Fabrinet (FN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fabrinet Conference Call. At this time, all participants are in a listen-only mode. We will conduct question and answer session towards the end of this presentation.

(Operator Instructions)

I will now turn the presentation over to your host for today to, Paul Kalivas, General Counsel. You may proceed.

Thank you, Frances, 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 third quarter of fiscal 2011, which ended March 25, 2011.

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. Beginning this quarter, we have modified the content of our formal commentary to include non-GAAP results. Please see a GAAP to non-GAAP reconciliation of these financials on our website and in our press release.

I would also 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 operating results and tax rates, expected future growth of our end markets and our customers' markets, macro economic trends and completion of Building 6.

These statements reflect our opinion 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 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 February 02, 2011.

We'll commence the call today with brief remarks by Tom and Mark, followed by Tom for questions.

I would now like to turn the call over for Fabrinet's CEO and Chairman, Tom Mitchell.

Thank you, Paul and good afternoon, everyone. Today, I'm pleased to report not only record third-quarter results, but also our 45th consecutive quarter of profitability. There are two main factors, which are contributing to this ability of our business.

First, our growth drivers, new projects from existing customers, new projects from potential new customers and the long-term growth of each of the markets we serve. Second, while there may be some short-term inventory absorption, the trends remain promising. Our visibility remains good and our new project pipeline continues to expand.

We are doing everything we can to accelerate new product delivery in order for our customers to achieve time to market objectives. The net result is continuing confidence in the consistency and profitability of our results.

I will now turn the call over to Mark Schwartz, our CFO, for a further perspective of our business and financial results. Mark?

Thank you, Tom. Before I start, please note that all numbers are GAAP, unless stated otherwise. We will refer to certain non-GAAP results in order to distinguish the ongoing fundamentals of our business from one-time effects or share-based compensation expenses.

Tom mentioned the promising longer-term trends requiring the build out of or upgrade to next-generations communications infrastructure with the proliferation of tablet computing and smartphones among others, as well as high-speed mobile broadband access that continues to be in high demand, as well video applications enabling consumers to download full-length movies or high-definition content have driven our peak hour bandwidth usage to 40% video.

Over the next five years video is forecast to grow at a 50% compound annual growth rate and global IP traffic at a 33% compound annual growth rate. The demand to improve the cost per bit of capacity expansion is strong, which in turn is driving innovation at our customers to provide value and flexibility with their next-generation products. The high precision optical modules that we manufacture for our customers are the vital building blocks of this communication's infrastructure.

Now, to review results. We achieved record revenues of $195 million in the quarter ended March 25, 2011. Our revenues grew 42% from the same quarter last year and 6% sequentially. Our share based compensation expenses for the quarter were $1.2 million, of which $798,000 were included in SG&A.

SG&A also included $617,000 in expenses related to the completion of our registered offering of secondary shares completed in March, and $438,000 in expenses related to a separation agreement for an executive.

Our effective tax rate for the third quarter was 8.8%, compared to 7.4% the prior quarter. This is within the window of rate fluctuations we have historically experienced from period to period based on a number of variables, that impact multi-national operations. We continue to anticipate our global tax rate to remain at our historical levels of between 8% and 9% for the full fiscal year.

On a non-GAAP basis, net income totaled $19 million or $0.55 per share, calculated from a share base of $34.4 million fully diluted shares. Including share-based compensation and the other noted SG&A items, GAAP income was $16.7 million or $0.49 per share, which represents an annual increase of 23% and a quarter-over-quarter increase of 5%.

On an end-market basis, revenue from optical communications was $155 million or 79% of total revenues for the quarter, while lasers, sensors and other revenue was $40 million, the remaining 21% of our revenues. On a year-over-year basis, revenue from optical communications grew 42% and revenue from lasers and sensors grew 44%. Quarter over quarter, this represents 4% growth in optical communications and 12% growth in our lasers and sensors markets.

Moving on to the balance sheet, we ended the quarter with cash and cash equivalents of $116 million, an increase of $14 million from the previous quarter. During the quarter, we used $3 million of our cash toward the purchase of capital equipment, and $1 million of our cash toward the construction of our new Building 6.

Notably, our inventory days continued to improve, decreasing to 57 days from 60 days in the previous quarter. One additional highlight from our March quarter was the groundbreaking on the vertical construction of our new manufacturing facility in Thailand which we refer to as Building 6. Vertical construction commenced in late February and the 300,000 square foot factory is on plan to be completed and available to customers the first calendar quarter of 2012.

Now, I would like to discuss our guidance going forward. For the fourth quarter of fiscal 2011, we expect revenues to grow on a year-over-year basis by 10% to 13% to a level between $173 million and $178 million. We anticipate non-GAAP net earnings of $0.46 to $0.48 per share based on a fully diluted share base of 34.7 million shares, and GAAP net income of $0.44 to $0.46 per share based on 34.5 million fully diluted shares.

At this point, I'll turn the call over to the operator for questions. Operator?

(Operator Instructions)

And your first question today comes from line of Sherri Scribner with Deutsche Bank.

Hi, thank you. Hello there, Tom, and Mark.

Hi.

Hi. I just wanted to get a sense of what you are hearing from your optical customers. Clearly, the guidance implies healthy growth, but it's below where street expectations are. So I wanted to get a sense of, are you seeing more caution from your optical customers or something else going on that is making you a bit more cautious on the guidance?

Well, I think can add a little bit to that, Sherri, and perhaps Tom might add some color. We can only forecast and guide to what see. As you know and others on the call are aware, as we've said from time to time, we have good visibility with our customer base.

We see upwards of a year out in terms of forecast on the customers, and we continue to have good visibility even in the short term. But for now, based on the demand that we currently we have in our system from our existing customer base, our guidance is quantitative.

Maybe I'll sort of ask the question in a different way, because I know that you guys do have a lot of visibility with your customers and you get forecast further out. Just thinking about the June quarter guidance, is the June quarter slightly softer than other quarters as we move forward?

Because I know Tom talked about and you also talked the strong long-term trends you're seeing, so just trying to get a sense of, is there a pause here in the June quarter, which is what we've heard from some of the optical customers, or is it more of a longer-term trend?

It does appear to be a short to intermediate trend, Sherri. I think our customers can add more color specifically as to their own demands and what they are seeing in the marketplace, but we continue to see the demand drivers as we spoke a little about in the prepared remarks relative to wireline and wireless broadband that will continue to foster growth in these markets in the long-term.

Okay. And then just a quick follow-up in terms of the EPS guidance, the difference between the GAAP and the non-GAAP. I'm assuming that's primarily options. Just trying to get a sense of how much is option expense in next quarter's EPS guidance, and is there anything else in there?

No. As of now, there isn't. When we had our call in February, at that time, we had not received a demand from our private company investor, H&Q Asia Pacific, to do a follow-on, and we had not planned for the separation of the executive that we mentioned. Again, as we go into this quarter, there are no other unplanned events or anything we can see on the horizon outside of share-based comp.

And how much is the share-based comp implied in the guidance in terms of the dollar amount?

I think we are looking at sub-$1 million this quarter, something in the $800,000 to $1 million.

Okay, great. Thank you.

You're welcome.

Your next question comes from the line of Subu Subramanian with Sanders Morris.

Thank you. My question was to do with guidance as well. If you look at the sequential downtick in your guidance about 10% of the midpoint of the range, is it all driven off of optical comps, or is it a mix of the businesses?

And then, depending on who the customers are, some have suggested a bottoming in June and some maybe a little bit further out, but just - I'd like to get your thoughts on how long do you think it will be at somewhat depressed levels relative to comp?

Hi, Subu. I think, as you've stated it is what we are seeing. Obviously, we can't comment on a specific customer. But what you are seeing and what the market is seeing and hearing from others is what we are seeing in the marketplace in terms of the duration of this inventory absorption or correction, as you want to call it.

And in terms of the mix between optical comps and the laser sensors business, is the decline all pretty much driven out by optical comp?

It appears that way by and large. Our laser and sensor and other revenues are stable.

And final question, Mark. I mean, is that short-term visibility any different as well as backlogs definitely for some of your customers have declined? Or, is the short-term visibility for the number you've guided to similar to what it has been in the last few quarters?

I think I'll let Tom talk a little bit about our visibility.

Our visibility, as I was saying, it continues to be good and the -- but I think that this appears to be, and like I said in my talk, this is a short-term inventory absorption.

Thank you, very much.

Sure

Your next question comes from the line of John Marchetti with Cowen & Company.

Thanks, very much. Just wondering if you would talk a little bit, guys, about sort of what you did have go right for you in the laser and sensor business this quarter? You had a nice uptick there both on a sequential and the year-over-year basis.

Just curious if that's really starting to gain some momentum for you, if you're now at a point where we can expect that business to really start contributing on a meaningful way as we go forward here for the next year or two. So, just any color there would be helpful.

Yes, I think, John that it's a -- the results are consistent with what we've said over the last three to four quarters which is that we see this business -- these businesses outpacing our communications business in terms of its growth, but there will be some lumpiness along the way as we saw in the second quarter.

The fact that it's only 20% of our revenue is the reason for that lumpiness. But we continue to be very optimistic about the growth, and we do believe that laser, sensor and other revenues for Fabrinet will continue to outpace communications.

Thanks, very much. And then, if I could just for a minute, is there anything that you can share with us in terms of the revenue by geography? I know we can get that later on as things come out, but just curious given the pause that we are seeing right now on the optical side in terms of your geographic split, where you're sort of seeing that the most or if it's pretty broad across the board.

I think it is broad across the board, John. And our geographic split is certainly in our financial documents that we file. However, it's not as meaningful, perhaps as it is with other companies.

Because much of the revenue that we ship to Asia for example is considered Asian revenue by geography, however, it's US customers with either Asian subsidiaries or other connection there, where we are taking our assemblies and shipping them to another location within Asia.

So, you haven't seen I guess in that sense a big drop-off, say, in Asian revenue, if some of your customers are saying those are the people struggling to absorb inventory?

Well, we are not -- I think that you have to look at the customers for specifics relative to their customer base where there may be weakness or absorption of inventory, but for us, no, there hasn't been much change in where our revenue is generated geographically.

And then, last question and then I'll jump off and let some others ask, in terms of building -- excuse me, the new building coming on line in 2012, there has been no change, I guess, in your expectation for your ability to fill that space.

No, we are continuing to be very aggressive in meeting our construction deadlines and it remains on plan.

Thank you, very much.

You're welcome.

Your next question comes from the line of Louis Miscioscia with Collins Stewart.

Okay, great. Thank you. Mark, just to hit upon Building 6 again, are you able to sell any of that before the construction is actually finished, or do you really have to wait for it to be pretty much done before you start to go in? And, if you can sell it upfront just -- could you give us any kind of progress report on that?

Yes. That's a good question. I'll let Tom add a little bit of color. But generally speaking, facilities is one of the products or services, if you will, that we sell. We must have some facility space in front of us to be able to market it to the customer.

And we are running out of open facility space as we've been growing over the past seven quarters. So that Building 6 will come onboard as we need it, even with this current short-term rockiness in inventory absorption. That's not going to change our thinking relative to Building 6.

In terms of whether we pre-sale that space, that isn't the way we would look at it generally. As we look at new customers and existing customers with new projects, if they are planning for ramping those projects in the March, 2012 or June, 2012 quarter, then they will be earmarked for that new facility as space is available.

So, if that's what you mean by pre-sale, yes, we will allocate space to a new customer or an existing customer's new project as demand requires.

Okay. I guess that was obviously a good answer. Let me switch over just to another simple one. Obviously, nice tax rate there and you gave a suggestion for the next quarter, how long is that locked in for? Do you think that you've got an 8% to 9% or 8% to 10% tax rate for multiple years looking out?

Yes, we do. That's how the Company is organized and we don't see that changing.

Okay. And then, inventory days have actually obviously been dropping as availability has improved, any, I guess, near-term and long-term targets for those?

Internally, we have a goal to get to seven turns on our inventory, but that is a goal. We don't have a timeline in particular that we can discuss here to get there, but we are moving in that right direction there.

We have very, very good controls operationally with our supply chain team relative to inventory. And we have all the tools that we've developed internally to be able to assist us in reaching those targets.

As you are aware, over the course of much of 2010, or at least the latter half of 2010, we were constrained on certain materials. And as a result, we were bringing in more inventory as it became available, so we could secure it. Similarly, we are seeing a little bit of that relative to Japan. There are some part shortages that will continue into the foreseeable future.

We are taking all the proactive measures that you would expect to protect our revenue with second sources and otherwise, assisting our suppliers and our supply chain. But we will likely continue to carry some oversupply of parts from affected suppliers in that region until the situation stabilizes. And that may involve an inventory impact of $3 million to $5 million over the next couple of quarters.

I think as we get more efficient, that you are not going to see that number as an outlier, it's baked into our thinking in our projections going forward already.

Okay, great. Let me pass it to the next person. Thank you.

You're welcome.

Your next question comes from the line of Ehud Gelblum with Morgan Stanley.

Hi, this is Michael Kim calling in for Ehud Gelblum. I was wondering if you can touch on the 13% gross margin and the levers affecting it, and when we can expect that to trend down a bit?

Yes, I think as we have reached near full capacity in our existing space, we've seen our gross margin reach a bit of a high point outside of our targets. Our target gross margin rates continue to be in the 12% to 12.5%. And I think as the second half of this year plays out and as we move into Building 6, we'll find ourselves within that target range. Tom, any further thoughts on that?

No, I think that the target range that we've -- have before us-- the 12% to 12.5% is the target range that we can -- that we expect ourselves to achieve.

Great. Thank you.

Sure.

You're welcome, Michael.

Your next question comes from the line of Ajit Pai with Stifel, Nicolaus.

Yes, good afternoon.

Hi, Ajit, how are you?

Good. And, you?

Good. Thank you.

A couple of quick questions. Just going back to the laser business, on a sequential basis, I think you said that business was very stable, but just given the kind of momentum you have and the mix shift that's happening there and the seasonality of the customers in that business, is it fair to assume that that business is going to be up modestly sequentially in the June quarter?

The laser business?

Yes, lasers and sensors.

Yes, as you are aware, we have never broken that out specifically, but I think that we have significant momentum in that business where we feel comfortable that it is perhaps a bit more stable than the communications side of our business today.

Right. But sequentially that -- I mean, you would expect it to be flat to up rather than down, would it be fair?

I think that's fair.

Got it. And then, secondly, just addressing the top five customers that you have, could you give us some color as to how much they comprised of revenue and how much 10% customers that you had?

Well, we do that once a year. Our customers obviously are sensitive to revealing that level of information. In the current quarter, I believe we still have five 10% customers and that won't be a surprise to anyone -- the names of those companies.

Right. But was any of them outside of the optical communication components business?

No.

Got it. Okay. And then the last question would be just uses of cash -- you have Building 6, and then outside of that, is there anything in the other uses of cash that you can think of or prioritize right now?

No, I think that's going to be something for our Board of Directors to consider over the course of the next several quarters, but there is no current additional use of our cash outside of our working capital requirements and our new Building 6.

And any pipeline in terms of acquisitions -- potential acquisitions?

No, I think we continue to believe very strongly that we can grow our business Greenfield to the levels that we have suggested to each of you folks on the phone.

Tom, is there any color you would add to that?

No, I -- it's exactly right. We don't have any acquisition plans on our plate today and we fully believe we can grow this Company quite successfully in a Greenfield manner.

Got it. And then the last question would be just Building 6 -- just given some of the volatility you've seen, even though you have stated that you think it's just inventory correction, has there been any change in timeline in your construction plans or your deployment plans, or has there been no change whatsoever?

Our Building 6 is scheduled and is on plan to be available in January of 2012 and it will be there. And the scheduling of customers to go in that plant is on plan.

Got it. Well, thank you so much.

Thank you.

Your next question comes from the line of Cobb Sadler with Catamount Advisors.

Thanks a lot for taking the question. I had a question on the breakdown of the June quarter forecast by product type. If you can tell us if it's - is it legacy SONET, demux splitters or is it the higher growth stuff like [rodems] and tunables? Or, can you break that out like that?

It's difficult to break it out that way, because there are certain products that are related to a specific customer, and we're real mindful of giving way any information like that that could be connected to one of our customers specifically.

I can tell you that what we said in the recent quarters relative to how much of our revenue is derived from products that are two years of age or less, part numbers that didn't exist in our system more than two years ago is the same, and that is that we are still -- a bit over 50% of our revenue is derived from those parts.

Okay, that helps. And your customers -- have they given you an idea of what they are seeing in the June quarter, is it inventory, is it just the general softening of demand? Have they shared with you kind of the detail behind their forecast?

They have. We have a very close collaboration with the customers as you can imagine. In many cases, we are the sole source for what we build for the customer, but that's not information that we are prepared to share on this call.

Understood. Thanks a lot.

You're welcome. Thank you.

Your next question comes from the line of Alex Henderson with Miller Tabak.

Hi, guys.

Hi, Alex.

Hi, Alex.

Got a couple of questions for you. First, on the exchange rate, could you talk a little bit about the impact of the rising inflation rate and the rising Chinese exchange rate, and what that might do to your relative position as a contract manufacturer outside of there?

Yes, I think as you can imagine being a multinational entity with our functional currency in the US dollar, we've had foreign currency exposure every quarter of our operations. And in Thailand in particular, if we shift to Thailand for a moment, the exchange rate over the last 11 years has gone from 37 baht to the $1 up to 43 baht to the $1 and down to 30 and sub 30 baht to the $1.

And, in China, we've owned our factory in China for near six years. It will be six years in end of May and we've seen the same thing. We've seen those fluctuations trending into -- toward a more strengthening RMB obviously over those years. And it's just something that we manage, and like we do with other costs in our business we find ways to be more efficient so that it doesn't impact us as significantly.

Ladies and gentlemen, this concludes the question and answer portion of today's call. I'd like to turn the call back over to management for closing remarks.

Thank you, Regina. That concludes Fabrinet's earnings call. Thank you everyone for your participation.

Thank you

Thank you, all.