Q1 2023 Fabrinet Earnings Call

November 7, 2022

Okay.

Yeah.

Good afternoon, welcome to Fabry <unk> financial results conference call for the first quarter of fiscal year 'twenty to 'twenty three.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions on how to participate will be provided at that time.

As a reminder, today's call is being recorded.

I would now like to turn the call over to your host Garo its in Virginia.

The Pea of Investor Relations.

Thank you operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabulous financial and operating results for the first quarter of fiscal year 2023, which ended September 32022.

With me on the call today are Seamus Grady, Chief Executive Officer, and Cabot's Ferrar Chief Financial Officer.

This call will be webcast and a replay will be available on the investors section of our website located at Investor <unk> fabric Dot com.

During this call we will present, both GAAP and non-GAAP financial measures. Please refer to the investors section of our website for important information, including our earnings press release, and Investor presentation, which include our GAAP to non-GAAP reconciliation.

In addition, today's discussion will contain forward looking statements about the future financial performance of the company.

Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations.

These statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise them in light of new information or future events.

Required by law.

For a description of the risk factors that may affect our results. Please refer to our recent SEC filings in particular, the section captioned risk factors in our Form 10-K filed on August 16 2022.

We will begin the call with remarks from Seamus in Charbagh, followed by time for questions.

I would now like to turn the call over to carbonate CEO , Jim It's great.

Thank you Garo.

Everyone. Thank you for joining us on our call today.

Off to a strong start in fiscal 2023 with first quarter results that exceeded our guidance.

Total revenue was $655 $4 million with a better supply situations than anticipated, which contributed to our strong performance.

Revenue increased 21% from a year ago or 17% when we adjust for the contribution of approximately $20 million.

Due to the 14 week quarter in other words revenue would have been $20 million lower if not for the additional week.

Demand remains strong across the board with sequential growth from nearly all the end markets that we serve.

Supply for some automotive components saw relief in the quarter, resulting in a supply headwind to revenue that is only about half of the 25 to Turkey millions.

We had anticipated.

We also executed well to produce non-GAAP operating margins of 10, 7% consistent with our record fourth quarter on a full percentage point higher than the prior year revenue.

Revenue upside and strong margins helped drive non-GAAP EPS of $1 97.

Looking at the quarter in more detail, we delivered a record quarter for both optical communications and automotive revenue, even after considering the extra week in the quarter.

In the second quarter, we expect to start seeing optical communications revenue further supported by our new partnership with Dcs, a global leader in access networking infrastructure service assurance and consumer experience software solutions.

Through our partnership Dcs will transition sourcing procurement fulfillment and manufacturing activities.

Seminole, Florida facility to furnace.

We believe this new systems win has the potential to be a significant contributor to our growth when fully ramped.

Turning to non optical communications, we had an especially strong quarter.

Automotive revenue was up more than $30 million or more than 50% sequentially as improved component availability allowed us to capture more revenue than anticipated in the quarter.

Overall demand from our customers remains very strong, which makes us optimistic about our future.

Supply constraints remain a limiting factor on our growth we continue to focus on managing supply conditions as effectively as possible.

From a capacity perspective, we are very well positioned to serve increasing demand.

Last week, we held an official ribbon cutting ceremony for building nine of our Chonburi campus having.

Having approximately 1 million square feet of space.

While we are maintaining our practice of letting our customers take the lead and announcing relationships. We're very pleased with the early demand and traction building nine.

Looking at the second quarter, we remain optimistic that strong demand trends will continue to drive growth both year over year and sequentially. After factoring the additional week in the first quarter we.

We also remain confident that we can continue to realize incremental operating efficiencies as revenue grows faster than expenses and.

In summary, we had a strong first quarter with results that exceeded our guidance. We are optimistic about continued demand in our markets and we're well positioned to extend our track record of success as we look ahead now.

Now I'd like to turn the call over to <unk> for additional financial details on our first quarter and our guidance for the second quarter of fiscal 2023 Trevor.

Thank you Seamus and good afternoon, everyone.

We delivered strong first quarter results that were above.

Above our guidance ranges revenue in the quarter of about $655 4 million and represented a strong year over year and sequential growth even after backing out the approximately $20 million contribution from the additional week in the first quarter.

And excellent execution, we've done delivered our best ever non-GAAP gross and operating margin for the first quarter.

The strong margins combined with foreign exchange tailwind and higher interest income Regulus record non-GAAP earnings per share of $1 97.

Which was 18% above the high end of our guidance range.

Look again the revenue in more detail optical communications revenue was $497 $6 million.

Note that growth comparisons to prior periods should be adjusted by the additional week in Q1 monthly believed that optical communications revenue would have been up both sequentially and from a year ago, excluding the impact of the additional week.

We then optical telecom revenue was a record $404 $9 million.

Data comm revenue was $92 $7 million.

By technology Silicon Photonics revenue was $138 $9 million, an increase of 3% from a year ago and decline of 8% sequentially.

The sequential decline is primarily due to approximately $15 million revenue that's had shifted from Q3 due to alternative far Triple litigation.

Although datacom business tends to be more variable on a quarterly basis and continues to be impacted by supply chain headwinds, we anticipate that our datacom revenue will increase sequentially in Q2.

Revenue from products rated at speeds of 400 gig or more was $195 $2 million.

Up from a year ago as well as sequentially.

Revenue from 100 gig products remained stable and was $139 $6 million up modestly from a year ago, but down sequentially.

Non optical communications revenue was very strong in the first quarter at a record $157 $9 million and represented 24% of total revenue.

Growth in non optical communications was driven primarily from our tortilla revenue of $86 eight.

$8 million.

Up 80% from a year ago and up 55% from last quarter.

During the quarter, we took advantage of availability of components that had been in short supply, enabling us to deliver meaningful growth.

On the component supply environment remains challenging and May result in declining automotive revenue in Q2, we anticipate the strong demand we have produced healthy year over year growth.

Industrial laser revenue was $35 4 million.

Down 5% sequentially, but remaining stable at a longer term trends.

Other non optical communications revenue of $35 7 million.

As I discuss the details of our P&L expense and profitability metrics provided on a non-GAAP basis, unless otherwise noted.

A reconciliation of GAAP to non-GAAP measures is included in our earnings press release, and Investor presentation, which you can find in the Investor relations sections of our website.

We executed very well in the first quarter to produce particularly strong gross margins for the first quarter at 12, 9%.

Below our fourth quarter performance.

We achieved these strong results. Despite the headwinds from annual Merit increases, which were largely offset by increasing efficiencies and continued foreign exchange tailwind.

Operating expense in the quarter of about $14 7 million or two 2% of revenue.

This produced operating income of $70 million or 10, 7% of revenue.

This performance represents our ninth quarter in a row are generating record operating income.

As a reminder, divest majority of our revenue is in U S dollars as are the majority of material and component costs.

However, a significant portion of our labor and operating costs and Thai baht.

Through the cash flow hedging program, we have been following for many years, we are able to enhance our visibility and smooth out the impact of foreign exchange fluctuations over time.

Nevertheless from time to time people would see a larger impact as a result of currency revaluation of balance sheet items and in Q1. This resulted in $2 $1 million or six cents per diluted share foreign exchange gain.

The current interest rate environment combined with our strong balance sheet contributed approximately $1 2 million or approximately <unk> <unk> per diluted share.

non-GAAP net income of $72 $4 million or $1 97 per diluted share, which is another quarterly record and was above our guidance range.

On a GAAP basis net income was $1.76 per diluted share.

Effective tax rate was one 1% in the first quarter.

For the year, we anticipate an effective tax rate in the low to mid single digits consistent with our phase III.

Turning to the balance sheet and cash flow statements at the end of the first quarter cash cash equivalents and restricted cash that $499 $9 million up $21 $4 million from the end of the fourth quarter.

Operating cash flow of $66 million with Capex of $10 $3 million free cash flow was a quarterly record at $54 million.

In fiscal year, 2020 three we will continue to execute on our plan to return surplus cash to shareholders.

During the first quarter <unk> purchased approximately 47000 shares for a total cash outlay of $4 $9 million.

Approximately $95 million remains in our share repurchase authorization.

Now I will turn to our guidance for the second quarter.

They continue to be optimistic about demand across our business as well as our ability to effectively manage supply constraints.

The component supply environment, so specific buckets of relief in the first quarter.

And we continue to expect improvements overtime.

This supply headwinds continue to persist in many areas of our business.

As such our Q2 guidance assumes the supply chain has been.

Of $25 million to $30 million.

For the second quarter, the anticipates revenue in the range of $640 to $660 million.

This represents both year over year and sequential growth.

After backing out the contribution of approximately $20 million from the additional week in the first quarter.

We anticipate non-GAAP net income to be in the range of $1 86.

<unk> to $1 93 per.

Diluted share.

In summary, our first quarter results provided a strong start to fiscal year 2023 is record revenue and earnings which both exceeded our guidance.

With continued favorable business conditions, we are optimistic that our track record of success it extend into the second quarter.

Operator, we are now ready to open the call for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone to ask a question. Please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Alex Henderson of Needham. Please go ahead.

Thanks.

Just a little clarity.

Art off with on the supply chain comment.

So.

And $30 in the automotive.

Impressive improvement, but I guess.

To a large extent most of the people falling carbon around a more focused on the optical side did your supply chain improve on the optical side.

If I can take the $30 million out of the.

Out of the revenues.

In line.

With our prior forecast.

Yes, Hi, Alex.

Yes, we can.

Called out the improvements on the automotive and just to just to remind our automotive businesses made up of.

The improvement was in the new automotive business, which is made up of.

Electric vehicles and answer later.

We hope to see some improvement it's too early to declare victory yet because we have started to see some improvement there and I think what's particularly encouraging for us is.

Specific component charges get cleared we're seeing that demand that we've been we've had some pent up demand let's call. It for some time once those component charges are here, we can see the revenue impact is almost immediate.

So.

This past quarter. The most of the the biggest part of the impact was on automotive some on the optical side as well, but mostly on the automotive side and as soon as we cleared those.

<unk> that have been plaguing us take a closer to everybody else for some time it is converting to revenue very quickly.

So does that imply that the majority of the.

Number that you threw out I think it was $25 million to $30 million.

Supply constraints in the quarter has a shift in the mix to more optical supply constraints and maybe less auto supply constraints have been how.

How do we measure how do we think about that.

Yes, so last quarter, you I think that'd be fair way to look at some of the most of the constraints were on the optical side.

I see.

Just going back to the.

The baseline businesses.

Dave.

A fair amount of granularity.

On the outlook.

Could you talk about what you think the Datacom and telecom.

400 gig.

Silicon Photonics are going to do on a year over year basis, since we have that extra year confusion.

Okay.

How do you expect those to behave.

Year over year, as opposed to quarter to quarter or adjusted for the quarter to quarter. If there's some way to do that.

Highlights this is Trevor let me take that one.

I think you meant to say extra week, we had in Q4, rather than an extra year. So.

Alastair.

I misspoke.

Alright, so our silicon photonics has been very strong both sequentially and on quarter on quarter.

On a year on year basis as well so we continue to see 400 gig growing.

The primary driver of that the earlier spelled out was driven by 400, ZR, which came off from <unk>.

Low base, obviously this year, we continued to see very strong demand in that space. So both silicon photonics.

And obviously the higher data rates remained very stable, even though on sequential basis youll see slight.

Slight decline in Silicon photonics revenue, but that has to do with 15 million extra revenue that we had in Q4 from a prior quarter. So overall, we are very optimistic about both silicon photonics and the higher data rate businesses that are coming down the track both on telecom and Datacom as well and again the year on year growth was primarily driven by a four.

ZR, which remains very strong class.

Yes, I was really talking about in the guide for the fourth quarter, whether you thought datacom and telecom would grow on a year over year basis.

Any calibration of that within the.

The guide does just what I was looking for.

So we anticipate that the higher data rates will continue to grow so.

In the prepared remarks, I mentioned that our Datacom business remains very strong although some of the supply constraints there mostly.

In our Datacom business again, those supply headwinds are still ahead of us, but we are very optimistic about.

The growth rate that we do anticipate probably slightly higher growth rate in datacom.

Going into the next quarter.

Subject to supply constraints.

And telecom.

I'm sorry.

And what about telecom.

Telecom also continues to be strong again, that's impacted by supply constraints, but we do anticipate that to continue to grow yet.

Again.

Demand is holding very strong and across the board.

The caveat here is still <unk>.

Although the goods from supply perspective is to have about $25 million.

Baked in our our guidance, so thats, mostly across the board.

Subject to those supply constrained, we do anticipate both segments of our business to grow.

Okay. Thanks, Paul single floor.

Thanks, Alex Thanks, Mike.

Thank you our next question.

Comes from the line of semi challenging of Jpmorgan. Please go ahead.

Hi, Thanks for taking my questions and congrats on the strong Q.

I guess I had a couple so I'll just.

Cool.

One if you can talk a bit more about the DC.

Must win.

And I know you said.

Such ramp up in the fiscal second quarter.

How to think about the contribution from that business on a key win for the yield.

Do you see that opportunity being in the long run maybe if you can give some more color around that please.

Second one sort of quick.

Just your fiscal first quarter revenue for the extra week, the $20 million that you said and I think still the sequential growth.

Got you.

Implying at the midpoint of your guide going into Q is a bit softer than what we saw you sort of execute on the last couple of years. So I'm. Just wondering if you can talk to the sustainability of the non optical revenue in the border.

Is it that you had supply improvement and pull through a lot of backlog, which is somewhat limiting the sequential improvement that we see obviously continued.

Growth that we see going into Q.

Any questions. Thank you for taking the question.

Thanks, Lisa and thank you for the comments.

I'll take the first question around <unk>, and then I'll turn it over to Jamba for the question about the outlook.

Yes.

<unk> business.

As you know we don't size specific deals, but this is a meaningful program.

The transfer of production from Dcs is seminal facility in Florida to our facilities in Thailand.

It's.

It's part of our strategy, we continue to execute our strategy to add selective complete network system business.

We have a good track record of that though over the last with the last couple of years.

In this case, we're transferring from high cost high cost location to a low cost location.

Again with the meaningful revenue upside, we're not going to size it but it's a meaningful revenue upside and it really is a perfect fit with our strategy and capabilities and our track record of.

Executing transfers very.

Effectively and efficiently and allowing our customers to realize savings quickly.

<unk>.

Dcs has other manufacturing capabilities. So this represents a portion of their production.

But it is a meaningful deal that we're proud to have won we worked hard to win this deal with competition was strong we believe and we're very very happy to have been awarded business and look forward to engaging with Dcs to transfer production.

And again it reflects the overall opportunity in the system space.

We've been very optimistic about it and I think we've proven to be effective you.

If you go back to the Infinera accordion to win a few years ago and the Cisco business at a transfer to statistically the third let's call it meaningful or significant.

<unk> network system wins that we've had in the last few years.

So I think this is Chuck.

The guidance section on the growth part of it. So as you mentioned if you back out the extra $20 million from our Q1 revenue.

Year on year, you would see about 17% growth.

In Q1 versus last year, and our guidance at the midpoint for Q2 of course for about 15% growth on year on year basis again as a reminder, in Q1, we saw significant improvement in supply availability, so that explains a little bit higher growth rates.

Then what you anticipate in the Q2 guidance. Nevertheless, again, if you go back to the supply headwind commentaries I had.

We baked in about $25 million to $30 million supply headwinds. So overall I think.

Our growth rate is and has been consistent with our longer term plans of about 15% growth rate.

And I don't see any any major change in the trajectory of the demand environment. We are still operating in a supply constrained.

Area. So that's one of the reasons why.

Cautious about the guidance.

She is still very strong 15% on a year on year basis.

Got it. Thank you thanks for taking my questions.

Thank you Susan.

Thank you.

Again to ask a question press Star one one at this time.

Next question comes from the line of Fahad Mahjong of loop capital. Please go ahead.

Hey, Thank you for taking my question.

I'm still trying to get my head around.

<unk>.

Your comment about improved supply chain, if my math is correct the automotive revenue.

Move quite intensively volume more than.

The entirety of the supply chain headwinds that you've talked about.

It that the automotive supply improved in the optical communication supply chain worsen.

Can you just help us understand maybe quantify a little bit more.

So I think the I think the.

The non automotive or the optical.

Performed pretty much in line with our expectations.

But automotive did improve better than we had anticipated.

And we were able to convert those it's a handful of components that have been in short supply for some time once they once they became available we were able to convert that kind of pent up demand into revenue quickly.

I think the revenue on the on the optical side of the business was pretty much in line with our expectations.

I appreciate that so.

Given that there is a massive backlog of the automotive.

Sure.

Segment for you how should we be thinking about growth in the automotive space It seems like.

Your commentary.

Optical communications supply remains challenging, but how is it looking out for automotive and how should we be thinking about automotive revenue throughout the rest of the year.

I think it remains challenging.

The entire business.

I think we got a couple of breaks let's call. It in the automotive business with the supply situation remains challenging across the board if anything.

The breakthrough we had in automotive last quarter, but it's what it demonstrates we take is I know theres been a lot of concern about is the demand is there double ordering going on but we've been seeing is as the component availability clears that demand is converting into revenue immediately. So the demand is there the demand is real we believe.

But the supply constraints continues to be challenging across the across the board I wouldn't see it as regularly.

After an automotive or.

Better or worse in optical.

It's similar across the board.

Got it and then one last question for me.

And then I'll hand, it over to the floor.

And building nine how much of the square footage is now hoping for.

Yes, we don't report that.

Metric.

Perhaps.

We had the opening ceremony there last quarter.

We're very happy with Im sorry last week and last week the opening ceremony.

And I'm actually in Thailand, right now I was here for the for the opening ceremony.

We're very happy with the progress there with a number of customers, but we're not going to be.

Zero communicating metrics like occupied spoken for both sets of metrics because they don't really mean, a whole lot other than to say the vast bulk of the growth.

We'll be we'll be over the next while will be will be in the building nine locations. Our pinehurst facility is more or less at capacity.

Building Asus at capacity so.

The growth.

The next slide we will be building $9.

But I would say.

We're very happy with the progress there.

If I recall I think last quarter you guys said you had two anchor customers building nine.

Anything else even for one customer describe how much better is getting.

Well, we have yes, we have to.

Two anchor customers, we have other customers, who we are.

We're actively working with nothing nothing to announce yet proactively working with.

To get capacity set up there and again a lot of the new business that we talked about like for example.

The Dcs.

It's absolutely ramping and building night.

So most of the growth as I said there'll be there'll be exceptions here and there where for the most parts. The majority of the growth for the next one will be ended the night.

I would say if I excuse me if I compare it to maybe.

Maybe if I can answer it this way if I compare the.

Let's say the rate of expansion the rate of revenue growth that we envisage had building nine.

Which again just to remind us of 1 million square foot facility.

If I compare it to where we were at the same period.

And bill the Ace it back in.

2016, 2017 abilities I think the raises which we will grow <unk> nine Turkey right now it feels it feels faster because railroad. We opened building as this was our first facility our first factory and the new campus in Chonburi. There was a certain amount of the reluctance on the part of customers to be the first ones to go there. So there was a little better.

<unk>.

But now we're five years down the line that building is full and from the customers point of view. They don't really differentiate between building is we're building 90, so all of the Chonburi campus.

Its fully ramped it's going very very well, so I think our the.

Willingness of our customers to ramp and building <unk> is completely different to what we had five years ago <unk>. So we feel we feel very good about our ability to grow.

Business submitting nine quickly.

I appreciate the color Shimon.

Thanks, Ed.

Thank you.

Thank you. Our next question comes from Alex Henderson.

Of Needham <unk> Company. Please go ahead.

Great. Thanks.

So just wanted to dig into the interest line in the FX line.

So when you look at the guidance that you gave for the December quarter, I'm, assuming that $2 million.

FX falls out of it.

Actively back towards towards zero.

And similarly, if I look at the interest line Im thinking with interest rates going up.

Yes.

Certainly here, but probably on a global basis and I assume that you've got a.

Short term orientation tier current.

Massive cash balances should we be expecting the interest income line to go up.

Well the FX.

Zero out.

Hi, Alex.

Yes, Matt on the FX is probably right, we typically don't guide.

Evaluation below the line FX.

Lines. So we.

As with the allies, the actuarial evaluation that will flow to the bottom line and the actual basis on interested the elevated interest rates, obviously are going to translate to a higher interest income for us.

The trend has been going on in the last couple of quarters. So obviously, you can see that picks up in our interest baseline.

With our strong balance sheet and cash balances, we do anticipate a strong contribution going forward. So again to simplify your question FX out interest rate.

To continue to contribute.

Just going back to the interest rate line its up about $1 million sequentially is that predominantly a result of that.

The change in interest rates or is there something else going on there and should I be thinking of that rate of increase is what you are likely to do over the next two to three quarters on a sequential basis given.

Rates are up.

In the U S 4%.

Which.

Any big increase on your cash balances would think that that would have a pronounced impact on interest income can you just kind of some sense of what the trajectory over time it looks like there.

So yes indeed.

The incremental sequential increase in an.

Our interest income has the ability to increase the interest rates. So again, we don't like to speculate how is that going to work out in the future, but indeed, we have a very strong balance sheet and.

We do anticipate that to be a meaningful contribution as we look ahead.

But youre not really speculating if you're just assuming existing interest rates.

No further guidance, whether that magnitude increase that we saw quarter to quarter is at least the assumption used in the December quarter.

I'd like to stick to our core business. When we gave guidance out then I mean, the interest rates on the exchange rate as a side commentary. So I wouldn't go into further details in terms of guiding interest rates.

Okay.

I just wanted to go back a little bit into the other areas.

Have you seen any.

Change in the demand as a result of.

Your ability to supply the.

The auto segment.

So with $30 million extra shipping there could be tumor responses. One voyage. It's got all the stuff I wanted to Wow I got what I wanted to hear some additional orders because if you can get more I'd like more.

Rich.

Good certainly play into your backlog. So can you talk a little bit about whether what happened when you delivered that business to that segment.

I think Alex.

Sure.

It Hasnt resulted in really any change in the demand demand is just very strong.

It really is a case of once we get the components.

That pent up demand into revenue.

Get a chip.

We've had we've had strong backlog in really all of the markets we serve automotive in particular.

And in this case once we were able to share that components are a couple of components, we were able to very quickly converts to revenue and get it out the door.

But no. It hasnt resulted in additional demand I think the demand is already very strong we'll be happy if the demand remains and just converts over time as we as we are able to.

We'll get a breakthrough on these component shortages.

And just to be clear when you talk about your backlog.

Youre not taking into account.

<unk>.

I don't remember what the number was won't get we'll get an update there on tomorrow with momentum, but I think there was something like $75 million with a backlog there.

That's not taking into account the one point.

$4 $4 billion backlog at Sienna, none of that's factored in correct.

Yes, we don't actually talk about our backlog Alex.

We don't size. It we don't really talk about our backlog other than to say, it's it's very strong and we have we have visibility for much further out than we would normally have because of the component supply situations backlog is very strong, but we don't actually actually sizes.

And then trying to foot how much of momentum is backlog is included in our backlog and what you'll see and as we we don't know if we just go by the demand that we get from our customers. We don't try to round. It works with the numbers that youre projecting to the streets from Chris.

I appreciate your time thanks.

Thanks, Alex.

Thank you at this time I would like to turn the call back over to Seamus Grady for closing remarks.

Sure.

Thank you for joining our call today, we're off to a strong start in fiscal 2023 with first quarter results that exceeded our guidance ranges.

We executed well to deliver strong margins, despite seasonal headwinds, which increases our confidence that we can continue to deliver strong performance. As we look ahead. We look forward to speaking with you again and seeing those of you who will be attending the Needham Conference next week Goodbye.

This concludes today's conference call. Thank you for participating you may now disconnect.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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Good afternoon, welcome to <unk> financial results conference call for the first quarter of fiscal year 2023.

At this time all participants are in a listen only mode.

Later, we will conduct a question and answer session and instructions on how to participate will be provided at that time.

As a reminder, today's call is being recorded.

I would now like to turn the call over to your host Garo <unk>.

<unk> of Investor Relations.

Thank you operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Cabernets financial and operating results for the first quarter of fiscal year 2023, which ended September 32022.

On the call today are Seamus Grady, Chief Executive Officer, and Cabot's Ferrar, Chief Financial Officer.

This call will be webcast and a replay will be available on the investors section of our website located at Investor <unk> net dot com.

In addition, today's discussion will contain forward looking statements about the future financial performance of the company.

Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations.

These statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise them in light of new information or future events.

Required by law.

For a description of the risk factors that may affect our results. Please refer to our recent SEC filings in particular, the section captioned risk factors in our Form 10-K filed on August 16 2022.

We will begin the call with remarks from Seamus in traveller, followed by time for questions.

I would now like to turn the call over to carbonate CEO Seamus great.

Thank you Garo good afternoon, everyone and thank you for joining us on our call today.

We're off to a strong start in fiscal 2023.

With first quarter results that exceeded our guidance.

Total revenue was $655 4 million.

With a better supply situations than anticipated, which contributed to our strong performance.

Revenue increased 21% from a year ago or 17% when we adjust for the contribution of approximately $20 million due to the 14 week quarter in other words revenue would have been $20 million lower if not for the additional week.

Demand remains strong across the board with sequential growth from nearly all the end markets that we serve.

Supply for some automotive components saw relief in the quarter, resulting in a supply headwind to revenue that is only about half of the 25 to <unk> we.

We had anticipated.

We also executed well to produce non-GAAP operating margins of 10, 7% consistent with our record fourth quarter and a full percentage point higher than the prior year.

New upside and strong margins helped drive non-GAAP EPS of $1 97.

Looking at the quarter in more detail, we delivered a record quarter for both optical communications and automotive revenue.

Even after considering the extra week in the quarter.

In the second quarter, we expect to start seeing optical communications revenue further supported by our new partnership with Dcs.

Global leader in access networking infrastructure.

Service assurance and consumer experience software solutions.

Through our partnership <unk>.

<unk> will transition sourcing procurement fulfillment and manufacturing activities.

Seminole, Florida facility to furnace.

We believe this new systems win has the potential to be a significant contributor to our growth when fully ramped.

Turning to non optical communications, we had an especially strong quarter.

Automotive revenue was up more than $30 million or more than 50% sequentially as improved component availability allowed us to capture more revenue than anticipated in the quarter.

Overall demand from our customers remains very strong, which makes us optimistic about our future.

Supply constraints remain a limiting factor on our growth we continue to focus on managing supply conditions as effectively as possible.

From a capacity perspective, we are very well positioned to serve increasing demand.

Last week, we held an official ribbon cutting ceremony for building nine of our Chonburi campus, adding approximately 1 million square feet of space.

While we are maintaining our practice of letting our customers take the lead and announcing relationships. We are very pleased with the early demand and traction building nine.

Looking at the second quarter, we remain optimistic that strong demand trends, which continue to drive growth both year over year and sequentially. After factoring the additional week in the first quarter.

We also remain confident that we can continue to realize incremental operating efficiencies as revenue grows faster than expenses and.

Now I'd like to turn the call over to Charva for additional financial details on our first quarter and our guidance for the second quarter of fiscal 2023 Trevor.

Thank you Seamus and good afternoon, everyone.

We delivered a strong first quarter results that were above our guidance ranges.

In the quarter of about $655 4 million and represented a strong year over year and sequential growth even after backing out the approximately $20 million contribution from the additional week in the first quarter.

We had excellent execution.

Delivered our best ever non-GAAP gross and operating margin for the first quarter.

The strong margins combined at Fortinet exchange tailwind and higher interest income Regulus record non-GAAP earnings per share of $1 97.

Which was 18% above the high end of our guidance range.

Look again the revenue in more detail optical communications revenue was $497 $6 million.

Note that growth comparisons to prior periods should be adjusted by the additional week in Q1.

We believe that optical communications revenue would have been up both sequentially and from a year ago, excluding the impact of the additional week.

Within optical telecom revenue was a record $404 $9 million.

Data revenue was $92 $7 million.

By technology Silicon Photonics revenue was $138 $9 million, an increase of 3% from a year ago and decline of 8% sequentially.

The sequential decline is primarily due to approximately $15 million revenue that's had shifted from Q3 due to alternative far Triple litigation.

Revenue from products rated at speeds of 400 gig or more was $195 $2 million.

From a year ago as well as sequentially.

Revenue from 100 gig products remained stable and was $139 $6 million up modestly from a year ago, but down sequentially.

Non optical communications revenue was very strong in the first quarter at a record $157 $9 million and represented 24% of total revenue.

Growth in non optical communications was driven primarily from out of the revenue of $86 eight.

$8 million.

Up 80% from a year ago and up 55% from last quarter.

During the quarter, we took advantage of availability of components that had been in short supply, enabling us to deliver meaningful growth.

On the component supply environment remains challenging and May result in declining automotive revenue in Q2, we anticipate the strong demand we have produced healthy year over year growth.

Industrial laser revenue was $35 4 million.

Down 5% sequentially, but remaining stable the longer term trends.

Other non optical communications revenue of $35 7 million.

As I discuss the details of our P&L expense and profitability metrics provided on a non-GAAP basis, unless otherwise noted.

A reconciliation of GAAP to non-GAAP measures is included in our earnings press release, and Investor presentation, which you can find in the Investor relations sections of our website.

We executed very well in the first quarter to produce particularly strong gross margins for the first quarter at 12, 9%.

<unk>.

Just below our fourth quarter performance.

Yes achieved these strong results despite the headwinds from annual merit increases, which were largely offset by increasing efficiencies.

And continued foreign exchange tailwind.

Operating expense in the quarter by $14 7 million.

For two 2% of revenue.

This produced operating income of $17 million or 10, 7% of revenue.

This performance represents our ninth quarter in a row are generating record operating income.

As a reminder, divest majority of our revenue is in U S dollars as are the majority of material and component costs.

However, a significant portion of our labor and operating costs and Thai baht.

Through the cash flow hedging program, we have been following for many years, we are able to enhance our visibility and smooth out the impact of foreign exchange fluctuations over time.

Nevertheless from time to time equally see a larger impact as a result of currency revaluation of balance sheet items and in Q1.

<unk> and $2 $1 million or six cents per diluted share Fortinet exchange gain.

The current interest rate environment combined with our strong balance sheet contributed approximately $1 2 million or approximately <unk> <unk> per diluted share.

non-GAAP net income of $72 $4 million or $1 97 per diluted share.

She has another quarter later escort and was above our guidance range.

On a GAAP basis net income was $1.76 per diluted share.

Effective tax rate was one 1% in the first quarter.

For the year, we anticipate an effective tax rate in the low to mid single digits consistent with our history.

Operating cash flow of $66 million with Capex of $10 $3 million free cash flow was a quarterly record at $54 million.

In fiscal year, 2020 three we will continue to execute on our plan to return surplus cash to shareholders.

During the first quarter repurchase approximately 47000 shares for a total cash outlay of $4 $9 million.

<unk> $95 million remains in our share repurchase authorization.

Now I'll turn to our guidance for the second quarter.

They continue to be optimistic about demand across our business as well as our ability to effectively manage supply constraints.

The components supply environment, so specific buckets of relief in the first quarter.

And we continue to expect improvements overtime.

This supply headwinds continue to persist in many areas of our business.

As such our Q2 guidance assumes the supply chain has been.

Of $25 million to $30 million.

For the second quarter, we anticipate revenue in the range of $640 to $660 million.

This represents both year over year and sequential growth.

After backing out the contribution of approximately $20 million from the additional week in the first quarter.

We anticipate non-GAAP net income to be in the range of $1 86.

<unk> to $1 93 per.

Diluted share.

In summary, our first quarter results provided a strong start to fiscal year 2023 with record revenue and earnings which both exceeded our guidance.

With continued favorable business conditions, we are optimistic that our track record of success it will extend into the second quarter.

Operator, we are now ready to open the call for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone again Thats Star one one on your telephone to ask a question. Please.

Please standby, while we compile the Q&A roster.

Our first question comes from the line of Alex Henderson of Needham. Please go ahead.

Thanks, maybe just a little clarity.

Off with on the supply chain comment.

So.

And $30 in the automotive.

Impressive improvement.

But I guess.

To a large extent most of the people falling probably kind of more focused on the optical side did your supply chain improve on the optical side.

If I just take the $30 million out of the.

Out of the revenues.

In line.

With our prior forecast.

Yes, Hi, Alex.

Yes, we can.

Called out the improvements on the automotive and just to just to remind our automotive businesses made up of the improvement was in the new automotive business, which is made up of.

Electric vehicles and also lidar.

We hope to see some improvements it's too early to declare victory yet, but we have started to see some improvements, but I think what's particularly encouraging for us is.

In specific component charges get cleared we're seeing that demand that we've been we've had some pent up demand let's call. It for some time once those component shortages are clearing we can see the revenue impact is almost immediate.

So.

This past quarter. The most of the biggest part of the impact was on automotive some on the optical side as well, but mostly on the automotive side.

And like I say as we clear those shortages that have been plaguing us.

And also to everybody else for some time it is converting to revenue very quickly.

So does that imply that the majority of the.

Number that you threw out I think it was 25% to $30 million.

Supply constraints in the quarter has a shift in the mix to more optical supply constraints and maybe less auto supply constraints that we had.

How do we measure how do we think about that.

Yes, so last quarter, you I think that'd be fair way to look at some of the most of the constraints were on the optical side.

Thanks Jay.

<unk>.

Just going back to the.

The baseline businesses.

Gave.

A fair amount of granularity.

On the outlook.

Could you talk about what you think the Datacom and telecom.

400 gig.

Welcome to <unk> are going to do on a year over year basis, since we have that extra year confusion.

How do you expect them to behave.

Year over year as opposed to quarter to quarter or adjusted for the quarter to quarter. If there is somebody to do that.

Highlights. This is Chuck so let me take that one so I think you meant to say extra week, we had in Q4, rather than an extra year. So.

Understood.

I misspoke.

Alright, so our silicon photonics has been very strong.

Both sequentially and on a quarter on quarter.

On a year on year basis as well so we continue to see 400 gig and growing.

The primary driver of that the earlier spell out was driven by 400, ZR, which came up from a low base. Obviously this year, we continued to see very strong demand in that space. So both silicon photonics.

Obviously, the higher data rates remained very stable, even though on sequential basis, you see a slight.

Slight decline in Silicon photonics revenue, but that has to do with 50 million extra revenue that we had in Q4 from a prior quarter. So overall, we are very optimistic about both silicon photonics and the higher data rate businesses that are coming down the track both on telecom and Datacom as well and again the year on year growth was primarily driven by a four.

ZR, which remains very strong class.

Yes, I was really talking about in the guide for the fourth quarter, whether you thought datacom and telecom would grow on a year over year basis.

Any calibration of that within the.

The guide does just what I was looking for.

So we anticipate that the higher data rates will continue to grow so.

In the prepared remarks, I mentioned that our data comm business remains very strong although some of the supply constraints there mostly.

In our Datacom business again, those supply headwinds are still ahead of us, but we are very optimistic about.

The growth rate that we do anticipate probably slightly higher growth rate in data com.

Going into the next quarter.

Subject to supply constraints.

And telecom any sense.

I'm sorry.

And what about telecom.

Telecom also continues to be strong again, that's impacted by supply constraints, but we do anticipate that too.

Integral yes.

Demand is holding very strong and across the board.

The caveat here is still that E.

Although the goods from supply perspective is to have about $25 million baked in our our guidance So thats mostly.

Across the board, but.

Subject to those supply constrained, we do anticipate both segment of our business to grow.

Okay. Thanks, Paul Singapore.

Thanks, Alex Thanks, Mike.

Thank you. Our next question comes from the line of Cemig charity of Jpmorgan. Please go ahead.

Hi, Thanks for taking my questions and congrats on the strong Brent Hugh.

I guess I had a couple.

Yes.

Good.

One if you can talk a bit more about the DC.

Must win.

And I know you said that business starts to ramp up in the fiscal second quarter, but sort of.

How to think about the contribution from that business on that new win for the yield how big do you see that opportunity be.

In the long run maybe if you can give some more color around that please.

The second one.

Jeff Geophysical first quarter revenue for the extra week between $8 million that you said and I think still the sequential growth.

<unk>.

Implying at the midpoint of your guide going into Q is a bit softer than what we saw you sort of execute on the last couple of years. So I'm just wondering like if you can talk to the sustainability of the non optical revenue in the quarter.

Is it that you had some slight improvement in pull through a lot of backlog, which is somewhat limiting sort of the sequential improvement that we see.

Could you <unk> go ahead.

Those are the two questions. Thank you for taking the question.

Thanks, Amit and thank you for the comments.

I'll take the first question around Dcs, and then I'll turn it over to Jamba for the question about the outlook.

Yes.

S business.

As you know we don't size specific deals, but this is a meaningful program.

Transfer production from Dcs is seminal facility.

Florida to our facilities in Thailand.

It is.

It's part of our strategy, we continue to execute our strategy to add selective complete network system business and we have a good track record of fact that over the last with the last couple of years is this case youre transferring from high cost high cost location to low cost locations.

Again with the meaningful revenue upside, we're not going to size it but it's a meaningful revenue upside and it really is a perfect fit with our strategy and capabilities and our track record of.

Executing transfers.

Effectively and efficiently and allowing our customers to realize savings quickly.

<unk>.

Dcs has other manufacturing capabilities. So this represents a portion of their production, but it is a meaningful deal that we're proud to have won we work hard to win this deal with competition.

Strong we believe.

And we're very very happy to have been awarded business and look forward to engaging with Dcs to transfer production.

And again it reflects the overall opportunity in the system space, which we've been very optimistic about it and I think we've proven to be effective if you go back to the Infinera corium to win a few years ago and the Cisco business at a transfer. This is this will be the third let's call it meaningful or significant.

Network system wins that we've had in the last few years.

So I think this is Jonathan.

The guidance section the growth part of it. So as you mentioned if you back out the extra $20 million from our Q1 revenue.

Year on year, you would see about 17% growth.

Then what you anticipate in the Q2 guidance. Nevertheless, again, if you go back to the supply headwind commentaries I had.

We baked in about $25 million to $30 million supply headwinds. So overall I think.

Our growth rate is and has been consistent with our longer term plans of about 15% growth rate.

And I don't see any any major change in the trajectory of the demand environment. We are still operating in a supply constrained.

Area. So that's one of the reasons why we are a bit cautious about the guidance.

She is still very strong 15% on a year on year basis.

Got it. Thank you thanks for taking my questions.

Thank you Susan.

Thank you.

Again to ask a question press Star one one at this time.

Our next question comes from the line of Fahad Mahjong of loop capital. Please go ahead.

Hey, Thank you for taking my question.

I'm still trying to get my head around.

<unk>.

Your comment about improved supply chain, if my math is correct the automotive revenue.

Move quite handsomely quality more than.

The entirety of the supply chain headwinds that you've talked about.

It that the automotive supply improved in the optical communications supply chain worsen.

Can you just help us understand maybe quantify a little bit more.

So I think the I think the.

The non automotive or the optical.

Performed pretty much in line with our expectations.

But automotive did improve better than we had anticipated.

And we were able to convert those handful of components that have been.

Short supply for some time once they once they became available we were able to convert that kind of pent up demand into revenue quickly.

I think the revenue on the on the optical side of the business was pretty much in line with our expectations.

I appreciate that so.

Given that there is a massive backlog of the automotive.

Ill.

Segment for you how should we be thinking about growth in the automotive space.

It seems like.

Your commentary seem to suggest that optical communications supply remains challenging, but how is it looking out for automotive and how should we be thinking about automotive revenue throughout the rest of the year.

I think it remains challenging.

The entire business.

I think we've got a couple of breaks let's call. It in the automotive business with the supply situation remains challenging across the board if anything.

The breakthrough we had in automotive last quarter, what it's what it demonstrates we take is I know there's been a lot of concerned about is the demand is there double ordering going on but we've been seeing it as a component availability clears that demand is converting into revenue immediately. So the demand is there the demand is real we believe.

But.

The supply constraints continues to be challenging across the across the board I wouldn't see it as regularly.

And automotive or.

Better or worse in optical.

It's similar across the book.

Got it and then one last question for me.

And then I'll hand, it over to the floor.

And building nine how much of the square footage is now spoken for.

Yeah, We don't report that.

Metric.

Perhaps.

We had the opening ceremony there last quarter.

We're very happy with I am sorry last week and last week, we had the opening ceremony.

And I'm actually in Thailand, right now I was here for the for the opening ceremony.

We're very happy with the progress there with a number of customers, but we're not going to be announcing or communicating metrics like occupied spoken for those type of metrics because it doesn't really mean, a whole lot other than to say the vast bulk of the growth will be will be seeing over the next while will be will be in the building nine locations our pinehurst.

The facility is.

More or less at capacity.

Building Asus at capacity.

So the growth.

Over the next one will be in building $9.

But I would say.

We're happy with the progress there.

If I recall I think last quarter you guys said you had two anchor customers more benign.

Any anything else either for one customer describe omega how much better is getting.

Well, we have yes, we have to.

Two anchor customers, we have other customers, who we are.

We're actively working with nothing nothing to announce yet proactively working with.

To get capacity set up there and again a lot of the new business that we talked about like for example.

The Dcs.

<unk> definitely be ramping and building night.

So most of the growth as I said there'll be there'll be exceptions here and there but for the most parts. The majority of the growth for the next one will be ended the night.

I would say if I may.

Excuse me if I compare it to maybe.

Maybe if I can answer this way if I compare the.

Let's say the rate of expansion in the rates of revenue growth that we envisage had building nine which again just remind us of 1 million square foot facility, if I compare it to where we were at the same period.

And building Apis that sit back in.

2016, 2017 and building it is I think the ratio, which we will grow <unk> nine charge right now it feels it feels faster because.

Remember when we opened designate this was our first facility.

First factory and the new campus in Chonburi, there was a certain amount of maybe reluctance on the part of customers to be the first we want to go there. So there was a little bit of reluctance.

But now we're five years down the line that busy its fall.

And from the customers point of view that don't really differentiate between building. After building night. It's all the Chonburi campus, it's fully ramped it's going very very well. So I think our the willingness of our customers to ramp and building <unk> is <unk>.

Pete the difference too to what we had five years ago in building. So we feel we feel very good about our ability to grow and add business submitting nine quickly.

I appreciate the color.

Kevin.

Thanks, guys.

Thank you.

Thank you. Our next question comes from Alex Henderson.

Of Needham <unk> Company. Please go ahead.

Alright. Thanks.

So just wanted to dig into the interest line in the fall.

X line.

So when you look at the guide that you gave for the December quarter, I'm, assuming that $2 million.

FX falls out of it effectively back towards towards zero.

And similarly, if you look at the interest line Im thinking it with interest rates going up.

Certainly here, but probably on a global basis and assume that.

<unk> got a fairly short term orientation to your current.

Massive cash balances should we be expecting the interest income line to go up.

Well the FX.

Zero out.

Hi, Alex.

Yes, Matt on the FX is probably right. We typically don't guide the reevaluation below the line FX lines. So we as.

<unk> is the actual evaluation that will flow to the bottom line of that job basis on interested the elevated interest rates, obviously are going to translate to a higher interest income for us.

The trend has been going on in the last couple of quarters. So obviously you guys see that picks up in our interest baseline.

With our strong balance sheet and cash balances, we do anticipate a strong contribution going forward. So again to simplify your question FX out interest rate.

To continue to contribute.

Just going back to the interest rate line its up about $1 million sequentially is that predominantly a result of the.

Rates are up.

Can the U S 4%.

Which.

The big increase on your cash balances I would think that that would have a pronounced impact on interest income can you just kind of some sense of what the trajectory over time it looks like there.

So yes indeed.

The incremental.

Sequential increase in an.

And our interest income has the ability to increase the interest rate. So again, we don't like to speculate how is that going to work out in the future, but indeed, we have already strong balance sheet.

We do anticipate that to be a meaningful contribution as we look at.

Not really speculating if you're just assuming existing interest rates. So no further guidance, whether that magnitude increase that we saw quarter to quarter or is.

At least the assumptions used in the December quarter.

I'd like to stick to our core business. When we gave guidance out then I mean, the interest rates on the exchange rate as a side commentary. So I won't go into further details in terms of guiding interest rates.

Okay.

I just wanted to go back a little bit into the other areas.

Have you seen any.

Change in the demand as a result of.

Your ability to supply the.

The auto segment.

So with $30 million extra shipping there could be tumor responses.

Oh Boy I, just got all the stuff I wanted to Wow I got what I wanted to hear some additional orders because if you can get more I'd like more.

Rich.

It could certainly play into your backlog. So can you talk a little bit about whether what happened when you delivered that business to that segment.

I think Alex.

Sure.

It Hasnt resulted in really any change in the demand the demand is just very strong.

It really is a case of once we get the components, we can convert that pent up demand into revenue.

And get a chip.

We've had we've had strong backlog in really all of the markets we serve automotive in particular.

And in this case once we were able to share that components are a couple of components, we were able to very quickly converts to revenue and get it out the door.

But no. It hasnt resulted in additional demand I think the demand is already very strong we'll be happy if the demand remains and just converts over time as we as we are able to.

We'll get a breakthrough on these component shortages.

And just to be clear when you talk about your backlog.

Youre not taking into account.

<unk>.

I remember what the number was won't get we'll get an update there on tomorrow with momentum, but I think there was something like $75 million worth of backlog there.

That's not taking into account the one point.

Obviously with $4 $4 billion backlog at Sienna, none of that's factored in correct.

Yes, we don't actually talk about our backlog Alex.

And then trying to foresee how much of momentum. This backlog is included in our backlog, which at the end of this week. We don't know if we just go by the demand that we get from our customers. We don't try to round. It works with the numbers that you're projecting to the streets in place. Okay. Appreciate it. Thanks.

Thanks, Alex.

Excellent.

Thank you at this time I would like to turn the call back over to Seamus Grady for closing remarks, Sir.

Sir.

Thank you for joining our call today, we're off to a strong start in fiscal 2023 with first quarter results that exceeded our guidance ranges.

We executed well to deliver strong margins, despite seasonal headwinds, which increases our confidence that we can continue to deliver strong performance as we look ahead.

We look forward to speaking with you again and seeing those of you who will be attending the Needham Conference next week Goodbye.

This concludes today's conference call. Thank you for participating you may now disconnect.

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