Good afternoon. Welcome to the Fabrinet Financial Results Conference Call for the First Quarter of Fiscal Year 2024. 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 provided at that time. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Garo Toomajanian, VP of 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 first quarter of fiscal year 2024, which ended September 29, 2023. 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 the Investors section of our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation, as well as additional details of our revenue breakdown. In addition, 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 22, 2023. 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. Good afternoon, everyone, and thank you for joining us on our call today. We set new quarterly records for revenue and EPS in our first quarter, both of which were above our guidance ranges. Free cash flow also reached a new quarterly record. We achieved triple-digit year-over-year growth in datacom revenue, driven by next-generation optical interconnect for AI applications. This datacom growth more than made up for continued but diminishing sequential declines in telecom revenue as inventory absorption runs its course. Overall revenue was $685.5 million, representing an increase of 5% from the fourth quarter, as well as from a year ago. Recall that the first quarter of fiscal 2023 was a 14-week quarter, adding approximately $20 million to revenue a year ago. Excluding this impact, revenue would have grown 8% year-over-year. Our strong revenue growth contributed to a record bottom line, with non-GAAP net income up $2.00 per share. Looking at the first quarter in more detail, optical communications revenue increased from both a year ago and the fourth quarter. Within optical communications, telecom revenue decreased sequentially, though by a smaller amount than anticipated. Datacom growth more than offset the telecom decline again, with sequential growth of 26% from a very strong fourth quarter, and year-over-year growth of over 160%. As in Q4, datacom growth was driven primarily by AI optical interconnect. In our non-optical communications business, revenue was relatively flat, as anticipated. A small sequential decline in automotive revenue was largely offset by growth in industrial lasers and other non-optical communications revenue. Looking to the second quarter, we expect the industry-wide inventory adjustments in telecom to continue. We believe that datacom growth, particularly in AI will more than offset these headwinds again in the second quarter. In short, we are optimistic that the telecom inventory-related issues are temporary, whereas the demand strength in datacom is sustainable. In summary, our record top and bottom line results represented a strong start to the fiscal year, and we are confident that we remain well-positioned to continue delivering solid results as we look ahead. Now I'd like to turn the call over to Csaba for additional financial details on our first quarter of fiscal 2024 and our guidance for the second quarter. Csaba?

Thank you, Seamus, and good afternoon, everyone. Revenue was above our guidance range at $685.5 million, up 5% both sequentially and from a year ago. Keep in mind that the first quarter of the prior year benefited by approximately $20 million due to an additional week. Our strong revenue helped to produce record earnings. Non-GAAP net income was $2 per share, which was above our guidance range. We have published additional details regarding our revenue breakdown in the investor presentation, which you can find on our website. So, in looking more closely at revenue, I will focus my comments on the most notable changes. Optical communications revenue of $533.3 million was a new quarterly record, and very strong sequential datacom growth of 26% more than made up for a smaller than anticipated decline in telecom revenue of 6%. Datacom growth is being driven primarily by 800 gig technology for AI applications. We believe there is still excess inventory in the supply chain, and in the second quarter, we expect datacom revenue to again more than offset telecom declines by a wide margin. Looking at optical communications revenue by data rate, growth in revenue from products rated 400 gig and faster was substantially greater than revenue declines from 100 gig programs. Non-optical communications revenue was consistent with the fourth quarter at $152.2 million and represented 22% of total revenue. Automotive revenue declined 5% from the fourth quarter due to some inventory absorption. This was partially offset by a smaller sequential increase in industrial laser and other non-optical communications revenue. As I discussed the details of our P&L, expense and profitability metrics will be on a non-GAAP basis unless otherwise noted. Gross margin in the quarter was 12.6%. As anticipated, gross margin declined seasonally by about 20 basis points from Q4 primarily due to annual merit increases which take effect in the first quarter. Operating expenses in the quarter were $14.9 million or 2.2% of revenue, an improvement of 10 basis points from the fourth quarter. We anticipate that operating expenses will continue to decline as a percentage of revenue as our business scales. Operating income was $71.7 million representing an operating margin of 10.5%, consistent with the fourth quarter. Our strong balance sheet again benefited our interest income, which was $5.9 million in the quarter. Our gain from foreign currency asset and liability evaluations at the end of the quarter was relatively small at $0.4 million. Effective GAAP tax rate was 7.2% in the first quarter, which is above the mid-single-digit level we continue to expect for the fiscal year as a whole. Non-GAAP net income was a new quarterly record of $72.8 million or $2 per diluted share. On a GAAP basis, net income was $1.78 per diluted share. Turning to the balance sheet and cash flow statement, at the end of the first quarter cash and short-term investments were $670.8 million, up $120.3 million from the end of the fourth quarter. This increase was driven primarily by strong operating cash flow of $145 million with CapEx of $11.4 million, free cash flow was a quarterly record at $133.6 million. Our share repurchase program was not active in the first quarter. As a result, $100 million remained in our share repurchase authorization at the end of the quarter. Now I will turn to our guidance for the second quarter. As I mentioned, we expect inventory adjustments at our customers primarily in the telecom space to continue into the second quarter. We expect sequential revenue growth from high-data rate data from AI programs to once again more than offset these telecom headwinds. We anticipate automotive revenue to decline sequentially, and expect industrial laser revenue to be relatively flat. In total, we expect revenue to be between $680 million and $700 million. From a profitability perspective, we anticipate non-GAAP net income to be in the range of $1.98 to $2.05 per diluted share. In summary, we are happy to have exceeded our first quarter guidance by producing record revenue, net income, and free cash flow. We continue to balance consistent growth with improving profitability. We are optimistic that we can continue to execute well to deliver strong results as we look ahead. Operator, we are now ready to open the call for questions.

Thank you. Our first question is from Alex Henderson with Needham. Your line is open, please go ahead.

Great, thank you very much. I've got a quick question for you on the news that came out of Jabil about the Jabil purchase of the Silicon Photonics business over at Intel. I know Intel's Silicon Photonics has been historically a customer of yours. And I was wondering how you think that will impact you over time, particularly given the difficulty of moving an existing line?

Hi, Alex. Yes, it looks like Intel wanted to exit that market for their own strategic reasons. Intel has not been a 10% customer of ours. We have been one of two sources on the programs that we're involved with. We remain focused on being a manufacturer serving several customers in the market rather than selling our own products. So for us, we understand Intel has sold the business in its entirety to Jabil, including the development of new products, supply of the products, etc. And that's just not a business that we're involved in. The immediate impact, it's too early to say; the news only became official literally a few days ago, so we have to sit down with our customer and work out the transfer plan. And we're confident that in these situations we provide a high level of service to our customers and, in general, we've become good at managing these types of transitions, and usually find a way to come out on top.

Great. And then do you think that this represents an increase in Jabil trying to get into the optical market or what's your assessment of the competitive implications of it?

It's a different business than what we're involved in. We manufacture products for other companies and have no interest in creating our own products. Therefore, it seems that Jabil's approach is more focused on original design manufacturing, which is not something we pursue. I view it as a distinct market compared to ours, but we wish Jabil the best.

I hope the background noise isn't too distracting; I just got out of a cab. I wanted to ask one more question before I hand it over. Can you discuss any potential pipeline activity or your thoughts on how to enter the Ethernet side of the 800-gig AI opportunity? Thank you.

Well, we just really follow our customers' leads, Alex. Whichever protocol the customers deem to be the one that they want us to work on, we're happy. For us, we don't really mind whether the products are Ethernet or any other protocol, we don't really mind. So, we work with our customers, and we're working with, I would say, a number of customers in the space to make sure we continue to provide the products that they need in the volumes that they need. But we really don't mind whether it's Ethernet or InfiniBand or anything else.

Well, yes, but your current 800-gig customer is almost exclusively InfiniBand and NVLink. And obviously, over time, the world will shift towards Ethernet. So, the question is do you have a hook into that string?

We do indeed. We're working with, I would say, a number of opportunities that we're working on that will be both, again, InfiniBand, but also Ethernet-based products.

Great, thank you.

Thanks, Alex. Be careful crossing the road.

Thank you. And our next question will come from Samik Chatterjee with JPMorgan. Your line is open, please go ahead.

Yes, thank you. Thanks for taking my questions. I guess to start off, maybe I can follow-up on Alex's question here. Seamus, as you move towards working with customers on the Ethernet side, what are you finding relative to the competitive landscape? Just from the outside in, from our perspective, it looks like more companies are, in their manufacturing supply chain, in relation to Ethernet, but can you share your thoughts about what you're seeing from a competitive aspect, and what's the differentiation that you bring there into that ecosystem? And I have a follow-up. Thank you.

Yes, I think, Samik, for newer products, whether it's 800-gig or higher speeds, we feel pretty confident that we're well-positioned to support the customer's need. I think for older-generation products, the competitive landscape, it's much more competitive. But for new-generation products, for these kind of specific short-reach low-power low-latency applications, there's really a handful of companies who are able to design these products. And we're well-positioned, we think, to support them. So again, whether it's InfiniBand or Ethernet, we just follow our customer's lead; whatever they need from us, we're happy to help them with. And again, our focus is always on producing the current generation products, but also winning the next-generation products. So, we're very focused on that with our customers in this space.

Okay, got it. If I can just ask as a follow-up on the guidance, going from 4Q to 1Q, you had a sequential increase of about $13 million or so in the revenue, with the increase in datacom easily offsetting the telecom decline. As you look forward, you're carrying forward the same theme, where datacom does offset telecom, but the magnitude of it seems to be much lower just given the $5 million sequential increase at the midpoint that you're guiding to. So maybe if you can help us with the puts and takes there, is telecom declining more than what we've seen from 4Q to 1Q or is that the datacom ramp moderating just given that you are maybe reaching more capacity with a customer that you're engaged with? Thank you.

In the first quarter, our telecom segment declined less than we initially expected, dropping around 6%. Heading into the quarter, we thought the decline might be more significant. The decrease was mainly due to stronger-than-expected demand for certain telecom programs, particularly DCI, which is associated with datacenter growth. Looking ahead to the second quarter, we anticipate that our telecom business will decline further. While we don't provide guidance beyond one quarter, we generally expect telecom to decline while datacom increases by a greater amount. Based on insights from our customers, we believe the telecom decline will likely continue until the middle of the calendar year, aligning with the end of our fiscal year. We expect further declines this quarter and the next, with a potential bottoming out in the June quarter. Additionally, while datacom growth has been robust, we anticipate that rate of growth will eventually slow down.

Okay, thank you. Thanks for taking my questions.

No problem. Thank you, Samik.

Thank you. Our next question is from Mike Genovese with Rosenblatt Securities. Your line is open, please go ahead.

Great, thanks. Hi, Seamus.

Hi, Mike.

Hi. Can you give us any commentary at all on performance breakout between 400G and 800Gb datacom or new programs versus existing older programs? Is there any color we could get there?

Well, in general, we break out 400 gig and above, which, of course, at this point is a pretty large category. And at some point, we may want to revise how we do that. But for now, it's really everything in that 400 gig and above category. So, 400 gig inside the data center, 400 ZR, DCI, 800-gig, AI, everything really in that 400 gig and above category, but the growth has been coming from primarily the higher speed, newer programs, older programs, and let's call it traditional datacom products have not been as strong especially at the lower speeds, 100-gig, and the like. The growth for us, certainly, we don't speak for the whole industry, but for us the growth that we've seen has been primarily on the higher speed, newer programs, mainly focused around these newer AI applications, 800 gig being the biggest driver for us there.

Perfect. Maybe I'd follow-up on that question, because I thought that the color you gave about telecom and DCI driving less, a decline in telecom, but less than expected, I mean, that was a great color. So, maybe comparing how telecom came in to how the older datacom programs, I mean, was there any surprise on the upside there, or did it behave, or downside, or did it behave as expected?

I believe the traditional datacom performed as anticipated. The newer datacom has shown significant strength, which was expected at this stage. However, the robustness in DCI was somewhat surprising. We anticipated a decline in telecom; based on the guidance from our customers at the start of the quarter, we projected a drop of about 12% to 15%. Instead, we only saw a decrease of around 6%, which was much less than anticipated, mainly due to the influence of DCI. Although it falls under the telecom category, it's largely driven by the ongoing datacenter expansion.

Got it. Okay, great. And then, finally for me, just could you, maybe Csaba or both of you, talk about just the decision to not buy back stock in the quarter and kind of going forward? What you're thinking about with buybacks?

Hi Mike, this is Csaba. Last quarter, as I mentioned in our prepared remarks, we didn't buy anything back. We have, obviously, an OMR opportunity in the open window. In addition, we have a 10b5 plan in place. The 10b5 plan is rule-based and subject to certain prices. Obviously, it didn't trigger last quarter. But, obviously, we are still committed to returning surplus cash to our shareholders. So, we are revisiting the 10b5 plan from time to time. And subject to the new pricing and the market conditions, we will make amendments. And we continue to be committed to return the surplus cash we generate to shareholders.

Excellent. Great. Well, thanks for letting me ask the questions. I appreciate it.

You're very welcome, Mike. Thank you.

Thank you. One moment for our next question. Our next question is from Tim Savageaux with Northland Capital Markets. Your line is open. Please go ahead.

Hey, good afternoon and congrats on the results. A couple of questions, you previously described the AI connectivity opportunity, I think, at 800-gig or maybe just in general as in very early stages and a very large opportunity. Actually, maybe missing a few varies there.

Yes, I think at 1.5 I maybe said very twice and got pulled off; very, very early stages.

Well, I guess as we've moved forward a few months here into the end of the year, would you add or subtract any varies at this point? Or can you give us your current assessment of where Fabrinet is in terms of the ramp and how that opportunity is looking relative to what you were seeing previously?

I believe we remain very optimistic about the market in general. The opportunity for optical interconnect in artificial intelligence applications is significant, and our position is solid. We are developing products for a leader in the industry who has their own design and product. While they have other options, we believe they are currently committed to sourcing from us. We are ramping up both our ongoing programs and exploring additional business opportunities. Our main focus is on executing the business we have already secured while ensuring we win new generation programs. We are diligently working on both aspects and have executed very well so far. Our strategy is to continually delight our customers and ensure we perform excellently with new products. We see ample opportunity ahead and believe this is a great chance for us.

Great. I appreciate that and just a follow-up I know it is VR I think you've gotten within shouting distance of 10% of revenue for you guys before the latest inventory correction and I think it's a great opportunity for us given that you've called it out it's kind of the source of unexpected growth in the quarter maybe you can give us an update on kind of where that stands in terms of materiality of the overall business or the telecom or however you want to talk about it and I just got one more quick follow-up after that?

Yes, I believe that 400 ZR is very strong for us. We haven't categorized it separately yet, but its performance is quite robust and continues to grow. The growth may not be linear, so we might experience some fluctuations with 400 ZR, but we are pleased to be involved in it. It has significantly contributed to offsetting what we initially expected for last quarter, which was a decline of around 12% to 15%. The difference between that expectation and our actual results was primarily driven by 400 ZR for DCI applications. We still view it as an early stage opportunity, with many customers and programs in progress. While they're not all at the same level of development—some are further along and some are just getting qualified—we believe that 400 ZR still has substantial potential for us.

Well, and this wasn't going to be my question but now that you mention it well should we look at this sort of ZR thing is it kind of a blip that's coming in and coming back down here you're seeing weakness elsewhere across telecom as you look forward into your December quarter guide and continued growth in ZR?

Yes, we are still observing ongoing weakness in the telecom sector overall. Without the 400 ZR, the decline would be even more significant, particularly in the traditional telecom products. We anticipate continued softness through the December quarter and extending into the middle of next year, after which we expect it to stabilize.

Got it. And last question for me is given the growth that you've seen and the kind of metrics you've discussed in the past, where do we stand in terms of major additional capacity additions in this facility?

Yes, facility problem it seems in a funny in a way it seems crazy that we're even that we're even talking about it, but it is something we have to keep a close eye on as we ramp up. It seems like at the blink of an eye ago that we opened Building 8 in Chonburi, it's now completely full and Building 9 is off to a flying start, so we'll be keeping a close eye on that. I think in all probability you could say well, if we pull the trigger too early what are the implications of that, they're very, very small implications really. So, typically what we said in the past is once we get to 70% utilization in our last building, we'll build another building; whether we do that this time around or whether we pull the trigger a little bit earlier remains to be seen but I think we're, I would say stay tuned over the next couple of quarters, it's not going to take us 5 years or anything like that to get to capacity in Building 9; we're off to a great start there, I was there last week and the facilitation that's going on in Building 9 and the expansion is just amazing and it's really encouraging to see and whether it was good luck or good planning on our part I think our timing on building nine months as it turns out exactly right; a little bit of luck I think never hurt anyone. So, we'll be keeping a close eye on that Tim and once we do make that decision we'll communicate it on this call and in due course but again the cost would be subject to Csaba correcting me, I would say if I put a range on $50 million to $60 million for another one million square feet and about a one year to 18 months time horizon. But yes, it's something we'd be keeping a close eye on Tim. Great, thanks very much. Thank you, Tim.

Thank you and one moment for our next question. And we have a follow-up question from the line of Samik Chatterjee with JPM. Your line is open. Please go ahead.

Hi, thanks for taking the follow-ups. I'll be quick I promise. Just Csaba, any color on I know you mentioned the gross margin moderated sequentially because of the merit increases. But as you embed that now into the cost structure, puts and takes on how to think about gross margin going forward and then Seamus either for you or Csaba, like the automotive revenue declining and you said it will decline modestly is that more of a temporary production led headwind or is this a fall-off of the legacy programs while growth is sort of continuing on the new programs? Thank you, any clarification on those two items?

Maybe I'll take the automotive question first and then I will let Csaba discuss the gross margin. Yes, we saw some I would call it inventory digestion going on in automotive this past quarter; we think it's primarily temporary, and there may be another quarter or so of inventory digestion but nothing to get too concerned about. We remain optimistic about our EV charging business overall, but like any business that's ramping, it's a little bit of inventory digestion going on. If you look at our overall revenue, we've always said we're around kind of the $90 million mark since we overcame the component charges a couple of quarters ago. So, it's been pretty stable, actually. If you look at the last few quarters in our Q3, we had $94 million of automotive revenue, Q4 was $93 million, and then Q1 was $88 million. So, not a huge amount of variation, kind of normal variability as our customers go through inventory digestion I would say. But overall we remain optimistic about that business.

Regarding gross margin, Samik, obviously as you know there are lots of puts and takes in the gross margin and this last fiscal quarter we had a mild headwind as usual from merit increases and gross margin came in as we had anticipated at 12.6%. And obviously, we are working hard to make sure that we continue to execute well efficiently, provide cost reductions for our customers and also make sure that we manage the mix of business to deliver industrially the margins. I think we have done a good job there in the last couple of years. Obviously, there are a couple of factors to be mindful of that may resolve some seasonalities like the merit increases in the first quarter. It's also subject to foreign exchanges which have been tailed in the past and then we managed to overcome the temporary headwinds there as well. So, there are lots of puts and takes but we are optimistic that we can maintain this middle 12.5 round about gross margin and above, working hard to make sure that we continue to deliver on the operating margins as we scale the business and accomplish our roadmap for growth.

Thank you. Thanks for taking the questions.

Thanks, Samik.

Thank you. And one moment for our next question. And our next question comes from the line of Dave Kang with B. Riley. Your line is open. Please go ahead.

Hi, yes, thank you. First question is regarding your 400 gig plus revenue of $322 million, what is the rough split between datacom versus telecom?

We typically don't break out and provide that breakdown, but obviously as you appreciate what we have communicated in the past, datacom growth in that space has been obviously far more than the telecom growth. So, you would think datacom is going to be much stronger in that area, but we haven't provided a breakdown on that.

Right, and then on the telecom portion of that 400 gig plus, I mean is this growing or is it going to inventory question, any color on that segment?

I think we touched on that as well, that the traditional telecom business that's not DCI as we typically would include that in the Telecom segment has been going through inventory digestion and has been there for a while and we continue to see a headwind there. But our DCI and 400G particularly have been very strong over the last couple of quarters and we continue to be optimistic on that space. So, I think again, the puts and takes there is traditional telecom still experiencing headwinds and the datacom, which is again driven by data centers DCI is going strong for us.

Got it. And just quickly on the number of 10% customers you had or near 10% customers and new 10% or near 10% customers?

We are disclosing our 10% customers in our 10-K at the end of the year. So, obviously, we have disclosed that in August. At that time, we obviously had the 10% customers, but we are not disclosing this during the quarter. So, you will have to wait for another couple of quarters to see if any change is there.

Got it. Thank you.

Thank you, Dave.

Thank you. And I'm showing no further questions and I would like to hand the conference back over to Seamus Grady for any closing remarks.

Thank you. Thank you for joining our call today. We're very pleased with our first quarter performance, including record revenue, net income, and free cash flow. We're optimistic about the longer-term drivers of our business and our ability to continue to execute well to produce strong results. We look forward to speaking with you again and seeing those of you participating in the Needham Virtual Conference next week. Thank you and goodbye.

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