Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the Third Quarter of Fiscal Year 2021. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Garo Toomajanian, Investor Relations. Thank you. 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 third quarter of fiscal year 2021, which ended March 26, 2021. With me on the call today are Seamus Grady, Chief Executive Officer; and Csaba Sverha, Chief Financial Officer. This call is being webcast, and a replay will be available on the Investors section of our website located at investor.fabrinet.com. During this call, we will present both GAAP and non-GAAP financial measures. Please refer to our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-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 February 2, 2021. We will begin the call with remarks from Seamus and Csaba followed by time for questions. I would now like to turn the call over to Fabrinet's CEO, Seamus Grady. Seamus?

Thank you, Garo, and good afternoon, everyone. We had a very strong quarter, representing our third quarter in a row of record revenue and earnings per share, both of which also exceeded our guidance. With sequential growth in all of the end markets that we track, total revenue was $479.3 million. Non-GAAP operating margins of 9.5% were at the highest level in 2 years and helped produce record non-GAAP earnings of $1.21 per share. We generated these results while positioning ourselves for continued growth, and we are optimistic that we can deliver another record quarter in Q4. Looking at some of the highlights of the quarter. Optical communications revenue reached a new record, driven primarily by record telecom revenue. Our Cisco optical transport system transfer program, which we have been discussing on recent calls, contributed to this strong performance. This program transfer was completed in the third quarter, reaching its full run rate about one quarter earlier than originally anticipated. Based on the success of this transfer, we believe that our unique value proposition in manufacturing complete network systems puts us in a strong position to win additional new business from our existing customers as well as other systems manufacturers who are looking to leverage their supply chain by outsourcing more efficiently. Notably, these newer systems programs are having a positive impact on operating margins as we were able to generate this revenue with close to zero incremental operating expenses. We also achieved record non-optical communications revenue in Q3. Revenue grew sequentially from all non-optical markets, with automotive reaching a new record revenue level and representing the largest non-optical category for the third quarter in a row. Newer automotive technologies were the biggest factors driving our strong automotive growth in the quarter. In summary, we are pleased to have delivered record third quarter results that exceeded our guidance. We are optimistic about all the end markets that we serve and believe that with continued efficient execution, we will be able to deliver an even stronger fourth quarter, resulting in our best year ever. Now I'd like to turn the call over to Csaba for additional financial details and our guidance for the fourth quarter of fiscal 2021.

Thank you, Seamus, and good afternoon, everyone. We are excited about our performance in the third quarter, which produced record revenue and non-GAAP earnings. Revenue of $479.3 million was above our guidance range, and non-GAAP earnings of $1.21 also exceeded our guidance. Looking at revenue in more detail. Optical communications was $361.7 million or 75% of total revenue, up 4% from Q2. Non-optical communications revenue was $117.6 million or 25% of total revenue and increased 11% from Q2. Within optical communications, telecom revenue was $283.5 million, up 4% from last quarter. Datacom revenue was $78.3 million, up 5% sequentially. Silicon photonics remains an important revenue driver at 22% of total revenue or $105.4 million, up 4% from Q2. Revenue from 100-gig products increased 8% sequentially to $138.6 million but remains below peak levels as growth from faster data rate products continues to accelerate. Revenue from 400-gig and faster was $105.1 million, up 1% from last quarter and more than triple from a year ago. In Q4, we expect the optical communications growth trend to continue. Looking at our non-optical communications business. Automotive has grown to become the largest category for the third quarter in a row with record revenue of $52.5 million in the third quarter, up 12% sequentially, driven primarily by growth from new automotive programs. We remain optimistic about these new automotive programs as we look ahead. Industrial laser revenue was $36.1 million, up 7% from Q2. Sensor revenue was $4.1 million, and other non-optical communications revenue was up 10% to $24.8 million. We believe the combination of laser and automotive strength will generate sequential growth for non-optical communications again in the fourth quarter. Now turning to the details of our P&L. Unless otherwise noted, profitability metrics are on a non-GAAP basis. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release and investor presentation, which you can find on our website. Gross margin was 12.2%, up from 12.1% in Q2 and in line with our target range of 12% to 12.5%. Operating expenses in the quarter were $12.7 million or 2.6% of revenue, reflecting our ability to grow revenue without meaningful increases in operating expenses. This produced record operating income of $45.6 million or 9.5% of revenue, the highest level in 2 years. Taxes in the third quarter were $1.6 million, and our normalized effective tax rate was 4%. We continue to anticipate an effective tax rate of about 4% for the year. Non-GAAP net income was a record at $45.4 million or $1.21 per diluted share. On a GAAP basis, net income was also a record at $27.5 million or $1 per diluted share. Turning to the balance sheet and cash flow statement. At the end of the third quarter, cash, restricted cash and investments were $508.9 million. Operating cash flow was a strong $23.8 million. With CapEx of $6.4 million, free cash flow was $27.5 million in the third quarter. During the quarter, we repurchased approximately 15,000 shares at an average price of $80.64 for a total cash outlay of $1.2 million. I would now like to turn to our guidance for the fourth quarter of fiscal year 2021. We continue to be very optimistic about our business and anticipate another record quarter for revenue and profitability in Q4. We expect total revenue in the fourth quarter to be between $475 million and $495 million and EPS to be in the range of $1.18 to $1.25 per diluted share. In summary, we had our best performance ever in Q3 and are well-positioned to continue our track record of success as we look ahead. Operator, we are now ready to open the call for questions.

I show our first question comes from John Marchetti from Stifel.

Seamus, I just wanted to clarify something on the Cisco business that you mentioned in your prepared remarks. Are we at the full run rate now exiting the fiscal third quarter? Or do you expect to be there in fiscal fourth quarter? I just want to make sure I have that correct and I heard you correctly when you were talking about that.

John, I think we're at the full run rate exiting the quarter. We ramped about a quarter ahead of schedule. I think it's safe to say we're at the full run rate at the end of the quarter. So I don't want to give the impression that there's going to be some meaningful uptick. And of course, we don't guide on a customer-by-customer basis. But we're at the run rate and have been for the better part of the quarter.

Got it. And then I know it's incorporated within the guidance, but I was wondering if you could just spend a moment on maybe what you're seeing out there from a supply chain perspective. Obviously, a lot of different data points swirling around about where the supply chain stands. Just curious if you're seeing any material shortages that may be weighing on your outlook and if that's changing any of the demand profile or how you're thinking about maybe even as we get into the second half of this calendar year.

Yes, for sure. We did see a certain amount of shortage in Q3, and we anticipate that they'll continue in Q4. And that's been factored into our outlook. We're not immune to these component shortages just like everybody else is. There always seems to be some component crisis either just behind us or just ahead of us. We had passives and capacitors before now, and it's semiconductor shortages right now. We try to stay very close to our customers so that we're able to anticipate the demand. And then the more visibility we can give to our suppliers, the better positioned we are to support them. But yes, we have seen that component shortage situation that has impacted us in the past quarter. We think it's impacted the whole industry. But it's part of our job as a management team to make sure we stay close to our customers and our suppliers and proactively work on the issues so that we get the customers what they need and not use the component shortage as an excuse, if that makes sense. It's just part of the normal business. There's always some, it seems like these days, there's always some crisis just ahead of us or just behind us. So we've just learned to live with that, I guess.

I have one more question, Seamus. Following up on the supply chain tightness, are customers providing you with more visibility to help you prepare for their needs a few quarters in advance? Does this situation restrict your ability to handle unexpected demand increases in a quarter, rather than just meeting planned demand? I'm interested in how we should consider its impact on the business in the coming quarters.

Yes, I agree, John. We are gaining more visibility as our customers are providing us with more information than usual to help us manage our component inventory. However, this doesn't mean we will forecast our revenue beyond the typical one-quarter outlook. I would say our customers are offering us improved visibility, which allows us to relay better information to our suppliers and ensure that we can meet their needs and potential increases in demand. Even in the current tight component situation, we've seen instances where customers have still come in with unexpected demand despite the already constrained environment. Overall, the enhanced visibility from our customers to us, and then from us to our suppliers, helps alleviate the issue, but it doesn't completely resolve it.

I show our next question comes from the line of Samik Chatterjee from JPMorgan.

I guess, Seamus, I wanted to start off with the optical segment. And if I heard you on the prepared remarks correctly, you mentioned that the 400-gig growth was about 1% sequentially lower than what you saw in 100-gig. So I just wanted to clarify that I heard it correctly and what's the driver there. And also, generally, what we're seeing in the rest of the optical landscape, particularly aligned to telecom revenues, we're seeing more of an expectation of a back half of the calendar year ramp given demand coming from telco customers. So given that you just mentioned you have more visibility now into the back half of the calendar year, I just wanted to get your thoughts of what you're seeing. Are you expecting more of a sequential ramp as you go through the rest of the calendar year? Any insights to that would be helpful. And I have a follow-up as well.

Yes. I will let Csaba provide the details on the 400-gig versus the 100-gig shortly. The visibility we have from customers primarily helps us position component supply to meet the existing demand. We're not using it to forecast revenue for the second half of the year. I’ll let Csaba address your question regarding the growth in 400-gig compared to 100-gig.

Samik, this is Csaba. Yes. So in our 400-gig, we still had our record revenue. The sequential growth was indeed 1%. We shipped about $105 million in 400-gig, so that higher data rate is still ramping. Obviously, in 100-gig, we saw a little bit of a sequential increase. However, that's still lagging behind our highest revenue in the 100-gig category, which was about a year ago at $160 million. So obviously, we don't really have a crystal ball how this decline of the 100-gig and ramp of the 400-gig is going to happen. But we remain optimistic that medium to long term, 400-gig ramp is going to continue to accelerate more rapidly. So I would say it's a kind of dynamic situation, and there is definitely a shift between 100-gig and 400-gig. Therefore, I wouldn't read too much into one quarter's sequential increase or decrease. So I think it's going to take a couple of quarters to taper off and see how the true picture on 100 and 400 is going to play out.

Got it. I have a quick question about the automotive segment as well. You mentioned strong growth, driven by new platforms. How much of that growth is from traditional use cases you've supported with customers like Valeo versus the newer LIDAR customers? Additionally, regarding competitive differentiation in automotive LIDAR, should I view the competitive aspects in manufacturing as similar to what you have in optical, or do you foresee differences as the industry evolves?

Yes. I believe there are many questions regarding this. Firstly, in terms of the division between traditional automotive and our newer automotive programs, the majority of our growth is coming from the newer automotive initiatives. With the electric vehicle platforms and LIDAR, the traditional business is solid but lacks the same growth momentum. It seems to be more stable compared to these new automotive programs. Most of the growth we are experiencing originates from the new automotive programs. Regarding our capabilities, we believe, and our customers affirm, that our manufacturing skills align well with their needs. They complement our work in the optical domain, sharing similar challenges in product assembly and employing comparable processes. The knowledge we've gained over the years in assembling optical products proves very beneficial for our LIDAR products. Our customers recognize this, and they indicate that we are establishing a strong reputation among discerning LIDAR clients. We aspire to be seen as the preferred supplier in LIDAR, just as we are in the optical field, and we feel we are making progress toward that goal. Thus, our capabilities are indeed complementary to our optical expertise.

I show our next question comes from the line of Alex Henderson from Needham.

First off, a great quarter and thanks for the good guide. I was looking at the industrial laser business, and I'm trying to understand the mechanics implications of the change in ownership of one of the larger players. And to what extent do you think that has an impact on you one way or another? Do you think it's a positive, negative or neutral in terms of that change of ownership?

It's still early for us to fully assess the impact, Alex. Coherent is a customer of Fabrinet, as are all the companies involved in that situation. Historically, we have not lost business due to industry consolidation; in fact, we have often benefited from it. We did notice that II-VI has communicated a need to identify significant synergies. We are eager to assist them in realizing those synergies, and we plan to collaborate when the timing is appropriate. At this moment, it is too soon to engage fully as they have not yet received approval for the deal. However, we are looking forward to working together when the time comes. We have never had a preference regarding which company would have been more advantageous for us to acquire, and we are open to collaborating with everyone.

Positive transaction for you that it probably brings more business to you as a result.

As I mentioned, we don't have a clear answer at this point. It's too early to tell. However, we are optimistic. We believe we can assist II-VI and are willing to contribute to help them achieve the necessary synergies, but it’s still very early to determine the impact on us, whether it will be positive, negative, or neutral.

Most people are considering the extent of the impact.

Alex, we are having trouble hearing you as your connection is cutting in and out. If you could dial back in from a different line, we can bring you back in at the end of the next question, if that works for you. Right now, we just can't make out what you're saying.

I show the next question in the queue comes from the line of Dave Kang from B. Riley.

This is Danny on for Dave. Congrats on the quarter. I was just wondering if you could provide any insight on demand from certain regions, specifically North America and China, as NeoPhotonics mentioned that demand from there might be muted for the next quarter. Are you experiencing that impact as well, and how are you considering that?

We don't usually have great visibility into where our products ultimately end up. While we know where we ship the products, we don't always have insight into their final destinations. We ship products to our customers, who then send them to their end customers. In some cases, we even ship products to competitors, who may use them before passing them on to our customers. Therefore, we don’t have a clear understanding of the end markets. We are aware of where we ship, but unfortunately, we lack visibility into the final destinations.

Okay. Got it. Regarding the Cisco ramp, you mentioned the potential for expansion. Are you having any encouraging conversations lately about the Cisco program or expansions with other customers?

Yes. I think what we mentioned was Cisco is an example of, as was Infinera maybe before it, of the type of execution we're able to deliver for our customers, the fast transfers and obviously the savings and the supply chain simplification that we're able to realize for our customers. And then I think we talked about the opportunity with maybe other customers in a similar vein. There are lots of other Cisco-like companies, if you like, out there that we feel we could do a similar job for. Of course, we're always in discussions with all of our customers, including Cisco, about expanding the relationship. And so far, touch wood, the transfer of the optical transport business has done very, very well. We're very happy with that. We know Cisco's very happy with that. So we'll be looking to really capitalize on that and grow our business as best we can with Cisco but also with other customers.

I show our next question comes from Alex Henderson.

Great. I hope you can hear me better at this time. Yes, I hope I didn't miss it in the last question that happened while I was redialing in. But I was hoping you could go back to the supply chain and talk a little bit about the mechanics of the change in supply conditions. Obviously, you have a job of managing through it, but it seems pretty clear that almost everybody we've talked to has suggested that the supply chain pressures have built over the course of the first quarter and into the current quarter and are worse in the second quarter than they were in the first quarter. Could you describe whether you're seeing a larger impact that you're absorbing in 2Q? Or are you absorbing a similar impact? And is it a function of the supply chain is now just simply constraining the upside to the numbers? And then I would hope you explain to me how you get a potentially down EPS sequentially given you have almost always had up sequential EPS from CY 1Q to CY 2Q. Why is the low end of the band below what you reported in 1Q? Is that a function of supply constraints or some other element within the mix that's exogenous to the typical pattern?

Thanks, Alex. So I'll let Csaba talk in a moment about the EPS outlook. But just on the supply constraints, yes, I think we're experiencing the same supply constraints that really everybody else is experiencing. And I would say it did get worse in calendar Q2 or Q3. I think we've become pretty good at two things. One is managing through those types of situations, those types of supply constraints that seem to hit us from time to time, by working with our customers and working with our suppliers. And also, we're pretty adept, I think, at factoring it into our guidance. So we don't break it out separately. We see it as our role really is to take it all into account, use our best judgment when we set the guidance to factor it in. That's what we did in Q3. That's what we did, if you go back 1.5 years, 2 years ago when we had the MLCC shortages, and that's what we're doing for Q4. We've taken the shortage situation into account, the constraints into account when we set our guidance. But I think certainly, I think everyone would agree, were it not for these constraints, there is more demand there than can be supplied right now were it not for these component constraints.

Okay. So Alex, let me clarify on the EPS. The guidance is $1.18 as the low end. It is actually lower than what we indicated for fiscal Q3. We experienced about a $0.02 benefit in Q2 from foreign exchange rates in our actual numbers, which we typically do not include in the guidance. That accounts for about $0.02 in the guidance. Additionally, the lower end of the revenue guidance is $475 million, and we finished at $480 million, which provides about $0.03 from sequential improvement.

But normally, you are never down sequentially from the seasonally weakest first quarter to the seasonally stronger second quarter. Is there something going on that might be related to supply constraints?

The supply constraints are basically baked into our numbers, but again, the biggest part is the strong actual numbers in Q3, which was to do with the FX of about $0.02.

That concludes our Q&A session. At this time, I would like to turn the call over to Mr. Seamus Grady, CEO, for closing remarks.

Thank you, operator, and thank you all for joining our call today. We achieved a very strong third quarter with record revenue and earnings per share, and we expect ongoing positive demand trends to help us deliver another record quarter in Q4, leading to our best fiscal year ever. As we continue to implement our strategy, we believe our business is well positioned to maintain positive results over the long term. We look forward to speaking with you again soon. Goodbye.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.