Fabrinet (FN) 2014 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to Fabrinet's third-quarter 2014 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 will be given at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to turn the call over to John Marchetti, Fabrinet's Chief Strategy Officer. Please go ahead, sir.

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 of FY14, which ended March 28, 2014. With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of Fabrinet; and TS Ng, our Chief Financial Officer.

This call is being webcast and 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 will 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 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 February 4, 2014. We will begin the call with brief remarks by Tom, myself, 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, John, and good afternoon everyone.

I'm pleased with the results delivered in the third quarter, and I'm encouraged by the early signs of improving demand that we are beginning to see across our business. We continue to work closely with our customers to meet their current and future production needs. This close collaboration combined with our commitment to providing world-class engineering and manufacturing services with a focus on total customer satisfaction, gives me confidence that growth in our business should accelerate as we move through the calendar year. 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 back to John for a discussion of the markets we serve.

Thanks, Tom.

Third-quarter results were very much in line with our expectations, and we continue to expect that the March quarter will mark the revenue trough of the calendar year. As anticipated, revenue in both our optical and non-optical businesses was down sequentially, but increased on a year-over-year basis. This year-over-year increase gives us confidence that despite the weaker seasonality that we typically see in our March quarter, underlying demand fundamentals continue to improve.

In telecom, we continue to see faster growth in 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 healthy. We expect these trends to continue and remain confident that the underlying fundamentals of our optical business are strong, and we expect to benefit through our customers as spending on optical equipments accelerates through the calendar year.

The laser market showed some additional signs of stability in the March quarter with a modest increase on a sequential 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 markets. But over long-term, we believe that the laser market represents a significant opportunity for growth as it is still in the early stages of outsourcing.

Demand in our automotive segment remains solid with both a quarter-over-quarter and year-over-year increase in revenue attributable to those customers. 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.

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

As we look out into the remainder of calendar 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 continue to improve. With that, I would now like to turn the call over to TS, our CFO, for a review of the financial results.

Thank you, John. Good afternoon, everyone.

I would like to start with a brief update on the insurance recovery status and then move to a review for the results for the third quarter and end with our outlook for fiscal Q4.

In the March quarter, we received our final insurance payment of $38.2 million. With the receipt of this payment, I'm happy to report that we are done with the insurance recovery process. In total we have received payment against our claims in the amount of approximately $74.7 million, and we estimate that the overall cost of the flat less the insurance receipts and other government grants was approximately $24.7 million.

Now to review the results for the third quarter of FY14. Please note that all numbers are (inaudible) unless stated otherwise. Our total revenue for the quarter was $167.7 million, a decrease of 6% sequentially and an increase of 8% compared to the third quarters of FY13. On an end market basis, revenue from optical communications was $119.8 million, all 71% of total revenue for the quarter while lasers, sensors, and other revenue was $47.9 million, the remaining 29%.

Our shared daily compensation expenses for the quarter were $1.5 million, of which roughly $1.2 million was included in SG&A. Our taxes in the quarter were a net expenses of approximately $727,000, mostly booked by our Chinese subsidiary. Excluding flat incomes and one-time items, our effective tax rate for the quarter was 5.8% within our expected range of 5% to 6%.

On a GAAP of basis, including share-day compensation expenses, executive separation costs, and income related to our insurance recovery, our net income was $47.7 million, or $1.33 per diluted share, compared to net income of $21.1 million, or $0.61 per diluted share in the third quarter of FY13. On a non-GAAP of basis, net income totaled $12.3 million for the quarter, or $0.34 per share. Non-GAAP net income was down from $16 million last quarter as a result of lower revenue that grew 6.6% compared to income of $11.5 million in the same period last year.

Moving onto the balance sheet and cash flow statement. We ended the quarter with a cash balance of $234 million cash increased by approximately $54 million sequentially, primarily as a result of our receipt of the final insurance payment.

I would now like to discuss guidance for the next quarter. We expect revenues of between $169 million and $173 million. GAAP net income per share was expected to be in the range of $0.29 to $0.31 with non-GAAP net income per share of $0.33 to $0.35, based on approximately $36 million fully diluted shares outstanding.

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

(Operator Instructions)

Subu Subrahmanyan, The Juda Group.

Hi. I had two questions.

First, on the demand environment. You had mentioned some positive commentary, John, just in terms of trends you are seeing.

If you could elaborate on that. What gives you some of the confidence, given the results from Phase I with the larger customers was somewhat more mixed? I was wondering what you see in terms of visibility on that.

And then if you could update us on the situation at [26] where your relationship is. And if you can clarify who your 10% customers are for the quarter, that would be helpful. Thank you.

Sure, Subu.

In terms of your first question on the demand environment, I think obviously the guidance captures some of the uncertainty that's out there. But we still feel pretty comfortable that the underlying fundamentals continue to get a little bit stronger on the telecom side.

And like I said, both our telecom and our datacom business were down sequentially in the quarter. That came in pretty much as expected.

I think as we are continuing to look a little bit further out, the conversations that we are having with customers about their demand levels and things like that continue to be constructive. The guidance that we are getting here, I think up sequentially is in line with what we're hearing from customers that are out there.

So I think in terms of the overall demand environment, specifically on the optical side, I think we are very much in line with what we are hearing from customers out there.

On the non-optical businesses, it is a little bit more mixed. This quarter was down sequentially. But both our laser and auto businesses were up just a little bit on a sequential basis even. So those businesses, I think, continue to see pretty healthy fundamentals.

Our Other category, if you will, which is some sensor and some medical and some one-off programs that we've got going on right now, that was really the reason for that segment to be down sequentially.

So we feel that, again, the auto business has been one of our higher visibility businesses that continues to perform pretty well for us. On the laser side, we are encouraged that that's starting to get a little bit more stable; and hopefully we can continue to see some growth as we go through the remainder of the year.

In terms of your question about [26], there really is no big change relative to what we talked about last quarter. We have the contract in place.

I think the operational side of the relationship, if you will, in terms of how orders are coming in and things like that, has settled down quite a bit now that we've gotten a little bit further into the relationship with the contract signed, so no big changes there.

We still feel very comfortable about what we're doing with them, and I think that's, that's the way we continue to be that.

I'll let TS comment on the 10% customers in the quarter, but there's really not too much change there.

Yes. It's just like what we disclosed in the 10-K, the usual two customers, which are JDSU and Oclaro.

Got it. Thank you very much.

Patrick Newton, Stifel.

Yes, thanks for taking my questions. Good afternoon, Tom, TS, and John.

My first question is echoing what Subu just said. Given the earnings commentary out of one of your largest customers, I thought that the revenue results and guide are relatively solid.

But the biggest issue I think that investors are having with the quarter was the gross margin results and then the implied guidance. I think the last time we saw gross margin reach this mid-10% level, it snapped back rather aggressively.

I guess my questions are -- Can you walk us through what impacted gross margin so aggressively in the quarter on a sequential basis? What is embedded in guidance? You seem to be targeting a relatively flat gross margin sequentially.

Is pricing playing any type of role in that line item? And can you discuss the potential for snap back as we move through the year?

Okay Patrick, this is TS. Good questions.

The gross margin for March quarter would have been close to 11%. It's not because of one customer in the non-optical segment, where cease operations toward the end of the quarter. So we had shipping to them, a bunch of the stuff. Toward the end of the quarter, they stopped operations; and they are behind in payments.

So according to the Company standards, I took a provision for that. The customer is going to start to figure out their strategy moving forward. If we ever get our money back, those results will be reversed in the future.

But just put that aside. You're looking at close to 11%. Merely because of the volume, lower volume. We lost $11 million sequentially compared to the December quarter. That accounts for the delta.

Okay. So I'm just backing into you guys having about a -- that reserve is somewhere around maybe $1.1 million. Is that accurate?

It looks like if all else equal, if that's accurate, you would've posted about a $0.37 quarter. Is that fair, TS?

Close to that, Patrick. Yes, your number is very close.

Okay.

So then that still doesn't answer the sequential question. Just to get the midpoint of guidance from the midpoint of revenue, that $0.34 earnings implies the gross margin somewhere in the 10%s. So is there still a reserve impact that's hitting the June quarter as well?

Yes, okay, so if you get down to the non-GAAP EPS, we lost $0.11 sequentially, $0.45 down $0.34. We guide $0.34 based on about --

I'm sorry, TS, to interrupt. I'm not talking about the March quarter. I'm talking about the June quarter guidance.

Okay. So June quarter, we are looking at $0.34. As I say, imply 11% for March quarter.

And for the June quarter if you go to revenues, pretty much about the same if you look at the midpoint. Maybe up a little bit. So if you trigger that down, it's about $0.34 at the midpoint.

Remember, March quarter I had some unusual item here. I have a tax, $0.06, impact in the March quarter. Also a foreign exchange $0.04 unfavorable impact. So if you account for that, adjust for the margin, it's pretty much in line with $0.34.

Maybe asked a different way.

As we march through the back half of the calendar year, is there anything that fundamentally should preclude you guys from posting kind of greater than 11% margins, which is what you'd been doing the last couple quarters?

I cannot think of anything. You know, if you look at our long-term goal of 12 to 12.5, at $190 million to $195 million, it's still pretty intact. Maybe a little bit on the upper range. But I went back and looked at it.

I can discuss that with you in detail when you call back. But essentially, I believe our long-term goal is still intact.

Okay, thank you.

And then, John, on the early signs of improvement. If we kind of take your commentary on the optical side, would it appear that we are in an environment that the second half of the calendar year we could see somewhat stronger than typical seasonality in optics?

I think that that is a possibility, Patrick. Where we're sitting today -- I'm not going to pretend I have visibility out into September or beyond.

But I do think that we've got a situation where as long as the fundamentals -- both in North America and we've seen some early signs of some spending in China as well-- as long as those things sort of continue and deployments stay on schedule, then I would anticipate that there's a pretty good likelihood that we'll see that.

Great. Thank you. Good luck.

(Operator Instructions)

Alex Henderson, Needham and Company.

Thanks. I've got a couple questions here.

I just wanted to go back to the gross margin question that was just being asked. Is it reasonable to think that the gross margin in the June quarter ought to be around 11%, consistent with the number that you would've had in the March quarter, excluding the one-time item?

Alex, that's accurate, yes.

Okay.

And then the second question, you made the comment that your datacom was down quarter to quarter. Could you talk about what your datacom did on a year-over-year basis?

The datacom business for us on a year-over-year basis was down a little bit as well. It was down both on a sequential and year-over-year basis.

Okay. I'm a little confused by that because I'm under the impression that both of your larger datacom customers are up year over year. For instance, JDSU was up 35% in their datacom business and I'm pretty sure that Oclaro is and I'm pretty sure that Finisar is.

So can you explain to me why your datacom is -- I'm showing a trajectory that is inconsistent with the rest of the market? Is there something going on there?

No, I don't there is anything in particular going there, Alex, to be fair. It's a one quarter sort of variability there, and it's not a very big number; so I'm not going to get overly excited about it. I don't think it's a share issue.

It may have been a little bit of mix in terms of those customers' portfolios and what we are shipping and some things like that. But, again, we are not overly concerned about it given what it's doing here.

If it's a trend that goes on for a couple quarters, then it's something that would probably get a little bit more concerned about. But right now, having it be one quarter, not something we're terribly concerned about.

Okay.

If I could go back to the comment that you made about non-optical programs were expected to be somewhat weaker than the optical sight of the business. You then turned around and called out improving conditions in industrial lasers and in auto. So I'm a little confused about how I reconcile those two statements.

Maybe there was some confusion there. I didn't say that it was supposed to be different than it turned in.

We said that we had expected both our optical business and our non-optical businesses to be down in this March quarter, and they were. Within that non-optical segment, we actually saw a very modest sequential improvement in both the laser business and the auto business.

So really the difference came, like I said, in some of our other segments. Not a big change overall in the total revenue numbers here. But, again, the laser business and the auto business was up very modestly on a sequential basis.

Okay, the question around the company that ceased operations in the quarter. Can you talk to us about what segment of business that was in?

That was purely in the Other category, Alex. So within the non-optical communications portions of the business.

It was a startup type company that we had working with for, I guess, a little bit over two years now. They finally came to a point where they were unable to continue funding operations, and we're sort of in the process of cleaning that up a little bit right now.

You know, we've had a few of these over the years as we continue to bring in sort of the startup community along with some more established customers from a business development perspective. In the past we've been able to collect all the monies that are owed to us. Our expectation right now is that we will do the same with this customer over time.

That will wind up reversing itself and be a little bit of a benefit at some point in the future in terms of the margin. Again, not a huge number, but it certainly had an impact on the gross margin this quarter.

Did it have an impact on the revenues as well? It sounds like that explains some of the variance in the Other Revenue line, not just in the cost of goods sold.

I assume if there's a reserve hit of $1.1 million, there's probably more than that on the revenue line.

A little bit. That's accurate. That's absolutely in that Other category of our non-optical business.

That's correct, yes.

So are we talking about $2 million swing in the numbers on the top line? Is that all we're talking about?

Less than a million, way less than a million yes --

Less than $1 million in revenues with a $1.1 million charge.

The $1.1 million charge came in the two sections, the majority in the revenue and some in the cost of goods sold.

Okay, I'll free the floor, thanks.

Sherri Scribner, Deutsche Bank.

Hi, Tom and TS.

This is [Kristi Shuti] calling on behalf of Sherri Scribner.

My first question is I was hoping you could shed some color on how the sensor business is doing.

The sensor business, at least on a quarter-over-quarter basis, still remains pretty flat. It's a very small portion of the overall revenue.

There is some sensor work that's done within the auto segment. So if we characterize that as part of it as well, even though we tend to pull that out as auto, then the group performed a little bit better. As a whole, it's a pretty small piece of the overall pie.

It was down sequentially this quarter; but, again, off a pretty small base. It didn't have a big material impact on the results in the quarter.

Okay. Thanks.

And I don't want to beat a dead horse here, but on the telecom sector I know we did speak about this in the Q&As before. But a few of the EMS companies and connectors companies have seen strengths on the telecom side.

So I was just wondering what it is that brought about that weakness this quarter, apart from seasonality.

To be fair, I don't think there was much more than seasonality to it for us this quarter. The March quarter results were pretty much in line with exactly what we were expecting as we planned out this quarter. There wasn't a whole lot of variability in the telecom business relative to our expectations at the beginning of our fiscal 3Q.

All right. What would say are your expectations for telecom CapEx going into the year?

Telecom CapEx?

Yes.

I think on an overall basis, the telecom CapEx that we saw certainly out of the North American carriers was very much in line with expectations in terms of the overall percentage increases being relatively modest.

I think that as we go through the year, our expectation is that some of the spending within those CapEx figures will start to shift a little bit more towards our customers' lines of business. And I think that what we've seen so far out of the China spending has been encouraging.

And I think that that's still going to be a little bit of a wild card, at least in terms of how it trickles all the way down to us as we go through this calendar year. But I think at least with the customers that we've had discussions with who have exposure to that China spending, they feel pretty good about it.

Okay, great. Thank you.

Dave King, from B. Riley.

Thank you. Good afternoon.

First a couple of numbers, can I get the depreciation in CapEx?

For the quarter?

Yes.

Depreciation is about $2.7 million. You can look at it from a cash flow based on a nine-month basis, so CapEx is about $3.1 million for the quarter.

Okay.

And then you talked about 10% customers, but can you talk about 2 6 and Finisar? Were they near 10% customers or not even close? Any color on that?

I think they were both below 10% in the quarter. You know, in the past, Finisar has been a 10% customer; and they tend to bounce around a little bit. They typically are better for us as telecom picks up.

I would say that, you know, I wouldn't necessarily say that they were close to a 10% customer. They are still a very important customer for us and one that we have high hopes for as we continue to work our way through the rest of the calendar year.

And I would say the same about 2 6. No big changes there from our expectations about what we anticipated them delivering to us in the quarter.

Can you remind us regarding the supply agreement you signed -- that's for how long?

It's more than an annual contract. It's a multi-year contract.

A multi year. Okay. Got it.

And then regarding your guidance. I guess I'm still a little confused. I got on the call a little bit late, so I missed some of the first margin discussion.

But are you guiding 11% for fiscal fourth quarter or not?

This is TS. Normally, we don't guide the gross margin. We guide the top lines and the non-GAAP EPS. So we are guiding $0.33 to $0.35 based on the midpoint of $171 million.

Right. But if you do the math, sounds like gross margin will be kind of flat at 10.5%, not 11%. I guess that's where I'm a little bit confused.

Well, if you remove some of the external items, I think that tells you -- you come to the conclusion, implied 11%.

Okay. What about regarding optical versus non-optical? Are you assuming kind of similar growth for both segments or optical to be stronger than non-optical?

As we are looking into the June quarter, I would say right now I think we will probably see a little bit better growth in the optical segment, but not significantly so.

Got it.

And just lastly, another number question, what with the mix between telecom versus datacom within optical? Is that about 70/30?

Yes.

Yes, roughly. Great. Thank you.

Roughly 70/30.

Got it. Thank you.

Alex Henderson, Needham and Company.

To go back to the question on Finisar for a second, just to be clear. They do almost all of their datacom in-house, correct? You're only really doing the telecom portion for them. That's accurate?

That is accurate, Alex.

Thank you.

Yes.

I'm showing no further questions.

Great. Well, thank you, everybody, for joining us today. We look forward to talking to you over the next month or so. And we'll have an update for you on the fiscal 4Q and the end of the fiscal year on our August call. Thank you.

We really appreciate your support. This is Tom.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation.

You may all disconnect. Have a good day.