Fabrinet (FN) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Fabrinet's second-quarter 2014 financial results conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded.

At this time, I would like to hand the conference over to Mr. Paul Kalivas, Chief Administrative Officer and General Counsel. 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 of FY14, which ended December 27, 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 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 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 November 5, 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'm pleased with the results delivered in the second quarter. And Fabrinet remains committed to providing world-class engineering and manufacturing services to our customers, and are working closely with them to meet their current and future production needs. This close collaboration, combined with our focus on total customer satisfaction, gives me confidence that 2014 will be another profitable year of growth.

As always, I want to thank our employees for their dedication and 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 a further discussion of the markets we serve.

Thanks, Tom, and thanks, everyone, for joining us today. 2Q was another good quarter for us, with revenue, margins, and non-GAAP EPS ahead of forecast.

Revenue in the quarter was driven by sequential and year-over-year increases in both our optical and non-optical businesses, with particular strength in our telecom segment, which was up approximately 10% quarter over quarter, continuing on the improvement that we saw last quarter.

In telecom, there continues to be a greater focus and effort in some of the more advanced components and modules, especially around 100-gig coherent technologies. While in datacom, demand for 10- and 40-gig solutions continues to be very healthy. We expect these trends to continue, and while the March quarter tends to be a softer quarter in terms of industry demand, we remain confident that the underlying fundamentals of our optical business are strong. And we expect to benefit through our customers as spending on optical equipment accelerates through the calendar year.

The laser market showed some early signs of improvement, with modest increases on both a sequential and year-over-year basis. We expect that over the near term, our laser business may continue to experience some lumpiness, as demand still seems somewhat variable by application and end market. But over the longer term, we believe that the laser market represents a significant opportunity for growth, as it is still in the early stages of outsourcing.

The demand and visibility on our automotive segment remains solid, with roughly flat results in the December quarter. We believe the longer-term trend in this business is encouraging for us, and we are excited about the opportunities for growth in the coming quarters.

While results in our non-optical businesses have been mixed over the last several quarters, we remain confident that our laser, sensor and other segment will be an important driver of our top-line growth for the next several years. As Tom has mentioned on several occasions, we continue to explore ways to accelerate our growth in these and potentially other new markets.

As we look out into the remainder of FY14, 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.

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

Thanks, John. Good afternoon, everyone. I would like to start with a brief update on the insurance recovery status, then move to reviews of the results of the second quarter, and end with our outlook for fiscal Q3.

In the December quarter, we did not receive any proceeds from insurance. However, we did settle an equipment claim with our insurance syndicate, and we received a final payment of $38.6 million on January 21, which will be reflected in fiscal-Q2 results.

With the settlement of our equipment claim, I'm happy to report that we are now essentially finished with our insurance process, as claims for all losses related to inventory, property, and business interruption have previously been settled and collected. Today we have received total payments against our claims in the amount of approximately $74.7 million, and we estimate that the overall cost of the flood, less the insurance proceeds and other government grants, was approximately $34.7 million. We expect our financial results to be impacted for another quarter due to the timings of insurance proceeds.

Now, to review the results for the second quarter of FY14. Please note that all numbers are GAAP, unless stated otherwise. Our total revenue for the second quarter of FY14 was $178.6 million, an increase of 4% sequentially, and 7% compared to the second quarter of FY13. On an end-market basis, revenue from optical communication was $129.7 million, or 73% of total revenue for the quarter, while lasers, sensors and other revenue was $48.8 million, the remaining 27%.

Our share-based compensation expenses for the quarter were $1.5 million, of which roughly $1.2 million was included in the SG&A.

Our taxes in the quarter were a net benefit of approximately $1.4 million, due to the release of uncertain tax positions in compliance with accounting standard FIN 48, and an increase in the value of deferred tax assets in our Chinese subsidiary. Without these items, our normalized tax rate would have been 5.5%, within our expected range of 5% to 6%.

On a non-GAAP basis, net income totaled $16 million for the quarter, or $0.45 per share, calculated from a base of roughly 35.6 million fully diluted shares. Non-GAAP net income grew 13% sequentially compared to non-GAAP net income of $14.2 million last quarter, and increased 16% compared to non-GAAP net income of $13.8 million in the same period last year.

On a GAAP basis, including share-based compensation expenses, our net income was $14.5 million, or $0.41 per diluted share, compared to GAAP net income of $16.7 million, or $0.48 per diluted share, in the second quarter of FY13. Please note that our FY13 results included approximately $4.8 million, or $0.14 per share, in flat insurance recoveries.

Moving on to the balance sheet and cash flow statement, we ended the quarter with a cash balance of $180 million. Cash increased by roughly $16 million sequentially, as a result of our stronger-than-expected second-quarter results, and solid working-capital controls.

I would now like to discuss guidance for the next quarter. We expect revenues of between $162 million and $166 million. We anticipate non-GAAP net income of $0.32 to $0.34 per share, based on a fully diluted basis of 36 million shares. We anticipate GAAP net income of $1.31 to $1.33, which includes approximately $38.6 million in final insurance proceeds.

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

(Operator Instructions)

Patrick Newton, Stifel.

Good afternoon, Tom, TS and John, thanks for taking my questions. Jumping right into the guidance. It seems a little softer than definitely what we were looking for. I would assume, given JDSU's laser results from last week, that perhaps that business is being pressured a little bit sequentially in the March quarter.

I was wondering, within your optical business, are we anticipating both telecom and datacom are going to decline Q-over-Q? And then within guidance, are there any product lines or technologies that represent the bulk of the sequential down tick in the outlook?

Sure, thanks, Patrick.

In terms of looking into next quarter, I think when we are looking at the sequential decline right now, probably more is coming from the optical side than from the non-optical side. Then, when you look at it within optical, telco's down a little bit more, although datacom, I think, has a chance to be flattish. At least right now, it's not indicating any real additional strength as we're looking out into the March quarter.

Okay, that's helpful. Tom or John, you had two customers make public comments over the last several weeks. One being Oclaro discussing outsourcing of its datacom business. The other being II-VI discussing a strategic agreement with an existing contract manufacturer for its optical manufacturing business.

Could you give us any color on the timing for when Oclaro's datacom outsourcing might occur? And discuss your competitive positioning, in order to, perhaps, be in that business. Could you also discuss the duration of the strategic agreement with II-VI or provide any details around that agreement?

This is Tom. I think John would probably put more color on the II-VI and Oclaro, because he studies it so much.

Thanks, Tom. I can say, Patrick, relative to II-VI, we're not going to share a lot of details here, but we do have a signed contract with II-VI, now. That's really all I can say about the matter, but I can confirm that we do have the signed contract.

In relation to some of the stuff that Oclaro has talked about, we are certainly in the evaluation stages with that now. I don't really know the timeframe with which we should be expecting something there. I think we'll leave it to Oclaro to comment on that. It's certainly something that we are taking a good, hard look at right now.

John, for that signed contract, can you at least discuss whether the duration is measured in quarters or years?

Patrick, I really can't comment on the contract specifics at this point.

Okay. Last one for me. Given your prepared remarks, you didn't mentioned a thing about the unrest in Thailand. It sounds like your employees are safe, your operations are unimpacted and things must be running along smoothly.

I was wondering if you could walk us through what contingency plans you have in place. Perhaps, Tom, given your history in the country, how would you compare the current pension to a prior period, 2008, 2010. Is there anything operationally that we should be concerned about? Thank you.

I don't think, Patrick, you should be concerned at all about it. I've been manufacturing in Thailand since 1984. There have been some periods that have been of concern, but never from a business concern.

We've never missed a shipment out of Thailand since that period of time. All of our incoming goods have always come in. And the Thai government has certainly been supportive of the economy, all throughout all these years.

And, again, what we see today is business as usual. So do the rest of the companies that are manufacturing in Thailand.

Just to add to that, Patrick in terms of the contingencies. We are in daily contact with all of our suppliers, with all of the logistics companies that we use, with the government, with the airfield.

Right now, we certainly have plans in place, were something to happen. As Tom indicated, we're certainly are not overly concerned about it. At the factory, it's absolutely business as usual. So until something changes, I think that that's exactly how we're going to continue to treat it.

Great, thank you for taking my questions. Good luck.

Sherri Scribner, Deutsche Bank.

Hi, thanks. I wanted to get a little detail on your thinking about operating expenses as we move forward, considering the step down in revenue. Should we think about SG&A being relatively flat?

Also, thinking about utilization rates, how utilizes building six at this point, and how much of a drag is the under-utilization in the March quarter impacting your results? Or the guidance.

Sherri, this is TS. I will take the first question and let John answer the space issue. As far as SG&A is concerned, operating expense should be flat. I think, even though we've guided down, we believe that's the temporary situation.

In the long run, we see them go back to the same levels of revenue. I don't think SG&A will fluctuate based on the short term volume chain. John, you want to take the next one?

Yes, Sherri, in terms of space right now, overall the campus is running probably around 75% plus or minus a percent or so in terms of space being utilized. Building six is probably just over 50% at this point.

From an equipment perspective, the factory is probably running in the low- to mid-60s, in terms of equipment utilization. We will continue to fill that up. It's still a little bit of a drag on the gross margin line, but we are slowly but surely absorbing more and more of building six.

Okay, that's helpful. Thinking about the June quarter and the rest of the fiscal year, and thinking about the guidance that you gave for March, typically you guys don't see a lot of seasonality. But you are guiding the March quarter down, I think at the midpoint, about 8%.

What type of seasonality would you typically expect in the June quarter? And how much seasonality do you expect in the back half of the calendar year?

It's hard for us to certainly see out that far, Sherri. If we use last year as a guide, we had a fairly steep decline sequentially, off our December quarter last year. Then managed to grow pretty well every quarter sequentially from there, as we went through the calendar year.

We are certainly expecting that we will be able to grow sequentially again from this March quarter low point, if you will. How much, exactly what we are anticipating, it's hard for us to say at this point. I would say that we do expect to grow sequentially as we move through the calendar year.

Okay. I just want to follow-up on some of the comments you made about Oclaro. I know nothing has been resolved at this point and you are evaluating, and they are evaluating.

If something were to happen, would you need to cut some of your expenses? Would there need to be some layoffs? What are you thinking? Thanks.

I don't think at this point we're really anticipate that we are going to have a huge issue with Oclaro here any time soon. Were we to lose any major customer like that, then I think we would absolutely have to take a look at realigning our resources to make sure that we are matching what we have against the revenue levels that we expect going forward. Were we to expect something like that to occur, then I think it would be reasonable to expect us to take actions to reduce our overall cost.

Great. Thank you very much.

Subu Subrahmanyan, The Juda Group.

Thank you. Two questions. John, it looks like optical com is down about 10% quarter over quarter. Can you remind us what's your mix between telecom and datacom as in optical com?

Sure. We've got about a two-thirds/one-third split, Subu. Although this quarter it was a little bit more weighted to telco. So it was on probably the higher end of that.

So that would suggest down 10% would be telco, down almost 15% as you mean datacom flat. My question is, that's more than seasonal down tick. At least one of your large customers actually suggested March is up for telco opticals. I'm just trying to understand the differences.

For us, Subu, it's a situation where we roll up the customer orders, and that's where we are at right now. It's not, I think, in any one vendor's camp, if you will. It's spread out fairly evenly across the mix.

So, again, I understand that it's down a little bit more, certainly, than we would like. But that's where we are right now. We don't believe that it's got anything to do, really, with market share moving away from us or anything along those lines.

It's just a product of that's the order roll-up that we have at this point in time. So, that's the guidance that we're giving.

Given the Oclaro divestitures, could you remind us, the pieces of Oclaro that they were doing internally on the datacom side, what there is coming up is contracted yet? How much of that did you have exposure for versus what of that was their Shenzhen facility that you did not have exposure for before?

I'm sorry, Subu, I want to make sure I understand the question. Would you please repeat it again?

Yes, I was wondering. There was some commentary about their datacom business outsourcing, what options they may be considering.

I'm wondering, was that in Shenzhen with them? Or was some of that with you? Do you feel like some of the business that you had at Oclaro is being in some form re-bid?

The business that I think was mentioned earlier today would be stuff that I'm assuming would come out of Japan, out of some of the hold historic Opnext business. I don't think it was coming out of Shenzhen.

Understand. Final question on II-VI, II-VI, obviously, has made comments about their own plans for vertical integration, outsourcing. Your exposure to Oclaro, a significant portion of that business went to II-VI.

Can you just talk about, is II-VI, the run rate, are they a 10% customer now? On Oclaro, how you typically over the couple of quarters see that playing out?

I think that piece of business that we got from -- or that we now have with II-VI that came from Oclaro, we certainly anticipate that as that matures and continues, with any luck it will continue to grow with us, as it has, over that has over the last several years, as we had it with Oclaro as the product manager or product owner there, I should say. In terms of whether or not II-VI is a 10% customer, I've got to figure all that out as it translates into what point they take ownership and whose books it's actually still on. I'm not trying to be evasive here, it's just I'm not exactly sure, quite frankly yet, exactly how it's rolling up and where it's being reported.

Thank you.

Troy Jensen, Piper.

I had another follow-up here for John. John, you highlighted 100-g telco and 10- and 40-g datacom. We've heard that from some of the other optical guys, too, in the last week. Can you tell us which the two you guys had most exposure to? Which one's going to be more important for growth in the future?

Sure. Most of the 10- and 40-g on the datacom side, that's where we've got a little less exposure than we do to the telco. Over time, I think, as telco catches up, because certainly 10- and 40- is a little bit stronger, not just for us, but I think for the industry in general, right now. I think as 100-gig starts to gain some additional momentum and acceleration, that will be of bigger importance for us going forward than 40- or 10- in the datacom side.

I'd like to hear about your confidence regarding a wrap in telco 2014. Myself, other people in the industry, thought it was going to happen in 2013. Just like to know what gives you confidence.

I think, Troy, part of this is, I don't see any major obstacles out there. I think it has been really a situation where we're just needing to see, I think, multiple operators come in and start to deploy at the same time.

I think that as we're getting further and further into this deployment cycle, we are starting to get some additional signs of that occurring, whether it's increased participation from some of the Chinese carriers; some early signs, I think, of hope coming out of Europe; I think another year of the US market being a little further into its overall builds. I think we are now starting to get enough of a sense that we are going to get multiple carriers participating at the same time. That's really where I think our confidence comes from, more so than anything else.

Great, understood. Good luck, gentlemen.

Thank you.

Thank you. I'm showing no further questions at this time, sir.

Great. Thank you everybody for joining us today and we look forward to speaking again soon.

Yes, thanks.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program. You may all disconnect and have a wonderful day.