Fabrinet (FN) 2016 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to Fabrinet's second-quarter FY16 financial results conference call.

(Operator Instructions)

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. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabrinet's financial and operating results for the second quarter of FY16 which ended December 25, 2015.

With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of Fabrinet; and TS 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-Q filed on November 3, 2015.

We will begin the call with remarks from Tom and TS, 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 pleased to report second-quarter results that were above our guidance for both revenue and earnings per share. These results reflect the strong business momentum that we continue to see, as well as the healthy state of the industries we serve.

One of the important drivers of our growth is new business. In the second quarter new programs represented 25% of the total revenue which is an increase from 12% a year ago. This, combined with growth from existing programs and contributions from Fabrinet West, produced the results that were above our guided range. We believe this momentum will continue into the third quarter and we are increasingly optimistic about the fiscal year.

In early January we announced the hiring of Dr. Hong Hou as Chief Technical Officer. With extensive technical and leadership experience in the semiconductor and communications industries, Hong will be a valuable asset in support of new product introduction programs.

While we have ample capacity to meet increasing customer demand, we have begun construction of the first building at our new campus outside of Bangkok. We expect this new building to be complete in about a year and to help us meet our growing demand. Now I will turn the call over to TS 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 second-quarter revenue was $233 million and was above the high end of our guidance range. Revenue increased 24% from a year ago, or 29% when you exclude the impact of $8.4 million in consignment revenue in the second quarter of FY15.

Our optical communications business represented 72% of our total revenue, consistent with our recent performance. Optical revenues of $168.7 million increased 26% from a year ago and 9% from the first quarter. Within optical the revenue split was 54% to telecom markets and 46% to datacom markets which was consistent with the first quarter.

Our datacom mix represented a 10 percentage point increase from a year ago as datacom revenue grew 64% from a year ago while telecom revenue grew 5% from a year ago. As in the first quarter, growth in our optical communications business was driven by our advanced optical components and modules, including our 100G solutions and new programs. In fact, revenue from 100G programs nearly tripled from a year ago while revenue from 10G programs grew 36%, both of which more than offset the decline we saw in revenue from 40G programs.

Turning to our non-optical communications business, revenue from lasers, sensors and other markets represented 28% of total revenue and increased 18% from a year ago and 4% sequentially. During the second quarter strong growth in revenue from sensors again drove most of this increase, although the lasers and other markets, including automotive, also contributed to growth.

New business represents manufacturing programs from new or existing customers that were not in production two years ago. Revenue from new business represented 25% of total revenue in the second quarter, up from 13% of revenue in the same quarter last year. Our focus on new business, combined with increasing production from existing programs, resulted in a strong overall growth in the quarter.

We ended the quarter with approximately 90% of our capacity in our existing facilities in Thailand occupied. However it is important to realize that with our factory-within-a-factory model we continue to have capacity to add additional equipment lines within our existing buildings.

On the basis of equipment we believe we are currently at approximately 75% capacity. Therefore, we believe we have significant room to continue to grow and meet customer demand even while our new facility outside Bangkok is being completed.

We closed the land purchase for our new campus in December and construction is already underway. We expect to begin occupying the new building in the second quarter of FY17.

Now turning to the details of our P&L. Unless otherwise stated, all numbers presented here are on a GAAP basis. Gross margin in the second quarter was 12.2%, an increase of 100 basis points from a year ago and 20 basis points from last quarter, primarily due to higher-than-anticipated revenue.

Excluding share-based compensation expenses, non-GAAP gross margin was 12.5% in the second quarter, an increase of approximately 20 basis points from the first quarter and at the upper end of our target range. For the third quarter we expect gross margin to be roughly flat compared to fiscal Q2. Our total share-based compensation expenses for the quarter were $3.1 million, of which roughly $2.6 million was included in SG&A.

While start-up costs related to our new Fabrinet West, which are reflected primarily in operating expenses, continue to have a slight negative effect on our operating margin, GAAP operating margin increased to 6.3% in the second quarter compared with 5.7% a year ago. Non-GAAP operating margin was 7.9%, down from 8.1% a year ago with increased costs associated with ramping up production at our Fabrinet West facility.

Other income and expenses in the second quarter included a $5.4 million foreign exchange gain. As we noted last quarter, we expected that the unrealized loss in booked Q1 would reverse as the contracted baht was delivered. The remaining unrealized loss of approximately $5.5 million booked in Q1 will be reversed in tandem with the contracted baht delivery.

Taxes in the quarter were a net expense of $1.3 million and our normalized effective tax rate was 6.8% 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 unrealized gains from mark-to-market foreign exchange adjustments, net income for the second quarter was $19.8 million or $0.54 per diluted share, compared to $8.7 million or $0.24 per diluted share in the second quarter of 2015. On a non-GAAP basis net income totaled $18.2 million for the quarter or $0.50 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 approximately $267 million. This represents an increase of almost $19 million from the end of the first quarter, primarily due to operating cash inflows.

During the quarter we also drew $18 million against our revolving credit facility to purchase the land for our new campus and initial payments for new building construction. We continue to expect CapEx in FY16 to be in the range of $60 million to $70 million with approximately $30 million of that in maintenance CapEx and the remainder going toward the land purchase and construction of our new manufacturing facility in Thailand.

I would now like to turn to our guidance for the third quarter. We are encouraged by our increasing business momentum and expect this momentum to continue in the third quarter. We expect revenue to be between $240 million and $244 million, representing growth of between 27% and 29% from a year ago.

Recall that there was no consignment revenue in the third quarter of FY15. We anticipate GAAP net income per share to be in the range of $0.47 to $0.49 and non-GAAP net income per share of $0.52 to $0.54, based on approximately 36.8 million fully-diluted shares outstanding.

In summary, we are pleased with our performance in the second 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.

(Operator Instructions)

Troy Jensen, Piper.

Hi, gentlemen, congrats on a really nice quarter here.

Thanks, Troy.

Maybe a couple questions from me. First of all, if you think about your March quarter guidance, can you give us any indications on what you think datacom and telco will be in that mix? Are you expecting both to grow roughly the same? Or will one be stronger than the other?

Troy, this is TS. If you look at Q2 results, the majority was relying on the datacom. And we are so happy that telecom finally has come to the party. That momentum will continue.

And again, we will see growth in both sectors. Obviously, datacom is going to slow down a little bit but we are very encouraged with telecom which has a real good momentum right now. So I will say both sectors are growing, with telecom probably growing a little bit faster than the datacom now.

Perfect. And, TS, another one for you. What revenue level do you guys need now with the new cost structure to hit your 9% to 10% operating margin targets?

Okay, the 9.5% we previously guided, mostly relates to the Fabrinet West operating expense. You can see now we're at 7.9% now. Again, if we talk about Fabrinet West, it will continue to ramp. Last quarter we saw some very nice revenue uptick from Q1 and that revenue momentum will continue. So when we get up to the tens of the millions we talked about in the past, I will be able to see 9% to 9.5%.

All right, understood. One last question from me and I'll cede the floor. To go over that capacity numbers that you quoted again. So if I understand it, 94% of the capacity as is currently taken, I should think of that as footprint, but only about 75% of it is utilized?

We say 90% to 92% is our space capacity. Remember, we assign space to each of our customers. Within the space, factory-within-a-factory, customers have the capability to add more lines or go on to another shift. So the space is about 90% to 92%, but the equipment utilization today is only sitting at 75%. That's what we said in the prepared remarks.

All right, so plenty of room for growth. Keep up the good work, gentlemen.

Thank you.

Patrick Newton, Stifel.

Good afternoon, Tom and TS, thank you for taking my questions. I really wanted to dig in on the new product revenue 25% of sales. It's really impressive. But if we back into new product versus existing product, it's clear that is what has been the driver of growth over the last several quarters. And was the legacy product is doing well but not near the same level.

So I guess the question is, what kind of visibility do we have on the new product revenue? Should we continue to anticipate that as a percentage of revenue it should increase over the next few quarters? Or do we need to start seeing the non-new product growth rate start to accelerate in order to keep up the cadence of growth that you've been exhibiting?

This is Tom. We believe that the new product revenue will continue to grow in the Company and grow as a percent of our revenue. And the legacy products though also are continuing to grow. So we are experiencing growth in the new products and growth in the legacy products.

Tom, is that necessarily measured in quarters or measured in years from the new products continue to increase as a percentage of your total revenue?

It's measured in quarters.

Okay.

Patrick, let me add a little color here. If you look at Q2, we did $16 million more than in Q1. Q1 216 to 233, right? So I would say roughly speaking, the $16 million is split between existing customers, which we don't call new business, and the new business. Count straight half-half, right?

Now the new business is a function of new customers coming to us and a lot depends on the rate of the ramp. Some customers ramp faster than others as a new customer. Obviously, the existing customers continue riding on the metro upgrade, things like that. So it would be a mixture. In the future the growth will come from both sources. Is that helpful?

Yes, that's helpful. Digging further into that comment is, so on the existing customers and trying to get them to the party, to this new product party, is there aggressive inflection that you see? Or any customer commentary to date that points that this inflection should happen?

Because I think there's a growing expectation among investors that we have some really good demand dynamics across the 100G telecom side of the metro and also 100G on datacom. So any signs that's starting to build into your customers' forecast?

This is Tom again. I think the last time we talked, looking at our process, the NPI or new product introduction, we track that on a weekly and quarterly basis, customer by customer, to see what is in the pipeline and what's coming out of the pipeline and when we expect that to go into production. We certainly have a comfortable feel for what new products are going to come on our lines.

Great. And last one for me. You answered a prior question and said in the prepared remarks that you are very comfortable with your capacity to meet current demand. Given the solid guidance on top of the utilization data that you gave us, is there any type of revenue capability or generating potential you could allude to in this current footprint to help us understand when capacity needs to roll on?

Patrick, when you say current capacity, are you talking about the first campus, right? The current campus. The current campus, we continue to try to get more space.

And again, we have more than 1 million square feet and obviously sometimes you can rearrange and get a little bit more manufacturing space. So that process continues. I will say until the new building comes online in the next two to three quarters, we can meet our guidance and our revenue projection.

I fully support that.

Great, thank you very much for taking my questions. Great quarter.

Thank you, Patrick.

Alex Henderson, Needham.

Hi, guys.

Hi, Alex.

I just wanted to clarify, was the capital expenditure number that you were talking about calendar-year 2016 or FY16? The $60 million to $70 million number?

The $60 million to $70 million is the fiscal year.

Fiscal year. So if you were to look at calendar year, because obviously we're already through the half of the year, are you expecting it to accelerate in the back half? Or would it slowdown in the back half as you get near completion?

Based on my wild guess, FY17 I don't think we will spend $70 million. Because a lot of big-ticket items like land and the building were already spent in FY16. So unless something comes out, we buy another land somewhere else, I don't see we are going to be more than $70 million.

All right. And then the comment on Fabrinet West, I was a little surprised to hear that you had already pulled revenue in there. Clearly a ramp in that business is an important variable to margins because you are absorbing the cost. As I understand it, you guys are modeling that on a cost-plus basis and the margin structure is quite different than the corporate average.

Can you talk a little bit about that? What do you think the timeline is for getting up to, say, a $10 million-type quarterly run rate on that? Can you do that over calendar 2016?

Calendar 2016... remember we said this is more a FY17 event to get up to the tens of millions. Obviously, we hope to end calendar 2016 with somewhere closer to the tens of millions.

As of today we have many customers in the pipeline. We started with 2 and then the following quarter we had like 10. And right now we are engaging more than 20.

Again, some of these customers may not pan out. And if they pan out a lot depends on how fast they can ramp. So I will say that tens of millions we alluded to in the past are still on track but exactly which quarter is hard for us to say.

Is it right that we should be thinking about this as 20% gross margin business on a cost-plus basis as opposed to traditional model?

Alex, I think your question, it varies with the industry. Most of our competitors in the Santa Clara area, I was told that their margin is around there. I could be wrong but most of the information I got is that they are closer to that, so you are right.

So it's likely that's kind of the model you are targeting here then?

Yes, that's correct, Alex.

In terms of new customers, you gave a new customer metric for the trailing quarter. As you look forward into the March quarter, it sounds like you probably got a couple additional new customers kicking in there as well. Is that new customer percentage likely to continue to increase as a percent in the upcoming quarter?

So Alex, we normally sign up a few new customers every quarter. Some of these a very small, some are big. Again, as I said earlier, some may not pan out. Or maybe take a long time to ramp to meaningful revenue.

So again, the sheer numbers of customers we sign up doesn't mean in five quarters' time or two quarters' time you're going to see big revenue. A lot depends on the program we're working on with them and also the market conditions.

Great, thanks. I'll cede the floor.

Thank you Alex.

Dave Kang, B. Riley & Company.

Thank you, good afternoon. First question is any changes to your top customers' percentages of sales?

Top customer or 10% customer?

Yes, 10% customers. Any changes in those numbers?

Yes, so as I say, we have one more quarter before we hit the year end. We only do that at year-end in the 10-K filing. At this moment it's hard to say because the year is not over yet, Dave.

Okay, fair enough. I know you sell through your optical component customers but do they tell you where the end demand is coming from, whether it's China or North America? Any color on that?

No, they ship to the end customer. Some of them will tell us it's for Ciena or for who, right? But in general, if it goes to China we have no idea, whether they send it to the CM or some Chinese end customer. We mentioned that in the last couple of quarters already in the call here.

Sure, okay. And then some of your top customers have said that they are struggling with their own capacity situations so they are maybe on allocation. Any of that impacted your business? Any estimate to how much revenue was left on the table last quarter, fiscal second-quarter? If any?

It's Tom. I think across the board we didn't leave any revenue on the table. We really have the capacity and we have the equipment to support the orders that we have.

Any particular products that really stood out last quarter and are expected to be better than the industry average this quarter as well?

I don't think we mentioned it that way, Dave. Again, maybe my customers may be able to tell, but in general with this metro upgrade we see a lot of activity in the 100G transceiver or modulator, we talked about that. Also in the ROADMs, we see a lot, pretty strong in ROADMs. That's all I can tell you.

Okay, all right. And then maybe we can talk about silicon photonics. That has become certainly meaningful component. Can you disclose the percentage revenue? And can you tell us, talk about, some of the new customers expected to ramp this year, this calendar year?

Okay I don't think I can get into the customer because my customer may not want us to mention their names here. But I can tell you that the proportions of the ops comm revenue for 100G has been increasing. I believe I said that we are north of 10% of our ops comm revenue coming from silicon photonics.

Sure. And lastly, I wanted to ask about the non-optical business. Can you talk about the commercial laser business? Because it sounds like some of your customers are reporting that because of the macro headwind, they are seeing some choppiness. How is the commercial laser business for you guys?

And can you, lastly, talk about what you expect in the auto sensor? I guess that was really the main catalyst for that segment?

Okay, good question. On the non-ops comm side we see steady. We do not see the kind of wave we saw in the datacom or telecom. They are pretty steady and we continue to grind along. Obviously the growth rate is lower than telecom and datacom.

Laser, as you probably know, I think most of our customers are pretty flat on the laser side. We have good growth on the sensor side last quarter, but again those are consumer electronics and they might just disappear. So we don't know, we go quarter by quarter, unlike most of the telecom products where we can plan a little bit longer. So consumer electronics is subject to fluctuations from quarter to quarter.

All right, thank you very much.

Thank you.

Tim Savageaux, Northland.

Hi, good afternoon.

Good afternoon.

Hi, Tim.

Let me add my congratulations on a great quarter. Thought you were on your way there to telling us 100G as a percent of overall revenue, you given us a couple of different indications here I believe, last quarter that it was greater than 10G and 40G combined. This quarter indication of tripling year over year. Wonder if we might be able to get any additional color on that? I assume it's more than half of your optical comm revenue or any indications on how 100G was growing on a sequential basis. And I have a follow-up there.

Okay. Incidentally, we mentioned 100G as a percent of op comm revenue. Then you have op comm that is ROADM, amplifier. Have to go by the speed of the transceiver. In the past we said we ship more 100G than 10G and 40G combined.

As a percent of op comm we are approaching maybe half of it but not quite half yet. So obviously we continue to see it grow. Obviously as a percent of transceiver and transmitter and modulator where you can measure by the speed and obviously 100G is more than half right now. Is that helpful?

Very helpful, thank you. And to follow up on the ROADM comment, I think last quarter you indicated that you were beginning to see some indications of strength. It sounds like more of an order or a forecast type of activity. I wondered -- I'm guessing here that may have translated into more tangible revenue this quarter. But if you can update your previous comments on ROADMs and maybe indicate whether you have seen that transition into more steady revenue flow versus early indications of strength?

I think consistent with most of the analysts' reports, talking about metro upgrade, we see very strong ROADM shipments. Obviously, some of the orders definitely spill over into the next quarter. That's why our guidance is up for this quarter. So yes, the only thing I can tell you is that you ask my customer more about the ROADM story. We are the contract manufacturer, but I see a lot of activity there.

Great, thanks very much. I will pass it on.

Thank you.

Alex Henderson, Needham & Company.

I just wanted to see, is Hong there?

No, he's not here.

I was going to say congratulations to him for joining the Company. I hadn't talked to him in a while. Thanks, that's all I wanted to do, thanks.

We are very pleased about it ourselves.

Thank you. That concludes our question-and-answer session for today. I would like to hand the conference to Tom Mitchell for any closing comments.

I just want to thank you guys for your continued support and we will talk to you again next quarter.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.