Fabrinet (FN) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Fabrinet's fourth-quarter 2013 financial results call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded. I would now like to turn the call over to your host, Paul Kalivas, Chief Administrative Officer. Please go ahead.

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 fourth quarter and fiscal year 2013 which ended June 28, 2013. 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 www.investor.fabrinet.com. During this afternoon's discussion, we will be presenting both GAAP and non-GAAP numbers. Our GAAP results and a reconciliation of our GAAP to non-GAAP results are attached to our earnings Press Release which is also posted on our website.

I would like to remind you that today's discussion may contain forward-looking statements about the future financial performance of the Company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from Management's current expectations. 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 recent SEC filings, in particular, the section captioned Risk Factors, in our form 10-Q filed on May 3, 2013. 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, and good afternoon, everyone. I am pleased that we ended fiscal 2013 on a positive note, with our fourth-quarter revenue and earnings per share above expectations. As we enter fiscal 2014, I am confident that our healthy pipeline of new business, strong customer relationships and intensive focus on quality and total customer satisfaction, will deliver another year of profitable growth. As always, I want to thank our employees for their hard work and all of our customers for their continued trust and support of Fabrinet.

I will now turn the call over to John Marchetti, Fabrinet's Chief Strategy Officer, for further discussion of the markets we serve.

Thanks, Tom, and thanks, everyone, for joining us today. Despite a relatively anemic demand environment, fiscal 2013 was a solid year for Fabrinet with double digit growth in both revenue and earnings per share. Our non- optical communications business performed well with 5% year-over-year growth. Our optical business continues to track slightly above industry growth on the back of new program wins. In terms of overall demand trends, fiscal 2013 was a somewhat challenging year. While there was some variability from quarter-to-quarter, orders, for the most part were flattish. These demand trends were prevalent across several of our lines of business and were not attributable to any one particular customer or end market vertical, suggesting to us that demand was adversely affected by sluggish spending trends in multiple markets. Near-term, we expect these current demand challenges to continue.

In optical communications, we experienced some modest increases relative to our expectations in the quarter, with results suggesting to us that demand continues to firm up. However, we did not see a material increase in orders across the entire customer set, and, as a result, we will continue to maintain a conservative bias toward the second half of the calendar year. Similar to what we have seen over the last couple of quarters, there continues to be a great deal of focus and effort on some of the more advanced components and modules. We expect these trends to continue, and it is this activity that gives us confidence that the underlying fundamentals of our optical business remain strong. We expect a benefit to our customers as spending on optical equipment accelerates.

Our laser, sensor and other business was up sequentially in the fourth quarter and remains an important avenue of growth for us. As Thomas mentioned on several occasions, we will continue to explore ways to accelerate our diversification efforts in these and potentially other new markets. The laser market, while, stable has yet to show signs of any meaningful re-acceleration. The weakness that we saw in the government and research markets over the last couple of quarters appears to have found a floor while the industrial market remains mixed. We expect that over the near-term our laser business may continue to experience some sluggishness, however, we continue to believe that the overall laser market is in the early stages of outsourcing and represents a significant opportunity for growth over the next several years.

Demand and visibility on our automotive segment remains solid, and we are encouraged that signs point to this continuing. We are winning new business in the segment, excited about the opportunities for growth in the coming quarters. Overall we remain confident that our laser, sensor and other segment will be a critical driver of our top line growth for the next several years. As we enter fiscal 2014, we are encouraged by the overall growth prospects for our business. We continue to work closely with our customers to ensure that we are aligning our resources to meet their current and future production needs and believe that our business will accelerate along with our customers as demand trends improve. Our new customer acquisition efforts are a vital part of our overall growth strategy, and, while these new wins always take time to generate meaningful revenue, we believe the pipeline for this new business remains strong.

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

Thanks, John. Good afternoon, everyone. I am pleased to report that Fabrinet delivered fiscal Q4 results above our guidance range. I would like to start with an update on the insurance recovery status then move to a review of the results for the fourth quarter of fiscal 2013 and end with our outlook for fiscal Q1. As a reminder, we continue to expect our financial results to be impacted for multiple quarters due to the timings of approval and payment of insurance proceeds. Claims for all losses related to equipment, inventory, property and business interruptions have been submitted, and we continue to work with our insurance syndicates to settle these claims. As of this date, all claims have been settled with the exception of our [value equipment] claim.

In the fourth quarter, we received a final payment towards the business interruption claim in an amount of approximately $8.4 million. For the fiscal year, we have received total payments against our claims in amounts of approximately $29.5 million, and we will continue to pursue aggressively the balance. Additionally, as of the end of the fiscal year, we have signed settlement agreements with all of our customers impacted by floods but still [dance] having been completed pay outs by us. We will disclose additional information on the timing and payment of our insurance claims as it becomes available.

Now, to review the results for the fourth quarter and fiscal 2013. Please note that all numbers are GAAP, unless stated otherwise. Our total revenue for the fourth quarter was $159.9 million, an increase of 3% sequentially, and an increase of 12% compared to the fourth quarter of fiscal 2012. Please remember that the fourth quarters of fiscal 2012 were still impacted by our flood recovery efforts. On an end market basis revenue from optical communications was $111.8 million in the fourth quarter, or 72 -- 70% of total revenues, while lasers, sensors and other revenue was $48.1 million, the remaining 30%. For the fiscal year, our total revenue was $641.5 million, an increase of 14% compared with fiscal 2012, primarily as a result of our flood recovery efforts For the fiscal year, revenue from Optical Communications was $449.8 million, or 70% of our total revenue, while lasers, sensors and other revenue was $191.7 million, the remaining 30%. We are pleased with our ongoing demonstrations of our revenue and will continue to explore additional ways to facilitate these efforts.

Our share -based compensation expenses for the quarter was $1.1 million of which roughly $945,000 was included in SG&A. For fiscal 2013, our share -based compensation expenses were $5.1 million, of which approximately $4 million was included in SG&A. Our flood-related items for the quarter was incomes of $6.1 million which consist of the final payment on our business interruptions claim of $8.4 million, offset by additional expenses from settlements of all customer claims of $2.3 million. For fiscal 2013, our income flood-related was $27.2 million, which consisted of payments received from our claims for $29.5 million offset with additional expansion from settlements of all customer complaints of $2.3 million. These, compare to a flood-related loss of $97.3 million in fiscal 2012. These amounts are included in our results as other income and are excluded from our non-GAAP results. We intend to book that gain on the insurance proceeds in the future period, as those amounts become reasonably certain.

Our effective tax rate for the quarter was 1.5% including the effective flood-related insurance recovery as well as a laser [fam posse] tax provision. Without these items, our normalized tax rate would've been 5.3%. For the fiscal year are effective tax rate was 4.9%, in line with our expected range of 5% to 6%. On a non-GAAP basis, net income totaled $12.4 million for the quarter, or $0.35 per diluted share, an increase of 60% compared to non-GAAP net incomes of $10.7 million or $0.31 per diluted share in the same period a year ago. Non-GAAP income in fiscal 2013 was $50.5 million or $1.44 per diluted share, an increase of 16% compared to non-GAAP net incomes of $43.4 million, or $1.25 per diluted share in fiscal 2012. On a GAAP basis including flood-related income, share -based compensation expenses and other nonrecurring expenses, our net income for the fourth quarter was $15.1 million, or $0.43 per diluted share compared to net income of $7.5 million or $0.22 per diluted share in the fourth quarters of fiscal 2012. GAAP net income for fiscal 2012 was $69 million or $1.98 per diluted share compared to a GAAP net loss of $56.5 million or a loss of $1.64 per diluted share in fiscal 2012. In the near-term we expect that our GAAP results may continue to fluctuate, due to the size and timings of future insurance recoveries.

Moving on to the balance sheet and cash flow statement. We ended the quarter with a cash balance of approximately $150 million. Cash decreased by approximately $8 million sequentially, as a result of payments made in accordance with flood settlement agreements between us and our customers.

I would now like to discuss guidance for next quarter. As both Tom and John discussed, we have yet to see signs of sustained increase in orders from our customers. As a result, we are remaining conservative in our outlook for fiscal Q1. We expect revenue of between $158 million and $162 million. GAAP net income per share is expected to be in the range of $0.46 to $0.48 with expected non-GAAP net income per share in the range of $0.31 to $0.33 based on approximately 35 million fully diluted shares.

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

(Operator Instructions)

Sherri Scribner, Deutsche Bank.

I wanted to get a sense of the linearity in the quarter? I know you commented a couple times during the prepared remarks that you aren't seeing signs of a sustained improvement in customer orders, and you're cautious for the second half, but you did see some upside. Was that primarily at the end of the quarter, or can you give us some sense of linearity?

Yes, sure, Sherri. This is John. I think linearity was pretty much in line with what we expected. We did see a little bit of an increase later in the quarter, but again, I don't think it's anything that was terribly surprising to us in terms of linearity relative to prior quarters.

Okay, and then just thinking about some of your customers have been positive. We had a positive pre-announcement, we've had some positive earnings results and guidance but you guys are guiding relatively in line. Are you not hearing from customers that they're more positive? What's causing your conservatism?

I think really, Sherri, it just comes down to orders. I think most of the talk that we've heard from the bulk of the customers, certainly publicly talks about a seasonal uptick in the second half of the year. I think we certainly are hopeful that that's going to occur, but I don't think we've seen enough from an order pattern to suggest we're going to see anything really outside of that yet.

Okay, and I just want to ask a quick question on the SG&A. It was down this quarter, pretty low considering where it's been. How should we model SG&A going forward?

Sherri, this is TS. I think the SG&A moving forward, still like what we said before, $6 million to $6.3 million a quarter including the stock -based compensation. Now at this time we took a $1 million reduction from the prior quarter is because we have the reduction, small reduction in force, and as of the end of the cutoff we had less people. And based on the actuarial study we pulled a [lexus] 7 liability, and we take that to the SG& A per accounting standards.

Okay so you won't see SG&A go down, because -- even though you had a reduction in force?

No, this is only a one-time thing and we'll be back to $6 million to $6.5 million including the stock -based compensation.

Okay, thank you.

Alex Henderson, Needham.

I got part of my answer on that last question. The exchange rate, hit you guys pretty hard last quarter. It looks like it's essentially fully reversed. Should we be anticipating getting back some of that gross margin pressure that we had built into our models as a result of that in the prior quarter? And then second I guess and the answer to the operating line would be that we've get the Sales & Marketing will come back, and that will be partially offsetting it I assume?

Alex, this is TS. On the exchange, if you remember last couple quarters we said we have a hedging program in place. We also already begin to buy some put options and so you will see the benefits on assuming if we bought against US Dollar continues to depreciate. You'll see that coming maybe one or two quarter lag. That's how the hedging program is. So, I think for the current quarter of Q1 you might not see impact. And assuming opportunity to depreciate, yes, might see some impact benefits in the fourth quarter.

So sequentially fairly flat into the September quarter on gross margin and the Sales & Marketing pops back up?

That's correct, yes.

Okay and can you talk a little bit about the portion of your business that's coming from a couple of key pockets and the portion that is exposed to the other side of it, ie, when you are looking at your business, how much do you see of it is coherent silicon photonics, the data center 10 gig, 40 gig, 100 gig? Conversely can you talk about how much of your product line comes from sonnet, STH 310 10 gig long-haul, the legacy stuff in one bucket, the growth segments in the other so we can get a sense of the mix of that?

Sure, so Alex if you look at our Optical Communications business we're about two thirds, one third telecom to data com. On that data comp side we are primarily leveraged to the 10 and 40 cycle that's going on there. So I think certainly on the data com side the bulk of that is primarily in the growth year aspects, if you will, of the Optical Communications realm. On the telco side, it still a little bit more mixed than that I would say -- I don't have the percentages right here in front of me, but between 100 gig and coherent and some things of that nature, it's probably 20% to 25% of that telco specific business and the rest is mixed through, like you're talking about some 10 gig transport as well of some of the other technologies. We don't have a ton of sonnet still that we're doing so there's not a lot of exposure there, but there certainly is a fair bit of it still at the ten gig speed.

I see. Last question for me, Casix, any thoughts on how -- what that did, and then I'll cede the floor?

We have never really broke Casix out specifically. It is still below 10% of total revenue.

Okay. Thanks.

Patrick Newton, Stifel.

I guess the first one for Tom -- on your prepared remarks you talked about a healthy pipeline of new business. And I was wondering if you could comment on this new pipeline entering fiscal year '14 compared to prior fiscal years. And is the comment about the healthy pipeline directed at the automotive and sensor given some of the strengths that you've seen there at the laser side given that scenario where you've really been investing in or even on the optic side? Just would love some detail there?

I think it goes back a bit almost about two years ago. We really began to focus on business development much more than we had in the past and, most of -- not most but just about all of the new business that we're fortunate enough to be able to secure takes us about anywhere between one year and three years to materialize into meaningful revenue. And we're now beginning to see the efforts that we put in starting at about two years ago, we're beginning to see that those opportunities are in fact in our sales funnel, our marketing funnel, and are beginning to work our way through that channel and begin to be real revenue contributors as we go out of this fiscal year into next fiscal year. So we're very encouraged about that.

And the other thing that is really quite encouraging is that's we're -- our tier one customer base is continuing to show us revenues that future revenues and future projects we're working on and the new product introductions we're working on, all of that is really the basis for my comments. But I think it really does show that as we go forward in 2014 and beyond, that our revenues have a real strong base to work off of.

And if we take that and look at pure growth numbers I think in fiscal year '13 the optical side outgrew the laser, sensors and other side which is somewhat of an anomaly. So should we see that slip back to kind of your traditional growth coming from laser, sensors and others and Optical Communications also contributing but to a lesser extent?

Well I think Patrick, to be fair a lot of that is going to have to do on the different segment demand trends as well. There certainly is all else being equal, I would expect that to occur. But we could certainly have quarters or depending on how those quarters stack up a full year where optical may ultimately still grow faster just based on the overall demand trends. But all else being equal, yes, we would still expect that that other segment consisting of the lasers and the auto and sensor business would grow faster.

Okay. And I guess just kind of dovetailing off of Alex's question, you talked about not seeing a material uptick in orders across your entire -- material or customers on the optic side is what I'm reading into. And the question about the mix between kind of the product areas that are hot and not, clearly it seems like you're seeing some of the similar trends on the data com and on that 100 G coherent, and you just had the -- more legacy businesses where you're not seen it yet? Are there any pockets of strength in that legacy portfolio?

There are some, and it varies I think a little bit by customer. I think again you're still having an environment where especially on the telco side, you don't have all of the carriers really out deploying this next generation of technology yet. And so there are certainly certain carriers out there that are putting in purchases for some of the older equipment so to speak. So I think we'll probably continue to see that for a while. We certainly saw it during the ten gig transition. I like to think that as we continue to move forward you'll see more and more of that shift toward the growth year products, so to speak. But today there are still obviously some carriers that are out there that are purchasing some of the slower speeds. And for us and our customers, we're going to support them no matter what it is they want to build.

And then I guess last one on the insurance side, I'm not sure that I caught this completely, but did I hear correctly that you've signed an agreement with all customers impacted by flooding? And that you -- did I hear correctly that you've made advanced payments to your customers on the insurance proceeds and, therefore, you would be collecting directly the future insurance proceeds? Can you help me -- fill me in there? I didn't quite understand the comment.

Patrick, we say as a cutoff we had settled with all the customers -- two of the big customers has been already paid off. So at the cutoff if you look at the balance sheet we still have $9.8 million in the liability to the customer, and for this quarter we will pay off bills majority of those $9.8 million. And that is to the customer, so I hope that answers your question. Then with the insurance we're pretty much settled and collected the money except the big one -- the equipment claim which we are working on.

And so this means that since you've paid off your customers in full that any incremental cash flows coming from that equipment claim on a go forward basis are 100% applicable to Fabrinet as opposed to some going to your customers?

That's a good observation. Yes.

Okay and then assuming -- what which drive you to prepay your customers? I'm assuming that you're not giving them 100 cents on the dollar? Is that accurate?

No, of course not. I think it's been almost two years. And I, obviously with the insurance company is a different story. They drag their feet, late payment most insurance companies do that. Now with the customer which we have a relationship, we have to basically support them. No, I think we just go by the order book agreement they claim, and so it's a good settlement.

Great. Thanks for taking my question.

Paul Coster, JPMorgan.

Can you share with us any customer concentration numbers?

Well I mean, those will be in the K that we file in a little bit. The only two 10% or greater customers in the quarter were the same that we've had for the last several quarters which would be JDS Fuzhou and Oclaro.

Thank you. And I think it was in Tom's remarks you talked about new customer wins and pipeline. I may have misunderstood is it -- do have new customers that are material and can be shared with us now, or are these anticipated? And, should we ever expect a customer really to -- any single customer to move the needle, a new customer that is?

It takes a while for those customers to build up to be a significant revenue contributor there, Paul. As Tom mentioned this is an effort that goes back quite frankly about close to two years now where we really started to refocus the business development efforts on not just winning customers but winning new tier one customers. We're quoting several programs. We have a lot of new customer wins, some are small, some have the potential to be large, and some are in aggregate as we start to pile up, some of those wins will be large. Is somebody going to get the point where there are 20% plus of revenue? Certainly not going to happen quickly, but I think with some of the customers, given some of the programs that we're potentially working on how quickly they ramp what they ultimately could mean, they could certainly be at some point in the future, 10% or greater customers. But I don't think it's likely that any of those would be that material in fiscal 2014.

I guess one more follow-up if I may. Tom talked about a very long lead time on sort of establishing business with a customer. Is that because early on in the cycle you win just a tiny bit of business and they kind of qualify you over a period of quarters, and then eventually it grows into something? Or is it because as part of your customer on boarding process you're really having to identify tiny customers and start small and just hope that you're picking the winners?

I think a further definition for my talk on the lead times that it takes to put in place the meaningful revenue from the new customer or the new project from an existing customer. They're both in the same category. But most all of those projects are all NPI projects, new product introduction.

Right.

So we basically start working with the customer, and right after they finish the beta units and we start with -- and then we work -- because they completed the alpha units, they are working on the beta units, and then we come in and assist them. It's not really work with them to develop the manufacturing process and the design for manufacturing. And all of that, all of that effort and work that goes into that, takes some times can take a year or for sure takes more than nine months. And then with the product -- and those products have to be introduced to their customers, and their customers have to qualify those products and then once all of that is in place, then that piece of business for the sake of conversation totally belongs to us, and we begin to enjoy the revenue going forward.

Got it. Thank you.

Subu Subrahmanyan, Juda group.

Thank you, John, can you talk about upsides to the quarter versus guidance? Is higher than kind of a normal upside you've had. And you didn't comment about some strengthening in the orders at the end of the quarter. Can you talk about that trend? And if that reversed, why you don't believe there's more of trajectory here, given some of the more optimistic commentary from your customers?

Sure, Subu. You're right. It did strengthen as we mentioned a little bit towards the end of the quarter. The upside relative to our expectations did primarily come from the optical communication side of the business, so that is really what drove the upside relative to guidance this quarter. We -- I don't think it's dropped off dramatically. We haven't seen a big drop-off in those orders there. That's why we're essentially guiding flat with where we are today. And I think that for us, given where we are in the quarter, we've got about half of it behind is now as we've got about six or seven weeks left in the quarter to go through. Could we see a little bit more upside if orders improve in September or over the last few weeks here of August? Potentially yes. So, I think that there is an opportunity for that. By the same token, there's not this huge bias, I think, but every week we're seeing a match up of those orders shipped and so, are we being somewhat conservative? I think we are but I think again, where -- with the upside we saw toward the end of this quarter and then guiding flat off of that, I think we are capturing some of that in the guidance that we gave.

Understood. And, on the gross margin side, I knew you had mentioned that hedging is offsetting some of the appreciation of the US dollar versus the thai baht. Is it fair to say that even if we don't see further appreciation of the US dollar, and a couple of quarters or I don't know how long you hedge for but a couple of quarters down the largest to reversing of that a year ago should be able to get the gross margin back in the mid- 11s, level or is there something else that needs to happen as well?

Yes. Yes I think your observation is correct.

So we don't need a further appreciation and the hedging is for couple quarters and maybe starting December quarter period versus whatever the FX specific effect on gross margin. Is that the right way to think about it?

Yes, that's correct.

Great. Thank you.

This ends our Q&A for today. I'll turn it back to John Marchetti for closing remarks.

Great. Thanks, everybody, for joining us today, and we look forward to talking to you soon.

Ladies and gentlemen, thanks for participating in today's program. This concludes the program. You may all disconnect.