Fabrinet (FN) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Fabrinet's fourth quarter and FY15 financial results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to introduce your host for today's conference, Mr. John Marchetti, Chief Strategy Officer. 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 fourth quarter and FY15 which ended June 26, 2015. With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of Board of Directors of Fabrinet, and T.S. Ng, our Chief Financial 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 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 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, and our Form 10-Q filed on May 5, 2015. We will begin the call with brief remarks by Tom, myself, and T.S., followed by time for questions. I would now like to turn the call over to Fabrinet's Chairman and CEO, Tom Mitchell.

Thank you, John, and good afternoon, everyone. We ended FY15 with record revenue and growth across all of our market segments. We saw gross margins expand, and delivered a solid year of earnings per share growth. Importantly, we made significant progress in both new product introduction and advanced packaging capabilities. As we start FY16, I am confident that these programs will continue to gain momentum and drive new revenue opportunities, to deliver another year of profitable growth. I will now turn the call back to John for a discussion of the markets we serve. John?

Thanks, Tom. Fourth quarter results were ahead of our expectations, and we achieved record revenue levels, driven by a sequential increase in sales across all of our market segments. As we begin our new fiscal year, the overall demand outlook for our business is encouraging, and combined with contributions from our new programs, we expect our first quarter revenue to increase sequentially in both our optical and non-optical segments.

Our optical communications business turned in a very solid quarter, increasing 34% year-over-year, and 8% sequentially. Our split between telco and datacom in the quarter was approximately 61% telco to 39% datacom, and we were particularly pleased that both our telecom and datacom optical communications businesses outperformed expectations in the quarter, with both segments up on a sequential and year-over-year basis.

On a normalized basis, excluding the impact of the consignment revenue on our results, the optical communications business increased approximately 17% year-over-year, and nearly 6% quarter-over-quarter. For FY15, optical communications revenue of $553.2 million increased 14.3% compared to FY14, driven by 20%-plus growth in our datacom segment. The full year split between telco and datacom was 63% and 37%, respectively.

On a normalized basis, excluding the impact of the consignment revenue on our results, the optical communications business increased approximately 8.6% year-over-year. Similar to other quarters, growth in our optical communications business was driven by advanced optical components and modules, including 100 gig, while improvements in our datacom business were driven by 40 and 100 gig solutions. In the September quarter, we're expecting both our telco and datacom businesses to increase modestly on a sequential basis.

Our non-optical segment rebounded nicely off a muted 3Q, growing 17.5% year-over-year and more than 11% sequentially, driven by quarter over quarter increases across our laser, automotive, sensors and other businesses. On a normalized basis, excluding the impact of the consignment revenue on our results, the non-optical communications business increased approximately 8.2% year-over-year and 8.7% sequentially.

In the current quarter, we expect the non-optical portion of our revenue to be flat to up modestly on a quarter-over-quarter basis. For the fiscal year, non-optical communications revenue of $220.3 million increased 13.7%, compared to FY14, driven by solid growth across all subsegments. On a normalized basis, excluding the impact of the consignment revenue on our results, the non-optical communications business increased approximately 10.1% year-over-year. In terms of revenue from new business, it represented nearly 20% of total revenue in the quarter, up from approximately 11% of revenue in the same quarter of last year, and increasing by more than 20% sequentially. The focus on new business growth was one of our strategic initiatives in FY15, and we are encouraged by the progress made this year.

We are confident that the investments made to strengthen our advanced packaging and new product introduction capabilities, along with additions to our worldwide sales efforts will help us broaden and strengthen this pipeline to ensure that it remains a healthy contributor to growth in FY16 and beyond.

We continue to work closely with our customers to ensure that we are aligning our resources to meet their current and future production needs. To that end, we are planning to build a new manufacturing facility in Thailand to increase our capacity. This increased capacity is needed, as we expect our current throughput in Thailand to be nearly 85% occupied by the end of the calendar year.

Fabrinet West, our new US NPI operation launched earlier this year, it continues to ramp. We expect to begin shipping product for revenue in the September quarter. Early customer feedback has been encouraging, and we remain confident about the long-term opportunity we believe this new operation will provide for both existing and new customers, and expect that as this NPI facility grows, it will provide increased opportunities for the transfer of volume products to Thailand.

As we enter FY16, we're excited about the overall growth prospects for our business. We believe the investments we are making to expand our capabilities, our focus on world-class customer service and manufacturing quality, and a growing pipeline of new engagements positions us well for profitable growth in the coming fiscal year. With that, I would now like to turn the call over the to T.S, for a review of our financial results.

Thanks, John. Good afternoon, everyone. For our call today, I will start with a review of our fourth quarter results, and later discuss our full FY15 performance. As in the past, all numbers presented here are GAAP, unless stated otherwise. Total revenue for the fourth quarter was a record $206.5 million, an increase of 9% sequentially, and 25% compared to total revenues of $160.1 million in the fourth quarter of last fiscal year.

Please note that revenue in the quarter included approximately $4.6 million in consigned shipment revenue, compared to no contribution last quarter, and a negative impact of $[15.5] million to revenue in the fourth quarter of FY14. On an apples-to-apples basis, including the impact of the consigned revenue, sales in the fourth quarter were (inaudible) 6.6% sequentially and 14.3% year-over-year. At this time, all of the consigned shipment revenue removed from our FY14 results has been recognized, and we do not expect any impact to our future results.

On an end market basis, revenue from optical communications was $147.6 million or 72% of total revenue for the quarter, while revenue from our non-optical businesses was $58.8 million, the remaining 28%. GAAP gross margin for the fourth quarter was 11.9%, an increase of 50 basis points sequentially, as higher sales drove better cost absorption. Excluding share-based compensation expenses, non-GAAP gross margin was 12.1% in fiscal fourth quarter, up 50 basis points quarter-over-quarter.

For FY16 one quarter, we expect gross margins to be flat to up slightly on a sequential basis. Our total share-based compensation expenses for the quarter were $2.2 million, of which roughly $1.9 million was included in SG&A. As we highlighted earlier in the year, the increase in SG&A in fiscal fourth quarter was primarily due to increased expenses associated with our new Fabrinet West operations and the expansions of our sales team. We expect that we will remain at this expense level through FY16.

Our taxes in the quarter were a net expense of approximately $900,000, and our effective tax rate was 6.3%, within our expected range of 6% to 7%. We anticipate that our effective tax rate will remain in the 6% to 7% range through FY16.

On a non-GAAP basis, net income totaled $14.5 million for the quarter, or $0.40 per diluted share. Non-GAAP net income increased by approximately $1.5 million compared to last quarter, driven by increased sales, partially offset by the higher SG&A expenses. On a GAAP basis, including share-based compensation expenses, net income in the quarter was $13 million or $0.36 per diluted share, compared to GAAP net income of $12 million or $0.30 per diluted share in the third quarter.

Turning to the results for the fiscal year. Revenue was a record $773.6 million, an increase of 14.1%, compared to FY14. Please note that our FY15 revenue includes approximately $16.5 million of consigned shipment revenue that was removed from our FY14 results. On an adjusted basis, revenue in FY15 would have grown 9%, compared to FY14.

On an end market basis, revenue from optical communications was $[553.2] million or 72% of total revenue for the fiscal year, while revenue from non-optical businesses was $220.3 million, the remaining 28%. GAAP gross margin for the year was 11.3%, an increase of 30 basis points, compared to FY14. While non-GAAP gross margin for FY15 was 11.5%, up from 11.1% last fiscal year, as higher sales drove better cost absorption.

For FY15, our share-based compensation expenses were $8 million, of which approximately $6.6 million was included in SG&A. Our effective tax rate for FY15 was 8.4%, or roughly $4 million in total tax expenses. Normalized for several items that occurred during the year, our effective tax rate would have been within our stated 6% to 7% range.

Non-GAAP net income in FY15 was $56.4 million or $1.57 per diluted share, an increase of 3% compared to non-GAAP net income of $54.6 million, or $1.53 per diluted share in FY14. On a GAAP basis, net income for FY15 was $43.6 million or $1.21 per diluted share, compared to GAAP net income of $91.7 million or $2.58 per diluted share in FY14. GAAP net income in FY14 was positively impacted by $44 million or $1.24 per diluted share due to the collections of insurance proceeds.

Moving on to the balance sheet and cash flow statements. We ended the quarter with a cash and investment balance of $256 million. CapEx for the year was approximately $54.1 million, of which roughly $26 million was used to purchase our new facility in Santa Clara. In FY16, we expect CapEx to be in the range of $50 million to $55 million, which includes approximately $15 million for our new facility in Thailand.

I would now like to discuss guidance for the next quarter. We expect revenues of between $206 million and $210 million. GAAP net income per share is expected to be in the range of $0.33 to $0.35, and non-GAAP net income per share of $0.41 to $0.43, based on approximately 36.5 million fully diluted shares outstanding. That concludes our prepared remarks. At this point, I would like to turn the call over for questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes from Patrick Newton of Stifel.

Your line is open.

Good afternoon, Tom, T.S., and John. Thank you for taking my questions.

Just jumping right in. The results and guidance I thought were pretty strong, especially considering how challenged the business environment has been for your largest laser customers across the board. So I was hoping to get some understanding there, especially given that you're guiding for flat to up sequential business in that segment.

So could you help us understand? Is the Automotive and Sensors business helping there and helping offset some of this laser softness? Is this one of the areas where you're seeing the new customer strength that you alluded to? Or is this truly that optical is seeing a strengthening order book and offsetting some of the laser softness?

Yes, Patrick, this is John.

I think in general, we've seen a relatively stable environment within that non-optical segment as well. As you look at the commentary that we gave, looking into the September quarter, there certainly are some ups and downs within that. Not every category is expected to be up on a sequential basis. But I do think that in total, when we look at the changes across those different subsegments within that non-optical business, there really aren't big swings in any one category.

So while some may be down a little bit, we're able to make up for that I think in some other categories. But there's no real one big swing factor in either direction that we're then making up for with something else. In general, all of those businesses within that non-optical segment remain pretty stable, even if there is obviously some variability within them.

Is that just due to you being maybe a quarter or two ahead of your customers' revenue numbers? Or is it because you're tied more to newer projects? I mean, you had some pretty exacerbated down ticks in the laser revenue of some of your customers. And it just seems like you're bucking the trend.

And I think, again, I could only go off of kind of the outlook that we see in front of us here. There's a potential always that there's a little bit of a time lag, and we are a lagging indicator to the group. So there is certainly the potential that as we move further into our fiscal year, we may see that come back to bite us a little bit at a later date.

But where we're sitting right now, like I said, across the board, there certainly is a little bit of variability. But there isn't any, I think, one subcategory within that non-optical segment that's particularly worrisome here for us.

Okay. Great.

And then, I guess just shifting to Fabrinet West. I think you quantified that there should be a little bit of revenue contribution in the September quarter. Could you help us understand the approximate expectation there?

And then, as we think about the tens of millions in revenue that you had alluded to in the past, any change to that kind of wide outlook? And any thoughts on how that should layer into FY16?

Sure. As you look at it, I think from a near-term perspective, we're just shipping product for the first time in this September quarter. So the contribution from revenue from our Fabrinet West operation in the September quarter is still going to be pretty de minimis. I don't think it's certainly going to be anything that we're likely to call out when we do this call again a quarter from now.

As we look longer term into the opportunity that we believe that facility holds, I don't think there's any change there about our expectation that this is going to be a critical component of our longer-term growth strategy, especially as it relates to transferring products from that NPI facility here in the US, to volume production in Thailand. So looking out on a longer-term basis -- and again, that longer-term contribution is still probably more of a 2017 event than it really is a 2016 event. We'll wait and see as we get a little further into this.

But I still think the expectation there is for ultimately this operation to be measured in tens of millions of dollars on a quarterly basis.

On a quarterly basis, okay.

And then last one, if I may, on the gross margin side for either John or T.S. Given the NPI facility, I would imagine, should have an accretive gross margin, and given that you just posted a $12.1 million in the quarter, should we expect as we move through FY16 that Fabrinet should be able to secure a 12%-plus margin through the year until the opening of Building 7?

Patrick, this is T.S.

I certainly hope so. As John stated that, right now the revenue is still pretty much the contract manufacturing side of the business. We have not really booked any NPI revenue there. So as you can see, most of the start-up cost is below the line. So I would certainly expect that as we start shipping the revenue for Fabrinet West, that will have some contribution to the margin.

Great. Thank you for taking my questions. Good luck.

Thanks, Patrick.

Our next question comes from Vad Yazvinski of Jordan Capital.

Your line is open.

Good afternoon, gentlemen. I have a question, a little different from the previous caller. Obviously, we are an investor versus they're an analyst.

From my standpoint, you have done a great job over the last several quarters, and even last the several years, kind of going through the issues, and whether with flooding, et cetera. But now it appears that the Business is firing on all cylinders, and you are doing a great job. But the capital structure still appears to be in the need of an optimization.

You obviously have excess capital on the balance sheet. And it would be interesting to me, as a shareholder, to figure out what your thoughts are on the long-term solution to the excess capital you have on the balance sheet. Whether it's a (inaudible) share buyback, special dividend or -- I know you are going to probably answer, yes, you needed to expand the facilities both on the West Coast and maybe an extra facility in the Far East. But nevertheless, it still appears that you have excess capital any way you slice it.

And the interesting thing to us, the shareholders, has been that one of your largest shareholders has continued to kind of throw shares into the market every time the price gets to a certain point. And what are the thoughts about buying back the remainder of the shares they might have and reducing share count, et cetera?

Thank you, Vad.

What I would say to it -- we've discussed this before on, I think, some prior calls. Our first use of cash or our priority for use of that cash remains growth. We think there are several opportunities that are in front of us right now, both in terms of expanding into new geographies, as well as expanding the footprint that we have in Thailand currently, as we continue to work up against some capacity constraints in that region. So that I think still remains our primary goal for the uses of cash.

And I think beyond that, as we continue to move through this fiscal year, we'll continue to evaluate where we are relative to our own internal plan and the opportunities that are presented against us. And then, I think at some point down the road, we'll make the determination if we feel that it's the right time to do something more shareholder-focused. But I think for right now, our focus remains on using that cash for growth initiatives while we continue to evaluate other options for it.

Understood. As I said, that's sort of an expected answer, obviously. But it would still appear to us, as shareholders -- and this is just one shareholder raising their voice and mentioning it. But even assuming no other expansion in Thailand or investing more money in the, call it, Fabrinet West, you still would appear to have excess capital.

And to us, it's just interesting that we've been quiet for a little while. And a lot of people have been, but it would appear as you are doing great. And at this point, it's just hard to imagine the use of capital that would require all that excess capital you have on the balance sheet, that would be organic. Obviously, externally, I understand if you were to pursue a small acquisition or something like that, that would make sense. But internally, it still appears that you have excess capital, at least to us as shareholders.

We appreciate that opinion. And like I said, we continue to evaluate the options that are in front of us. And when that time is right, or when we make that determination along with the Board, we will put information like that out into the marketplace.

I appreciate it. Thank you for taking my question.

Sure.

Thank you.

Our next question comes from Paul Coster of JPMorgan.

Your line is open.

Hello. Thanks, this is actually Paul Chung on for Paul Coster. Thanks for taking my question.

Can you just talk about the currency dynamics in OpEx, particularly from (inaudible) in the Thai baht, and how we should think about year-over-year benefit if any?

Yes, Paul, this is T.S.

As we mentioned in the last couple of the conference calls, we eventually dollar cost average. We hedge our Thai baht more from a long-term basis. So the quarter-to-quarter or day-to-day spot currency trend really doesn't affect us in that regard. So, yes, the Thai currency and renminbi in China has been depreciating. But again, as you can imagine, the next few months, we have already bought the currency about a few months ago. And obviously, that currency position will benefit us more in the long-term basis. But on a quarter to quarter, you don't see any impact here.

Okay. Thanks for that.

And then, when should we see the flow-through for both CapEx and OpEx for the new Thailand facility? In which quarters?

That will be primarily in 2017. We'll start construction here in FY16, but that won't really hit the P&L until we get into FY17.

Okay.

You will see some balance sheet entry this year, in FY15, between cash and construction and [program]. But it will not hit P&L until 2017, as John mentioned.

Okay. And then, where do you think OpEx level on a percentage of sales is going to shake out in the interim and possibly longer term? Thanks.

Okay. So if you look at our financial trend, before we initiated the two big projects, which is expand the sales organization and also invest in our Fabrinet West six months ago. If you look at six months ago, our [OpEx] is above $6 million to $7 million, in that range. And today, we have ticked up to close to $9 million to $9.5 million. So the additional expenses, $0.5 million of which is related to sales organizational expansion, and the other $2 million to $2.5 million related to Fabrinet West.

So at some point in time when we book the revenue, some or most of this will go up to the cost of goods sold line. But hopefully, the revenue will be good. And the expenses reclassified to cost of goods sold to create a gross margin. And hopefully that gross margin is big enough, above the average, so we can expand the overall Company gross margin. So that has been the plan.

And right now, for your model purpose, you can actually use $9 million to $9.5 million in total, moving forward. Obviously, a portion of this will have to go into cost of goods sold, depending on the ramp of the Fabrinet West

Thank you.

Thank you.

(Operator Instructions)

Our next question comes from Dave King of B. Riley.

Your line is open.

Thank you. Good afternoon.

First question is regarding your top customers. Have the percentages remained pretty much the same as before, or any changes?

The 10-K is going out in two days time. So, Dave, you will see the 10-K is pretty much the same as the previous. So for FY15, it will be the same as the previous year.

So basically, two [2%] customers and a few 10% customers, is that about right?

Yes, I would say that. Yes, close to that.

Yes. Okay, sure. Good enough.

And then regarding your SG&A, what is that $858,000 for the investigation costs?

Okay. That's a GAAP number. In the case of EPS, non-GAAP EPS, we cut that out. So in the previous quarter, we booked-- I can't remember exactly, but [$2 million] for the investigation related to the revenue recognition, we reported last year end. So and then, when it comes to pay the bill, we get a discount back from the service provider. So that will flow back to the same line.

Okay, all right. And then regarding the datacom business, what is your rough mix between 10G, 40G, and 100G?

I think, Dave, as you're looking at it just on the datacom side.

Yes, just datacom.

Yes, I mean, if you're looking at 100 gig and 40 gig, those are much larger today than the 10-gig portion that we have on the datacom side specifically.

Okay.

And so when you look at that on a combined basis, the 40 gig and 100 gig are certainly larger than the 10 gig. We typically don't break it down much further than that just because we don't want to be saying too much about the customer products that we're building right now. But I would say those two combined on the 40-gig and 100-gig side are certainly larger than the 10-gig portion of that business.

And some of your customers talked about incremental pricing pressure that they're experiencing in 10 gig and maybe even 40 gig. Now how does that flow through to you guys?

There's no direct pricing impact on us; meaning if they're forced to lower prices to compete in the marketplace, that doesn't pass through directly to us. That said, we are under continual cost pressure by our customers to always deliver better pricing to them. So I wouldn't say we've seen anything that's terribly abnormal on our front. But as Tom likes to say frequently, if you keep getting punched in the face and somebody starts punching you in the face a little harder, I don't know how much you recognize that.

So cost pressure is something that we deal with every single quarter. And I wouldn't say it's been anything abnormal, relative to what we're used to seeing.

Got it. Thank you.

Thank you.

At this time, I don't see any other questions in queue. I would like to turn it back to management for any closing remarks.

Great.

Well, thank you everybody for joining us today. And we look forward to talking to you about a quarter's time from now. Thanks very much.

Thank you very much.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.