Fabrinet
SWB:FAN
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Earnings Call Analysis
Summary
Q1-2025
Fabrinet kicked off fiscal year 2025 with solid momentum, reporting $804 million in Q1 revenue, a 17% increase year-over-year and 7% sequentially. The company experienced strong growth in optical communications, particularly a 36% increase in datacom revenues, mainly from AI-driven optical products. Operating margins remained robust at 10.7%. Looking ahead, Fabrinet anticipates Q2 revenue between $800 million and $820 million and expects non-GAAP EPS to be between $2.44 and $2.52 per diluted share, signaling continued confidence in its growth trajectory.
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Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the First Quarter of Fiscal Year 2025. [Operator Instructions] As a reminder, today's call is being recorded.
I would now like to turn the call over to your host for today, Garo Toomajanian, Vice President of Investor Relations. Please go ahead.
Thank you, operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the first quarter of fiscal year 2025, which ended September 27, 2024. With me on the call today are Seamus Grady, Chief Executive Officer; and Csaba Sverha, Chief Financial Officer. This call is being webcast and a replay will be available on the Investors section of our website located at investor.fabrinet.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 as well as additional details of our revenue breakdown. 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-K filed on August 20, 2024.
We will begin the call with remarks from Seamus and Csaba, followed by time for questions. I would now like to turn the call over to Fabrinet's CEO, Seamus Grady. Seamus?
Thank you, Garo. Good afternoon, and thanks to those of you joining our call today. We started fiscal year 2025 with significant momentum across our business. First quarter revenue of $804 million was well above the top end of our guidance range, increasing 17% from a year ago and 7% from Q4. Margins were very healthy with operating margin of 10.7% in the quarter. These results enabled us to deliver non-GAAP EPS at the upper end of our guidance range of $2.39, even after a $0.19 headwind from foreign exchange revaluations in the quarter. All in all, we're very proud of these results and our strong start to the fiscal year. As we anticipated, revenue was up sequentially and year-over-year for every major product group.
In optical communications, datacom revenue grew 36% from a year ago, driven mainly by optical interconnect products for AI applications. We remain optimistic about positive long-term datacom trends for our business and our position as a leading contract manufacturer serving this rapidly expanding market. We are encouraged by the results of our telecom business in the quarter, which saw year-over-year revenue growth for the first time in 6 quarters. Demand for traditional telecom products appears to have leveled out, while growth continues to come from data center interconnect products as well as telecom systems, where we continue to win business. We are optimistic that over time, the telecom headwinds that the industry has been experiencing will turn into tailwinds and that our telecom revenue growth will be further bolstered by continued demand for DCI and telecom system products.
Turning to non-optical communications. We saw accelerating revenue growth in the quarter, driven mostly by strong automotive revenue that exceeded $100 million for the first time. Within the automotive market, EV charging infrastructure products continue to see excellent momentum. Industrial laser revenue was also strong, reaching its highest level in 2 years. We believe these strong automotive and industrial laser trends can continue into the second quarter. As you know, last quarter, we announced that we would be breaking ground on Building 10 during the fiscal year. I'm happy to report that we are making significant progress in lining up contractors and receiving the necessary approvals. We are optimistic that construction will begin by the end of the calendar year on this facility, which will increase our total footprint by more than 50% and help support our growth for the next several years.
In summary, we had an excellent start to fiscal year 2025, highlighted by continued acceleration in revenue growth while also continuing to deliver industry-leading operating margins. We're optimistic that our positive business momentum will extend into the second quarter as reflected in the outlook that Csaba will discuss in a moment.
Now, I'll turn the call over to Csaba for more financial details on our first quarter and our guidance for the second quarter of fiscal 2025. Csaba?
Thank you, Seamus, and good afternoon, everyone. We had a great start to the year. First quarter revenue of $804 million increased 17% from a year ago and 7% from Q4 and represented a new record level of revenue for the company. The higher exchange rate for the Thai baht meant that our FX revaluation loss was higher than expected in the quarter at $7 million or $0.19 per diluted share. Even with that headwind, non-GAAP EPS was at the upper end of our guidance range at $2.39. Details of our revenue breakdown are included in the investor presentation on our website and I will focus my comments on some of the more notable metrics.
In the first quarter, optical communications revenue was $626 million or 78% of total revenue, up 17% from a year ago and 5% from Q4. Within optical communications, datacom revenue was $329 million or 53% of optical communications revenue, an increase of 36% from a year ago and 5% from the prior quarter. Telecom revenue was $297 million or 47% of optical communications revenue and increased 2% from a year ago and 6% from Q4. Looking at the optical communications trend by data rate, the most noteworthy result was the relative strength of products rated below 800 gig. Revenue from products below 800 gig was $262 million in the first quarter, up 30% from a year ago and 17% from Q4.
The strong performance was due to strength from datacom programs and from certain data center interconnect products such as 400ZR, which are classified as telecom products. As in the fourth quarter, 400ZR products were 10% of optical communications revenue. Revenue from products rated 800 gig or faster was $257 million, up 19% from a year ago and down 1% from Q4 as new customer programs are early in their product ramps. Revenue from optical communications products that are non-speed-rated, including ROADMs, amplifiers, fiber arrays and other devices was $107 million, down $7 million from Q4. Revenue from non-optical communications saw strong growth in the first quarter at $178 million, up 17% from a year ago and 13% from Q4. This growth continues to be driven mainly by EV charging infrastructure programs in the automotive market.
As I discuss the details of our P&L, expense and profitability metrics will be on a non-GAAP basis unless otherwise noted. Gross margin in the first quarter was 12.7%, an increase of 20 basis points from the fourth quarter. Operating expenses were [ $16 million ] and were again less than 2% of revenue. Operating income was a record $86 million, representing an operating margin of 10.7%, which was consistent with the fourth quarter. Interest income of $11 million in the quarter was in line with Q4. A large part of this income was offset by the greater-than-expected foreign exchange revaluation loss of $7 million. Effective GAAP tax rate was 4.2% in the first quarter. We expect that our tax rate will remain in the mid-single digits this year. Non-GAAP net income was $87 million or $2.39 per diluted share.
Turning to our balance sheet. We ended the first quarter with cash and short-term investments of $909 million, up $50 million from the end of the fourth quarter. Operating cash flow in the quarter was consistent with Q4 at $83 million. CapEx was $20 million, resulting in free cash flow of $63 million in the first quarter. During the first quarter, we did not repurchase any shares. We anticipate being more active in our repurchase program during the remainder of the fiscal year and have $200 million authorized for share buybacks.
Now, I will turn to our guidance for the second quarter of fiscal year 2025. We are optimistic that after delivering 5 quarters in a row of record-breaking revenue, we are well positioned for another record quarter. For the second quarter, we expect total revenue to be between $800 million and $820 million. By major product area, we anticipate year-over-year growth from each of datacom, telecom and auto. On a sequential basis, we anticipate growth in total revenue as well, driven mainly by telecom with datacom and auto flat to slightly up from Q1.
We expect top line strength to also be reflected in our profitability results. We anticipate that a strengthening Thai baht will begin putting increased pressure on gross margins. We believe we can largely offset that impact with continued operating leverage, which should result in operating margins consistent with our recent performance. As a result, we anticipate EPS to be between $2.44 to $2.52 per diluted share. In summary, we are excited with our strong start to fiscal 2025 and are confident that we will see continued momentum in our business as we look ahead.
Operator, we are now ready to open the call for questions.
Thank you. [Operator Instructions] Our first question for the day will be coming from Karl Ackerman of BNP.
I appreciate the outlook for the December quarter with regard to the end markets themselves. Specifically, though, with regard to datacom and opto, they sound to be largely flattish sequentially in December. But if we could just drill down a bit further, do you anticipate growth of 800 gig transceiver revenue in the December quarter? Or should we anticipate that 800 gig transceiver revenue may be flat to down through the first half of 2025 until 800 gig network interface cards are more readily available in the market? And I have a follow-up, please.
Karl, thanks for the question. So yes, if you look at our datacom growth, we're very optimistic about the long-term datacom trends and we believe we will continue to be the beneficiary of growth in the datacom market. Of course, our biggest datacom program with NVIDIA, it's a little different from -- than most in that they have also qualified optical transceivers from merchant vendors, but we're the sole source for their designed products. What we have seen is a little bit of mix shift in the quarter. Our datacom business is up, but the mix has shifted around between 400 gig and 800 gig, really while we transition to 1.6.
So, we still have 100% market share of the NVIDIA designed transceivers irrespective of data rate. But the exact timing of, let's say, when 1.6 will begin to ramp in earnest and what the outlook is for 800 versus 400, we wouldn't really be prepared to give that level of granularity. But 800 gig remains robust, 400 gig remains robust, and we have a lot of installed capacity for really all of those speeds. And we're getting geared up, I guess, to ramp 1.6 once the product that it goes into becomes more generally available. Our overall relationship with NVIDIA remains very strong. We do a very good job for them. They're very happy with our performance and we continue to install capacity to support their needs.
I appreciate that. For my follow-up, is the pickup in 400 gig revenue entirely weighted toward growth of coherent ZR pluggables? Or is there a new business win or something else with regard to 400 gig datacom that's driving that sequential uptick -- in the quarter?
Yes, there's a new business win there that is primarily responsible for the growth in -- it's a mix. Some of it is mix shift with our main customer between 800 and 400, but there's also a nice chunk of growth with a new win at 400 gig.
Thank you. [Operator Instructions] And our next question will be coming from the line of Tim Savageaux of Northland Capital.
Can you guys hear me okay?
Yes, Tim. We can hear you fine.
Okay. Great. Sound is acting a little weird. I just want to follow up on that discussion you were just having with regard to a new business win. I'm assuming that's with the current customer and just sort of extending your reach there? Or is that a new customer? And did you say whether that was telecom or datacom?
It's with an existing customer. In fact, you're right, Tim, it is a telecom product actually. It's a DCI product with an existing customer. So, it's actually not a datacom win. It's a telecom win, although it is 400 gig transceiver.
Got it. And I think you addressed this, but I just want to make sure I heard it right. And the mix shift you're talking about in datacom is within your biggest customer? Or are there other customers doing 400 gig that's driving that mix shift? I think it was the former.
Yes, the former. The mix shift that I talked about is the mix between 800 and 400 gig, which again, we don't fully have visibility as to what's causing that at all times. But for us, again, our focus is on making sure we're servicing what the customer needs from us for their designed products. And sometimes like we saw last quarter, there's a little bit of mix shift, a little bit more 400 gig than we would have thought maybe going into the quarter, maybe a little bit less 800 gig and then 1.6, we're getting geared up to ship as soon as the -- to ship in volume as soon as the customer gives us a signal to start ramping that. But yes, that mix shift was within our main customer there.
Okay. But -- and once again, just following what you're just discussing there on 1.6, it sounds like it's safe to assume there's no 1.6 revenue in the December quarter guide.
There would be some, but not that we break that out, but yes, there would be some. I mean we would have to have already been shipping some level of 1.6. We're not going to go from a standing start to ramp. So, we've been -- we have been shipping a little bit. We continue to ship, but the significant ramp is in front of us.
Okay. Great. And last one for me. Speaking of new customers, I wonder if you can give us an update or over the course of the quarter, you have any greater visibility into when you expect material business with Ciena to ramp?
Yes. I think the time line we spoke about last quarter is still pretty much accurate. I think it's probably at this stage, 9 months or so away from being significant revenue for us. But everything is on track. No major changes there since last time we spoke. We're still very excited about that, very happy with that win and working very hard to make sure we do a good job for Ciena. But no big changes since we last spoke. We have picked up additional non-Ciena new business in the quarter as well, but that we can -- not one that we can name. Unfortunately, we look to our customers to, to give us the go ahead if we can name them or not, but we have picked up additional business, new business to us in one case, a new program. And in the other case, it's a share gain in the optical space. But back to your question, Tim, no big change since we last spoke on Ciena.
Okay. And if I just get one more quick one in there. Just with regard to what you just mentioned in terms of the new -- so that's optical systems business that you're referencing in these new programs or share gain?
Yes. In one case, it's a new product that we've been working with the customer on for some time. And in the other case, same customer, it's share gain where we're taking a piece of system business away from one of our competitors.
Thank you. [Operator Instructions] And our next question will be coming from the line of Samik Chatterjee of JPMorgan.
Two questions, if I may. Seamus, you talked about the 800 gig revenue or the mix between 800 gig and 400 gig with your primary datacom customer shifting a bit within the quarter. I was more curious if you sort of dial down into 800 gig in particular, are you seeing a mix shift in terms of your primary customers' willingness to use outside suppliers with sort of different designs versus the in-house design where you are the 100% supplier? Are you seeing any mix shift relative to sort of internal versus external design and their willingness to use that within 800 gig as well?
Yes, Samik, we don't really have visibility into how the customer makes those decisions. Yes, as you rightly say, our biggest datacom program with NVIDIA, we're the sole source for their designed products, their designed transceivers, 400, 800 and 1.6, et cetera. But they have designed or they have approved for use in their network transceivers from merchant vendors to complement the transceivers of their own design, which again are manufactured by us. This really helps them to secure supply, not from any manufacturing constraints in our side, but more so their ability to access alternate parts and components, alternatives to those that are designed into their own transceivers.
We don't control or even really have any visibility into how our customer decides which devices to use where. However, our customers, including NVIDIA, our largest datacom customer, they commit significant resources for equipment and capacity at our sites and it's specific to their products. And of course, they're motivated to leverage that capacity and those investments as much as they can. That said, we do have visibility into demand for current and upcoming products that we are manufacturing for our customers. And based on that visibility, we're very optimistic that we're well positioned to see continued growth. But the -- I think it's -- they've approved -- like I said, they've approved a number of merchant suppliers for transceivers and they tend to use us and the merchant transceivers, but exactly how that decision gets made, we don't really have visibility to. Our focus is on just ensuring that we satisfy everything that they need from us and that we retain our position as the sole source for their designed transceivers.
Got it. And if I can just clarify and also move to my second question. So, in terms of clarification, just to confirm that you don't have any capacity shortages in terms of the capacity to cater to the 800 gig demand from your primary customer that you talked about where they sort of help you with the equipment, et cetera? And then sort of for my second question, autos, I mean, I haven't seen any positive autos data points in a while in this macro backdrop. So, how are you sort of really getting -- driving confidence that what you're seeing in terms of auto demand is not an inventory refill versus a more sustainable sort of demand improvement there? That's all from my side.
No problem. Yes. Just confirm, no, we have no capacity constraints at any of the speeds at 800 gig, 400, 1.6. We have no capacity constraints for our main customer there. On automotive, yes, we have seen some nice growth in automotive and it's driven by share gain, not by inventory correction or anything like that or inventory correction rebound share gain where we have taken business away from a competitor in the -- again, with our main customer there on the automotive EV charging infrastructure side of the business. So, it's share gain. So, we're quietly optimistic that, that's sustainable. We have to perform. We have to deliver, of course, and what the customer give us -- the customer can take it away. But we're quietly optimistic that, that business is growing nicely, and we're very happy with that relationship. So it's share gain, not inventory rebound.
Thank you. [Operator Instructions] Our next question will be coming from the line of George Notter of Jefferies.
I guess I wanted to ask more about 1.6 terabit transceivers for your primary customer. How do I think about the milestones that you guys have to go through in order to generate much more significant revenue? Is it simply a matter of them shipping the Blackwell platform in greater quantities and that's the catalyst for you guys? Or are there other milestones like specific qualifications or anything like that? I'd love to learn more about that.
Thank you, George. Yes. So, it really is down to our main customer there shipping Blackwell. They have talked publicly about they had some, I think, some design challenges, some yield issues, I think they call it some yield challenges for Blackwell, nothing to do with what we're doing. I think it's more at the foundry level. So really, once those issues are behind them and Blackwell begins to ramp in earnest, we're ready to go. So, it's really a question of when the customer is beginning to start shipping Blackwell, we should start to see 1.6 ramp up. There's a whole range of steps we have to go through to get qualified, but that's just normal business in terms of throughput and cost and yield and everything else. And we work very closely with our customer on all of those detailed milestones, but nothing too unusual about that. It's really just a case of Blackwell beginning to ramp that we believe will drive the demand increase that we're hoping to see for 1.6.
Got it. Super. And any constraints on componentry? I know in the marketplace, people have been talking about constraints on EMLs, other components. Anything that feeds into that opportunity that you see as a constraint component-wise?
None that we can really speak to. No. I think the customer has done a really outstanding job making sure that there's ample supply and capacity and also alternatives in place for several of the critical components. Maybe one of the good things about if Blackwell has been delayed by a little bit, one of the good things about that is it has given the customer and of course, ourselves extra time to make sure we have ample sources for each of the critical components. So, we're quite optimistic about that. We think once 1.6 begins to ramp, we should be in good shape.
Our next question will be coming from the line of Ryan Koontz of Needham.
Hoping to unpack telecom a little bit here. It sounds like Coherent ZR, 400ZR is the main driver there and you talked about some systems business that's a share gain. So, I assume that means the balance of the business is -- remains relatively stalled. So a, if you can confirm that? And then b, do you see ZR potentially cannibalizing some of that legacy business? Are you seeing any of that in your thoughts with your customers in terms of forecast and such?
Thanks, Ryan. So yes, we've -- what we've seen in the quarter, if you take our telecom business and you kind of break it into a couple of different buckets, if you like, there's the growth that we had been seeing in telecom while the overall business had been down for a while, ZR DCI as a category has been quite strong for us and primarily ZR. We did see what we would call traditional telecom begin to flatten out. And we're now starting to see some growth in traditional telecom. So, we're -- I suppose we're optimistic that, that traditional telecom business, which for some time has been a headwind, we think that's about to turn to a tailwind in the coming quarters.
ZR and the degree to which ZR is cannibalizing other products, there probably is a degree of that going on. We wouldn't be best positioned really to talk about that because, of course, we don't make every product for every customer. So, we don't have perfect visibility into that. But certainly, we've been very happy with the growth in ZR. And as you said, the win -- the new business win that we had in the quarter was also a ZR product. So, we're quite excited about ZR. From our point of view, if it cannibalizes something else as long as we're making the ZR, we're okay with that. But again, not too sure if it's cannibalizing existing products or not, not sure.
That's fair, Seamus. And on the ZR side then, how many major customers do you have for that? And do you have any idea what kind of global share you might have for ZR pluggable Coherent?
Right now, we have 6 ZR customers of varying sizes and they have varying market shares. We think we have a couple of the leaders in the space, but we have 6 ZR customers overall. Our share of ZR, we don't have great visibility to. It's a pretty new -- relatively new market. So, we -- I guess, we know what the numerator is, the denominator, we're not clear on. But we're just focused on winning as many of those customers as we can and all of the critical, the key new products with those customers and then making sure that where we can, we're helping those customers qualify the components that go into the ZR module as well as the ZR module itself. So, we work very hard with our customers to bring up their capability and their capacity. But to answer your question, we have 6 ZR customers right now.
Great. And I'm sure your strong position at [ 400ZR ] positions you well for 800ZR when that turns up. Do you have a rough idea when you think we might see some volume there at 800ZR?
Yes, it's already shipping.
Thank you. [Operator Instructions] And our next question will be coming from the line of Mike Genovese of Rosenblatt Securities.
I missed...
Mike, we can't hear you, Mike.
Okay. I can't do anything about that. So, I'll have to pass.
We can hear you now, we can hear you now. Go ahead. We can hear you now.
Okay. Perfect. I'm just curious, have you won any systems business with your main datacom customer that you can talk about?
System business with our main datacom customer. I mean our place, if you like, in the supply chain with our main datacom customer is we're their prime contract manufacturer for their optical interconnect products. That's really our focus. We're not trying to be greedy and go after everything. They have other suppliers and other contract manufacturers that they use. So, our focus is on making sure we satisfy everything that they need from on the optical interconnect side. That's our primary focus.
Okay. Got it. And I know this was asked earlier, but just I want to check again on the 1.6 terabit. You're not seeing anything in the laser or any other component supply chain that would make you at the beginning of that cycle could be supply constraints, nothing there?
Yes. There's a number of, I would say, new component sources that are being qualified and have been qualified already. So, I think in the early days of any of these products, there's always component constraints, somewhere along the line, there's always component constraints. But overall, I think I'm pretty impressed with the job that our customer has done in making sure they have ample supply and ample sources for all of the main components that go into the products. So, I could be wrong, but I'm not expecting there to be huge constraints on the component side.
Okay. And then finally, just on the model. How should we model interest and other income for 2Q and then beyond that? What would you encourage us to put in the model?
Mike, this is Csaba. Obviously, we are guiding one quarter at a time. And as you have seen, our interest income was somewhat flat in the last 2 quarters. So, I think there will be 2 dynamics going on. As interest rates would be coming down, obviously, it would present some headwinds. But at the same time, our cash position has been increasing over time as well. So, this helped us to maintain. So, I would be reluctant to give you any outlook beyond Q2. But on longer term, as interest rates are coming down, obviously, that will present some sort of headwinds in the future.
Thank you. This does conclude the Q&A session for today. And I would like to go ahead and turn the call back over to Seamus for closing remarks. Please go ahead.
Thank you for joining our call today. We're off to a great start in fiscal year 2025 with another quarter of record revenue with significant business momentum and several growth drivers benefiting us. We're optimistic that Q2 will represent another strong quarter for the company. We look forward to speaking with you again and to seeing those of you who will be attending the Needham Virtual Conference in a couple of weeks. Goodbye.
Thank you all for joining today's conference call. You may now disconnect.