Fabrinet (FN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter Fiscal Year 2011 Fabrinet Earnings Conference Call. My name is Amisia, and I will be your coordinator today. At this time, all participants are on a listen-only mode. We will conduct a question and answer session towards the end of the conference.

(Operator Instructions)

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

Thank you. 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 second quarter of fiscal 2011, which ended December 24, 2010.

With us on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of 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, expansion of our customer base, 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-Q filed on November 3, 2010.

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

Thank you, Paul. Good afternoon. Let me start by saying we are pleased with our record results for the second quarter of fiscal 2011. We exceeded both our revenue and our earnings guidance. Our revenue of $185 million reflects growth of 61% from a year ago and 6% sequential.

Our net profit for the quarter was $15.8 million, or a 42% increase from a year ago, and a 4% sequential improvement. This represents our 44th consecutive quarter of profitability. Based on our visibility and the strength of anticipated demand, our pipeline for projects continues to be robust, and we feel well-positioned for 2011.

In order to support the growth opportunities, we have undertaken a number of initiatives. First, we are pleased to announce that we have opened a new European sales and marketing office in Stockholm, Sweden, and hired a Vice President of Scandinavian business development.

Through this office, we expect to better serve our existing European customers and further expand our customer base. Secondly, we continue to meet milestones for the construction of our new Building 6. We expect Building 6 to be completed and available for customers during the first calendar quarter of 2012.

As we discussed previously, Building 6 will be approximately [300,000 square feet] (corrected by company after the call), and will be located at 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.

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

Thank you, Tom. I will now provide more details on our second quarter results, followed by financial guidance for the third quarter. As Tom mentioned, we're pleased to have achieved record revenues of $185 million in the quarter ended December 24, 2010. Our revenues grew 61% from the same quarter last year, and 6% sequentially.

Broadband content, such as video, voice over IP, and smartphones are driving higher network utilization and increasing demand for bandwidth. Carriers are responding by upgrading their networks with 4G wireless, fiber to the home, and 40G or 100G equipment to raise performance and lower operating costs. The high-precision optical modules and components we build for our customers are the vital building blocks within this equipment.

We continue to see similar growth opportunities in the industrial lasers and sensors industries, as our innovative customers continue to design new and broader-reaching applications for these products.

On an end-market basis, revenue from optical communications was $149 million, or 81% of total revenues for the quarter, while lasers, sensors, and other revenue was $36 million, or the remaining 19% of our revenues. On a year-over-year basis, revenue from optical communications grew 59%, and revenue from lasers and sensors grew 73%. Quarter-over-quarter, this represents 8% growth in optical communications, and 1% growth in our lasers and sensors markets.

Our SG&A costs were $6 million, or 3.2% of revenues, in the second quarter, compared to $4.8 million, or 2.8% of revenues the prior quarter, and compared to $3.8 million, or 3.3% of revenues, in the year prior quarter. The increase in SG&A expenses was primarily related to an increase in our share-based compensation expenses and accrued bonuses for fiscal year 2011.

For the second quarter, share-based compensation expenses were $0.8 million, a sequential increase of $670,000 from the previous quarter, as a result of replenishing the equity positions of our long-term employees and granting first-time option awards to employees that had joined our company either prior to or in the months since our public offering last June.

Our effective tax rate for the quarter was 7.4% compared to 8.2% the prior quarter. We continue to anticipate our global tax rate to remain at our historical levels of between 8% and 9% for the 2011 fiscal year.

Our tax expense in the second quarter included an accrual of $485,000 as a result of a change in the withholding tax rate assessed by the tax authorities of China on funds distributed by Chinese entities to offshore parent companies. The additional expense impacted our earnings by approximately $0.01 per share.

Our net income was $15.8 million for the second quarter, or $0.46 per share, calculated from a share base of 34.5 million fully diluted shares. This represents an annual increase of 42% and a quarter-over-quarter increase of 4%.

Moving on to the balance sheet, we ended the quarter with cash and cash equivalents of $102 million, up $1 million from the previous quarter, after cash expenditures of $6 million to support our future growth. During the quarter, we used $1.2 million of our cash toward the initial phases of construction of Building 6, and $4.8 million for the purchase of new equipment.

Notably, our inventories decreased to $107 million, a decrease of $6 million from the first fiscal quarter 2011. As a result, our inventory days decreased to 60 days from 67 in the previous quarter. We expect our inventory days to continue to decrease over the next six to nine months. During the second quarter of 2011, $8.3 million of net cash was provided by operating activities.

Now, I would like to discuss guidance going forward. As Tom indicated, our near-term visibility is robust, with significant customer activity. For the third quarter of fiscal 2011, we expect revenues to grow on a year-over-year basis by 35% to 39% to a level between $182 million and $187 million. We anticipate net income of $0.47 to $0.49 per share, based on a fully diluted share base of 34.6 million shares.

In closing, I'd like to say we're pleased with our execution in the second quarter 2011, and we believe that we are well-positioned to continue to execute successfully in the quarters ahead.

At this point, I'd like to turn the call back over for questions. Operator?

(Operator Instructions)

And the first question comes from the line of Sherri Scribner with Deutsche Bank. Please, proceed.

Hi, thank you. Congratulations on the quarter, Mark, and Tom --

Thank you.

-- I guess everybody in the Fabrinet team. I just wanted to ask you about the guidance. Obviously, the guidance is higher than street expectations, but if you look at it at the midpoint, it's roughly flat, sequentially. So I guess I'm trying to understand -- is there a bit of conservatism in that number?

I mean, typically you grow a little bit from quarter to quarter. Or, is this a quarter that you would expect to be -- I mean, obviously expected to be flat, but maybe a little more commentary.

Well, I think you're right to point that out, Sherri. The quarter is tracking well for us. We have excellent visibility, which provides us a certain level of confidence in the quarter. The visibility we have comes directly from a senior level of our customers, as we've talked about on these calls in the past.

Our customers provide us updated forecasts, and we refresh their forecasts regularly. We're still growing in each of the markets we address. And overall, we expect to continue to grow, and expect to continue to outpace the growth of the markets we serve. But as we look at the quarter from a very current perspective, meaning as of today, this is what we see.

You mentioned the conservative nature of our guidance in the past. We don't guide particularly conservatively as a means of trying to come in above that number at the end of a quarter. However, we give you the best information we have available at the time, and we feel comfortable in the numbers that we've provided.

Okay. That commentary is helpful. In terms of the optical communications segment, it seems like that's growing much more rapidly, and I guess I would have thought a couple quarters ago you would see a little more momentum with the Laser business.

So I'm trying to get -- so maybe you could give a little bit of detail on when you expect laser to take off a little bit more. I know that's more of a nascent market.

Yes, the Laser and Sensor businesses for us are a smaller portion of our revenues, right -- 19% this quarter. It's hovered in the 19% to 20% over the last several quarters. We do expect that to continue to trend up in the future.

I think because our revenues in those two segments are relatively small in comparison to our communications revenue, there's certainly more lumpiness in those industries for us. And growth tends to be more of a series of step functions.

So it won't track as linearly as our communications does, because it just simply isn't as diverse as our communications revenue is. But, we continue to be very optimistic about our growth in both of those segments.

Okay, great. Thank you.

You're very welcome.

And the next question comes from the line of Ajit Pai with Stifel Nicholas. Please proceed.

Yes, congratulations on a great quarter.

Thank you.

So a couple of quick questions. I think you talked about lumpiness in the laser business, and about how, as it gets more diversified, it'll get a little less lumpy. Could you give us some color on efforts that you have made to diversify the commercial laser business?

How many new customers you have over there, and also whether there are any other material customers besides your largest customer over there that's ramping currently?

Yes, thank you, Ajit, for your question. So generally, we won't comment about a specific customer. However, we had two significant customer wins in the past year in lasers specifically. You may know, Ajit, and others on the call, that our customized optics subsidiary in China, CASIX, services many of the laser customers globally already.

So there is, perhaps, an increased initiative within our sales organization to look at existing customers of CASIX and determine how we can assist those folks with their engineering and manufacturing requirements at the component and module level. And I think we're all hopeful that we'll be able to add more customer wins in the next couple of quarters as a result of those efforts.

Got it. The second question is, just looking at and prioritizing the uses of cash flow. So even when you went public as a company, you had net cash in the balance sheet You're generating cash. And Building 6 isn't as thirsty as one would have thought in terms of consuming cash.

So, could you give us some color as to how you'd prioritize your current uses of cash and whether acquisitions -- or potentially acquiring plants from future customers -- something that you'd done a few years ago, whether that's something you're looking at actively? Or, how you'd prioritize uses of cash?

Sure. So, first of all, we don't believe that we need acquisition to fuel the growth of our business. We think with our existing customer base, new projects from our existing customers, and our pipeline of new customers and new projects from those new customers, that we can continue to outpace the industries that we serve as a whole in terms of our growth rate.

Having said that, we're always looking at opportunities. And we're generally always in discussions with one or another customer relative to transferring production from their manufacturing sites or even viewing their own acquisitions in the context of how we can assist them in transferring production once those acquisitions have closed.

In terms of our own acquisition activity, while we do look at companies as processes are available and active, that is not a significant driver of our growth, and it wouldn't surprise me, Ajit, if there was something to talk about or not something to talk about over the next 12 months.

Got it. And then uses of cash, then -- what do you plan to do with the cash? Do you plan to buy back shares, initiate a dividend --?

Well, we're examining a lot of those and other potential opportunities. I don't think it makes much sense for us to buy back shares now, given the liquidity in the shares. But we're certainly looking at various alternatives and we may find that we have a use for some portion of that cash in the ramp of Building 6. So, there'll be more to follow on that in the future, I'm sure.

Okay. And then the last question is -- could you give us some color as to --you talked about a European presence becoming more material. Could you give us a little more color there as to how this European presence is going to be helping you? I think you talked about being closer to your customers, but -- a little more color there.

Sure. Tom, do you want to address that?

Yes, we been a bit hesitant in years past to expand very much into Europe, and we made a decision about a year ago that we would expand into Europe, and it's a great opportunity for us. We do have a number of customers in Europe. But, we have such an opportunity in front of us, and we're really looking forward to the new sales office in Scandinavia.

Right. And what -- when you say you're expanding there, is it more of a sales office? Is there a manufacturing component? You know, what is the actual kind of work you'll be doing over there?

It's solely limited to business development, sales, and marketing.

Got it. Okay. Thank you so much. And congratulations, again.

Yes, thank you.

Thanks, Ajit.

(Operator Instructions)

And the next question comes from the line of Cobb Sadler with Catamount Advisors. Please, proceed.

Hi guys. I had a question on inventory -- the inventory decrease. Was it more finished goods or raw materials that decreased? And what are your lead times looking like for raw materials? Do you still have to keep some buffer stock, or are lead times coming down?

Hi, Cobb, thanks for your question. So we've been saying for the past couple of quarters that we could see our way to some of these component capacity restrictions starting to lift, and we've certainly seen that in the last quarter.

And I think -- and Tom can certainly add to this. But I think one of the encouraging signs for us is the signals we're receiving from the supplier base that they are now -- they have committed to the growth of these industries -- communications in particular and are seeing this as a long-term growth opportunity and are now investing in additional capacity.

So we are seeing, across ASICs, across opto-mechanicals, pure optics -- we're seeing many of those limitations that we had discussed in the past starting to recede. And that's reflected in the days of our inventory, which is not finished goods.

Cobb, our inventory tends almost exclusively -- with some traditional levels of buffer stocks -- to be almost exclusively raw materials and work-in-process. And we think that that number of inventory days will continue to decline over the next six to nine months.

Got it. Sounds good. And then lead times to your customers. Are lead times staying about the same, or contracting -- expanding? That would be to your customers -- what kind of lead times you're quoting on average.

Well, as you can imagine, given the diversity of the products we build and the industries that we serve, that there isn't really a meaningful number I could tell you, in terms of lead times on a product basis. But I think that -- look, in manufacturing, there's always a material that is constrained -- always something that is being chased. And that doesn't change.

But I think the sheer number of parts that are in that type of a constraint position has declined. And, as a result, in some cases, that may lead to shorter lead times with our customer base. But I don't think that -- and I'll ask Tom to add any detail. I don't think that's meaningfully changing our lead time profiles right now.

Got it.

But we continue to strive to reduce the lead times to make our customers more competitive in the marketplace. But, as Mark said, the supply chain -- the improvements in the supply chain have greatly helped, I think, the whole industry, as it relates to lead times.

Sounds good. And then, just, on market share on high-growth products, so -- ROADMs and tunable XFPs, what do you think your market share is? Do you think it's higher or lower than corporate average throughout the optical sector? I guess I'm trying to gauge your exposure to, again, ROADMs and tunable XFPs and things like that, and how that might affect your growth going forward.

Well, Cobb, I think it's difficult for us to gauge that against others. But for sure, the majority of our revenues are derived from time-to-market products, some of which you've mentioned. And by that I mean the majority of our revenues are from part numbers that didn't exist two years ago in our system.

Okay. Got it. Sounds great. Thanks, very much.

You're very welcome.

Thank you.

(Operator Instructions)

And the next question comes from the line of Troy Jensen with Piper Jaffray. Please, proceed.

Hey. Congrats on a nice quarter, gentlemen.

Thanks, Troy.

Thank you.

Okay, so a quick question for Mark. I know you guys have always talked about the lasers and sensors starting to become a larger percentage of your overall revenues. But I know opticals surprised, right -- and provided more growth.

If you look about a year out from now, do you think lasers will actually get to that higher percentage? Or, do you think that the strength in optics can sustain for several quarters yet?

Perhaps difficult to answer, Troy. We believe in the growth trends in optical communications. And the surprises that we've had to the upside in our revenue over the past three quarters, at least, have by and large been through growth of that portion of our revenues. So difficult for us to speculate, but it appears that the revenue growth for communications for Fabrinet is sustainable over the next several quarters.

Okay. And just a point of clarification for me here. It looks like your December quarter end ended on the 24th. Is that typical for you guys to close a week early? And, will we have a 14-week quarter here in March versus a 13-week in December?

Well, we will have a 14-week quarter. We run off of a 52/53 year. So the first quarter of our fiscal '12 will be a 14-week quarter. That's the September quarter.

You know, is that the same as last year, Mark? Are you going to have an extra --

No, we haven't had, as a public company yet, a 14-week quarter.

Okay. But even with that, you still think flat sequentially despite the extra quarter at the midpoint?

Well, like I said, we continue to be real optimistic about growth prospects this quarter. And we can only report what we see currently.

Understood. Keep up the good work, guys.

Thank you.

And the next question comes from the line of Mark Hillman with Collins Stewart. Please, proceed.

Hey, this is actually Lou Miscioscia and Mark. We're both on the line together. Just a quick question about the different optical portions of the business. Are you doing any of your own design work for your own products? Or, is it mostly assembling others that your customers are bringing to you?

Thanks, Lou. So we don't compete against our customers. So all of the design efforts undertaken at Fabrinet are process design improvements on our customers' products. We work hand-in-hand with our customers, oftentimes on their design teams, but the designs all belong to our customers.

Okay, great. And, obviously, it sounds like no change to that in the future. Okay --

I'm sorry, was there a follow-on question, Lou?

Just -- okay, and it sounds like, obviously, there's no change to that. That's the strategy going forward too.

That is exactly right.

That's right, Lou.

Okay. Okay, thanks. Good luck on the new year.

Thank you.

Thank you.

Ladies and gentlemen, this concludes the question and answer session for today's call. 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, everyone, for your participation.

Thank you.

Thank you, all.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.