Fabrinet (FN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Fabrinet's third quarter fiscal 2012 financial results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions on how to participate will be given at that time. (Operator Instructions) As a reminder, today's conference is being recorded.

And now I would like to turn the call over to your host, Paul Kalivas.

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 third quarter fiscal 2012 which ended March 30, 2012. With us on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of Fabrinet; TS Ng, our Chief Financial Officer, and John Marchetti, our Chief Strategy Officer. This call is being webcast and a replay will be available on the investor section of our website located at investor.fabrinet.com. Please refer to our website for important information, including our earnings Press Release and our non-GAAP to GAAP reconciliation.

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 timing for returning to normal operational levels, customer demand for our services and growth of our end markets, and the sufficiency of our manufacturing capacity, our expected timing for completion of infrastructure improvements at our Pinehurst campus, that our balance sheet and insurance will be sufficient for all of our cash flow needs, and our statements regarding our future operating results and tax rate. 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 in the Forward-looking statements include, but are not limited to, difficulties in realizing recoveries from our insurance carriers in the amounts and within the time frames that we expect, less customer demand for our products and services than forecasted, less growth in the optical communications, industrial lasers and sensors market than we forecast, difficulties expanding into new markets, our reliance on a limited number of customers and suppliers, and difficulties in accurately forecasting demand for our services. 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, on our Form 10-K filed on August 31, 2011, and our Form 10-Q filed on February 8, 2012.

We will begin the call with brief remarks by Tom, John, and TS 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. I'm pleased to report that through the continued hard work and dedication of our employees we remain on a strong recovery path. We're excited that building six has been completed and is fully available for customers. The migration of production lines from Chac Chi to Pinehurst has also been completed. We are focusing our efforts on the production qualification process during the current quarter and remain confident that the September quarter will mark our return to normal operational levels. During this period of flood disruption and recovery, I'm delighted that our customers have recognized our employees for the sacrifices made and extraordinary effort they continue to put forward. We won new customer business during the quarter and the confidence in our value position to support our customer remains solid.

In summary, we are rapidly restoring our customers' production capacity and are looking forward in the coming months to getting back to business as usual. I will now turn the call over to John Marchetti, Chief Strategy Officer, for a further perspective of the markets we serve. John.

Thanks, Tom. I'll start with an update on a number of initiatives that are currently underway and then briefly discuss our markets as well as some of the recent industry developments. The first initiative relates to production capacity. With building six now complete, we have the entire 300,000 square foot building, which includes engineering and office space, available for customers. This facility is more than sufficient to house production displaced from Chac Chi while leaving us with additional capacity to ramp wins from new and existing customers. On a related note, we continue to explore locating new production capacity at an alternate site in order to provide diversification options for our customers. We continue to make progress on this important initiative and will announce a decision once we have reached a definitive conclusion.

In terms of infrastructure improvements, we have started work on lengthening and strengthening the perimeter walls surrounding all of our buildings at the Pinehurst campus, and we are on schedule to have this completed by the end of June. While the Pinehurst buildings were never breached during last year's floods, these improvements are designed to increase the protective measures around the campus to withstand potential flooding to a height nearly double last year's record highs.

Finally, a perspective on the markets we serve. Overall, demand trends while stable remain sluggish and we have not seen a material change in orders from our customers over the last quarter. In optical communications demand levels have stabilized. We have not witnessed any significant order declines similar to what we saw during the second half of calendar 2011. Similar to our customers' commentary, we remain optimistic for improved order flow in the second half of the calendar year but have yet to see signs of a meaningful uptick. Demand in our laser and sensor segment remains solid with some variation by application. We continue to believe that the overall laser market is in the early stages of outsourcing, similar to where we were in optical four to five years ago, and we remain confident that this segment will be a driver of our top-line growth for the next several years. Looking ahead as inventories are lean and our production capabilities are coming back on line, we look forward to getting back to business as usual.

I will now turn the call over to TS Ng, our CFO, for a report on our financial results. TS?

Thanks, John. First, I would like to start with a brief introduction and then go through the financial results and guidance. This is my sixth year at Fabrinet. Although I spent the last two years as the managing director of our Casix business, I have participated in the financial closing process since joining the Company. Prior to Fabrinet, I was with a Thai public company in (inaudible) and spent 11 years as a public controller with Read-Rite Corporation which was a NASDAQ listed company. I was with Hitachi Global Storage Technology doing [stock] compliance and internal audit functions and spent my early career in the semiconductor industry. I'm excited with my new role and look forward to working closely with all of you. A quick note on our financials before I begin.

We continue to expect our financial results to be impacted for multiple quarters due to the timings of approval and payments of insurance proceeds. With the exceptions of Chac Chi [building claims], we had [some interest claims] for all other items including machinery and equipment, inventory, and business interruption claims for losses incurred for both ACU2 and ACU3. We are actively engaged with our -- [counter issuing] brokers, loss adjustors and our customers to pursue this claim. We continue to believe that the combinations of our strong balance sheet and insurance coverage will be sufficient to support our recovery efforts, our customers' future production demands, the stability of our business model, and our continued profitability. Now, to review results for the third quarters of fiscal 2012.

Please note that all numbers are GAAP unless stated otherwise. We achieved revenues of $139 million for the quarter ended March 30, 2012. This represents a decline of 28.7% from the same quarter last year and an increase of 43.9% sequentially. The primary reason for the year-over-year decline and subsequent increase is the impact of last October's flat and subsequent recovery of our operations. Our share-based compensation expenses for the quarter were $1.3 million of which $958,000 were included in SG&A. Our flat related expenses for the quarter were [$55.6] million which mainly consisted of $48.5 million loss related to customer owned equipment, $2.1 million loss for damage to Company and customer-owned inventory, and other flood-related expenses of $5 million. These amounts are included in our results as gross losses without any regard for recovery under our insurance policy. We intend to recover (inaudible) in future period results as those amounts become reasonably certain.

Our effective tax rate for the third quarter was a tax benefit of [0.2%] compared to a tax benefit of 6.7% the prior quarter. In the near term, there may be some fluctuations in our effective tax rate due to the size and timing of losses and future payments initially related to the floods. Excluding those items, we will expect our effective tax rate going forward to be between 5% to 6%. On a non-GAAP basis, net income totaled $9.9 million, or $0.28 per share, calculated from a base of $35 million fully diluted shares. Included in our non-GAAP EPS of $0.28 is the $0.04 benefit as a result of FX gain and other one-time items.

On a GAAP basis, including flood-related contingencies and other expenses as well as share-based compensation expenses, our net loss was $46.3 million or $1.35 per share. On an end market basis, revenue from optical communication was $93 million, or 66.9% of total revenues for the quarter, while lasers, sensors, and other revenue was $46 million, the remaining 33.1% of our revenue. On a year-over-year basis, revenue from optical communications declined 39.1% and revenue from lasers and sensors increased 14.9%. Quarter over quarter, this represents an increase of 36.1% in optical communications and an increase of 62.7% in our lasers and sensors market.

Moving on to the balance sheet. We ended the quarter with a cash and cash equivalent of $125.4 million, an increase of $13.3 million from the previous quarter. During the quarter, major uses of cash included $7.9 million towards the construction of building six, $5 million in flood-related expenses, and $300,000 to purchase capital equipment. I would now like to discuss guidance for fiscal 4Q. For the fourth quarter of fiscal 2012, we expect revenue of between $139 million and $143 million. We anticipate non-GAAP net income of $0.25 to $0.27 per share based on a fully diluted basis of 34.9 million shares. GAAP net income remains subject to timing of insurance recoveries and flat losses from customer-owned equipment. Therefore, we [had determined] to not provide a range for the fiscal fourth quarter.

That concludes our prepared remarks. At this point, I would like to turn the call over for questions. Operator.

Thank you. (Operator Instructions)

And our first question in queue comes from Patrick Newton with Stifel Nicolaus. Your line is open.

Good afternoon, Tom, T. S, and John. Just starting on the commercial laser and sensor side of the business -- very solid results there. Can you comment on the strength and did you add any new customers in the quarter? Or did you expand pretty materially inside of some of your customers because it would appear that your results are definitely outstripping some of your customers' results. And maybe, did any of the commercial laser and sensor customers represent 10% customer in the quarter?

Sure. Thanks, Patrick.

I would say the only one customer -- and this is something we've obviously disclosed before -- is JDSU, where we do all of their laser business. For all of our other laser customers, we continue to be a fairly small portion of their overall laser build. So, I would say, with the exception of JDSU, there hasn't been a big change in that business there.

We still feel very good about where we are in the market. It's still very early days for us. We think our penetration of that market and our market share, if you will, is still in the low single digits. So, we still think there's an awful lot of runway there for us to continue to expand in that market. So, we did sign some new customers in the quarter. They were not contributors to revenue -- certainly not in a meaningful way, similar to what we do in the coms business. It takes awhile for these customers to ramp.

So, again, we feel very good about the pipeline, but I don't think there's been a big change here. And we do continue to expect this business, this laser business, to be the primary driver of the growth as we look out over the next couple of years.

So, John, given that JDSU is now prime manufacturing process with Amata, expecting their fiber laser revenue to decline sequentially, would it be fair to expect that we should see a similar kind of sequential decline out of your laser sensor business in June?

We don't guide by specific end market, but I don't know that, again, we can tie that one to one. To be fair, we'll have to wait and see, but at this point I'm certainly not going to give any kind of indication by customer of where we expect revenue to shake out.

Okay. And then I guess -- looking at the revenue outlook overall, with the flat to up 3% sequentially, it seems if I look at some of your 10% customers that have guided, it looks a little bit soft at the outlook that they're looking at.

So, is it fair to say that some of the optical communication players that were most impacted by the flood -- you had two guys that were very materially impacted. Is perhaps one of them not coming back to the extent that you would have thought? Is there a potential that they're using an alternative contract manufacturer, or should we see maybe more of a ramp in the September quarter?

So, I think for us, again, we're expecting to still be impacted by the flood in the June quarter. We've said all along that we really look at that as more of a qualification quarter than a revenue quarter for those customers that were impacted by the flood. Now, we certainly could see some revenue from those customers. I don't want to set the expectation that we're expecting zero. But we're certainly not expecting the majority of that business back in the June quarter. So, I think that, again, it will be the September quarter before we feel like we have a real good, firm picture of the overall demand levels that are out there.

Okay. One last one for T.S. If I take the mid point of your guidance on revenue, it would seem to either imply a sequential drop in gross margin or a pretty material increase in OpEx. So could you walk us through how we should look at those line items; and if gross margin is being impacted, could you walk through what's driving that expectation?

Patrick, the gross margin is our daily operations. We look at it as like business as usual. We manage gross margins on a daily basis. So, I don't see -- in the long run, we are still looking at sales to trend 0.5%. Obviously (inaudible) some fluctuation, but at this moment we will not guide gross margin. But the only thing I can say is that we manage gross margin on a daily basis and obtain (inaudible) long-term (inaudible) 0.5%.

All right. Thank you for taking my questions.

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

Thank you. My question was around (technical difficulties) guidance and demand levels as well. If you look at the demand levels that the customers have been seeing for the last two-three quarters, John, as you mentioned up-front, they've been pretty flattish (technical difficulty). Revenue levels for Fabrinet were at the $180 million to $190 million level in September before you entered into this downturn. Do you expect that by September, as

you get back to full production, we should get because to those levels? And can you talk about the puts and takes in terms of potential lost customer business as they go to other -- try to diversify contract manufacturing base versus new business on the lasers and sensors side?

Sure, I'll take a crack at that and then I'll pass it over to Tom for his comments as well on the customers and some of the demand.

The short answer for us on September is, it's still a little early for us to look out that far. We'll see as we start to roll that up, but again, the one thing that we do feel comfortable about is that we will have certainly the operational capacity to meet whatever demand levels are out there right now. Could we be back to a flat year-over-year on a September to September basis? We certainly have the potential to be there, but I think it's still too early for us to really get a good look at where those orders are coming in.

One of the things we talked about last quarter and I think still holds true here, is that we still don't believe we're getting the full overall demand picture from those customers that were affected by the floods. So, as we get closer, we're certainly hoping we'll have a better answer for you there. But as we sit here right now it's difficult for us to say where we'll actually be in September.

Tom, I don't know if you want to comment a little bit on customers and some of the interactions you've been having with them and as they look out at (technical difficulty) for their manufacturing.

Well, I think we're on a rapid path to recover our manufacturing capacity and, as we've said, by the September quarter all that capacity will be back in place again, and there has been a tremendous effort to put all that in place, but it's happening; and I think that capacity will correspond with the demand that's in the market. Thank you.

Understood.

If I could follow up, the trajectory of improvement we've seen, obviously December to March and March to June -- at least I expected there would be a little bit more of an improvement in manufacturing. I understand there's some qualification period, but had you expected earlier March to June to be relatively flat? Or three months ago would you have expected some improvement just as you get -- it's a process of improving manufacturing? Or would you have expected kind of flattish March to June and then September to be another step function up?

Well, I think, Subu, the thing to remember about the March quarter is that the primary driver of the sequential increase off of December, where the customers, where their operations were not -- didn't have to be displaced or moved from Chokchai in to Pinehurst, but rather those customers, where their business was shut down for a number of weeks as we couldn't get materials and employees into the manufacturing facilities here at Pinehurst.

So, the biggest change from March -- or from December to March -- really had to do with those customers having a full quarter as opposed to, say, two-thirds of a quarter of business operations. So, I think that's probably the biggest change as we look where we are in March relative to where we were in December.

Understood.

The one observation I would make though, is your customers who were impacted in Chokchai are expecting June levels to return back to September or June levels. They seem to be expecting that recovery, which is why I was trying to reconcile whether you're just being conservative in times for qualification, or are some of the businesses actually kind of moving away?

Our June guidance does not reflect customers moving away from Fabrinet.

Okay. Thank you.

Thank you. Our next question in queue comes from Ehud Gelblum with Morgan Stanley. Your line is open.

How are you? Thanks so much. A couple of questions.

First of all -- on the charges, you had said last quarter that you were expecting $44 million to $63 million, I think Mark had said, in anticipated loss. I don't know if that was on customer equipment -- and I'm wondering if this charge you now have of $48.5 million of customer-owned equipment that you are looking for revamping from insurance company. Is that the entire amount? Are you finished counting up everything? Or do you expect that there is more loss of the customer-owned equipment?

I think that covers most of the customer consigned, (inaudible) and we also have inventory losses continue from the last quarter. We also book $5 million business interruption losses. So, moving forward, I don't expect any big entry through the one-time charges. We might continue to have business interruption. (inaudible) business interruption, we'll continue to see some expenses moving through the line, but nothing significant.

Okay. How long does it take to replace that customer-owned equipment, the $48.5 million? Can you tell us -- is this equipment already in your -- I'm assuming because you said you got to full capacity by September quarter, I'm assuming that equipment is pretty much all ordered and you're about to receive it or will receive it in the couple of months?

Correct, Ehud. The bulk of that equipment is actually already here -- or most of it is -- and is being put into the lines as we speak. So, for the most part, that equipment has arrived. There may be a couple of pieces that are still outstanding, but we need that to get the lines back up and running; that was the bulk of the equipment was ordered back before the end of the December quarter, and now it's just a matter of getting it all in and getting it back up and running.

Okay, helpful.

The laser and sensors business rebounded really pretty sharply to this $46 million number that you had up from -- I believe it was $25 million -- no, sorry, $28 million last quarter. Is that a recovery purely based on -- I know the quarter before that you were at $49 million, the same place you are now. So, was that dip down in December and back in March purely a function of capacity, or was there a change in demand? So, as we look forward should we be using this $46 million number this quarter as baseline, growing it from there, or is there still capacity or demand issues?

No, I think that's a fair point, Ehud. I would look at that as a decent baseline. I think, again, the biggest driver of the recovery and the majority of our business here in the March quarter has been that sequential improvement off of the flood-affected December levels. So, I think that $46 million range is probably a good range to be thinking about to go from here.

So, basically all the issues you may have had in production capacity for lasers and sensors is all corrected; that was corrected earlier than the optics side, and that's why we're back at that level?

Correct, because those businesses were primarily, if not exclusively -- and I'd have to double check that -- located in Pinehurst. So, while they were shut down for a period of time during the flood, they were not damaged or needed to be moved in any way.

Right. So, then, as we look forward to your guidance for next quarter we should assume the lasers and sensors business is flat to perhaps slightly up, and that dovetails with prior questions as to the implication on optical. There's a flatness in that -- in the optical number. Is that now constrained based on capacity, as in, you've had two quarters of increased capacity, but now -- there's one quarter of increased capacity -- and now it will take into September before you have more capacity? Or should we read into the flat guidance for June that demand is completely flattened out at this level?

I think the way -- again, the way we're looking at the June quarter -- for those customers that were displaced out of Chokchai, we still look at this as primarily a qualification quarter. So, we don't expect a lot of revenue from those customers in this quarter. Beyond that -- and I don't want to get into talking about guidance by specific lines -- but we'll see where demand shakes out in the quarter. Right now the guidance is for flat to up 3% sequentially, and that's the way the market looks to us through our customers today.

Okay. (inaudible) And the customers, when we follow them, they seem to be a little more optimistic for the June quarter. Should we take it that, if they're right you'll see an up side? Or is it more timing (inaudible) and you could be right -- so there's no timing involved, as in whatever they're seeing for their June quarters, do you actually ship them in booked revenue in your March quarter, because there's timing between when you actually get revenue and when they get revenue on the same piece of equipment?

To be fair, we're typically a lagging indicator; so as they give orders to us, we'll fill. So, I don't know that -- you're right in that we are obviously building to their order plans and we've got a 13-week rolling plan that we build to. To the extent that orders increase as we go through June and into the second half of the calendar year, you should see that show up in our results as well.

Terrific. Finally -- one of your US customers, at times your largest, is in the process of merging with another customer or another component supplier. They are moving their capacity to Malaysia, not with you, and then they are -- the company they're acquiring, there's an opportunity for outsourcing there as well for the parts that you don't have. Is there, A, opportunity for you to get some of those parts that potentially to be moving to Malaysia? And in the near term are you seeing that merger be more of a hindrance than a help in terms of your business with those two customers?

I think to answer the second part of your question first -- at this point we haven't seen any change either way in our business with either two customers. So, we're operating with both of those, business as usual, if you will. And, again, we're working very hard with both of them to get their capacity back up and on-line as quickly as we can.

To the first part of your question, I think time will tell. We've seen an awful lot of mergers and acquisitions in this industry over the last 10 years. In some cases it's worked out extremely well for us. In other cases we've kind of held our own. But I think, to your point, or at least indirectly, I do think there's opportunity for us to potentially win some additional business from one or both of these customers as they open up more of their business to outsourced manufacturing.

So, time will tell how that ultimately all works out and we've got to wait to see as that merger slowly comes together. But there certainly is an opportunity there for us over time.

Terrific. I appreciate it.

Our next question comes from Paul Coster with JPMorgan. Your line is open.

Yes, thanks very much for taking my question.

I just want to dwell on this point about the June quarter being a qualification period. In the event that demand does exceed your expectations, I take it you cannot respond, because of the qualification process that cannot be accelerated. Am I correct in that understanding?

Generally, yes. The way it works -- obviously the qualification process is different by product; so in some instances, depending on the length and time of the qualification process, we can be up and running and do whatever we need to do for that customer. But for, say, 2,000-hour environmental testing -- that takes a full 2,000 hours. Depending when that starts and finishes, there's really not a whole lot you can do to accelerate that process.

But I am correct in saying that you are probably capacity-constrained in June?

Well, I don't know that I would call it capacity-constrained, because we've got manufacturing facilities and things like that open to us. You're right in that, if there is demand for a specific product that has yet to be qualified, we can't meet it.

Okay, got it. And then I just want to go back to this point of, during this period when you compromised in terms of your capacity -- did business go to competitors? And do you anticipate with a high degree of confidence that business coming back to you in September quarter? Or did it just simply come inside with weak demand and so you didn't lose any market share even on a quarterly basis?

So, there's a couple of instances where we actually sent employees and some equipment back to customers so they could meet some demand through in-house capabilities; where we augmented some of that so they could try to get as much of it up and running as quickly as they could. That capacity, or those products, we still expect to come back to us over the next quarter or two.

In terms of customers migrating away from us during the flood to other contract manufacturers, we did not see that. We kept the customers that we had. We kept the product lines that we had for those customers.

Now, going forward, are our customers evaluating other options in order to mitigate risk and in order to make sure that they can do what is necessary to protect themselves in the future? I think that's absolutely yes. What that ultimately means for us and where that will all shake out is something that will be looked for over time. We've been saying for years that we thought there would be a bigger second source threat to our business, and the flood may have really driven that home to folks.

We're going to have to wait and see how that plays out over time. Right now we're doing business for the customers that we're doing business for prior and during the flood.

Right. Thank you very much.

Thank you. Our next question in queue comes from Sherri Scribner with Deutsche Bank. Your line is open.

Hello. This is Kevin LaBuz in for Sherri.

John, I believe you said earlier in the call that you're expecting to see a little bit of a rebound in the second half of calendar '12. I'm just wondering what you're seeing and what you're hearing that gives that you confidence or leads to you believe that?

I said we're hopeful, I should say. At this point, I think we want to be very careful about that. There's obviously some optimism in the marketplace, both from our customers as well as our customers' customers about the potential for a better second half of the calendar year. So, that was really what I was trying to allude to in my prepared remarks. But at this point, like I said, we're not giving guidance for June. What we're hopeful, as we begin to get our customers re-qualified and we can meet that demand, that, that will certainly help. But at this point, I think it's certainly too early for us to be giving any kind of real outlook on the September or December quarters.

Okay. And you had also noted a number of new business wins. Could you just give a little bit of break down on optical communications (technical difficulty) and new versus existing customers for those wins?

So, the new wins that I alluded to in the prepared remarks, I meant really more along the lines of new customers wins. We have continued to win new products and projects from existing customers, so that certainly augments that as well. All of the customers that we've signed year to date -- or I should say, fiscal year to date -- it's been a fairly good mix of both optical as well as laser and sensor customers. But as you know, it takes a while for those customers to migrate their production capability over to us, for us to then qualify that line again, and then get back up to a revenue ramp over time. For a new customer that comes to us, that process probably takes at least 12 months.

So, the new wins I think are very important for us from a pipeline perspective. They give us confidence in the long-term growth outlook that we have for the Company, but it's not something that, when we sign new customers we're expecting meaningful revenue in the next quarter or two.

All right. One last question -- one of your top customers is moving to an all-outsource model. Have you had any indications from any of your other customers that they would be considering doing such a thing?

Not directly. Our customers are constantly looking at ways to improve their manufacturing process and improve their profitability, and to the extent that outsourcing contract manufacturing makes sense for them, I think will you continue to see them move in that way. There are other customers who are very vocal about embracing the vertical integration model. So, we'll see if that changes over time, but I think there still is a healthy mix on both sides of that.

Thank you very much.

Thank you. (Operator Instructions)

Our next question comes from Patrick Mulvehill with Piper Jaffray. Your line is open.

Great. Thank you for taking my question.

Going back to the conversation about gross margin -- earlier in the year, the optical component customers were talking about how they're seeing 10% to 12% ASP declines. I was wondering if you had any discussions with your customers to date that suggest that they're trying to get some pricing concession from you, and if at all that factors into the implied sequential step-down in gross margins for the rest of the year?

So, let me take a crack at that, and I'll turn it over to TS to talk about the puts and takes there. But to be fair, price is something that we have to deliver to our customers every single quarter. We have quarterly meetings with all of our customers where we go through, set the targets for the next quarter, which includes not just yield and production but pricing as well. And, so for us, it's not something where it is a direct pass-through to where, if they feel they've given a concession to one of their customers, they turn around and pass that on directly to us.

But, again, to be fair, cost is one of the key elements that we have to deliver on to them. And if we aren't able to do that, then it will force them to look for somebody else to deliver that there. T.S., I don't know if you want to spend a minute just kind of going through some of the puts and takes in gross margin and SG&A.

I think, John, that's well said. If you look at the gross margin consists of price and cost, and there are many moving parts in cost element here. We face cost increase or decrease almost every day. So, like John said, we have to deliver the value proposition to the customer and cost reduction is a daily affair here. We manage the cost reduction. We try to contain the margin, and sustain the long-term margin of 12% to 12.5%.

Great. Thank you very much.

Thank you.

Thank you.

And at this time I'm showing no other questions in queue. I would like to return the program to our presenters for any concluding remarks.

Thank you. That concludes Fabrinet's earnings call. Thanks to everyone for joining us.

Ladies and gentlemen, thank you for joining today's conference. This does conclude the program and you may now disconnect.