Q4 2023 Fabrinet Earnings Call
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Good afternoon, welcome to fibre net of Naturals results conference call for the fourth quarter and 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 conference over to your host Garo too much Union Vice President of Investor Relations.
Thank you operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss fiber net financial and operating results for the fourth quarter and fiscal year 2023, which ended June 32023 with me on the call today are Seamus Grady, Chief Executive Officer, and <unk> Chief Financial Officer.
This call is being webcast and a replay will be available on the investors section of our website located at Investor Dark fiber net dot com <unk>.
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, 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 May nine 2023.
We will begin the call with remarks from Seamus and Charva, followed by time for questions I would now like to turn the call word of Fibernet CEO Seamus Grady Seamus.
Thank you Carol and good afternoon, everyone and thank you for joining us on our call today.
Our fourth quarter financial performance exceeded our guidance for both revenue and earnings per share.
Revenue of $655 $9 million grew 12% from a year ago.
We continued to generate double digit operating margins, which helped produce non-GAAP earnings per share of $1 <unk> in the quarter.
Our financial results for the year reflect our ability to grow and execute through supply headwinds that we experienced early in the year and the inventory adjustments that we encountered in the second half of the year.
Revenue of over $2 $6 billion increased 17% year over year.
non-GAAP operating margin expanded more than 50 basis points to 10, 8% for the year and we generated record non-GAAP earnings per share of $7 67.
An increase of 25% from fiscal 'twenty to 'twenty two as we continued to demonstrate strong execution.
Looking at the fourth quarter in more detail revenue was essentially flat sequentially for optical communications.
Within optical communications Telecom revenue saw a sizable decrease as a result of inventory digestion at our customers and their customers.
The decline in telecom revenue was offset by record revenue growth in Datacom on both a year over year and sequential basis.
In fact, datacom revenue more than doubled from a year ago and grew more than 50% sequentially.
This datacom growth was primarily driven by an 800 gig AI data Center transceiver program for one of our customers.
In our non optical communications business revenue increased almost 25% from a year ago.
Declined slightly sequentially.
Looking to the first quarter and beyond we expect the near term inventory correction at our customers are experiencing to persist.
However, we are confident that the very strong datacom performance. We saw in the fourth quarter will continue to largely offset these inventory related headwinds in our fiscal first quarter in.
In fact, we're very optimistic about our overall market position, including the potential for continued growth in AI related programs as we look ahead.
In summary.
Our solid fourth quarter performance contributed to record results for the full fiscal year.
We are excited about our strong industry position and are confident that we can continue to deliver excellent financial results in the coming year.
Now I would like to turn the call over to <unk> for additional financial details on our fourth quarter and fiscal 2023, and our guidance for the first quarter of fiscal 2020 for Java.
Thank you Seamus and good afternoon, everyone.
Revenue and EPS above our guidance ranges in the fourth quarter.
Revenue was $655 $9 million up 12% from a year ago and down 1% from the third quarter.
The strong performance fell to the bottom line.
<unk> non-GAAP earnings per share of $1 86.
For the full year revenue was 2.6 $45 billion, an increase of 17% from the prior year and fiscal 2023, we had four customers that each contributed 10% or more to revenue.
<unk> contributed 16% of revenue followed by low mental at 15% and media at 13% and Infinera at 12%.
Our top 10 customers together made up 84% of revenue and included a diverse range of customers in telecom Datacom automotive industrial laser markets.
Looking at revenue in more detail optical communications revenue was $502 $1 million up 8% from a year ago and essentially flat with Q3.
Within optical telecom revenue was $309 $6 million, which was down 17% from a year ago and 19% from the third quarter.
This decrease was primarily due to inventory adjustments in the industry.
On the other hand, datacom, so tremendous growth in the largest sequential and year over year revenue increase in our history.
Datacom revenue in the fourth quarter was a record $192 $5 million. This represents growth of 107% from a year ago, and an increase of 57% from the third quarter.
The biggest contributor to our Datacom growth was an 800 gig program for AI applications.
By technology Silicon Photonics revenue of $88 $1 million declined 19% sequentially due to the inventory adjustments we discussed.
By speed revenue from products rated 400 gig and foster grew to a new record of $266 $8 million up 49% from a year ago and up 21% from Q3.
Revenue from 100 gig programs was $96 million.
32% from a year ago and 14% from Q3.
As anticipated revenue from 100 gig products continued to decline due to inventory digestion, and Thats 400 gig and faster products gained momentum.
Revenue from non feed related products was $120 million or 24% of optical communications revenue.
Non optical communications revenue was $153 $8 million up 25% from a year ago, but down 5% from our record third quarter and representing 23% of total revenue.
Our automotive revenue continues to be in the same range as the prior two quarters, reflecting improved component availability.
Our automotive revenue of $92 $9 million was up 66% from a year ago, but down 1% from Q3.
Industrial laser revenue was $28 million.
Down 10% from Q3.
Other non optical communications revenue was $32 $9 million up 10% from a year ago, but down 12% from Q3.
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 section of our website.
Gross margin in the quarter was 12, 8% as anticipated gross margin declined about 30 basis points from Q3 due to foreign exchange fluctuations in our currency hedging program.
Operating expenses in the quarter of about $14 9 million.
Or two 3% of revenue, which was slightly higher than anticipated due to some onetime items and year end adjustments.
<unk> produced operating income of $69 million, representing an operating margin of 10, 5%.
We benefited from an increase in interest income, which was $4 million as well as a gain of $1 9 million from foreign currency asset and liability evaluations at the end of the quarter.
Effective GAAP tax rate was nine 4% in the fourth quarter.
Selecting yearend adjustments for the year, our effective GAAP tax rate was four 7% and we anticipate that our tax rate remained in the mid single digit in fiscal 2024.
non-GAAP net income of $68 $4 million or $1 86 per diluted share and above our guidance range.
On a GAAP basis net income was $1 65 per diluted share.
For the full fiscal year 2023, operating margins were 10, 8% an increase of 50 basis points from the prior year non.
non-GAAP net income was a record $7 67 per diluted share an increase of 25% from a year ago.
As in fiscal 2022, EPS growth significantly outpaced revenue growth.
Turning to the balance sheet and cash flow statements at the end of the fourth quarter cash cash equivalents restricted cash and short term investments of $558 $5 million.
At $11 $7 million from the end of the third quarter.
Operating cash flow was a quarterly record of $71 $1 million at Capex of $17 $9 million free cash flow was $53 $2 million.
Also a quarterly record.
For the full year, we generated record operating cash flow of $213 $3 million and a record free cash flow of $152 million.
We were active with our share repurchase program in the fourth quarter.
Took advantage of favorable market conditions to repurchase over 400000 shares at an average price of $94 78.
For a total cash outlay of $38 $4 million.
For the full year, we repurchased approximately 488000 shares for a total cash outlay of $47 $6 million, reflecting our commitment to return capital and drive value to shareholders.
As a result, $52 $4 million remained in our share repurchase authorization at the end of fiscal 2023.
Since then our board has authorized an additional $47 $6 million for repurchases, resulting in $100 million currently available for repurchases.
Now I will turn to our guidance for the first quarter.
We expect inventory adjustments at our customers and their customers to continue into the first quarter.
This FX will be seen primarily in our telecom revenue.
We believe that strength in new high data rate Datacom programs for AI applications were largely offset the impact of this inventory adjustments.
We expect automotive and industrial laser revenue to be relatively flat.
Therefore, anticipating that total revenue in the first quarter.
Moderately higher than the fourth quarter.
We anticipate revenue to be between 650 and $670 million.
From a profitability perspective in the first quarter, we expect seasonal near term pressure on gross margins due to our annual merit increases.
As in prior years, we expect to continue executing well and to deliver improving efficiencies as we work our way through the year.
At year end adjustments to operating expenses behind us, we expect operating expenses to return to the 2% range.
Taking these factors into account, we anticipate non-GAAP net income to be in the range of $1 <unk> to $1 90 per diluted share.
In summary, we exceeded our fourth quarter guidance by successfully navigating through some unusual industrial dynamics, while our business has been negatively impacted by inventory absorption new programs have largely offset these headwinds, enabling us to deliver healthy results as we continue to focus on extend.
Our track record of strong execution.
Operator, we are now ready to open the call for questions.
Thank you.
Ladies and gentlemen to ask the question. Please press star one on your telephone.
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Please standby, while we compile the Q&A roster.
Okay.
Our first question comes from the line of Alex Henderson with Needham Your line is open.
Great. Thank you so much.
Yeah.
I know that you've had a really great quarter here and a good solid guide in the September quarter.
Looking at the.
The news flow out of virtually every.
OEM customer out there whether that'd be.
20, some odd percent decline five whether that be sharp declines at juniper, whether that be a 37% decline.
Their service provider business at Cisco.
Whether it be ad trend.
Literally across the board there has been a dozen companies.
And across every single one of them they have given some pretty weak guidance and I know that you guys lock in.
90 days in advance because of the <unk>.
8% to 12 week production window, so while the September quarters.
A nice relief from that bad news it seems like a lot of that bad news came.
In the June and July timeframe, and therefore might be less.
A representative.
The September quarter.
I also know you don't like to give guidance for the for a quarter out but.
Clearly this is an unusual situation.
And the situation does require us to ask can you give us any sense of what's going on in that December timeframe based on what you've seen.
Of late.
Hi, Alex.
Yes, a couple of things I would say we believe the.
Let's say the inventory digestion headwinds in the industry headwinds that.
Really everyone is experiencing.
That is factored into our our September quarter guide.
If you look at our overall business. If you look at our Q4 results in our telecom business is.
Is down primarily driven by inventory digestion.
In our Datacom business is up nicely, primarily driven by significant growth in <unk>.
AI transceiver, let's call it transfer.
<unk> transceiver business.
So we don't feel like we're missing something in the September guide, we think its representative I'll put it this way Alex it's representative of.
The business that we have all we can do really is dealing with what's in front of US we have 13 weeks rolling forecast.
From our customers, we guide one quarter at a time as you rightly point out but.
But essentially what we're seeing going on if you. If you were to distill it down into a kind of a <unk> a short snapshot our datacom business is up strongly.
Our telecom business is down because of inventory digestion, but we think that will come back.
So.
Therefore.
Okay could you talk a little bit about the capacity availability for the Datacom piece.
That's a pretty steep ramp on a year over year basis.
Going from essentially zero to very large number.
Hi.
Is the slope look like in terms of your ability to continue that ramp in terms of capacity availability.
<unk>.
Yes, so we have ample capacity Alex as you know we recently opened the.
1 million square foot building nine facility in Chonburi. So we have ample capacity and we have lots of room to expand and build more buildings.
As needed.
The ramp is steep but that's that's what we do that's one of the services. We provide is that kind of burst capacity when the customer has a very large.
<unk>, a very steep ramp one of the services, we provided to the ability to to make sure we're not the pacing item.
Some other let's say pacing item as always but we have to make sure. We're not the pacing item. So we're very focused on that Alex and we're very comfortable I understand shipments, but you must have some visibility in terms of testing equipment and other line capacity that the customer needs to install in order to get it in.
Which is the gating factor to ramping that datacom.
That's correct, we do but it wouldnt really be for us to speak to that Alex.
Okay. Thank you I appreciate the.
The candid answers thanks.
Thanks, Alex Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of from Mig <unk> with Jpmorgan. Your line is open.
Hi, This is Joe Cardoso on for some challenging mine.
First question just on the inventory digestion that youre seeing in the telecom industry I guess.
Just given your relationships with your customers and your experience in the industry is there any visibility at this point in time in terms of the longevity of this digestion cycle that we're going through like I think historically some of the folks have pointed to like a two quarter digestion is that lining up to how you guys are thinking about at this current time.
Any color you can provide about around that it would be helpful. And then I have a quick follow up thank you.
So inventory digestion is it's a difficult one to call.
And it's quite difficult for us to distinguish between.
The specific causes let's say of changes in order patterns or demand from our customers from their customers.
We have returned to getting 13 weeks committed orders from our customers.
We're not really seeing that the longer term visibility that we have joined the supply the supply chain crisis.
So our customers are back to normal 13 week order patterns, but they don't necessarily tell us why the order size is what it is if you follow me.
And while everyone is talking about inventory digestion, it's not really possible for us to tell plus is inventory digestion and what is the change in the demand the underlying demand.
Secondly.
The timing of the inventory digestion, it's quite difficult to be precise about it.
We hear the same so both the same.
Industry observations that others have made that it seems to be a two quarter.
The timing of this seems to be about two quarters than that as we get towards the end of the calendar year, we should start to see order patterns come back to normal in the early part of calendar 2024, we just don't know and I think we'd have to just wait and see like everybody else, but that's that's what we are hearing until we have the <unk>.
<unk> orders were reluctant to kind of call. It at this point.
Got it I appreciate it Christian is I guess my follow up is just around the 800 gig and maybe I should just call. It the AI opportunity for you guys in Datacom.
Obviously, you did youre doing tremendously well with the current program that you won I'm just curious like what is the opportunity for you guys to win an additional program beyond the current customer that you're in do you have any visibility around it.
Is that opportunity materializing in any way just curious to hear your thoughts around expanded beyond just this current customer to perhaps a different supplier. Thank you.
Yes, so we're not first of all we're not going to breakout if you like the AI program itself, because it's right now as you rightly pointed out it's coming from one customer.
Really that then we'll let them speak to whats going on in that business.
While we can say is that that particular program is ramping very fast.
Has obviously become a meaningful contributor to our revenue.
On our growth rates and has really helped us to absorb the decline in the telecom business and the timing couldn't have been better really.
But we also believe very much in the early days of.
This program and this opportunity.
Very very much in the early days.
We're really just a couple of quarters into this.
We believe as we understand it would be a very long very.
The long cycle.
Right on trend.
We're looking forward to expanding that said beyond.
Definitely beyond one customer, but also to multiple programs with with the customer base that we have currently so nothing really to announce at this point, but it didn't seem to represent a very significant opportunity and we're we're very excited about it.
Thanks, very much I appreciate the responses and congrats on the results.
Yes.
Thank you.
Please standby for our next question.
Our next question comes from the line of Tim <unk> with Northland Capital markets. Your line is open.
Hey, good afternoon, and congrats Tim.
As well in the quarter.
Thank you.
I don't know if I missed it but in terms of the guide which is kind of flattish overall although.
Clearly better than.
Might've been feared do you expect the trends.
That you saw on the <unk>.
Fourth quarter to continue in terms of the significant.
Decline in Telecom and continued strong increase in Datacom or do you expect that to kind of.
Maybe flatten out a little bit and I have a follow up.
Yes, Hi, Tim This is Jeff yes.
We are expecting a pretty similar pattern in our Q1 I pointed out that we are anticipating telecom to be down sequentially in Q1, and we are anticipating datacom to be up so the trends haven't really changed quarter on quarter and they also said that out of our laser they are anticipating it to be flat.
Delek gone down Datacom outbound flat.
Although our laser.
Okay, I guess im trying to come back for a little more color on that just given the degree of volatility we saw in Q4.
Which is very significant increases in datacom very significant declines in telecom.
When you say expect a similar pattern is that what you continue to expect big movements on both sides.
Yes or.
Yes, yes that is correct.
Okay great.
I wanted to follow up on the access or con systems side.
Once the deal with Nokia recently.
Imagine thats going to take a while to sort of ramp up.
But between that and your previous pre existing relationship with gcs.
At what point I guess in fiscal 'twenty four.
Would you expect that to start to get material for you.
Was it material at all in Q4.
So first of all I think the.
It wasn't hugely material in Q4, I would say.
And if you take the business with Nokia.
It is important for sure and we're very very happy to be expanding the relationship with Nokia.
But we don't believe it will be.
And material or a 10% customer or anything like that it's an important.
Piece of business, it's an important deal it's important to Nokia, it's important to us to help them with their onshoring activities, but in terms of the revenue impact I wouldn't want you to be thinking that it's a hugely significant.
Revenue driver it's enough.
Well, maybe a little bit, but what more broadly given they're in the same kind of Mecca, the woods or competitors. If you look at the access systems area in general.
Maybe refocus the question on that in terms of.
Timing and degree of materiality in fiscal 'twenty, four including Dcs.
Yes, it's difficult to say at this point Tim.
We focused on getting the products introduced obviously DCF has now introduced and is in our it's in our numbers. If you like it's in our forecast.
It's in our Q1 number.
Nokia it's early days, but we think because theres a lot of opportunity there both in the access space, but in the onshoring.
Generally opportunities for onshoring generally and also if you call. It if you like friend shoring.
Thailand is a friendly location to manufacture for our customers. So we're very focused on that but it's it would be very difficult to size. It at this point in time.
Okay. Thanks very much.
Thank you Tim Thank you Tim.
Thank you.
Please standby for our next question.
Our next question comes from the line of Dave Kang with B Riley Your line is open.
Yes. Thank you good.
Good afternoon. My first question is.
What was the supply chain impact in fiscal fourth quarter Ed.
What are your expectations for this upcoming quarter.
So Dave we had we had considered if you if you look back at our last earnings call we have.
Forecasts that are considered about $15 million of a revenue headwind.
From supply chain constraints in Q4, and that's the way it pans out really.
There or thereabouts about that level.
The good news is that the supply environment continues to improve.
At very manageable levels for supply headwinds just normal.
Normal.
Supply challenges that everyone faces.
And we really don't feel the need to call out that impact at this point. So we're actually enough, we're not calling out any specific number in our Q1 guidance.
And we won't unless something changes considerably in the future.
Got it and then my follow up is.
So last quarter, you talked about retail wins.
400 gig intra data do you see 800 gig <unk> have they changed since then and which is the strongest of the three four year now and do you expect them to remain tailwind for you next calendar year.
Yes.
Here.
Yes fiscal year, I think the auto maintain tailwind I think.
I think the 800 gig.
Data Center transceiver program, if I had to if I had to rank them in terms of the <unk>.
Significance, that's probably the biggest opportunity followed by <unk>.
400, ZR in terms of growth.
And then 400 gig I think that'd be the order in which I would I would put them, but I think we are.
We're very we're very excited where we are ideally positioned we really think we're ideally positioned.
The growth in Datacom again, largely driven by these three product areas. If you like is more than offsetting the declines in telecom so in the future as telecom comes back.
The growth in Datacom is sustainable and is long term. So we showed benefits we think nicely.
When telecom comes back after all the inventory has been digested.
And just to be clear you expect those rankings to be kind of remain as is in fiscal 'twenty four or could they change.
I think.
Maybe the two and three could change, let's say 400 gig rollout codes outpaced 400 ZR, but.
Or does he offer is growing nicely, we have a number of customers in that area as you know.
It's growing nicely.
I would say 800 800 gig.
Biggest growth opportunity and then followed by either either 400.
<unk>, our 400 gig inside the data center both of those represent.
What opportunities as well.
Got it thank you.
Thank you <expletive>.
Thank you.
At this time I would like to turn the call back to Seamus for closing remark.
Thank you for joining our call today, we executed well in a dynamic environment to produce fourth quarter results that exceeded our guidance ranges. We remained well positioned to continue our track record of strong execution and we remain optimistic about the positive long term trends in the markets. We serve we look forward to speaking with you again bye bye.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.