Fabrinet (FN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Fabrinet's First Quarter Fiscal 2011 Earnings Announcement. My name is Tony and I'll be your coordinator for today. At this time, all participants are in listen-only mode. (Operator Instructions).

I would now like to turn the call over to your host for today, Mr. Paul Kalivas, General Counsel. Please proceed.

Thank you, Tony, and good afternoon, everyone. This is Paul Kalivas, General Counsel of Fabrinet. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the first quarter of fiscal 2011, which ended September 24, 2010.

With us on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors at Fabrinet, and Mark Schwartz, our Chief Financial Officer and Executive Vice President.

This call is being webcast and a replay will be available at the Investors section of our website located at investor.fabrinet.com. Please refer to our website for important information, including our earnings press release.

Before we begin, I would like to remind you that today's discussion may contain forward-looking statements. Forward-looking statements are not guarantees, and actual results could differ materially due to a number of risks and uncertainties. Such forward-looking statements include our expectations regarding future revenue growth and profitability, macroeconomic trends, and completion of Building 6.

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 SEC filings; in particular, the section captioned Risk Factors in our Form 10-K filed on September 8, 2010.

We will commence the call with brief remarks by Tom and Mark, followed by time for questions. I would now like to turn the call over to Fabrinet's CEO and Chairman, Tom Mitchell.

And good afternoon, everyone. Let me start by saying that we are pleased with our record results for the first quarter fiscal 2011, having exceeded both our revenue and earnings guidance.

Our revenue of $174 million reflects growth of 10% sequentially and 79% from a year ago. Our net profit for the quarter was $15.2 million, a 12% sequential improvement and a 146% increase from a year ago. We believe that we are well positioned to accelerate full year revenue growth in fiscal year 2011 while continuing our long track record of profitability.

During the first quarter, we continued to grow our revenue with existing customers as a result of both increased demand for existing products and the ramp of new products into production. We are also seeing interest in our services from potential new customers and continue to believe the United States, Europe, and Japan each represent significant opportunities for future expansion.

We continue to believe that macro-level trends, including the ongoing demand for more bandwidth and the increased number of applications utilizing industrial lasers, optics, and MEMS-based sensors position us well for 2011 and beyond.

In terms of our ability to meet future growth requirements, we are on target for our new Building 6 to be open for business by the first calendar quarter of 2012. Building 6 will be approximately 300,000 square feet and will be located adjacent to one of our existing manufacturing campuses outside of Bangkok, Thailand.

When completed, this facility will increase our global footprint by approximately 30% and will enable Fabrinet to support revenues in excess of $1.1 billion, more than double our financial 2010 revenue.

I will now turn the call over to Mark Schwartz, our CFO, for a more detailed look at our financial results and for our second quarter 2011 guidance. Mark?

Thank you, Tom. I will now provide more details on our first quarter 2011 results followed by financial guidance for the second quarter.

As Tom mentioned, we are pleased to have achieved record revenue of $174 million in the quarter ended September 24, 2010. Our revenues grew 10% sequentially and 75% from last year. On an end-market basis, revenue from Optical Communications was $138 million, or 80% of total revenues for the quarter, while Lasers, Sensors and Other revenue was $36 million, the remaining 20%.

Quarter-over-quarter, this represents 10% growth in Optical Communications and 12% growth in Lasers and Sensors. On a year-over-year basis, revenue from optical communications grew 63% and revenue from Lasers and Sensors, 187%.

Our SG&A costs were $4.8 million, or 2.8% of revenues in the first quarter, compared to $4.2 million, or 2.7% of revenues the prior quarter, and compared to $3.8 million, or 3.9% of revenues in the year prior quarter. The increase in SG&A expenses was primarily related to public company costs and accrued bonuses.

Our effective tax rate for the quarter was 8.2%, compared to 11.7% the prior quarter. We expect the tax rate to remain at our historical levels of between 8% and 9% for the 2011 fiscal year. Our favorable tax rate is derived in part from benefits we enjoy under Thailand's Investment Promotion Act.

Our net income was $15.2 million for the first quarter, or $0.44 per share, calculated from a share base of 34.4 million fully diluted shares. This represents a quarter-over-quarter increase of 12% and an annual increase of 146%. It also represents our forty-third consecutive quarter of profitability. Included in our costs in the first quarter are $228,000 in stock-based compensation expenses.

Moving on to the balance sheet, we ended the quarter with cash and equivalents of $101 million. This included $26.3 million in net proceeds from our June 2010 IPO, which we collected during the first quarter. During the quarter, we used $5.4 million in cash to complete the purchase of land for the construction of Building 6.

Our rate of growth and the current environment of materials constraints is reflected in our balance of inventory at the end of the quarter. As we noted in our previous earnings call, we have entered into agreements with certain customers to enable us to secure inventory in excess of build plans in the event sufficient other materials become available to fulfill production.

As a result, inventories increased to $113 million, an increase of $15 million from the fourth fiscal quarter 2010. Our inventory days increased to 67 days from 64 days in the previous quarter.

As for cash flow, during the first quarter of 2011, we used $1.9 million of net cash in operating activities. We invested $7.3 million for capital equipment and facilities during the quarter, including $5.4 million to complete the purchase of land for Building 6. We also received $26.3 million in proceeds, net of expenses, from our June IPO.

Now I would like to discuss guidance going forward. For the second quarter of fiscal 2011, we expect revenues to grow on a year-over-year basis by 48% to 52% to a level between $170 million and $175 million, resulting in $0.42 to $0.45 earnings per share on a fully diluted share base of 34.3 million shares.

In closing, I would like to say we are pleased with our execution in the first quarter 2011 and we believe we are well positioned to continue to execute successfully in the quarters ahead. At this point, I would like to turn the call over for questions. Operator?

(Operator Instructions). And your first question comes from the line of Sherri Scribner. Please proceed.

Thank you. I'd wanted to ask you about your revenue guidance in light of some cautious comments from some of your customers. It looks like your revenue guidance at midpoint is for down slightly. I wanted to get a sense of what you're seeing from end customers. Is there a softening of demand for your products? Is there a softening of demand from the optical segment? I just wanted to get a sense of your expectations for December, what you expect to see.

All right, Sherri. Thank you for your question. We are in communication with our customers on a regular basis, which I'm sure is not a surprise. We have not seen any material changes to our demand, nor with the tone of our customers in the last quarter. Demand continues to be stable, our visibility continues to be stable, and we continue to be constrained on certain materials and equipment.

So as we look forward, as we've said in the past, we do expect there will be fluctuations from quarter to quarter, but we still see very solid growth in the industries that -- in the markets that we serve.

Okay. I guess with the revenue guidance of down slightly or essentially flat, it seems like there's maybe a bit of conservatism in there or maybe there's a bit of a slowdown, but you're saying that things are stable. So I just wanted to understand, is that conservative or is that something you would typically expect in the December quarter?

I don't think it's seasonal for us. And I think that based on what we're seeing from our current forecasts from our customers, that we are comfortable within this range.

Okay, great. And then I just want to ask a follow-up on the gross margins. The guidance at the midpoint implies a little bit of a decline in the gross margin. What are you seeing there? Why are you seeing a bit of a decline there?

I don't think we're seeing a bit of a decline in our gross margin. Again, our margins should remain within the range that we forecast for the fiscal year, Sherri.

Okay. Great. Thank you.

You're welcome.

And your next question comes from the line of Ajit Pai. Please proceed.

Yes, good afternoon.

Hi, Ajit. How are you?

Good. A couple of quick questions. I think the first is the plant that you mentioned, the Building 6 that comes on line in the March quarter, right at the beginning of the year. Could you give us some impact as to what the depreciation on that would be on a -- the impact would be on a quarterly basis?

Well, when Building 6 is fully commissioned, we're talking about, call it the March quarter of 2012, and we may not have to take full depreciation on that building until perhaps the June quarter of 2012. And we'll work through that and provide the details as we get closer. But if we're looking at the construction costs to be approximately $27 million, then we may be looking at depreciation of upwards of $1 million per year.

Got it. And then, just a little bit of color on the sort of commercial laser market that you've been targeting. Can you give us some idea of whether you've got additional customers. I know that Coherent was a significant customer that you had highlighted in the past, but are there any other material wins?

This is Tom. So anyway, we are fortunately having new customers for our industrial lasers, which is quite good for us, and we're having a -- we're receiving additional projects from our current customers for the industrial lasers. So the industrial laser part of our business looks very good.

Got it. And then, just looking at the revenue guidance for the December quarter, I think almost -- a large number of the customers, the folks that have reported in the com-equipment [world]-- some have guided -- system vendors have guided down; there are others that have guided up for the December quarter.

Could you give us some indication, when you're looking at the December quarter, on the businesses, on the telecom side and then on the commercial laser side, whether you're expecting one to be weaker than the other going into the December quarter?

Sure, Ajit. I think first and foremost, our diversification efforts over the past years -- several quarters -- has been successful in that for sure over time certain markets appear to be performing better than others.

But in our case, given the level of diversification that we've achieved, we believe that we can continue to be successful and continue to have a stable revenue base, even as certain of the sectors or sub-sectors of the markets that we serve are over-performing or under-performing. So I think for us a large part of our ability to continue to be stable is our diversification.

Right. But when you have a look at the margin structure for the two businesses, just for modeling purposes, trying to understand it a little better, are the margins -- the gross margins and operating margins for serving telecom customers the same as serving commercial laser business?

So, generally speaking, yes. Within each customer, various products have different margin structures and for sure within an industry, certain customers have different margin structures. But by and large, the three markets that we serve, the margin profiles are very similar.

And then, looking at the cash that you have on the balance sheet right now and that you'll be generating over the next several quarters, could you tell us the [process] uses of cash?

Not at this point. For sure, as items develop we will make some announcements, but currently we don't have any specific use for that cash that we will be building up.

Got it. Thank you.

You're welcome.

And your next question comes from the line of John Marchetti. Please proceed.

Thanks, Mark for the customer breakout in the quarter, I know in the past you've shared with us what kind of your top five customers represented in terms of total revenue.

Right, John. Thank you. So, going forward, this quarter inclusive, we will be doing that on an annual basis, no longer on the quarterly basis. We were required, when we were a private Company, in our S-1, to provide certain information that as a public Company we won't be providing.

Okay. Any big changes there relative to anything historical that we should keep an eye out for?

No, nothing significant. And again, our policy as a public Company is to not comment on any specific customer. So I'll leave it at that, but I don't think there's any surprises.

Fair enough. In terms of last quarter, you mentioned that you thought the shortage of components kept you maybe $5 million, $7 million short of the revenue you would have been able to achieve. Was that still the case this quarter in terms of leaving some revenue on the table because of it? Or have you worked through some of those issues at this point?

Last quarter, I think we said 5% to 7%, and I would say that number is the same this quarter as well. Ending the September quarter, there's probably 5% to 7% of additional revenue left on the table as a result of constraints.

Okay. And then, I guess as a follow-up to that, you indicated you had revenues up sequentially in this quarter. Should we expect that again next quarter as you continue to try to work through some of these constraints?

I think what we want you and others to focus on is our year-over-year growth. And obviously from last year to this year is one thing, but we're talking future quarters as well. We're talking about an industry on the communications side that we're seeing different data points in, as you folks are as well. But our belief continues to be that we will continue to have solid revenue growth, stable growth over the next several quarters.

Thank you.

(Operator Instructions). And your next question comes from the line of Alex Henderson. Please proceed.

Hey, guys.

Hi, Alex. How are you?

Hi, Alex.

I am very well. Thank you very much. When you gave your guidance sequentially flat to down, is there any difference in the rate of change between the third quarter and the calendar fourth between the two segments -- optical com and lasers -- commercial lasers?

Our revenue from the June to the September quarter, in terms of the percentage of revenue from each of those segments, was very similar, as you heard in our prepared remarks.

Yes, that was 10 and 12, but I was asking going forward one.

Yes. We don't see a significant change in the near-term.

Normally, the December quarter is a seasonally strong quarter for capital spending and I would presume given a fair amount of turns business within the quarter it would be a seasonally strong quarter for components and other products that you produced for the com segment.

I'm a little confused why you're indicating you think it's sequentially flattish, but solid growth in the same breath. I'm not sure I understand the dynamic that creates that.

Well, I think there's a number of things. One is that we believe that the rate of growth, at least in this quarter, perhaps has slowed as compared to last quarter. We still see stable revenue growth going forward in future quarters.

Sequential flat to down number is not the same rate of growth you just produced. I'm not sure I understand the answer.

So --.

I'm not trying to be obtuse; I'm just not sure I understand what you mean.

No. This quarter, December, our forecasts come directly from our customers. So what you're hearing from us is an aggregation of our customers' demand. And we see an opportunity for slight growth this quarter and we still believe that we have an opportunity for continuing growth in future quarters.

So when you say you're comfortable with the growth rate, that there's no change in the rate of growth, that sounds inconsistent. Again, the growth was up 10% quarter-to-quarter yet you're giving flat. Was there a change in linearity during the quarter or changing conditions in the quarter that goes from the 10% to the flat?

I think part of the answer is perhaps in how you're viewing the industry itself. You started out, Alex, by mentioning this quarter traditionally being a strong quarter. And I think from our perspective, while that may be the case generally, we've never really seen much seasonality because we've been in a growth mode ourselves for the last several years.

So it's difficult for us to say whether this is a seasonally strong or not quarter. We can only give you folks information based on what we're seeing in the marketplace.

So comments by [Sienna] that they saw a little softness in September or the comments out of [Oclaro] that they had quarters reversed in September, sequentially flat guidance from both Verizon and down sequential capital guidance from Verizon and flat at AT&T, those are non-normal conditions. So what you're saying is that you haven't seen a change in demand conditions?

That's correct.

Okay. So it sounds like your business is stronger than the backdrop then?

I think, again, we benefit from our diversification. There are certain segments within telecommunications, data communications, cable television that are doing well and others that are perhaps lagging. Same with industrial lasers and sensors. Because of the level of diversification we have though, and the visibility we get from our customers, we feel pretty good about the forecasts and guidance that we're giving.

Okay. One last question then I'll cede the floor. So as we look into the future and we hear about these very large RFQs that are out for 100-gig deployments the back half of next year, would you expect that the 100-gig would provide some acceleration in your business the back half of 2011 or would that be something that would have lesser of an impact on you.

Difficult to say at this point. We are working on 100-gig with some of our customers, but I think it's too early in that ramp to tell.

Okay. Thank you.

You're welcome.

And your next question comes from the line of Sharon Shih. Please proceed.

Hi, Tom and Mark.

Hi.

Hi. I just want to probably try to check on this inventory situation by the end of September quarter. I continue to see some 15% sequential increase. Is there any particular reason for the inventory increase or do you still expect some of the components shortage so you just try to pull in some of the inventory first?

I think your latter comment is correct, Sharon. So, we are still seeing material constraints, particularly in ASICs, but we are also seeing them in certain critical optical, mechanical, and other electronic components. It does appear that certain of the constraints appear to be loosening, but we are still in a situation where there are constraints across several products and several types of components.

That being said, we mentioned in our prepared remarks that part of the increase in our inventory is attributable to that; however, much of the increase in our inventory is attributable to the increases in our revenue.

But if I look back on the past few quarters, what would you think would be our normal inventory level for the going forward?

I think that we continue to expect our inventory levels to once again track our historic rates over some period of time. We expect to see inventory days begin to decline toward those levels starting in the next two to three quarters.

Okay. Yes. Okay. Great.

Thank you, Sharon.

Thank you.

And there are no further questions at this time. Thank you for your questions, ladies and gentlemen, and thank you for your participation. I would now like to hand the call over to Mr. Paul Kalivas for closing remarks.

Thank you. This concludes Fabrinet's earnings call. Thank you all for your participation.

Thank you for your participation, ladies and gentlemen. This concludes the presentation. You may now disconnect. Good day.