Fabrinet (FN) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Fabrinet's financial results conference call for the second quarter of FY17.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Garo Toomajanian, Investor Relations. 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 second quarter of FY17 ended December 30, 2016. With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board 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, which includes GAAP to non-GAAP reconciliations.

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 9, 2016.

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 delivered a strong second quarter, with revenue and profitability that were above our guidant range. Revenue increased over 50% from a year ago, as we benefited from growth in new programs as well as from existing customer programs. We expect these strong trends to continue into the third quarter.

On a personal note, at my request, our Board of Directors has initiated a CEO succession plan. I intend to continue to play a leadership role in the Company after we appoint a new CEO. We have not put a timeline on this process.

I will now turn the call over to TS for more details on the second quarter and our outlook. TS?

I would like to provide you with more details on our performance by end market and our financial results. Total revenue in the second quarter was $351.2 million, an increase of 51% from a year ago and above the high end of our guided range. Non-GAAP earnings were $0.91 per share and were also above the high end of guidance, due primarily to our revenue upside. Please note that included in the $0.91 non-GAAP EPS were $0.05 foreign exchange gain due to the non-recurring weakenings of the Thai baht toward the end of the quarter.

This result included a revenue contribution from our Exception EMS acquisition that was immaterial, but slightly better than expectations. Exception did not materially impact non-GAAP earnings per share.

Our growth is the result of strong optical communications demand, continuous growth in non-optical, and new customer programs. Revenue from new business or new programs that we started tracking in Q1 for FY14 represented 35% of our revenue in the second quarter compared to 35% a year ago.

Looking at our revenue breakdown in more detail. Optical communications represented 78% of our total revenue, or $274.2 million, an increase of 63% from a year ago. Non-optical revenue represented 22% of total revenue, or $76.9 million, an increase of 30% from a year ago, including a small contribution from Exception.

Within optical, the revenue split was 63% from telco applications and 32% from datacom applications. Both telecom and datacom continued to see strong year-over-year growth at 68% for telecom and 54% for datacom.

[My] technologies, 100-gig solutions continued to nominate and represented 45% of total revenue and 58% of optical revenue, or approximately $160 million, an increase of over 130% from a year ago. Revenue from 10-gig and 40-gig solutions decreased year over year, consistent with shipping demand -- market demand.

Also consistent with recent trend, we continued to see strong demand for silicon photonic modules. In the second quarter, silicon photonic revenue grew 137% from a year ago to over $34 million, or 31% of total revenue and 37% of optical revenue. As I mentioned, non-optical communications represented 22% of revenue in the second quarter.

Within non-optical communications, laser revenue increased 39% from a year ago to $35.5 million. Automotive product grew 8% from a year ago to $21.6 million, and sensors and other revenue increased 19% to $19.8 million.

Fabrinet West, our new product introduction facility in Santa Clara continues to ramp. We continue to operate three manufacturing lines there. While we operate in one segment and don't break out revenue by facility, we are enthusiastic about the contribution that this facility will make to our results. In fact, we have already seen the transfers of program for Fabrinet West to Thailand, consistent with our strategy to leverage NPI facility in Santa Clara and the UK to drive volume production.

The transfers from NPI programs to volume production will also help utilize capacity at our new facility in Chonburi, Thailand. This 500,000 square foot facility is already 10% occupied, with more than 35% of manufacturing space already spoken for. In fact, we continued to expect a small amount of revenue from this facility in the March quarter, with a continuing ramp as we look ahead.

Now turning to the details of our P&L, our reconciliations on GAAP to non-GAAP measures is included in our press release. Non-GAAP gross margin in the second quarter was 12.7%, a small increase on 12.5% a year ago. Even though start-up manufacturing costs associated with Fabrinet West were included in cost of revenue in the second quarter of FY17, but not [yet for] FY16.

For the third quarter, we expect non-GAAP gross margin to increase slightly over the second quarter, as we benefit from increased scale. Non-GAAP operating income in the second quarter was $34.3 million, resulting in an operating margins of 9.8%, the highest level we have seen in over five years.

Non-GAAP operating income excludes share-based compensation expenses of $8.6 million. Non-GAAP operating margin improved 190 basis points from a year ago, primarily due to higher margin and leverage to operating expenses with growing revenue.

Non-GAAP second-quarter results include the impacts of a $1.9 million foreign exchange gain due to weakenings of the Thai baht during the second quarter. Taxes in the quarter were a net expense of $2 million, and our normalized effective tax rate was 6.8%, which was within our expected range of 6% to 7%.

Non-GAAP net income $34.5 million in the second quarter, or $0.91 per diluted share, compared to $18.2 million, or $0.50 per diluted share in Q2 of FY16. On a GAAP basis, we include share-based compensation expenses and amortizations of debt issuing cost. Net income for the second quarter was $25.3 million, or $0.67 per diluted share, compared to $19.8 million, or $0.54 per diluted share, in the second quarters of FY16.

Moving on to the balance sheet and cash flow statement, we ended the second quarter with a cash and investment balance of approximately $259.3 million compared to $256.9 million at the end of the first quarter. Cash balance at the end of the second quarter included the impacts of $20.8 million in operating cash flow offset by $17.3 million in CapEx for machine and equipment, and $4.9 million for long-term loan repayment.

Additionally, $2.2 million in proceeds from loan draw-down was to support Chonburi construction payment. After the end of the quarter, we made a 20% deposit toward the $5.6 million purchase of an additional 25 acres of land adjacent to our new facility in Chonburi, Thailand.

For FY17, we continue to expect CapEx to be in the range of $60 million to $70 million, with approximately $30 million to $40 million of debt in [mainly in] the CapEx, and the remainder going toward the final construction and equipment for our new manufacturing facility in Chonburi, Thailand.

I would now like to discuss guidance for the third quarter. We expect the strong momentum we are experiencing to continue into the third quarter. We anticipate revenue in the third quarter to be between $360 million and $364 million representing growth of 43% to 45% from a year ago. We anticipate non-GAAP net income per share in the third quarter to be in the range of $0.87 to $0.89 and GAAP net income per share of $0.66 to $0.68, based on approximately 38 million fully diluted shares outstanding.

In summary, we are enthusiastic about our continued business momentum driven by ongoing strength in the optical market and new customer programs. We are also excited and see the beginning of the transfers of programs from Fabrinet West to Thailand, and believe our growing NPI pipeline will support our growth in the years ahead. Operator, we would now like to open the call for questions.

(Operator Instructions)

Alex Henderson, Needham & Company.

Hey, guys, nice quarter, and thanks for the guide. I wasn't sure I got the datacom/telecom split correctly. Can you give us what the percentages were there on that split?

Yes, hi, Alex, this is TS. I think I make a boo-boo there. I think the split is telecom is 62% and datacom is 37%, not 33%. Yes, I realized that.

37%/63%?

Right.

And that's of optical, right?

Yes, within optical.

So looking at the new customers as a percentage of sales at 35%, how much of that is coming from FN UK and FN West?

Well, we don't break out, okay. In the past, we talk about a number like $10 million. In UK, I believe that we mentioned about $5 million for the last few quarters. Moving forward, we are not going to break out the segments.

It's just that it's an important number relative to how fast you're adding customers. And to the extent that it's acquisition-driven, it's a little bit different than if it's a standard accretion of new customers.

But in the past, we mention that both UK and most of the Fabrinet West are non-optical communications.

Right. Okay. I got it. Looking at the laser business, that was the other area that I think I got the numbers a little bit off on. Can you just go over the lasers? That was, what, 39% growth, is that what you said?

No, I didn't say 39% growth. I think we said maybe laser represents 39% of the total, right?

Of total, that's what it was. Okay. Great. That's what I needed. Thank you.

Okay.

Paul Coster, JPMorgan.

Thank you very much, appreciate your time. I think you talked of -- TS, you talked to 10% of the new Thai facility being occupied. I think I heard you say that 90% of the space is spoken for. Did I get that correct?

No. We said about more than 25% of the space is spoken for.

More than 25%, is that correct?

Yes, that's correct.

Okay, got it. And then, the business that is coming back from Fabrinet West to Thailand, as you said, is non-optical. Is it a larger share of the -- or is it the largest share of the new facility that is being deployed on sensors and lasers?

Not necessarily. We were saying that Fabrinet West, as I mentioned, the optical and non-optical majority today. Today as the business unfolds, it's mostly non-optical. We also have optical communication. Remember, Fabrinet West is a new product introduction facility. We try to capture the product at the inception stages.

Why have you committed to a land purchase at this time?

Well, we have the 50 acres of land, and one building is already built, already completed. And there is land adjacent to the 50 acres available. So we thought for the future growth, we would like to secure the land and also provide another access, just in case, either there's a heavy traffic jam on the one access, we have another alternate route to get into the campus.

Okay. Was there a significant change in customer concentration this quarter?

Not really. We don't normally talk about 10% customer until the end of the year.

Okay. My last question, really for Tom, I suppose, is can you just give us a little bit of a sense of what your strategic stance is in readiness for whatever changes come about as a result of the tax reform proposals that are being considered here in the United States?

So, Paul, as you probably follow our story, you know that over the year, Fabrinet expanded the global footprint quite significantly. We now have Fabrinet West; we also have another manufacturing site in New Jersey. We are in the UK now; we are already in China and in Thailand.

So right now, the policy is not clear. It depends on which version you want to follow. So as the policy become clearer, we will be able to react, because today with our global footprint, we should be able to react, whatever it comes.

I think that's the most I could ask for at the moment. Thank you so much.

Thank you.

Patrick Newton, Stifel.

Good afternoon, Tom and TS, thank you for taking my question. First, starting on the CEO search, Tom, should we think of the hiring of a search firm implicit that you're looking at external candidates only? And also, just as we think about acquisition of assets similar to Exception, would the pace of acquisitions slow as you're transitioning to a new CEO?

Well, the first answer to the first question is the CEO search is really brought about by the succession planning where the responsibility is of the Board, and we really don't have a timeline on it. So we don't foresee in the near future any change at all, except that it is the responsibility of the Board to report that. This was our method of doing that.

And no changes to the pace of acquisitions, it sounds like?

No, I think the M&A activity continues. There's not going to be a change. There is really no change at all.

So, Patrick, if you look at the press release, we talk about Tom will continue to involve with the Business. He will continue to take on a leadership role, as soon as we appoint a CEO.

And then, as you're sitting here thinking about the change at the CEO level, can you comment -- I have no tactful way to pose this question. But was there also a comment at the Board level about potentially strategic alternatives or other changes, given the reduced role of the Founder?

No, I don't think so. For sure the search for -- is looks at internal candidates and it looks at external candidates. And then, obviously, what we're doing is we're trying to bring somebody to be -- the candidates to come will have a proven ability to take the Company to the next levels of growth and profitability.

Okay. So, no consideration at all of potentially selling the Business, given this transition?

That has not been put on the table at all.

Okay. Shifting to the NPI facility, TS, I understand you don't want to give explicit revenue generation, but is the assignment at West breakeven currently?

We actually don't talk about that. But obviously, we have very good prospect on the business. Especially right now, they are transferring the program, some of the mass production program to Chonburi.

So, sometimes you ask me for the revenues. It's hard for me to quantify because, some of which they make it over there [where they're accessing three lines], and the rest they transfer to Thailand. Again, when you look at profitability, it's also hard for me to quantify. But we are very happy with the acquisition -- or not acquisition, the greenfield, and we'll continue to look for opportunity there.

Okay. And then maybe without -- I understand the breakeven in revenue can be a little bit harder, but is the margin profile of the revenue that's flowing through Fabrinet West still helpfully accretive to the corporate average?

If you look at this quarter, I reported 12.7%, and right now the Fabrinet West is 100% in the cost of revenue. So you can draw the conclusion from there.

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

Thank you, Patrick.

Troy Jensen, Piper.

Congrats on the nice quarter and, Tom, congrats on pending retirement here. It's well overdue.

I don't think it is retirement for me in the program right now, but we did have to report this succession planning program.

All right. Understood. Can't let go. I understand.

A couple of quick questions. TS, I just want to make it clear, you said you only had one 10% customer in the quarter, is that correct?

No, I didn't say that. I said we only report the 10% customers toward the end of the fiscal year. So obviously, with all of the things going on, you're aware of that. I do hope that I have more than one 10% customer.

Yes. Understood. Okay. How about quickly on -- this may be premature, but you guys -- have you thought about breaking ground on the next building yet or is that still a year-plus out? Or like a timeline? You won't start yet, but a timeline?

I believe we won't start breaking ground on it for another two years.

All right. Understood.

This is a 550,000 square foot plant that we opened in October, and I think the groundbreaking for the next plant will be somewhere between 12 and 18 months.

Okay. Understood. And then, TS, just in your guidance, are you expecting lasers and sensors to grow sequentially in the March quarter?

For sensor, yes, I believe so, yes. Laser, honestly, I don't know because it's really the forecast, so, hard to tell.

All right. And just, could you guys give any color on maybe specific products? Is QSFP28 becoming a bigger piece of the revenues or anything material yet? And I'd love to hear, if you could talk at all on growth in ROADMs.

I think we talk about silicon photonic become a very nice piece of business we have. In our current year, about [21%] of our total revenue. We don't have a QSFP28, but we are ramping. We have [all favor], LR4, SR4, so we had four or five [table] on that. Other than that, 100 gig is pretty strong. We continue to enjoy the 100-gig growth.

All right, guys. Good luck this year.

Thank you.

Thanks.

Tim Savageaux, Northland Capital.

Hi, good afternoon and congratulations on a nice quarter. I want to maybe focus back on that guidance question. So it sounds like, given your comments on non-optical, that you expect most of the sequential growth to remain coming on the optical communications side as we look into the March quarter. Is that fair to say?

Yes, Tim, yes, I think that's a good observation.

Okay. Great. And I wanted to maybe try and get a sense of how much the new capacity that you mentioned came online late last year contributed to either the upside in the quarter or the sequential guidance.

And I want to follow up on a few metrics. You mentioned 25% occupied, but if there's any color you can give us on the revenue contribution of the new facility, in either results or guide, that would be helpful.

Okay, so if you follow our story, Tim, we essentially, we said Pinehurst, the old campus, in terms of space we are almost there. We are pretty much are fully occupied.

On the equipment, equipment capacity, depends on whether six day or seven day. We still have [available] capacity there. For example, if you're willing to run seven day, we are able to hire people to stagger them to run seven days a week. Our equipment utilization is about 70% to 75% only. So we still have room in our old campus, Pinehurst campus.

For the new campus, we mentioned in our prepared script that in March we had some revenue contribution from the new campus, Chonburi campus. But it's not significant. We are still helping the customer to qualify to (inaudible) based on their requirement. Is that helpful?

It is. And I'm trying to put it in context of some of your past land acquisitions, this current announcement you just made. I believe at the time you bought the land that you've got the buildings on now, I think it was about 50 acres, and I believe at the time you talked about adding 150% of your current capacity over a period of time.

As we stand here now, when you reference the 550,000 square feet, how much of that is of the original 150% addition? I think it's somewhere like a third. And as you look at this new land, how should we think of that with regards to the size of the capacity expansion on top of that?

Okay. So unless you have land, you can't even build building, and that's the strategy behind that. We have land, currently 50 acres. We have one building already completed; we have room for two more buildings.

So each building you can see, you can assume that it's a 500,000 square foot. So for three buildings, it's 1.5 million. Currently in Pinehurst we have 1 million manufacturing space, so 150% on the current Pinehurst capacity.

On the new land, it's 25 acres, roughly speaking. Half of the existing land we bought about one year, two years ago. So you can see, it's another 50% of the 150%, if you try to build another building out there. Is that helpful?

It is. What would be more helpful is to understand what sort of demand indications or growth that you're seeing that would have you move further on another capacity increase when you're a third of the way through the current one. I think that's pretty extraordinary. I'd love you to share your planning assumptions on them.

Maybe I can help a little bit on that. The thing is we work on a 10-year plan, and we don't want to get land-locked by having all our capacity in 50 acres and then there isn't any more land available in that area, so we have to go and relocate again in another area.

We're very pleased with that area. Every indication is it's going to work really great for us. And buying the 25 acres, which is adjacent to the existing 50, is exactly a great -- I believe it was really a strategic decision to go forward so you always have the option of increasing in that campus.

It doesn't mean that we have land, we definitely want to build the building today. We'll build the building in concert with the market demand and conditions.

Understood. So you're being a little opportunistic there. One more for me back on the product side. It does look like you saw strength here at 100 gig, both across telecom and datacom, and so within photonics, and I would assume in QSFP28.

You haven't talked much about the ROADM side. It seems like, as I look through my numbers, you might have seen some flattening out there. I wonder if you can readdress that ROADM market and any more color about the strength in 100 gig, whether you expect that to continue as you move forward to be the primary source of growth on the optical [con] side.

Okay, very good question, Tim. Tom Mitchell's always coached me: Don't get into the customer territory. So Lumentum is going to report I think tomorrow. You probably can hear what they say about ROADM.

I believe December or January -- January [finished out] about WSS and ROADM. They talk about Chinese is going to adopt ROADM, if you listen to their earnings call. Nothing in the pipeline to tell me that -- such as ROADM on the product side is going to slow down. But again, tomorrow you can hear from Lumentum and see what they say.

Got it. Thanks, guys.

Thank you, Tim.

Alex Henderson, Needham & Company.

Thanks. Did you give the geographic breakout and growth rates in the quarter?

It will be in the Q on the [billed to]. About 50% to North America, and the rest between Asia and Europe. And actually, Alex, I went further one step -- [that's billed to], right, in the Q, but shipped to. Suffice to say that today we only have less than 20% shipped to USA, so majority is outside USA.

So we build the product outside the US, and then about 20% ship back to the US. My customer import them back to the US. For Fabrinet, we [always FOB Bangkok Airport].

And going back to the capacity utilization at Pinehurst versus Chonburi, it's my understanding that you moved some of the common equipment that you share between the vendors to Chonburi from Pinehurst. Did that open up some space in Pinehurst and allow you to get a little bit more available space to offer to customers?

No, we didn't move any equipment out of Pinehurst to Chonburi. Everything in Chonburi is all new.

New, yes.

Well, let me say it differently then. My understanding is you brought up a line that's more of a shared line in Chonburi, then shut down an old line at Pinehurst, which opens up some space at Pinehurst. Is that accurate?

In due course, yes, but not right away. We bought two brand new line we installed in Chonburi, and then we tried to go to product by product, customer by customer to transfer them. And, yes, you're right, in due course we free up some space. In fact, as we speak, we create space almost every day, because of consolidate [rationalize] production, move warehouse, consolidate warehouse, consolidate offices and so on. So we create space almost every quarter, every month.

I'll cede the floor, thanks.

Thank you, Alex.

Thank you, and that concludes our question-and-answer session. I would like to turn the conference back over to Fabrinet for any closing comments.

This is Tom, and I thank you for your attendance, and we'll speak to you again in our next call.

Thank you.

Good afternoon.

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.

Thank you.