Q3 2021 Fabrinet Earnings Call
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Good afternoon, welcome to the Fabry and that's financial results conference call for the third quarter of fiscal year 2021.
At this time, all participants on the listen only mode.
Later, we will conduct the question and answer session and instructions on how to participate will be provided at that time.
As a reminder of today's call is being recorded.
And I'd like to turn the call over to your host Garo to my Janie and Investor Relations. Thank you. Please go ahead.
Yeah.
Thank you operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss <unk>.
And operating results for the third quarter of fiscal year 2021, which ended March 26, 2020 lines with me on the call today are Seamus Grady Chief Executive Officer, and Capex channel.
The financial Officer.
This call is being webcast and a replay will be available on the investors section of our website located at Investor Day, Fibernet Dot com.
And this call we will present, both GAAP and non-GAAP financial measures. Please refer to of our website for important information and cleaning of our earnings press release and Investor presentation, which include our GAAP to non-GAAP reconciliation.
I would 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 and particularly the section captioned risk factors and our form 10-Q filed on February two 2021.
We will begin the call with remarks from Seamus and Chubb on followed by the time for questions I would now like to turn the call of the fab and the CEO Seamus Grady and Jimmy.
Thank you Garo and good afternoon, everyone.
We had a very strong quarter, representing our third quarter in a row of record revenue and earnings per share.
Both of which also exceeded our guidance.
With sequential growth and all of the end markets that we track total revenue was $479 $3 million.
Non-GAAP operating margins of nine 5% were at the highest level and two years and helped produce record non-GAAP earnings of $1 21 per share.
We generated these results while positioning ourselves for continued growth and we are optimistic that we can deliver another record quarter and Q4.
Looking at some of the highlights of the quarter optical communications revenue reached a new record driven primarily by record of telecom revenue.
Our Cisco optical transport system transfer program.
Which we have been discussing on recent calls contributed to the strong performance.
This program transfer was completed and the third quarter, reaching its full run rates of about one quarter earlier than originally anticipated.
Based on the success of this transfer we believe that our unique value proposition and manufacturing complete network systems puts us in a strong position to win additional new business from our existing customers as well as other systems manufacturers, who are looking to leverage their supply chain by outsourcing more efficiently.
Notably these newer systems programs are having a positive impact on operating margins as we were able to generate this revenue with close to zero incremental operating expenses.
We also achieved record non optical communications revenue in Q3.
Revenue grew sequentially from all non optical markets with automotive, reaching a new record revenue level and representing the largest non optical category for the third quarter and a row.
And you were automotive technologies, where the biggest factors driving our strong automotive growth and the quarter.
In summary.
We are pleased to have delivered record third quarter results that exceeded our guidance.
We are optimistic about all of the end markets that we serve and believes that with continued efficient execution will be able to deliver and even stronger fourth quarter, resulting in our best year ever.
Now I'd like to turn the call over to Trevor for additional financial details and our guidance for the fourth quarter of fiscal 2021 Java.
And your statements and good afternoon, everyone.
Cited about our performance and the third quarter, which produced record revenue and non-GAAP earnings.
Revenue of $479 2 million most of all of our guidance range and non-GAAP earnings of one dollar and 'twenty, one and also exceeded our guidance.
Looking at revenue in more detail optical communications was $261 7 million or 75% of total revenue.
<unk>, 4% from Q2 non.
Non optical communications revenue was $117 6 million or 25% of total revenue and the increased 11% from Q2.
And optical communications Telecom revenue was $283 5 million up 4% from last quarter.
Data comm revenue of $78 3 million of.
Up 5% sequentially.
Silicon Photonics remains on important revenue driver and 22% of total revenue on 105 4 million up 4% from Q2.
Revenue from 100 gig products increased 8% sequentially to $138 6 million, but remains below peak levels and growth from faster data rate products continues to accelerate.
Revenue from 400 gig and foster was $105 1 million of 1% from last quarter and more than tripled from a year ago.
And Q4, the expect optical communications growth tend to continue.
Looking at our non optical communications business.
Automotive has grown to become the largest category for the third quarter in a row and record revenue of $52 5 million in the third quarter.
And that percent sequentially, driven primarily by growth from new automotive programs.
And optimistic about these new automotive programs and we look ahead.
Industrial revenue was $36 1 million up 7% from Q2 and.
And so revenue was $4 1 million and other non optical communications revenue was up 10% to $24 8 million.
And we believe the combination of laser and ultimately to Jen and generated sequential growth from non optical communications again and the fourth quarter.
Now turning to the details of our P&L.
And that's otherwise noted profitability metrics are on a non-GAAP basis, and a reconciliation of GAAP to non-GAAP measures is included in our earnings press release, and Investor presentation, which you can find and our best site.
Gross margin was five 2% up from 12 point, 12% and Q2 and in line with our target range of 12 to 12, 5%.
Operating expenses in the quarter, and $12 7 million or two 6% of revenue.
Reflecting our ability to grow revenue and that was meaningful increases in operating expenses.
<unk> produced record operating income of $45 6 million or nine 5% of revenue the highest level and two years.
Taxes, and the third quarter, and $1 6 million and <unk>.
All of our normalized effective tax range plus 4%.
We continue to anticipate and effective tax rate of about 4% for the year.
Non-GAAP net income was a record at $45 4 million or $1.21 per diluted share.
On a GAAP basis net income was also a record and $37 5 million or $1 per diluted share.
Turning to the balance sheet and cash flow statement at.
At the end of the third quarter cash restricted cash and investments of $508 9 million.
Operating cash flow was a strong $23 8 million.
And as Capex of $6 4 million free cash flow of about $27 5 million and the third quarter.
During the quarter the repurchase of approximately 15000 shares and an average price of $80 and 64.
On a total cash outlay of $1 2 million.
I would now like to turn to our guidance for the fourth quarter of fiscal year, 2020 one.
And it continues to be very optimistic about our business and anticipate another record quarter for revenue and profitability in Q4.
The I expect total revenue in the fourth quarter to be between 475 and $495 million.
And EPS to the in the range of $1 18.
The $1.25 per diluted share.
In summary.
And had our best performance ever in Q3 and are well positioned to continue our track record of success and we look ahead.
Operator, we are now ready to open the call for questions.
Thank you Sir.
As a reminder to ask a question and you would need to press star one on your telephone.
To withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
I show. Our first question comes from the line of John Marchetti from Stifel. Please go ahead.
Thanks, very much Seamus I, just wanted to clarify something on the on the Cisco business that you mentioned.
On your prepared remarks.
Are we at the full run rate now exiting the fiscal third quarter or do you expect to be there in fiscal fourth quarter I just wanted to make sure I have that correct and I and I heard you correctly when you were talking about that.
Hi, John and I think we're at the full run rates.
During the quarter, we ramped but of course, we're ahead of schedule.
On.
I think we I think it's safe to say, we're at the full run rates and at the end of the quarter. So I.
And I don't want to give the impression that there is going to be some meaningful uptake on of course, the that we don't guide on the customer by customer basis, but we're at the run rates and has been for the better part of the hub the quarter.
Got it and then I know it's.
Within the guidance, but I was wondering if you could just spend a moment on.
And maybe what youre seeing out there from a supply chain perspective, obviously.
A lot of different data points swirling around about where the supply chain and stands just curious.
And if youre seeing any material shortages that may be weighing on your outlook.
And if thats <unk>.
<unk> and any of the the demand profile of how youre thinking about maybe even as we get into the second half of this calendar year.
Yes for sure.
And we did see a certain amount of of shortages and Q3 and we.
We anticipate that they will continue in Q4 and thats been factored into our into our outlook.
We're not immune to these component shortages just like everybody else does the obviously has some component of crisis, either just behind us or just ahead of us cash.
Sales and capacitors before now and it's the semiconductor shortages right now.
We tried to stay very close of our customers. So that we're able to anticipate the demand and then the more visibility we can give to our suppliers the <unk>.
Better positioned we are to to support the.
But yes, we have seen the component shortage situation that has impacted us in the past quarter. We think it's it's impacted the whole industry, but it's part of our job as the management team to make sure we stay close to our customers and our suppliers on.
Proactively work on the issues, so that we get the customers what the need of nuts and not use the the components.
Choices as an excuse with ethics and such as part of its part of the normal business does all of the sum. It seems like these days is all of a sudden crisis. Just ahead of us of just behind US. So we've just learned to live with and I guess.
And then if I can just ask one more seamus just following up on that.
From the short or from that supply chain tightness is it a situation where.
Customers have started to give you a little bit more visibility trying to get ahead of some of that give you. Some sense of what they may need a few quarters out is it more limit your ability to maybe meet surprise upside in the quarter as opposed to meet play and demand just just curious how we should think about and impacting the business over the next several quarters.
Yes, I think youre right. So we are getting more visibility as best as our customers can give us visibility of the normal.
Excuse me the normal visibility that they would give us theyre going far beyond that now in order to allow us to position the the component inventory.
Of course that doesn't mean that we'll be forecasting on a revenue beyond the we continue with the one quarter of the time forecast, but our customers are giving us better visibility I would say so that we can give our suppliers better visibility and.
And making sure we meet their needs and meet their meet their upsides as well because even in the components. The current component situations. We have had examples where customers have still come in with upsides inside lead time and and already tightened situations. So.
So better visibility of our own from our customers to us and then and turned for most of the supply base.
Helps alleviate the problem, but it doesn't make it go away.
Great. Thanks Seamus.
Thanks, John.
Thank you.
Our next question comes from the line of stomach strategy from J P. Morgan. Please go ahead.
Hi, good afternoon, and thanks for taking the question.
I guess the statements I wanted to start off with the optical segment.
And if I heard you.
On the prepared remarks correctly, you mentioned the the 400 gig growth was about one both of them sequentially lower than what you saw in 100 gig. So I just wanted to get it.
And that I heard it correctly and what's the driver there and also generally what we're seeing and the rest of the optical landscape, particularly in light of telecom.
Revenue was we are seeing more of an expectation of flow back.
Back half of the kind of into your kind of ramp given the demand coming from telco customers. So given that you. Just mentioned you have more visibility now into the back half of the kind of and the U I just wanted to get your thoughts on what are you seeing are you expecting more of us sequential ramp as you go through the rest of the calendar year.
And the insights into that would be helpful and I have a.
All of us with.
Yes, so I will.
Hopefully I will let <unk> give the detail on the 400 gig versus the 100 gig at the moment, but.
Yes, the the visibility we have from the customers is really more from the point of view of.
Allowing us as I mentioned earlier, allowing us to position component supply to support the demand that's there.
We're not using it to forecast revenue out and the second half of the year on things like that.
And then I'll, let Java.
<unk> answered. The question you had on the growth and 400 gig versus 100 gig.
Hi, Tom This is John yes, so and our 400 gig, we still had hour and a record revenue and the sequential growth was indeed, 1%, we shipped about $105 million and 404 hundred gig so the.
The data rate is still ramping obviously and the 100 GB.
A little bit sequence of events.
The increase however, and at scale.
Lagging behind our highest.
Revenue and the 100 gig category, which was about a year ago of $160 million.
Obviously, we don't really have a crystal ball, how how does the decline of the 100 gig and ramp of the floor.
<unk> is going to happen, but we remain optimistic in the medium to long term 400 G.
Brian is going to continue to accelerate more rapidly. So I would say, it's kind of a dynamic situation and there is definitely a shift between and under the 400 400 gig. Therefore, I wouldn't read too much into one quarter of sequential increase or decrease though I think it's going to take care of couple of quarters two to taper off.
And and see how the true.
The true picture on on the one.
100, 400, and Youre going to play out.
Got it.
Just if I can quickly ask you guys on the just wanted to focus on the automotive segment as well and then you had strong growth there.
And the new platforms that are launching on driving the growth.
Much of that is the traditional use cases that you might have supported with I think some of your customers like value versus some of the mode of light customers that you're supporting and.
Also when I think of what the competitive differentiation and automotive Lidar and just wanted to get your and insights should I be thinking about the competitive differentiation and the manufacturing to being very similar to the differentiation you already have and optical.
Sure.
Given the how the industry is evolving there do you see the competitive differentiation being higher or lower in terms of being a contract manufacturer for the industry.
Yes, so I think some legal questions. There. So first of all on the let's say the split between traditional automotive and what we call on your automotive programs. The vast majority of the growth.
The stuff, we're seeing is on the neuro the motor programs. So.
On the electric vehicle platforms, and later on and the like.
The the traditional business, it's good business, but it doesn't have the same level of growth, let's say, it's maybe a little bit more flat and.
And then the zero the more appropriate and so the vast bulk of the growth. We're seeing is on the the new automotive programs in terms of the the capability the differentiation, yes, absolutely we feel.
And I guess, it's not just of something we feel is something our customers tell us.
Is that our manufacturing capabilities.
Capabilities are very well suited to their needs and their very first of all of the very complementary to what we're doing in the in the optical space in terms of how the private school together at the same level of.
Of.
Difficulty lets say of putting these products together some of the same processes and putting these products together. So so what we've learned over over all of these years and putting these optical products together.
And as very complementary to the lighter the lidar products and our customers tell us that and they tell us that we are developing the reputation among the the day certainly made our customers for being.
Really goes we want to be the same way that we feel were.
And where they the go to supply and if you like and the optical space, we want to develop let's say and reputation and the lidar space and we think we're developing the us so.
Yes, so very much of a complementary set of capabilities complementary to our optical and capabilities.
Okay, great. Thank you thanks for taking my questions.
And thank you syndicate.
And the thank you.
I share. Our next question comes from the line of Alex Henderson from Needham. Please go ahead.
Thank you.
First of all of a great quarter and the thanks for the good guide.
I was looking at the industrial laser business and trying to understand the mechanics.
And the implications of the change in the ownership of one of the larger players.
To what extent you think.
That has an impact on the one way or another or do you think it's a positive negative or neutral.
In terms of that change of ownership.
So I guess, it's early days Alex and.
Coherence is of course is also a customer of fiber and that's.
Uh huh.
And really well against all of the company's effort involved and and the situation there.
So far it's early days, it's hard to tell at this stage, but.
Historically, we have not lost business through industry consolidation, let's put it that way and typically we have tended to benefit from industry consolidation.
We did notice that the.
The $2 six and Theyre.
Public statements they have announced some pretty significant synergies that there that the leading to find so we'd like to do.
We kind of to help them find those gross synergies of course, we think we can we can help them find those synergies. So we'll be working with them. When the time is right. It's too early at this stage the Havent got approval for the deal yet.
And certainly we are.
And I guess, we're excited about is we're looking forward to two of engaging when the time is right but.
We don't and we never have had a preference as to which company would have been better for us to have acquired.
We're happy to work with everybody.
The other than the transaction for you that.
Probably brings more business to you as a result.
Sorry, Alex and this is the first part of your question there.
So it's a positive transaction and general for you and you think it will probably bring more business to you as a result.
As I said, we set the stage, we don't know it's already it's it's really too early to say.
But we are optimistic we think we can we think the can help too.
And we'd certainly be and happy to do our parks to help them realize the synergies and lead to the need to realize but its very early days yet to be trying to predict whether it's.
Its positive negative or neutral for us.
Okay.
Okay.
Goodbye.
Yes.
The.
Again, most people's thinking.
And the magnitude of the impact and.
Right.
Alex you order.
Youre cutting and announced Alex we're having difficulty hearing you maybe if you could.
If you want to dial back and from a different line of Wil.
We'll jump you're back and and at the end of the next question. If that's okay. We just kind of area right now.
Alright. Thanks.
Thank you.
I show the next question and the queue comes from the line of David Kang from B Riley. Please go ahead.
Hey, guys. This is Danny on for David.
And congrats on the quarter.
Thank you, yes, and yes I was just wondering if you guys could provide any color on.
The demand from certain of your gearing if I'm thinking more.
From North America, and China as Photonics noted that demand from there might be muted for the next quarter. I was wondering if you guys are seeing that impact as well and how you guys are thinking about that.
Yes, so we don't usually of great visibility into let's say the.
We know who will be shipped the products to but ultimately where they're destined for we don't always have great visibility because as you can appreciate we shipped to our customers and then day ship on to their end customers and in some cases, we ship product to our competitors, who maybe do something with it and then ship it onto our customers who ship it on to their customers. So we don't have a great feel.
For the end markets. If you like we know where we shipped the products to and we just flow to us, but the end markets. We don't have great visibility into the into the us and create.
Okay got it and I guess on the Cisco ramp and you mentioned the potential for expansion and I was just.
Are you guys have any having any conversations that are particularly encouraging of plate for the Cisco program were expansions with other customers.
Yes, I think what we mentioned was the.
The Cisco as an example of as was the Infinera maybe before it on.
Of the type of execution, we were able to deliver for our customers the fast transfers and obviously the savings and the supply chain and simplification that we're able to to realize from our customers and.
And then I think we talked about the opportunity with near the other customers and the similar and dissimilar right. There's lots of other other Cisco like companies. If you like out there that we feel we could do a similar job for.
Of course, where all of us and discussions with all of our customers, including Cisco about expanding the relationship and you know so far.
Touch wood the.
And the transfer of the of the optical transport transport business has done very very well and we're very happy with us.
And when will Cisco of very happy with that so we'll be we'll be looking to to really capitalize on that and grow our business as best we can with Cisco with Cisco, but also with other other.
The other customers.
Okay got it thank you and I appreciate it.
Thank you Danny.
Thank you.
As a reminder to ask a question at this time. Please press star one on euro touched on telephone.
Yeah.
I show. Our next question comes from the line of Alex Henderson. Your line is open. Please go ahead.
Alex Henderson of Needham Your line is open and please proceed great.
It was just hitting the star one when you said the name of it was true you'd asked.
If I heard of re dialed in on the different line and I Hope you can hear me okay.
David Thanks for dialing back the.
And I hope you didn't miss it and the last question that happened, while I was re dialing in but.
I was hoping you could go back to the supply chain and talk a little bit about mechanics of the.
Change and supply conditions obviously.
You have.
Job of managing through it but it seems pretty clear that.
Mr. Everybody. We've talked to has suggested that the supply chain pressures have built over the course of the first quarter and into the current quarter and our worst and the second quarter than they were and the first quarter could you describe whether youre seeing a larger impact that youre absorbing and <unk> or <unk>.
Are you absorbing a similar impact.
And is it a function of the supply chain.
Chain is now just simply constraining the upside to the numbers.
And then I would hope you just explain to me how are you getting potentially down the EPS sequentially.
And given you have almost always had up sequential EPS from C Y <unk> to see why <unk> why is the low end of the band below what you reported and one Q is that of function of the supply constraints or some other element.
And within the mix.
And as to the typical pattern.
And.
Thanks, Eric So I'll, let Charles talk at the moment about the EPS outlook, but just on the supply constraints, yet I think.
We're experiencing the same.
Excuse me the same supply constraints and really everybody else is experiencing.
And I would say it did guess.
Worse in calendar Q2 of our Q3.
I think we've become pretty good of two things one is managing through those type of situations those type of of supply constraints that seem to hit us from time to time by working with their customers on working with the suppliers and also.
And we're pretty adept to think of factoring it into our guidance. So.
We don't break it out separately, we see it is our goal really is to take it all into account and use our best judgment when we set the guidance to factor it and Thats. What we did in Q3, that's what we did if you go back a year and a half two years ago. When we had the MLC shortages and Thats what were doing for Q4, we've taken the.
The short term situation into a into account of the constraints into account when we set our guidance, but I think certainly I think everyone would agree were it not for these constraints there was more demand there and then can be supplied right now.
Not for this component constraints.
Okay. So Alex let me clarify on the EPS so.
The number the guide is $1 18.
And the low end of it.
He had.
Actually it's in the lower than what we had posted for the fiscal Q3, we had about <unk> <unk> tailwind in Q2 from foreign exchange rates and our.
Our actual numbers, which we typically don't put and the guidance. So that explains about the two cents from the guide and also the the lower band of the revenue guidance $4 75, and the finished at $4 80, So that's about <unk> volume from sequential improvement.
But again job and normally you are never down sequentially from the seasonally weakest first quarter calendar to the seasonally stronger second quarter is there something going on that is that's the function of the supply constraints.
Okay.
The supply constraints out of basically baked into our numbers, but again the biggest part is based on actual numbers in Q3, which was the adobe the.
FX of about the sense.
I'll cede the floor. Thank you.
Thanks, Phil.
Thank you.
That concludes our Q&A session at the time I would like to turn the call over to Mr. Seamus Grady the CEO for closing remarks.
Thank you operator, and thanks, everyone for joining our call today, we delivered the very strong third quarter with record revenue and EPS and.
And we expect to continue positive demand trends.
The continued positive demand trends to help us produce another record quarter and Q4, culminating in our best fiscal year ever.
And we continue to execute on our strategy. We believe our business remains well positioned to continue delivering positive results over the longer term. We look forward to speaking with you again soon goodbye.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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