 million.
And EPS to be in the range of one dollar and then the.
The $1 17 per diluted share.
In summary, the.
The at least to deliver a record second quarter result, and are optimistic that the third quarter revenue produced another record performance.
Excited with the growth from new programs in multiple areas, coupled with our ability to expand margins.
The continued to aggressively pursue new opportunities that the.
Third the extent of our position and driving growing revenue and profitability and enhance long term shareholder value.
Operator, we are now ready to open the call for questions.
Thank you and ladies and gentlemen, as a reminder, yeah. The question at this time just press Star then one to getting the Q.
So the more of your other question just press the pound or hash pool.
One of the main while we compile the Q&A in the roster.
Our first question is from Alex Henderson with Needham.
<unk> please.
Thanks, guys.
So a couple of questions. So just a little off subject.
Well make sure that you didn't have any issues as a result of any of your customers are getting penetrated with solar winds.
And experience lateral or did you have any issues with solar ones.
Hi, Alex This is Jim the snow, we did not of any issues, we were quite fortunate not to be not to be hit by the solar wind.
Hugh.
We're not aware of any impact to our customers.
So we've been we've been quite fortunate we do have obviously a very very.
A very tight controls, but I think there's an element of good fortune as well so thankfully we haven't been impacted.
Well I'm glad to hear that thanks for answering that one.
The second question I wanted to ask the Israeli.
Lee.
Could you just tell me what the tax rate comment was because I couldn't understand you. When you when you gave the tax guide.
I'd like to just kind of it so basically what the commenting on our tax range, you've got anticipating more and more profit coming from all of our Chonburi campus, where we have tax incentives. So that's obviously driving our tax rate down.
Yeah, I know, but you gave the guidance I just couldn't hear the number of your problems.
Alright.
That's about 4%.
About 4%.
The the.
The second question I wanted to ask concern of.
We see Acacia and Cisco.
Merger looks like it's going to get done does that have any impact on you and are.
Given given that the closure of what had changed share trajectory at all.
Yes, so we.
So far we feel good about that the.
That relationship.
I think in the past the he said it's the deal went through or if the deal didn't go through we didn't really have strong views frankly, one way or the other so we're but we're happy to see the deal go through we think it's good for both companies and.
Very happy with obviously with the relationship there again with both companies now no Cisco.
So the.
No major impact from our point of view and.
And how about the momentum acquisition more the.
Non studying the impact to net one way or the other.
Yes, so obviously, we've had a strong relationship with both the with momentum for many years.
They were our largest customer for for some time.
The coherent is also a customer of ours.
There are less than the 10% customer, but they are the Arctic customer of ours and our work with the coherence has been focused on the industrial lasers site. So it's kind of been our sweet spot.
It's very early to say time will tell we haven't had any conversations actually without the company at this stage.
Related to the to the the acquisition.
But we are optimistic given our given.
Given our longstanding relationship with both companies we are optimistic that any impact from the combination would not negatively impact us and historically, we've tended to benefit from these type of a business combinations, but it's fairly early stages, yes.
From what I understand the rofin, so put manufacturing footprint.
Net of coherent is.
Extremely distributed in the.
The company said, the 65 per cent of their benefits.
<unk> 65 per cent of other synergies are coming from rationalizing footprint into Thailand, I assume that that means you and therefore that shouldn't that be of considerable positive flooring.
Obviously, the coherent was not moving as fast as momentum seems to intend to do.
Well, we'd certainly like to like to think that but I'd point out we're not the only manufacturer in Thailand.
We're not we're not lamenting the only manufacturer and of course the meant some of the old facility in Thailand to so I certainly wouldn't want to speak on the mentors behalf, but we'd be we'd be doing everything we can to try and win our share of that business.
Okay, and then finally I just go back to the comments from Cisco happening faster.
Just last question there so does that mean that we should anticipate.
That coming on faster and therefore, having less growth impact as we move into the back half of the year and get against those.
Those comps.
And as we move forward the or do you think that the.
Fast move is actually going to incent them to continue to move more production of over two.
No I think I think your first of some says is correct, it's really pulled everything and by about a quarter, but.
You know the the.
The business is what it is it's the business that we've moved from our competitor in the in Chonburi.
That's the that's the trend that's about a quarter ahead of schedule, but it just means that the.
The growth has accelerated but.
It's not necessarily going to result in more revenue if that makes sense.
Great. Thank you I appreciate your answers no.
Okay. Thanks, a lot.
Okay. Thank you.
Our next question comes from John Marchetti.
The question Paul.
Thanks, very much Seamus.
Announcement of the breaking ground on the new building in Chonburi and it sounds like it really got pulled forward a little bit for you in the I'm curious if that's just you know.
A function of the Cisco business.
Being completed.
Completed from the transfer process, a little bit ahead of schedule or if it's.
Some of this new lidar strength of that you've alluded to just curious because it does seem you know of.
Like a fairly big departure from where we were even just a quarter ago.
Well, it's been I suppose it's been in the works and in consideration for Awhile, we always we always say, we never waste of Intel.
The the previous <unk>.
Actually it's Paul.
We're going to pull the trigger on the next one in anticipation of growth and if you think about a lot of where the growth has come from in the last while I've just come from new customers that we've been adding into chonburi. So the the.
Cisco transfer is the big one the.
The big chunk of the the business we transferred from excuse.
Excuse me.
From Infinera in Berlin.
When the Chonburi and of course of lot of our new automotive programs in particular light of her laser lighting and a few others of.
I have got the Chonburi so.
We've got to the point, where we're you know we're getting quite busy in Chonburi and Thats the right time to pull the trigger on the next the next building so for us it's a.
You know, we don't really as simple as we don't really indicated when we're going to do it until we do it's John So it might look like it's a surprise or a.
Sure.
The Big news, if you like from last quarter, but really we haven't been indicating precisely when we would be planning to the that next building. So we see it as a it's a good indication of our our optimism in the growth trajectory that we're on.
And it will be a much bigger footprint than the than the last building.
Got it and then if I just think about the 100 400 gig split.
We've been talking a little bit in these last several quarters about sort of some of the challenges you've had on the datacom side because of that transition. It seemed like a pretty strongly this quarter do you think that inflection points behind you and I'm just curious as we're looking out going forward is the expectation now that that 400 per.
<unk> revenue continues to scale up of it but I guess, how much risk as David that the 100 continues to decline at that kind of weight that we recently just saw.
Yes, it's an interesting one I think the we talks about R. R.
Datacomm revenue.
We're guiding up on that we expect the to increases of the bed in Q3.
Just to remind we're talking inside the data center. So for those of Datacom is inside the data center outside of the data Center, our data center interconnect, we categorize in telecom.
We have seen.
I would say a fairly fairly strong transition from 100 gig products to let's say 204 hundred gig inside the data center with the few customers there who are transitioned to 200 or 400 gig products. It started.
I would say two quarters ago, and it's really the beginning to accelerate now and and our anticipated sequential growth in Datacom comes from those those customers who are who are really transitioning.
And also I talked we talked in the past about the tradeoff between price and volume we think the.
The demand trends and the pricing are now more if you like more of an equilibrium than they were in the past. So we see the datacom business growing up now so yeah. We think that infection point is kind of where kind of image or it's maybe slightly behind us at this point, we should we should see those higher data rates.
The central products start to ramp now.
Got it and then one last question for you all given some of the strength.
The recently showed in auto and how you are talking about it going forward.
We've certainly been hearing about some supply constraints, particularly within that market vertical just curious if that's.
That's something that we have to be aware of or be thinking about as we're looking at that business strike continuing as we go through the year.
Yes, I think it's always a deal it seems to be of pattern in our industry that there's always some you know of supply challenge every one of the half to two years, there seems to be some big supply constraints that hits us all.
And for US as it has become part of our if you like our standard operating procedure.
For us to figure out how to identify unsecured these critical parts.
We work very closely with the customers and our supply chain partners to make sure we get our share and hopefully our unfair share of the of the parks. We have seen you know like other southern think of spoken about we have seen longer lead times, mostly related to our automotive business.
But we factored this into our guidance and we will continue to do so so.
It is an issue, but we would want to make too much of it we just have to make sure. We we secured the parts work with the customers work with the suppliers to make sure we secure the parks and like I say, we have we have factored it into our into our guidance.
Great. Thanks very much.
Thanks, John.
Thank you.
Our next question comes from standard chartered.
J P. Morgan the question please.
Hi, guys. This is Joe Cardoso on for Sonic.
So my first question the follow up on the automotive question I'll, just ask I guess, you know relative to our expectation of automotive continues to outperform expectations and it sounds like the primary driver of Lidar and until that typically the traditional business I.
I guess, if we compare to like 90 days ago of 180 days ago has missed.
The demand kind of caught you guys by surprise as well and like what's really driving this demand for lidar, specifically, calling into production of vehicles any color there would be helpful.
So the first the growth in automotive has come from a couple of a couple of areas its traditional automotive.
But more so as you as you correctly pointed out a lighter.
We go by our customers, Turkey week Rolling forecast, we don't.
Unfortunately, Joe we don't we don't necessarily have visibility into what specific applications. Our customers are planning for those those lidar module separate producing and shipping.
So it's probably a question of better directed tour of our customers, but we're just very happy to be participating in that supply chain. We do feel we have a lot of strengths that position us very well to capitalize on the on the.
Hopefully explosive growth that the that the world would see in Lidar business, where we're very well positioned we believe for the day.
The the strongest country of manufacture in that space, but to the answer the question. The specific applications that are behind us we wouldnt be so sure I'm afraid.
Got it no that's fair and then my second question is more of the clarification of our confirmation I believe in the past.
This is related to the chunk dairy build out in the past you've disclosed that roughly one plant and equates to the 550 square.
550000 square feet or $500 million of total revenue opportunity. So is it correct I think the new building will account for roughly 1 billion of revenue.
Yes, I mean, the ballpark math would be would be correct here, but it really does depend on the mix.
For for a given.
10000 square feet it depends of the if you're producing.
A very densely populated very small physically small transceiver versus the big a big system that has a lot of areas.
The revenue mix will be different but that's the other numbers we've used in the past roughly 550000 square feet is about a half of big in revenue capacity. So yes. There is the correct assumption at this point.
Got it I appreciate the insights guys congrats on the quarter.
Thank you Jill.
Oh, sorry.
As a reminder to ask a question simply press star one on your telephone.
Our next question of some calls average at all with Northland Capital. Your question. Please.
Hi, good afternoon, and congrats on the results.
Alright, I wanted to follow up on the kind of capacity.
The additional question.
Because of the way you put it upfront realizing that you may not of kind of telegraphed the timing of.
Of breaking ground you did mention it was twice what the original plan was.
So I guess.
When was that original plan developed and how recently did it change and why did it change.
Well when I say of the original plan I mean, I guess, we had always envisaged.
At a high level.
The the building that we call the building as we always want to the very exciting naming convention, but the building building as in January we had always envisaged the building nine would be like a carbon copy of building as.
Again without having given that much total and then as we got as we got closer to making the decision you know theres always the tradeoff between the size and then the cost per square foot. So obviously the bigger of the building.
The the lower the cost per square foot to build the building.
So that was the trade off really so we just felt the time was right to make a bigger investments in.
In capacity.
And again like the lot of our operations there will be a disproportionately high amount of clean room space relative to other contract manufacturers and that does take time to bring on and get ready for it. So it's been an iterative process. The wasn't if you like a big Bang event that drove us to this decision. It was more of an iterative process as we looked as you know we have ample.
We have we have enough land so of assets for the long long time so.
The size of the of the law for the the land was never going to be of constraint. It was more about how big we wanted to build the building.
Taking into accounts, you know of parking space for employees and the future growth and expansion capabilities. So.
I hope that answers your question Tim.
Not quite but let me try one more thing and then I'll move on to a couple of more detailed questions which is.
You mentioned the number of factors kind of driving current capacity of Chonburi.
Cisco is ramping faster, but it is not ramping larger in magnitude.
Imagine that I think that's that's kind of what you said, so I guess I'm still looking for.
Outside of parking spaces.
What sort of opportunities may have arisen in the last quarter or two.
Assuming if I'm correct that Cisco is just happening quicker, but in terms of its overall contribution is about in line with expectations are there any things that you can point to the that might have.
Giving you a sense that you could make use of greater capacity.
Sure well of course, the the Cisco.
The Cisco opportunity that I mentioned.
It's ramping in line with our expectations that we had when we when we want that business, but Cisco is the very large company and we'd be very.
You know of very determined to make sure. We continue to expand that relationship maybe the specific program that we're transferring it is it is what it is in terms of the size of escape of the program, but we'd certainly be working very hard to make sure. We win additional business from Cisco. So so so that's one opportunity than the other is that there are a lot of other system.
The opportunity of that we're pursuing we've had we've had some considerable success, we think with Infinera and Cisco, but there are a lot of other companies out there that will also be pursuing.
In addition, our automotive business is growing.
On Lidar is becoming a bigger share of of the of the automotive business and then also we want to be able to make sure. We have capacity for the the inevitable move towards increased outsourcing in the industrial laser market. Because again, we think the industry is very underpenetrated in terms of outsourcing.
So it's really to you know to the position ourselves to be able to fulfill the pipeline of.
Of existing business and new business that we have in the works.
Got it crystal clear.
Hum.
While we're on on Cisco realizing here. So it's probably a limited amount you can say I mean, you have indicated that its ramped quicker.
Quicker than expected I assume not to the magnitude where you'd have any additional.
10% customers in the second quarter, but.
Would you expect that that could possibly be the case.
In Q3 or sometime in the second half of the year in terms of adding new kind of logos to that 10% of list.
Okay.
We disclosed the 10% at the end of the year of take.
I'd be optimistic we will have.
We've talked in the past the boat.
Scenario, becoming a 10% customer we believe Cisco with the 10% customer.
And I think were sales were still on track for that.
Beyond that I wouldn't like to I wouldn't like to speculate.
Fair enough and last question from me you don't you did see.
The decline in Silicon Photonics revenue in the quarter. After a couple of quarters of very strong growth.
At least sequentially.
Which seems to marry up to some degree with the decline in Datacom should we assume then.
That headwind came more from the Datacom side.
Versus the your other silicon photonic applications at higher data rates and telecom.
Hi, Tim This is Trevor yes, that's pretty much of a fair assumption. We did we do believe that the data com have have bottomed out so the silicon Photonics had also impacted that.
Downward trend in the data com.
We anticipate the <unk>.
<unk> is going to come back and the kids.
James.
Great. Thanks, very much and congrats again.
Thank you Tim.
Thank you. Our next question comes from David Kang of B Riley. The other question. Please.
Thank you. Good afternoon. My first question is regarding 100 gig and 400 gig just wanted some additional color. So I think you said 100 gig declined 15% sequentially, whereas the 400 gig plus increased 50% sequentially is that correct.
Yes, that's correct.
Now are you.
Lumping, both Datacom and telecom there and if you are then can you just provide some color.
Between Datacom and telecom.
Yes, we do have data come in the telecom combining both categories, usually not break out by data eight hour Datacom and telecom business. However, you did mention that in the data com space, we are anticipating the.
200, 400, G and take a little bit bigger.
Market share from the revenue. However, that's at this point is not meaningful of so.
The growth on 400 GB is primarily in our Telecom segment and the reminder, our data center interconnect is also categorized in that category, which Michelle.
We had strong drivers.
Got it and then of that 400 gig bucket.
Can you provide any color regarding 400 versus six and 800.
No we don't break out beyond that so it's 400 and above its the combination at this point of $4 six 800 at this stage is not.
What are.
The substantial amount yet.
The combination of forensics.
Got it and then.
You mentioned, the Datacom seems to have bottomed I mean I.
I think the last peak was about what 910 quarters ago. I think it was fiscal first quarter of 19 I'm looking at the model and it was about $109 million I mean can we get back to that.
Or how should we think about the dis.
The next the cycle.
So again.
The time I think what we have been seeing is a significant price erosion, which I think is the main main reason of our revenue decline while the volumes have been have been pretty strong in datacom space. So it's a number of other factor of the revenue was primarily driven by by price erosion and Lori Asps.
When we look at the out in the future of meeting they don't like to speculate.
Beyond one quarter. So at this point I wouldn't make any comments.
Not it's going to return to that range, but again 400 G 200, 400 gig starting to ramp which is obviously driving the higher ASP.
So I would say the pricing of cyclical trend will be fair to say that it should continue.
As it has been in the last 18 months.
Got it and then lastly on the auto I mean, what's the mix rough mix between the lidar versus traditional.
We usually don't break that out in terms of tradition of lidar, particularly northern Lidar. So when we talk about can you would help the multi resort. It does include Lidar and other newer ultimate team.
Programs of South for example of the laser lighting.
The vehicle related business as well so we are not breaking the doubts from traditional but the growth game and the <unk>.
Quarter of both from the strong traditional and stronger newer ultimately progress.
Got it thank you.
Youre welcome.
Thank you. Thank you our next question.
Operator would you sit on the line.
And our next question comes from Alex Henderson with Needham Your question. Please.
Great. Thank you.
A couple of follow up questions.
When you look at the automotive segment.
Is it concentrated in a few names.
That are achieving the bulk of that revenue or is it distributed across the multiple manufacturers.
It's sort of a few names not not a huge number of names I mean, our traditional automotive business. We have won one major customer there on what we call of our traditional automotive business that's the layoffs.
So theyre not of 10% customer, but there are a significant customer for us in our traditional automotive business and then our newer automotive we of others as well, but the layer would be the the bigger the biggest one in our traditional automotive and then of the newer automotive business.
We've talked about Xanodyne and the.
Possibly we brought him on the.
Of the customer bought them into probably the worst originally then transferred them to Bangkok, we didn't we didn't name them as a customer until I think it was maybe last quarter for the quarter before when with the <unk> agreement, we were able to name them.
We have a couple of other I would call newer automotive customers as well.
The laser laser lighting companies electric the companies and then some some other automotive customers that we're just bringing on other light our company's solid state Lidar on Adas type companies who are.
Quite quick.
Quite sensitive about his name any of them on sales until they are ready to communicate that but we have we are of good pipeline I'd say that the the pipeline of new business is almost all of the new automotive side of the business with the I would say of strong.
Our strong pipeline of of a lighter companies, there's a lot of light or companies out there today.
Obviously, the won't they won't all succeed but for US we want to make sure. We're working with the ones that we believe of the best of the best chance of success. So we have a good a good pipeline of lidar companies, but not the ones, where we'd be able to name at this stage.
So these are predominantly people the floor then sell them to the large auto companies as opposed to direct them to the auto companies themselves.
That's correct.
Okay.
Second question I had.
When you do kick this manufacturing plant.
The production.
Should we anticipate the same kind of 10 to 20 basis point pressure tomorrow gross margins, it's a fairly modest hit.
Margins relative to.
So.
The.
To the impact when you turn the plant on still is that the right way to think about it.
So obviously, that's really more of the depreciation expense of the affinity. So is anything as we round the facility the absorption should more than offset by the initially.
The depreciation expense it obviously for the pressure on all of our gross margin. Nevertheless, as we have always been driving efficiencies to offset the headwinds in.
In the past, we will continue to do so to make sure that we stayed in our gross margin range.
I recall last time, you turned up the needs.
The facility it was about a 10 to 20 basis point hit the.
The question would be is this twice that because of twice the size of should its tobey that kind of magnitude.
Well, if you think about the depreciation expense of of 50 million of investment should do the math I haven't done the exact match at this stage, but that's what you should think about in terms of the gross margin.
Headwind.
Okay.
And then.
I noticed one of the Oems.
Oems and the.
And the.
The networking space, the Pawnee and launched a co packaged product.
Are you starting to see more interest in co packaging and to what extent of that.
Creating a whole.
New growth vector for you.
We are and I think for us.
Co package of optics is inevitable.
Given the increase in speed and bandwidth from the the networking silicon.
It's probably a couple of years out before it becomes let's say mainstream book, we're very firmly working with our customers on that and for us.
So the.
Co package of optics for US is more of an evolution from what we've been doing with regard to silicon photonics over the last several years so yes.
We are seeing as being a driver for us in the coming years, nothing nothing imminent, but certainly it will become.
It's inevitable a 60 day.
The move to co packaged optics.
And then finally can you talk about the shut the machines the boss.
Obviously it.
It strengthened over the course of the last year, but it was fairly stable I think in the last quarter.
How combined as part of your hedged in the to what extent do you expect any variance from that the engine program.
So basically there are two aspects of the bought the situation in the overall exchange rate situations. You can look at the our income statement. We have had about 500 K loss in the last quarter the small gain in the <unk>.
Prior quarter represents approximately two cents headwinds, but when they look at the end of it.
Broader FX trends, primarily U S. Dollar has been weakening in the last couple.
A couple of months of.
The Doc.
FX Barclays Appreciating U S. Dollar is strengthening which is representing a headwind for us. So the hedging program we have in place as of late.
Hedge 100% hedged for the next quarter of 50 percentage for the following quarter and about 75% hedged.
Three quarters out so if you look at the market trends.
We have a pretty predictable estimate for the current quarter, but as we as we go along in the future the deck.
Current market situation will be reflected in all of our future results. So in Q2 because of that we didn't really have a significant impact from from the Bob because of the hedging program. However, as you look out to Q3 and the bot have strengthened somewhat in the last four months and that impact is going to start.
Putting a pressure on our Q3 gross margin, so which is baked in our guidance at this point.
But what would have been improving further otherwise.
Net.
Yes.
So I had.
That is correct.
Our margin expansion.
Because we have to make up for that headwind the improved efficiencies.
Alright, Okay. That's all I had thanks.
Thanks, Alex.
Thank you and this concludes our Q&A I'll point today are one of the loss to turn the call back to Seamus Grady for him.
Right.
Thank you for joining our call today, we're pleased to have exceeded our guidance with record revenues and EPS in the second quarter.
We are optimistic that the coming quarter will represent another record performance illustrates that our strategy is working we look forward to speaking with you again soon goodbye and thank you.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for your participation and you may now disconnect.
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Non-GAAP.
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