Fabrinet (FN) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for your patience. You've joined the Fabrinet Q2 2012 Earnings Conference Call. At this time all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference may be recorded. I would now like to turn the call over to your host, Mr. Paul Kalivas. Sir, you may begin.

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 second quarter fiscal 2012, which ended December 30, 2011. With us on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of Fabrinet, Mark Schwartz, our Chief Financial Officer and Executive Vice President, and John Marchetti, our Chief Strategy Officer.

This call is being webcast and the replay will be available at the Investor's section of our website located at investor.fabrinet.com. Please refer to our website for important information, including our earnings press release, and the non-GAAP to GAAP reconciliation.

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 can differ materially, due to a number of risks and uncertainties.

Such forward-looking statements include our expectations regarding customer demand and our future financial performance, including future revenue and profitability, the timing of completion of the construction of Building Six, and the capacity that we will gain upon its conclusion, our statements regarding expanding our geographic footprint, our expectations that we will recover significant amounts under our insurance policies, and that our balance sheet and insurance will be sufficient for our recovery efforts.

Our belief regarding how long our financial results will be impacted by the flooding and its consequences, our expected timing for making future claims with our insurance carriers, and our expectation regarding our efforts to secure our facilities against future flooding and the effectiveness of those efforts.

These forward-looking statements involve risks and uncertainties. Actual results could vary materially from these forward-looking statements. Important factors that could cause actual results to differ materially from those forward-looking statements include, but are not limited to, customer demand for our services, our ability to recover expected amounts under our insurance policies, post-flood recovery and rebuilding efforts Thailand, and general macroeconomic conditions.

These statements reflect our opinions only as 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 effect our results, please refer to our SEC filings, in particular the section captioned Risk Factors in our Form 10-Q, filed on November 9, 2011, and our Form 10-K filed on August 31, 2011.

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

Thank you, Paul. Good afternoon, everyone. Three-and-a-half months following the most severe flooding season of the last century in Thailand, I'm pleased to report that we are on a strong recovery path. Several of our most impacted customers have already reported on the solid progress we are making in restoring their manufacturing lines.

This sharp recovery has been driven by the confidence and the close collaboration of our customers, diligence, and extraordinary effort of our employees, and support of the regional and national Thai authorities. Our goal is to get back to business-as-usual in upcoming months. And we are making excellent progress to this end.

Now turning to the management team, I'd like to welcome John Marchetti, our Chief Strategy Officer. Many of you know John, or know of John. His most recent role was as the Managing Director and Equity Research Analyst at Cowen & Company, responsible for covering Fabrinet, among others in the optical supply chain.

This new beginning will also close a chapter on our history. With the flooding recovery on solid footing, insurance claims being addressed, final systems and reporting in order, and customer collaboration strong, Mark Schwartz has decided the time is right to take leave of Fabrinet.

The transition will take place for this quarter, and TS Ng, our Senior Vice President and Operating Controller for more than five years has accepted a promotion to the role of CFO and Chief Accounting Officer, which will become effective March 1.

Mark has been a valuable driver of our success and working together has been a privilege. Mark will be reviewing our financial results shortly, and will be presenting, along with John, at multiple conferences in the upcoming weeks before concluding the transition in April.

We are fortunate to have an outstanding infrastructure and dense strength on our team. I continue to lead the Company as CEO. Harpal Gill, our President and COO, manages all phases of our operation. TS Ng will assume Chief Financial Officer and Chief Accounting Officer roles, and John Marchetti has joined the team to focus on future growth initiatives, business expansion, and investor communication.

In summary, I could not be more proud of our employees. We have endures as a company, and continue to earn the trust of our customers, due to the extraordinary effort of our staff to support our customers in the face of incredible personal hardship. I have confidence in the strength of our management team, and believe our future looks brighter than ever.

I will now turn the call over to John Marchetti, our Chief Strategy Officer for a further perspective of the markets we serve. John?

Thank you, Tom. As many of you know, before joining Fabrinet I was an equity research analyst for many years and followed the communications industry, including optical, very closely. I've known Fabrinet for some time and admired the Company for its dedication to execution, and resulting industry leadership.

I'm excited to join the strong team here, and to help contribute to its ongoing success. I'm assuming leadership of the long-term strategy initiative, which include new business development, geographic diversification, as well as customer and investor communications.

I'd first like to start by discussing several initiatives already underway. The first relates to geographic expansion. While one team is focused on flood recovery and customer restoration over the past few months, a second team has been investigating expansion opportunities. Given the nature of the long-term commitment, our evaluations are currently ongoing, and we will announce a decision once the process has concluded.

The second initiative is infrastructure improvements. Thailand will continue to be an important location for our manufacturing operations, and we will continue to invest to upgrade our Thai facilities.

Thus, while the recent flooding did not impact the manufacturing space at our Pinehurst campus, we have decided to invest in strengthening the perimeter wall surrounding all of our buildings at the Pinehurst campus, including the new Building Six. These improvements are designed to withstand flooding to a height of two meters, nearly double the height of the recent flood.

Third initiation is capacity planning. In the near term, completing Building Six is the primary driver of our capacity addition. We have met our initial objectives, and now have 11 manufacturing bays, representing 80,000 square feet, open and ramping, with customer projects migrating from Chokchai .

Our next step is to complete the entire 300,000 square-foot building, which includes engineering and office space by the end of March. Upon completion, the capacity of Building Six will be more than sufficient to house all customer products from Chokchai, and leave room to ramp production of additional projects from new and existing customers.

Finally, let me share with your our perspective on the communications industry overall. While demand trends remain somewhat uneven and highly effected by carrier deployments and geographic exposure, broadly speaking, we believe that steep order reductions witnessed in the past year have given way to stability, along with some pockets of improvement.

Increasing adoption is sometimes masked, however, as systems providers negotiate annual price reductions, which typically commence January 1. Thus, adoption and unit growth in certain product areas may be offset by these ASP adjustments, creating an appearance of flattish business trends.

Looking ahead, as inventories are lean, overall industry demand is stable to slightly improving, and our own supply capabilities are strongly rebounding. We look forward to executing in our growth plan with the goal of addressing customer demand.

With that, I would now like to turn the call over to Mark Schwartz, our CFO, for a report on our business and financial results. Mark?

Thanks, John. Before I start, please note that all numbers are GAAP unless stated otherwise. First, we expect our financial results to be impacted for foreseeable future periods due to the timing of approval and payment of insurance proceeds, as well as certainty in the amount of insurance proceeds.

We have made a preliminary claim for business interruption loss with our carrier syndicate, and intend to add claims for inventory, equipment, and building damage, as we continue to closely collaborate with our customers to determine the extent of the loss, and our ability to recover or repair certain equipment.

We continue to believe that the combination of our insurance coverage and our strong balance sheet will be sufficient to support our recovery efforts and our customers' future production demands, and the stability of our business model, and continued profitability.

Now, to review results for the second quarter of fiscal 2012. We achieved revenue of $96.6 million in our second quarter of fiscal 2012, the quarter ended December 30, 2011. As Tom mentioned earlier, we were able to achieve this results only through the incredible efforts of our employees and the strong support from our customers. Without both working in complete tandem, we would not have been able to recover so quickly.

For the quarter, our revenues declined 47.7% from the same quarter last year, and 48.2% sequentially. Our share-based compensation expenses for the quarter were $1.6 million of which $1.1 million were included in SG&A.

Our flood-related expenses for the quarter were $40.3 million, which mainly consisted of $26.2 million loss from inventory damage, both to our own and our customers' inventories, $4.6 million loss from damages to our machinery and equipment, $2.4 million loss from building improvements and building damage at our Chokchai campus, and other flood-related expenses of $7.1 million. These amounts are included in our results as gross losses, without any regard for recovery under our insurance policies.

We intend to record proceeds from insurance in future period results as those amounts become reasonably certain. Additionally, we continue the process of surveying losses suffered by our customers to their own equipment that had been located at Chokchai at the time of the flood.

This is a complex task that requires close collaboration with our customers to determine replacement prices for each item, whether new, on a secondary market, or at auction, as well as determining the ability to repair certain of the equipment.

While we are currently unable to reasonable ascertain the extent of these gross losses, we believe the range of expected loss is between $44 million and $63 million, again, without regard for recovery under our insurance policies. We intend to include this loss as a flood-related expense in a future period when the amount is reasonably certain.

Our effective tax rate for the first quarter was a tax benefit of 6.7%, compared to 3.8% the prior quarter. We continue to anticipate our global tax rate to remain at historical levels for the full fiscal year.

On a non-GAAP basis, net income totaled $6.2 million, or $0.18 per share calculated from a share base of 34.7 million fully-diluted shares. Including flood-related contingencies and other expenses, as well as share-based compensation expenses, GAAP net loss was $33.3 million, or $0.96 per share on a filly-diluted basis.

On an end-market basis, revenue from optical communications was $68.4 million, or 70.8% of total revenues for the quarter, while lasers, sensors, and other revenue was $28.2 million, the remaining 29.2% of our revenues. On a year-over-year basis, revenue from optical communications declined 54.1%, and revenue from lasers and sensors declined 20.9%.

Quarter-over-quarter this represents a decline of 50.3% in optical communications, and a decline of 42.2% in our lasers and sensors markets, in both cases driven by the impact of the October flood.

Moving on to the balance sheet, we ended the quarter with cash and cash equivalents of $112.0 million, a decrease of $20 million from the previous quarter. During the quarter, we used $1.7 million of our cash toward the purchase of capital equipment, $10.7 million of our cash toward the construction of Building Six, and $7 million of our cash toward flood-related expenses.

Now, I would like to discuss guidance going forward. For the third quarter of fiscal 2012, we expect revenues of between $131 million and $136 million. We anticipate non-GAAP net income of $0.22 to $0.24 per share based on a fully-diluted share base of 34.9 million shares.

GAAP net income remains subject to time of insurance recoveries and the recording of flood losses from customer-owned equipment. Therefore, we have determined to not provide a range for the fiscal third quarter.

By way of upcoming investor events, John and I will be presenting at the following upcoming conferences -- February 9 at the Stifel Conference in Dana Point, California, February 14 we will participate in one-on-one investor meetings at the Deutsche Bank Small Mid-Cap Conference in South Beach, Florida, and February 27 at the Morgan Stanley Conference in San Francisco, California.

Finally, as our company has emerged from the worst effects of the flood with strengthened customer relationships, industry demand that appears stable or improving, and a deep and experienced management team, the timing is appropriate to announce my departure from Fabrinet. After nearly 13 years of working side-by-side with Tom and our team, I'm confident I leave the Company in good hands, and on a track to a bright future.

I'm genuinely honored and grateful to have had the opportunity to work with and learn from Tom, to have shared with my co-workers all of the successes we've achieved over the years. And to have met and developed relationships with our investors, equity analysts, bankers, board of directors, and other stakeholders along the way.

John and I look forward to meeting a number of you at conferences in upcoming weeks, and concluding the transition period by April. Thereafter, I look forward to continuing to follow the development of the Company.

I will now turn the call back over to Tom.

Thank you, Mark. It has been a pleasure to have worked together over the past 13 years. The Board, our employees, and I will miss you and express our sincere thanks for your dedication, management, and leadership.

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

Thank you, sir.

(Operator Instructions)

Our first question comes from Ehud Gelblum of Morgan Stanley. Your line is open.

Just an aside, if you could give any other color on your decision and how long you've been thinking about it that would be great. CFO departures are major things, and just want to make sure we totally understand your thought process. That's just a separate thing, we'd love to just hear more about that.

But in looking at the numbers for next quarter, the gross margin seems to be kind of staying flattish around 9%, and this quarter with the $97 million revenue, you had a gross margin of 9% as well. It seems to be breaking the mold of the last year, year-and-a-half in terms of the relationship between revenue and gross margin.

And wanted to see if -- why that was the case, both when the revenue fell this past quarter to $97 million -- why you managed to have that still relative strong gross margin? And why, when revenue goes up next quarter, why it stays again at that same gross margin? There have been in the past kind of a strong relationship between the two, and now it seems that's kind of broken. And then I have a follow up.

Thanks, Ehud. I think I'll take that second portion of the question first. I wouldn't read too much into any type of longer term change from our model.

As we all sit here together in this conference room, each of us would tell you as we emerge from the effects of this flood event, that our model continues to hold up, and that we believe that, over the course of some number of quarters gong forward, we will again reach and achieve that target level that we've always talked about, of 12% to 12.5% gross margin.

There are, as you can imagine, too many uncertainties in the next couple of quarters related to the timing of various actions and events related to the flood and recovery for us to have much more certainty than the guidance we've given on that gross margin. But there is a bit of conservativeness in that number from us, and we do expect our margins to start trending back toward historical levels.

But if you can go back over -- the last couple, bunch of quarters, where COGS has been very related to -- I mean, there's a fixed portion to it, and then a very strong variable portion to it. You can actually graph them on a line and they actually -- it's very linear. Yet, it seems now, that seems to be broken to your benefit.

Things seem to be better. As if the fixed portion was not as strong this past quarter and in the March, in your guidance as it has been in the past year-and-a-half. I can take it offline --

I think, Ehud, you have to consider that the dynamics of our business have changed in that two campuses have now become one campus. And I think as we sit here and attempt to model it out ourselves, our only model is likely to have to be modified as we go forward and really understand what this means to us.

So, when I say two campuses going to one, today there's no operations at Chokchai. We have not made any affirmative decisions as to whether we will ever go back to the Chokchai campus or not, but there's quite a bit of clean up activity and recovery effort underway at that campus. So, at least temporarily, and perhaps longer, we're operating under one campus, and that changes the dynamics of the model a little bit.

But, as I said, long term, we continue to believe that our historical model we will revert back to those numbers.

That's actually understandable. So now you have less fixed cost with only Pinehurst and not Chokchai. Okay. That's, I think, the piece that I may have been the piece I may have been missing.

Let me address the first part of your question, if may --

Sure.

-- and that's related to me. It's been about a year since I first mentioned to Tom that at some point I'd like to find the right time to exit from the Company. And we had some discussions, as I said, about a year ago, and then in August of 2011, I notified the Board that it was my intention to leave the Company, again, at the appropriate time.

So, the Board, with Tom as the Chairman, spent the requisite time considering the organizational structure, and ultimately determined that our operations controller, who'd been in the Company for nearly five years at that time, was the right man for the job.

And I went back to our Board last Thursday during our Board and Committee meetings last week, and notified the Board, that with John Marchetti now on board, and the Board's decision that my successor, when the time was right, would be TS, that I intended to start executing on that transition. So, it was not a surprise to anybody.

And the Board immediately convened and did what it needed to do to affirm the appointment of TS as the Chief Financial Officer, which will become effective March 1. So, during the next couple of months I will transition out. February is, as I see it, an investor transition month. John and I will be attending conferences. We're scheduled to do additional investor meetings with you, Ehud, and others.

And then March will be a transition month for TS and I in Bangkok with the remaining processes. And this is not a difficult transition for TS. He's been involved in closing the books since he's gotten here. He's taken more of a responsibility in that process this past quarter and the transition will be smooth.

So, you're not going -- it's a personal question, but you're not necessarily going some place. We're not going to see your name show up after some non-compete period. It's not as though you're leaving for another opportunity, you're --

No, I'm not. I'm not. I haven't begun to look. At some point I will. I'll spend some time with my family and figure what I'm off to do next.

Okay. We'll miss you. And, John, welcome aboard.

Thanks, Ehud.

Thank you. Our next question comes from Steve O'Brien of JPMorgan. Please, go ahead.

Hi. Thanks for taking my questions. Yes first off, on the demand environment, it's hard to -- I'm sure it's hard to gauge, but do you have a sense for where the March quarter, the demand levels might have been -- the March could have ended up, or could be headed had the Company not [been] past deconstrained, or even just looking back, what the relative demand environment looks like compared to where the run rate was, maybe, towards the middle of last year?

Difficult to say, Steve, as you can imagine. If we had this discussion nine months ago with a crystal ball in front of us, March and June certainly looked up at the time. And that may not have changed. But we have been focused on recovery efforts, and on the demand that we're able to fulfill for our each of our customers as we recover.

Perhaps John has some more thoughts on the demand itself that we're seeing, but as I said, we've been internally focused on recovering for our customers.

I guess the only thing I would add, Mark, is we have seen fewer declines in the order rates than we had seen, say, three, maybe six months ago. But, again, in terms of coming out in our operations where they stand today versus where they were maybe going into the quarter, it's really tough for us to say with a lot of certainty what March would have looked like, or something like that, in a perfect world.

But I would say that from an order perspective, we've stopped seeing some of the steep declines that were occurring in the later part of 2011.

I guess I'll ask more on the capacity side then. Any update to the timing of the ramp and the additional square footage as it comes on at Pinehurst? And when do you expect the Company to have full parity capacity online versus the pre-flood levels?

Yes, thanks, Steve. We mentioned in the prepared remarks that we've got square footage available already at Building Six; 11 bays totaling a little bit more than 80,000 square feet. We expect the remainder of Building Six to be turned over to us by the contractor later this quarter. So, by the end of this quarter, all of that space will be available to us. And it's not all earmarked, for sure.

Given timing to bring equipment in and restore equipment that had been at Chokchai, and then qualification processes, which obviously can't be rushed, we would expect that our September quarter, which will be the first quarter of our fiscal 2013 is likely the first quarter where we wouldn't expect our revenues to be impacted as a result of the flooding.

Steve O'Brien. Great. Perfect. Thanks. And then maybe, lastly, a point of clarification. The flood expense was $40 million this quarter. The expectation of $44 million to $63 million, that's on top of the $40 million in future quarters, or was that inclusion of the $40 million? And then maybe --

We carved out that range separately because we're not certain of where that number will ultimately fall. Once we reach a level of reasonable certainty, then GAAP requires us to book it. So, that'll be in future quarters. It may be this quarter, it may be in a quarter past this quarter.

Then, maybe can -- do you have a projection for cash out the door before, and I recognize you don't have an estimate of recoveries, but cash out the door for recovery?

Difficult to say. And as I mentioned, we have only made claims on a portion of our losses. We have not made claims on inventory or equipment as of yet. But, as we look at our policies, and we've got counsel advising us, there's a possibility that we will recover all of these out-of-pocket expenses, but if that turns out not to be the case, then we certainly have a balance sheet that is more than adequate to support us through this event.

Thank you, very much.

You're welcome.

Thank you. Our next question comes from Sherri Scribner of Deutsche Bank. Please, go ahead.

Hi, thank you. I just wanted to follow up on the question about the capacity and a little bit more about Chokchai. Once you ramp Building Six, would you expect that you'll have enough capacity to satisfy all of your customers, basically in the September quarter?

And then, moving forward, when are you going to know what you are going to do about Chokchai, and how necessary is that to get that capacity back online or make a decision about adding capacity in another geography?

We were fortunate, Sherri, that Building Six was in the state of near completion that it was. That's true. Today, roughly 83,000 square feet of Building Six is available, and that, plus, some of the additional capacity that will be coming online this quarter, in and of itself, is more than sufficient to take on everything that had previously been manufactured at Chokchai. And there will be some significant amount of additional space for future projects from new customers and existing customers in Building Six, in and of, itself.

In terms of Chokchai, that is ongoing. And my sense is, over the next quarter or two, as the recovery efforts have played out, we'll be in a position to state definitely what our final strategy is relative to that site. But it isn't critical that we get Chokchai back online today or tomorrow.

Okay. And then just as a follow up to the capacity question. Thinking about your customers with this disaster that's happened and the inability to manufacture, I know some of your customers have commented on being committed to you. I think Oclaro also mentioned that they're adding a contract manufacturer. Have you seen any of your customers move business away from you that you think will permanently move away?

No, not yet. It's difficult to say. We have been so focused on the customer service aspect of the recovery of this event. And, hopefully, you're hearing that, and others are seeing and hearing that from our customers' comments, that we're doing everything we can to support our customers right now.

Some of that involves moving things temporarily. But over a period of time, we don't expect that it'll amount to Fabrinet losing any customers or revenue from this event. I'll ask Tom to add any color on that.

Yes, sure. We don't see at this point, and looking into the future forward, we can see, that this event is going to impact us for losing any customers.

Okay, great. And then just a quick clarification. Mark, I think that you said that you are going to take a charge for equipment that was your customers equipment. I guess I'm just curious why you would take that charge, and why they wouldn't take that charge if they own it. Thanks.

Sure. So, we haven't booked that yet. We estimate that the loss of what we call consigned equipment, equipment that is owned by our customers but is located at our sites, the loss could be, we believe, between $44 million and $63 million in total. And if we had a definitive number, we would have booked it already, but we don't know. It's something within that range, we're not certain where it'll fall out.

Why that falls on Fabrinet is because when we take on equipment from our customers, we agree to take the care and custody and control of that equipment. And so, that is not to say that our customers don't have insurance coverage -- there's ranges of insurance coverages that our customers have across the board as to their equipment that's at their own sites, and at Fabrinet, but we're ultimately responsible for it. And our customers are relying on Fabrinet to make sure that there will be equipment available for their production at some point in the future.

Okay, that makes sense. Thank you.

You're welcome.

Thank you. Your next question comes from Patrick Newton of Stifel Nicolaus. Your line is open.

Thank you, gentlemen. Congratulations, Mark, and also to John, and a very solid execution in this challenging environment. First question, I guess, is asking the capacity questions a little bit differently. I think in March of 2011, you achieved revenue of approximately $195 million, and I believe on that call had stated at that time that you had darn near reached full utilization.

So, if we kind of take that high water mark, when we -- when Building Six is completed, I guess, what level of revenue can be achieved by the Company with the current manufacturing footprint, likely in this kind of September quarter timeframe? Thank you.

Sure, Patrick. There's a couple of moving parts there. Number one, Chokchai in any given quarter, given mix and other normal variations, was between 30% and 40% of the Thai revenue. I think we said that last quarter. I think we might have said 40%. And it's generally within that range.

The Pinehurst campus Buildings Three, Four, and Five in our peak revenue quarter as you mentioned of approximately one year ago, I think we had stated we were probably 85% capacity or maybe close to 90% of our capacity. We still had a couple of empty bays, I recall, and some space, but we were running low, and we knew we needed to have a new factory coming up quickly. And that's been the case throughout our history.

I think I probably said to you and others before that, generally, in our conservative nature looking at our growth, and making sure that we control it, that once a factory is completed, we often look back and say, gosh, we probably should have started that a quarter or two sooner.

But we'd rather be in that position than have a lot of extra factory space sitting idle, unabsorbed, waiting to be utilized. Well, in this case, as we said earlier, we were very fortunate to have started Building Six when we did and to having it at the level of near completedness that it was at the time of the flood.

We were over 70% complete on the construction. Once the contractors were able to get back into the building and start to finish the site, we had worked with them to make as much of it available as soon as possible. We were hoping for 30,000 square feet in January, and we ultimately received 83,000 square feet of space available to us, 11 bays.

That leaves, roughly, another 90,000-plus square feet in the factory of manufacturing area -- clean room assembly area, that will become available to us by the end of this quarter, we believe. So, given that we've always suggested that Building Six was likely in the sort of $75 million to maybe $90 million range a quarter in revenue at full capacity. And I think those numbers are probably -- they stay the same.

What has changed, a little bit, is as we've migrated production of what had previously been assembled at Chokchai over to Pinehurst, the operations teams have had to be creative in the use of space at Pinehurst and have necessarily become a bit more efficient in the use of space at Chokchai for products that had previously been assembled at Chokchai.

So, with all of those different variables, it's difficult to say today, I think, what our max revenue would be, but it's certainly something far north of $200 million per quarter. And I think that's something that the team will address, and give better, clearer guidance to on next quarter's call.

All right. Thank you for the very detailed answer. I guess just one more on gross margin, maybe asking Ehud's question a little differently. Could you possibly discuss Casix as a percentage of mix in the current quarter, and perhaps how you think that mix might change in the coming quarter? Thank you.

The Casix business has a couple of variables to it, as we've talked about in the past. Much of what we do at Casix is industrial optics, serving many of the same customers we have at the assembly side in Thailand, as well as many others. There's a portion of the Casix business that has always been related to telecommunications, and I think that has had the biggest beta for us over the last couple of years.

We've mentioned on this call previously, that some significant portion of Casix' revenue was related to optics for [rodems] and MWS. And that's still the case. And so, as that business rebounds, we ought to see incremental improvements to the revenue line and the gross margin line at Casix.

But we've never -- as you know Patrick, we've never broken out the gross margin separately at the Casix business, except to say that it is substantially higher than the assembly business, and that continues to be the case.

Thank you. Our next question comes from Troy Jensen of Piper Jaffray. Your line is open.

Hi, guys. Two quick questions here. So -- lasers and sensors continue -- it's been a great growth opportunity for you guys. Have you guys been targeting new customers, any new wins -- design wins that you can talk about there, or have those efforts kind of been put on hold while you try to fix the flood efforts here?

I'll let Tom add a little more color, but the business development efforts have not been on hold at all, in fact, we've added a couple of customers. We're not able to give the names today, but in the last quarter we had some wins, including industrial optics.

Tom, maybe you want to talk a little bit about this development.

I've been really satisfied, I've been really quite satisfied with the amount of success we've had over the last four months with new wins in sensors and lasers. It's been really good, and there's been -- from business development -- as you probably know, our business development is a completely different function than the day-to-day sales function which is handled by the business units themselves.

The business development function is an independent function, and it's achieved really great results in the last four months or more.

That's right.

And a lot of that has been -- a lot of that has been in lasers and sensors.

Got it, Tom. Next question is just on customer risk. I think you've got a few customers, the large ones that -- kind of shaky balance sheets right now, losing money because of these efforts. What do you guys do to mitigate the risk that you have with some of these customers?

I think, Troy, that's a -- as you can imagine, that's a very sensitive question. We continue to be responsible in that respect by monitoring the financial health of all of our customers. We do that regularly. We have close level of communication with the customers in that regard where we see any issue. This event has, in many way, created an even closer bond between Fabrinet and our customers.

And as we all sit here, and Tom can echo this, we continued to support each of our customers, and are working with each of them to -- that were impacted by the flood, to migrate their production into Pinehurst and get them up and running as soon as possible, whether they are the most financially stable or not. Irregardless of that, we are moving them all with the same concerted effort.

Tom, is there anything you'd like to add to that?

Well, on that same thing that echoes what Mark just said, is that the -- I think as we look at the financial strength of our customer base, it meets -- it all meets the prerequisites and the model that we've set out to follow. We've never deviated from that. We've deviated to make any exceptions.

I think that's right.

And, therefore, we have just great results on our accounts receivable. All of that has fallen into place over the last 12 years.

All right, understood. Good luck to Mark and John.

Thanks, Troy.

Thank you. Our next question comes from Subu Subrahmanyan of Juda Group. Your line is open.

Thank you. I had a follow up question on the trends in lasers and sensors. I just wanted to see if the end-market trend in that market have been more healthy, and if you expect it to grow as a percentage of revenues. The other question was regarding the trend in SG&A this quarter. It was, after backing out the stock-based compensations, you lowered the recent run rate, and I was wondering if you expect it to return to the run rate you saw in the past few quarters.

So, Subu, as part of our SG&A, there was some portion of our labor that, at least temporarily, has been moved into flood-related expenses. As you can imagine, some portion of the folks that were at Chokchai that, at least temporarily, did not have production to manage, they have been critical to the recovery effort across customers and at the building generally at Chokchai.

And so, we have obviously worked with our auditors and moved some of those expenses into the flood-related expense category, as we think that that is -- that makes those expenses more transparent to the reader of the financial statements. So, that is a temporary occurrence, and as we move back into production across each of those customers, you'll see that portion of the labor move back into SG&A.

Got it. And on the lasers, sensors as a percentage of your business?

Well, without providing any guidance relative to percentages and numbers, we continue to feel very confident in the growth of the laser and sensor business. We continue to feel that outsourcing in that industry is at the early stages, similar to what we saw on the communication side some number of years ago. And we do believe that there will be continued diversification of our revenue toward laser and sensor.

That being said, we've got to mesh back into our revenue picture the revenue from assembly that had been at Chokchai. So, you may see some blips in that number for the next few quarters, but again, it isn't a trend, it's more a -- the incorporation of what had previously been at Chokchai merged into the Pinehurst and back into our revenues.

All right. A final question on just overall demand. I know you pointed out earlier that's hard to determine. But if the Company's been at a $180 million to $190 million kind of run rate for the last few quarters, and if you looked at September, December, and March exing out the impact of flood, you've got a fairly flattish trend line for overall demand.

I think it's honestly difficult for us to say. I'll let John kind of tackle that one.

Well, I mean, Subu, what I would comment on that is it's difficult to look across those three distinct time periods and try to draw any trends, given what we've gone through on the production side. Like I said, we are seeing a change relative to cuts in orders, where that has certainly stabilized, and we're not seeing customers come back and try to reduce orders.

I think part of that is underlying demand, part of it is obviously a recovery relative to where we were a couple of months ago from a flood-related aspect. But I think for us right now, we're far more focused on trying to make sure we get production back up and running for our customers, whether it's in Building Six, or what have you, and meeting the demand orders that we're seeing come through them from right now. Where we are relative to the broader, say optical environment, is still I think a little bit challenging for us to really pinpoint at this time.

Understood. Thank you.

Thanks, Subu.

Thank you. Our next question comes from Lou Miscioscia of Collins Stewart. Your line is open.

[For] the guidance, I guess when you said that you'd be back up to sort of normalized -- or could run at normalized levels, do you think you'd be back up in September at the $190 million, $195 million, $200 million revenue run rate?

That is difficult to say, Lou, but I think the point we're trying to convey is equipment is being moved into Pinehurst that has been recovered from Chokchai, new and other used equipment that's been purchased and is being put on the lines, will go through a prolonged period of qualifications. Some of these products require two thousand hours of environmental testing, and you just can't rush that.

So, as we look at it, and sort of to map out when do we see the production running at a level that would not be impacted by this event, that looks to be for us, the September quarter. But we're not giving guidance as to what that number would be now.

Okay. And then maybe just sort of a similar question for the June quarter. Any feel -- obviously, it's nice to get March quarter guidance, I guess what would impact June either way whether you're finishing early in the quarter with the ability to be at normalized run rate or later?

The thing that effects June, and the thing primarily effects achieving the goal that we like to think of in September is equipment itself. You have to consider that a very large amount of equipment that we had operational in the last -- or three months ago, just about the time of the flood.

But also, we lost a significant amount of that that no matter what the efforts that we put into place to recover that equipment, or to put it back into operation, and we've done a tremendous job in doing that. But the thing is our capacity. Our capacity at this point is equipment related.

Wouldn't you say Schwartz?

Yes, that's absolutely the case. And as you can imagine, we have mapped out with our customers the timing to bring equipment into the factory. In some cases you've got equipment that is three and four months lead time -- not all, but in some. And most of that that's going to be required in three or four months has been ordered. And that time line gets broken down into equipment that takes two months, and six to eight weeks, and four weeks, etc.

And there's a path back to assembly with each of the customers. So, there's equipment, and then there's the qualification process.

Nobody is waiting on anything. There's a tremendous sense of urgency with ourselves and our customers to put this thing back on the track again. And as I said in my [old talk], in fact, this is happening.

Okay, great. And last question. Could you just reiterate where you are with evaluating whether you want to go back to Chokchai, which obviously doesn't seem that logical, or how far you are in looking at other geographies, whether it's China, Malaysia, or other areas in Thailand? Thank you. And good luck in getting everything back up and running.

Yes, thanks, Lou. I'll take a first stab at that, and then Tom or John can add any further color. But in terms of geographies, we looked at a number of locations already. And this is a decision that has a number of complex variables associated with it, including the collaboration with the customers. And so, we're not taking that decision lightly, as you can imagine.

As John mentioned, when we have more to report, we certainly will. Today, we just don't have enough detail to be able to provide any more information, although we have visited a number of locations already, and that is continuing.

Thank you.

Very welcome.

Thanks you.

(Operator Instructions)

And as there appear to be no further questions in queue, I'd like to turn this portion of the call back over to our presenters.

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

That does conclude the call, ladies and gentlemen. At this time, you may disconnect your lines. Thank you, and have a great day.