Fabrinet (FN) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Fabrinet's first quarter FY16 financial results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions on how to participate will be given at the time. As a reminder, today's conference is being recorded. I would now like to turn the call over to your host, Garo Toomajanian, Investor Relations.

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 first quarter of FY16, which ended September 25, 2015. With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of Fabrinet; and T.S. Ng, Fabrinet's 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 in our Form 10-K filed on August 19, 2015.

We will begin the call with remarks by Tom and T.S., followed by time for questions. I would now like to turn the call over to Fabrinet's CEO and Chairman, Tom Mitchell. Tom?

Thank you Garo, and good afternoon, everyone. We are off to a good start in FY16, with first-quarter revenue and non-GAAP earnings that were above our expectations, and a healthy performance across the board.

In the first quarter, new products increased to represent 24% of total revenue, compared to 11% a year ago. While the majority of the new product revenue came from existing customers, we also saw revenue from our Fabrinet West facility, which went into production during the quarter.

Another meaningful event during the quarter was the purchase of 50 acres of land outside of Bangkok for the development of a second manufacturing campus in Thailand. We recently broke ground on the first of what will ultimately be several buildings. In total, our new campus will ultimately enable us to increase our manufacturing capacity by 150% compared to our current capacity today.

From my perspective, we delivered a strong performance in the first quarter, and are off to a solid start in FY16. We're excited about our strategy to expand new product introductions, and are increasing our capacity to meet anticipated demand. We expect the investments we are making will continue to drive profitable growth as our business scales in years ahead.

Let me now turn the call over to T.S. for a discussion of the markets we serve and our financial results.

Thanks Tom, and good afternoon, everyone. I would like to provide you with more details on our performance by end market and our financial results.

Total first-quarter revenue was $216.4 million, and was above the high end of our guidance range. Revenue grew 14% from a year ago, or 16% when you exclude the impact of $3.3 million in consignment revenue in the first quarters of FY15. As we indicated last quarter, all of the consigned shipment revenue deferred from our FY14 was recognized in FY15, so there will be no impact to FY16 results.

Our optical communications business represented 72% of our total revenue, consistent with our recent performance. Optical revenues of $154.8 million increased 14% from a year ago, and 5% from the fourth quarter. Within optical, revenue split was 54% to telecom markets and 46% to datacom markets, representing a 9 percentage point increase for datacom from a year ago, as datacom revenue grew 40% from a year ago, while telecom revenue was stable. Growth in our optical communications business was driven by advanced optical components and modules, including 100G solutions and new programs. We expect this trend to continue in the second quarter.

Turning to our non-optical communications business, revenue from lasers, sensors, and other markets represented 28% of total revenue, and increased 14% from a year ago, and 5% sequentially. During the first quarter, strong growth in revenue from sensors drove most of this increase, through the laser and automotive markets also contributed to growth. We expect sensors to continue to drive growth in our non-optical revenue in the second quarter.

Revenue from new business represented 24% of total revenue in the first quarter, up from approximately 11% of revenue in the same quarter last year. Our focus on new business supported our overall growth in the quarter, and we expect this trend to continue as we look ahead.

As Tom mentioned, our NPI facility in Santa Clara went into production in the first quarter, and we expect volumes there to ramp through the air. Our strategy to broaden and strengthen our overall pipeline with new business is succeeding, and our current footprint in Thailand is expected to be nearly 89% occupied by the end of calendar year 2015. To that end, in September we executed a land purchase agreement for [approximately $12 million] (corrected by company after the call) to acquire approximately 50 acres for a second manufacturing campus in Thailand. In October, the first pilings went into the ground, and we expect to have construction of our first building of this new campus completed within a year. Estimated cost of construction of the new building is expected to be approximately $30 million to $35 million. Building 8, which will be the first of three new buildings, will add approximately 500,000 square feet of manufacturing space. In total, we anticipate that our second campus in Thailand will add approximately 150% to our total manufacturing capacity once it is fully built. We are excited that our new campus will be able to support our next phase of growth as we continue to scale our business.

Now turning to the details of our P&L. Unless otherwise stated, all numbers presented here are on a GAAP basis. GAAP gross margin in the first quarter was 12.0%, an increase of 10 basis points from the fourth quarter, primarily due to higher than anticipated revenue. Excluding share-based compensation expenses, non-GAAP gross margin was 12.3% in the first quarter, an increase of 20 basis points from the fourth quarter. For the second quarter, we expect gross margins to be flat to slightly up compared to fiscal Q1.

Our total share-based compensation expenses for the quarter were $2.7 million, of which roughly $2.1 million was included in SG&A. As we have indicated, start-up costs related to our new Fabrinet West facility in Santa Clara are reflected primarily in operating expenses. Including this impact, GAAP operating margin increased to 6.5%, excluding flood expenses in the first quarter, compared to 6.2% a year ago. Non-GAAP operating margin was 7.8%, about the same as a year ago, due to costs associated with ramping up production at our Fabrinet West facility, offset by efficiency due to higher sales volume. Please note that during the first quarter, our Casix facility in Fuzhou, China, was impacted by flooding in conjunction with Typhoon Soudelor that disrupted parts of China. Our GAAP results for the first quarter included $864,000 in losses to inventory, supplies, and equipment. However, our facilities were back up quickly after only minor disruptions.

Other income and expenses in the first quarter included a $10.9 million foreign exchange contracts loss associated with a mark-to-market adjustment at quarter end. During the quarter, the Thai baht continued to depreciate against the US dollar, and at quarter end created this unrealized loss against the various forward contracts we bought earlier. We expect that this unrealized loss will be reversed when the contracted baht is delivered. Taxes in the quarter were a net expense of $1.3 million, and our normalized effective tax rate was 6.7%, which was within our expected range of 6% to 7%. We continue to anticipate that our effective tax rate will be in the range of 6% to 7% for FY16.

On a GAAP basis, which includes share-based compensation expenses and the unrealized loss on mark-to-market foreign exchange adjustment, net income for the first quarter was $1.6 million, or $0.04 per diluted share, compared to GAAP net income of $13 million, or $0.36 per diluted share, in the fourth quarter. On a non-GAAP basis, net income totaled $16.2 million for the quarter, or $0.45 per diluted share, above the high end of our guidance.

Moving on to the balance sheet and cash flow statement, we ended the quarter with a cash and investments balance of $248 million. This is a decrease of approximately $8 million from the end of the fourth quarter, as CapEx, including costs associated with our land purchase, more than offset the operating cash flow generated in the quarter. In FY16, we now expect CapEx to be in the range of $60 million to $70 million, which consists of approximately $30 million in maintenance CapEx, and approximately $35 million for our new manufacturing facility in Thailand, including land purchase.

I would now like to discuss guidance for the second quarter. We expect revenue to be between $218 million and $222 million, representing growth of between 21% and 23% when you exclude consignment revenue of $8.4 million in the year-ago quarter. We anticipate GAAP net income per share to be in the range of $0.41 to $0.43, and non-GAAP net income per share of $0.45 to $0.47, based on approximately 36.6 million fully diluted shares outstanding.

In summary, we are pleased with our performance in the first quarter, and remain optimistic that our strategy will continue to drive profitable growth going forward. Operator, we would now like to open the call for questions.

Thank you, sir.

(Operator Instructions)

Alex Henderson, Needham & Company.

Thank you very much. I just wanted to clarify a couple of points, because I wasn't 100% sure what you'd said on it. When you talk about the datacom piece, could you just hit the comment you made on what the rate of growth was on the various pieces of it?

Hi, Alex. This is T.S. On the datacom, we talked about on the sequential is 25% growth from quarter to quarter. Then compared to a year ago, we're looking at pretty strong growth, about close to 40%, 45% growth.

Okay. The datacom growth, I assume that you have no short-reach optics -- i.e., VCSEL-based products in your production line. Is that correct?

Yes, that's correct.

So it's all Indium phosphide based?

Not necessarily. We don't have the short reach, but we have long reach in both our technology.

Okay. Looking at the new customers that you're bringing on, on Fabrinet West. Can you talk about how you expect that to ramp? I assume that given your extremely tight floor space -- you're still at two shifts -- what would happen if we saw enough demand to push you to three shifts on some of that?

Alex, this is Tom. How are you doing?

Hello, Tom. I am fine, thank you.

That growth is a planned growth, as normally as we plan any of our new factories. The customer base is probably 50-50 at the present time, current customers and new customers. As we progress on through the year, and particularly this fiscal year which ends in June, we really believe that those numbers of customers will increase.

I see. How do I anticipate the move from the production in Fabrinet West to the production facilities in Thailand, if you're running at 95% of use of the floor space by mid-year 2016?

Alex, this is T.S. Let me add a little bit of color from what Tom just said. I think 4900, or Fabrinet West, is going to take a while to fill up the space. It also creates a process to move to Thailand. As we mentioned, I think previously we said that would probably take up to maybe a FY17 event. At this moment, we are not guiding anything transferred to Thailand. Hopefully by the time we are ready to transfer to a low-cost manufacturing in Thailand, our new building will be ready.

Okay, so the utilization rate will continue to go up, excluding any movement from Fabrinet West to those facilities, so that once the building is up you'll have a natural move opportunity to take those people to Thailand?

Alex, this is Tom again. That facility was primarily put in place to be an NPI facility, a new product introduction facility. At the present time that's what it's performing as the new products that our customers bring in award us with as we go through their product life. Right now they're just in the infancy of their product life.

Okay, I get it. Thank you, I'll cede the floor.

Patrick Newton, Stifel.

Yes. Tom, T.S., thank you for taking my questions. Honing in on Fabrinet West even further, can you help us understand what the revenue contribution was in the September quarter, what is baked into your December quarter guide? Then is it still reasonable to think you could eclipse a $10-million quarterly run rate of revenue coming out of that facility exiting FY16?

Patrick, this is Tom. Thanks for calling in. The quarter we just completed, our first quarter, the contribution -- the revenue contribution of Fabrinet West was insignificant against the total of all of our revenue. We expected that revenue, as we go through the next two quarters, will also not be that significant to our total revenue. It was planned that way.

The $10 million quarterly run rate you alluded to is probably further out into FY17 time frame?

Yes, I think Patrick, last quarter we did say that probably is a FY17 event.

Okay. Then I believe you had two lines running last quarter. Can you inform us how many lines are currently up at Fabrinet West? Then do you have a loose expectation of how we should -- at the end of the year how many lines should be running? Is that baked into your CapEx guidance?

Yes, Patrick. We do have two lines very efficiently running. I suppose I would have to tell you that the performance of those lines is far greater than most insertion lines that you see today. Our insertion rate is at least four times higher than the average insertion rate of the other lines that are in an NPI facility. As we go forward, we're looking forward to begin to add to those two lines, in anticipation of the total of 10 lines that that facility will accommodate.

Great. Then T.S., I'm sorry if I missed this. How many 10% customers did you have in the quarter? Was there any change to the current 10% customers relative to the ones you previously listed in your 10-K?

I think Patrick it's still early in the year. We normally don't report that until the end of the year, the 10-K. But I will say that the last year in August, when we filed the 10-K that the two 10% customers remain. Then obviously we have some new customers may turn out to be a 10% customer, but until the end of the year we will never judge whether they will 10% or not.

I guess maybe asked differently, are you seeing a shift in the concentration at your top customers from who has consistently been listed as 10% customers, to perhaps some newer entrants cracking your significant customer base?

Okay the true answer is we see some shift. Whether they will be a 10% or not, we don't know until the end of the year.

Okay. On the 100G side, you alluded to that being part of the strength in optical communications. Could you help us understand the breakdown of 40G and above, or 100G and above within your broader optical communications business, or even more specifically, if you could give us that detail in the mix of datacom and telecom?

Okay. Patrick, normally we don't break it down, but I can only tell you that the 100G is far better than 10G and 40G combined in both telecom and datacom at the last quarter. The last quarter telecom and datacom at 100G essentially more than half of the total. Is that helpful?

Just to make sure I heard that right, 100G is more than half of your datacom and more than half of your telecom revenue in the most recent quarter?

Okay. I said that 100G is more than 10G and 40G combined. If you look at transceivers, obviously 100G accounts for more than half of the transceivers, both in telecom and datacom.

Understood. Thanks for the clarification. Good luck, great job in the quarter.

Thank you, Patrick.

Troy Jensen, Piper Jaffray.

Congrats on the nice quarter, gentlemen.

Thank you, Troy.

Maybe quickly for Tom here, so Tom you've been pretty upbeat recently on the new program initiatives at Fabrinet. Just be current if you could -- curious if you could quantify at all how big is the pipeline now versus where it was maybe a quarter or year ago?

As I understand the question, Troy, it's really relative to the pipeline of NPI projects?

Exactly, yes.

I think we've seen since the last time I was chatting with you guys at the last -- sometime in the last quarter, we've seen about a 10% increase. It continues to grow. I think it's been a big help. Our customer base knows that we have 4900, but they can also support in the NPI.

All right, understood. Then maybe two quick questions for T.S. here. SG&A was 3% about a year ago. I know it's gone up because of Fabrinet West, but do you think it's topped out here? Can we start to see leverage in the SG&A OpEx line?

Yes, Troy, if you look at non-GAAP, we guide about $9.5 million, $9.7 million per quarter, which includes about $2 million to $2.5 million Fabrinet West start-up costs, then plus another $0.5 million for the new sales team. That has been consistent in the last two, three quarters. Obviously when you ran Fabrinet West, a part of this will go to the constant result. I will say from now on, conservatively, $9.5 million will be -- you'll probably see $9.5 million in the next two quarters or so until we get some meaningful revenue from Fabrinet West.

Okay, and a follow-on from Patrick's question. It sounds like that's probably not until the March quarter, and then into 2017?

Yes.

All right, and the last question, T.S., then I'll cede the floor. Can you let us know what are you assuming is your other income to get to the $0.45 to $0.47 EPS guidance?

The other income -- for the non-GAAP, which essentially does not include foreign exchange -- because foreign exchange, we booked a loss last quarter, and of course when the contracted Thai baht is delivered, some of this mark-to-market loss will be reversed. If you look at the difference between GAAP and non-GAAP EPS, it's pretty narrow, only about $0.04, $0.05 difference. Typically it's about $0.10. We assume some again reverse back in the FQ second quarter.

I guess I'm asking specifically on the December quarter. What do you think the other income line's going to be three months now when you're reporting it?

There's no major item there other than the income, interest income. There's really nothing much there.

Okay. All right, thanks guys. Keep up the good work.

Thanks, Troy.

Paul Coster, JPMorgan.

Yes, thanks for taking the questions. A couple of quick ones. You talked to 24%, I think, of the revenues coming from new business this quarter. I just want to make sure I understand, is that new business or completely new customers? I'm just getting to understand that difference.

Hi Paul, this is T.S. The 24% Tom was talking to, he's talking about the business we don't have a year ago. This could be the existing customer or new customer. The majority is new customer. In other words, a year ago we don't have this customer or this business, so now we are tracking. We call it new business.

Okay. Maybe another way of asking the same kind of question is how is this new business coming in? Is it coming in through referrals? Is there some kind of reference account effect here that is buoying this business?

I think in Tom Mitchell's methodology will be the NPI. This is the NPI we are working on, and now it pans out as a volume shipment, and we start tracking those programs.

Okay. You've talked I think of 12%-plus gross margins on this $200-million run rate. Then you've got the Thai factory coming back and your fab layering in sometime next year. Can you talk to us about what impact, if any, this would have on gross and operating margins as it layers in? Will it pull them down temporarily?

Paul, pretty much on the currency side, we do dollar cost average. Even though the Thai baht currently swings -- recently swings quite a bit. But we have a hedging program. Essentially, the next six to nine months the cost is already locked in. If there's sudden depreciation, we don't get a benefit. If there's sudden appreciation, we don't suffer losses. That's how we manage, we hedge our exposure. In the long run obviously, if the currency weakens, we get a benefit, but that [benefit would smooth out over several quarters] (corrected by the company after the call).

I was referring to the depreciation from the new fab in Thailand once it starts layering in. How would that affect margins?

The depreciation in the Thai facility is not very big, because you can see from our financial statement last quarter we booked $4 million depreciation. Now most of the equipment is supplied by the customer, so we don't pick up the depreciation on equipment. On the new building, that is another year down the road, so at this moment I have not really modeled that depreciation on that. Is that the question?

Yes, that was the question. All right, thank you, T.S.

Thank you.

Tim Savageaux, Northland. Mr Savageaux, you line is open. Please make sure you're not muted. We will go to the next question, which comes from Alex Henderson of Needham & Company.

Thanks. I wanted to ask you a question about integration of various components into what are euphemistically called monolithic chips, and into the ACO and DCO pluggables that are developing, and how you see that impacting your business?

Historically, you guys have been a Company that put together a lot of piece parts into modules, and there was value added in that skill. I assume as we go to integrated monolithic circuits that there's less of that going on. But on the other side of the coin, I would venture to bet that there's a lot of additional packaging and testing that has to happen on those products. How should we think about the transition in the industry to more monolithic type designs, and your role as we go forward in those type of products?

Alex, this is Tom. That subject is one that we talked about as a team, or really got serious about as a team about, I don't know, five or six years ago. We went into a program called advanced packaging, and it's just a word, but it really does encompass all those technologies that you're bringing up. As you can see, the industry today is really leaning -- not leaning, but directing itself toward advanced packaging. We happen to be a leader in advanced packaging.

Does the content and value add that you provide in advanced packaging -- is it larger or is it smaller or is it the same effective deliverable value to the customer, and therefore to your revenues?

Alex, this is T.S. I will try my best to answer that. Based on what I see here, I think it's a natural progression of our process, even though you're going through the photonic integrator circuit, right? You still have wire bonding, you still have the laser alignment fiber handling. Tom talked about advanced packaging. I think the process is more robust, more high-precision types. We love to save money for our customers in terms of bond reduction. With a single chip you actually save a lot of money on the material side. On the labor content, I'm not too sure you would reduce, but again Tom talked about the investment we put together a few years ago, and it's nicely panned out. If you don't have an investment in the advanced packaging, we may not be in today to support our customers.

Is it fair to say that because of your foresight in advanced packaging that you are now in a position where you're gaining business from your want-to-be competitors in the optical contract manufacturing market, and winning new ACO, DCO-type projects that could materially advance your relative growth rate, because of that -- where other people are unable to do this because they were not positioning for several years ago?

That's the way we feel about it. That's exactly what we set our goals to do, and it's what we're accomplishing. To accomplish that, we had to -- about six years ago we began to really start looking at tomorrow's equipment, the manufacturing equipment and capacities that would support the future products that was going to be required as we went forward. We put a lot of capital into it, and we put a lot of technology into it. It's given us the capability of doing it, and we're recognized for it today.

Have you won any major new conversions from your competitors, such as the Sanmina in that space?

No, I don't think so. I think it's not winning against them, because we don't really measure our business that way. Our business is more of a relationship business. Our relationship, our part of the relationship is that we have the advanced packaging and advanced manufacturing equipment to support any new products and time to market products that come through their product line.

Okay. I will cede the floor. Thanks.

Thank you. At this time I would like to turn the call back over to Management for any closing remarks. Mr. Mitchell?

We are excited about our business. With our strategy to drive new programs from existing customers, as well as adding new customers to our mix, we are well positioned to continue our record of delivering profitable growth.

Thank you, Mr. Mitchell, and thank you ladies and gentlemen for your participation. This does conclude Fabrinet's first quarter 2016 financial results conference call. You may disconnect your lines at this time. Have a wonderful day.