Fabrinet (FN) Q1 2026 Earnings Call Transcript

Good afternoon. Welcome to Fabernet's Financial Results Conference call for the first quarter of fiscal year 2026. 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 Tumajinian, VP of Investor Relations.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabronet's financial and operating results for the first quarter of fiscal year 2026, which ended September 26, 2025. With me on the call today are Seamus Grady, Chairman and Chief Executive Officer, and Chavez Farah, 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. During this call, we will present both gap and non-gap financial measures. Please refer to the investor section of our website for important information, including our earnings press release and investor presentation, which include our gap-to-non-gap 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 19, 2025. We will begin the call with remarks from Seamus and Chaba, followed by time for questions. I would now like to turn the call over to Fabernet's Chairman and CEO, Seamus Grady. Seamus.

Thank you, Garo. Good afternoon, everyone, and thanks for joining our call today. We had an exceptional start to fiscal 2026 with record revenue and earnings that exceeded our guidance ranges and demonstrated our continued business momentum first quarter revenue was nine hundred and seventy eight million dollars an impressive increase of 22% from a year ago and an increase of 8% from Q4 non gap earnings were also outstanding at two dollars and ninety two cents per share with our revenue upside flowing directly to the bottom line in addition to these terrific first quarter results we're very optimistic that this strong momentum will extend into the second quarter with numerous revenue drivers contributing to our growth now let's look at the quarter in more detail starting with optical communications telecom revenue hit a new record increasing 59% from a year ago and 15% from Q4, driven primarily by data center interconnect products. Within telecom, DCI revenue nearly doubled from a year ago to 14% of company revenue. Datacom revenue declined sequentially as predicted, but by a smaller amount than we anticipated. This was the result of a smaller sequential decline than expected at our biggest datacom customer, as well as larger contributions from other datacom customers where we are gaining traction while we believe certain component constraints will persist into the second quarter we remain optimistic about overall demand trends in datacom within non-optical communications we are excited to introduce a new revenue category for high performance computing products in Q1 we qualified and started to ramp our first HPC program which contributed 15 million dollars to revenue. We believe this program will scale considerably over the coming quarters and become a significant driver to our overall growth. Automotive revenue was down slightly from Q4 as anticipated and industrial laser revenue was flat. With numerous growth drivers supporting our confidence, construction of Building 10, which will total 2 million square feet, remains on track for completion by the end of calendar 2026. We have accelerated the construction of a portion of Building 10, which we expect to be completed in mid-2026, in order to help ensure that we will have ample capacity to support our rapid growth. As we look to the second quarter, we are very optimistic that we can deliver another outstanding quarter with continued growth in telecom, driven by DCI expansion, strong datacom demand, and the rapid scaling of our HPC program. In summary, we are off to an excellent start in fiscal year 2026, with record first quarter results that exceeded our guidance ranges. With multiple growth drivers across our business producing increased business momentum, we are well positioned to deliver an outstanding second quarter. Now I'd like to turn the call over to Chaba for more financial details on our first quarter results and our outlook for the second quarter. Chaba.

Thank you, Seamus, and good afternoon, everyone. Fiscal year 2026 is off to an excellent start, with revenue and EPS that were above our guidance ranges. Revenue in the first quarter was a new record, $978 million, representing impressive growth of 22% from a year ago and 8% from Q4. Non-GAAP EPS was also a record $2.92, including the impact of a $2 million for $0.06 per share FX evaluation loss. Looking at revenue performance by market for the first quarter, optical communications revenue was $747 million, up 19% from a year ago and 8% from Q4. Within optical communications, telecom revenue grew to a record $412 million. dollars surging 59 percent from a year ago and 15 from q4 this impressive growth was driven primarily by continuous strong demand trends for data center interconnect products in the first quarter dci revenue was 138 million dollars representing remarkable growth of 92 percent from a year ago and 29 from q4 data com revenue declined by a smaller amount than expected totaling $273 million, down 17% from a year ago and 1% from Q4. While we continue to experience longer lead times for one critical component in particular, overall demand trends within Datacom remain strong. Non-optical communications revenue was $231 million, up 30% from a year ago and 5% from Q4. This increase was driven primarily by high-performance computing revenue of $15 million. We expect this new revenue category to drive even greater growth in Q2. Automotive revenue of $122 million was up 19% from a year ago, but down 5% from Q4. Industrial laser revenue of $40 million was up 12% from a year ago and flat sequentially. As I discussed the details of our P&L, all expense and profitability metrics will be presented on a non-gap basis unless otherwise noted. First quarter gross margin of 12.3% was down 30 basis points from Q4, but was in line with expectations as we absorbed FX headwinds in addition to the seasonal impact of annual merit increases. The small sequential decrease in gross margin was partially offset by our continued operating leverage. Operating expenses were $16 million for 1.7% of revenue, resulting in an operating margin of 10.6%, a 10 basis point decline from the fourth quarter. Interest income was $9 million in Q1 and was partially offset by a $2 million foreign exchange evaluation loss. Effective GAAP tax rate was 5.4%, consistent with expectations. Non-GAAP net income was $105 million, or $2.92 per diluted share. Turning to our balance sheet, we ended the first quarter with cash and short-term investments of $969 million, up $35 million from the end of Q4. operating cash flow in the quarter was 103 million dollars capital expenditures of 45 million dollars remained above maintenance capex levels as construction of building 10 progresses including the acceleration of a portion of the facility in the first quarter our share repurchase program was not as active as in recent quarters we repurchased 970 shares at an average price of $276 per share for a total cash outlay of $268,000. As of the end of the first quarter, $174 million remained available for e-purchases. Now, turning to our Q2 guidance. We expect our strong business momentum to extend in the second quarter, with multiple growth drivers across our business. We expect revenue to be up sequentially in all of major markets we serve, except automotive, which we expect to be flat, so slightly down. Most notably, we anticipate particularly strong growth in HPC, as that program continues to ramp quickly. As a result, we anticipate second quarter revenue to be in the range of $1.05 to $1.1 billion, representing remarkable growth of 29% from a year ago at the midpoint. From a profitability standpoint, we expect to maintain operating leverage, with revenue growth outpacing operating expenses this quarter. However, some of these gains may be partially offset by foreign exchange headwinds. Therefore, we anticipate earnings per diluted share to be between $3.15 and $3.30. In summary, we are extremely excited about our robust start to the fiscal year. We are optimistic that we can continue to build on this momentum in the second quarter as we benefit from multiple growth drivers across our business. Operator, we are now ready to open the call for questions.

Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. In fairness to all, we ask that you please limit yourself to one question and one follow-up before recueing from our additional questions. Please stand by while we compile our Q&A roster. Our first question will come from the line of Carl Ackerman with P&B Perry Bosch. Your line is open. Please go ahead.

Yes, thank you. Congrats on the quarter, gentlemen. For my first question, what is embedded in your December quarter outlook for Datacom? And as you address that, what are your assumptions on having access to necessary 200 gig per lane email laser capacity to support that growth?

Thank you, Carl. So we're not really going to comment on individual components for individual customers at this stage. I think what we would say is, you know, we're in the very early stages, really, of a generational transition to photonics that we've seen going on for some time. Fabernet is really ideally positioned to continue to capitalize on this transition. You know, we manage a lot of complexity for our customers. And, you know, as we as we've seen growth doesn't always happen in a straight line but you know for any company i think the best predictor of future performance is past performance and if you look at our over any any time horizon you care to look at our 10-year history the the revenue uh we had compounded annual revenue growth of 16 percent we compounded the earnings 21 percent over that same 10-year horizon last year revenue grew 19 percent last quarter our revenue grew 22 percent and as chava said at the midpoint of our guidance for this quarter we're projecting to grow 29 percent so you know really carl our our objective is to make sure we have enough if you like irons in the fire and enough customer opportunities in front of us that we can continue to deliver that kind of outsized growth you know we're quite excited about the this this period that we find ourselves in the middle of we think we're ideally positioned and we're just going to you know we're going to continue to keep pushing ahead you know winning those opportunities and executing on them so that we continue to grow in the in the future the way we have the way we've done so in the past Yep.

Yep. Thank you for that, Seamus. If I may address, if I may ask one more, you refer to your HPC program as your first HPC program in your prepared remarks. When you note this business will scale considerably, does that take into account any other customer engagements or discussions for other HPC programs with new or existing customers? Thank you.

Yeah, I think, you know, HPC for us, we decided to break it out as a separate category for a couple of reasons, really. One is a practical one. It doesn't fit neatly into any of the other categories that we have. So it's not telecom. It's not data com. It's data center, but it's not communication. So we decided to call it, you know, to break it out into its own category. And of course, the other reason we decided to do it was we're, you know, we're quite optimistic about this segment or category as an an area for us to really expand and continue to grow um you know it's early days but our initial foray into this category is going going very well it takes a little bit of time to get off the ground these are again these are complex products there's a qualification process that has to be gone through um you know we're working with our customer you know making sure we have a very efficient highly automated process in place and that's going very well uh the the customer is very happy the business is growing nicely and we really just got the business kicked off last quarter we got the qualification bills done and really just started to ship to ship products towards the tail end of the quarter and we'll continue to see that category grow for us nicely over the next while there are certainly other opportunities that we're pursuing there in that area in that area but it's early days yet but yeah we would be optimistic that you know at some point in the future we will have more than more than one customer in that category we will we will have multiple growth vectors like we have in all of the the markets we serve so yeah we think it's yeah we it's the first customer but we we hope not the only one those others we're working on thank you thank you one moment for our next question our next question will come from the

line of samik chatterjee with jp morgan your line is open please go ahead yeah i think they're they're

they're ramping differently I would say they're very different products you know if you look at the high-performance compute product it's an existing product that's already up and running with very high demand and you know we're one of a number of suppliers producing the product so we're just getting going with that the telecom the new telecom program that you mentioned you know that's a new product so you know now they both end up growing at a certain trajectory but you know the other one is a new a new product so the product has to grow in the market and then obviously we grow as that product grows that's that product grows in the market um the hpc product i think you know it gets off to a fairly slow a reasonably slow start because it's a it's quite a complex product and there's a lot to be bedded down in terms of automation etc but we're you know we're pretty confident that we should see some very strong growth in that in the in the short to medium term so they're both they're both strong growth drivers for us you know none of these products grow in a straight line and you know part of what we provide for our customers is that flexibility to manage a slow steady growth if it's a new product and maybe slightly more steep when we're maybe transferring from from uh another supplier or as we've seen in the past when you have completely outsized growth we can also cope with that so you know we take the good with the bad. None of these programs, like I say, none of them grow in a straight line. So we're, you know, we're just focused on making sure we execute in a very strong way for our customers, you know, excellent delivery, excellent quality, and at a very competitive cost. So that's our focus. Yeah, I would say it's possible, but not advisable for us to do that um um you know obviously we have a plan at the start of the quarter we have a plan right now we're at call it you know coming up on the midpoint of the quarter so we have you know we have a fair idea of how we think the quarter will shake out and we have some you know we still have some very strong growth drivers we have the hpc program that we talked about we have the new telecom uh product that we're ramping we have dci generally which is very strong for us uh you know datacom was also quite strong uh stronger than we had thought going into the quarter we did a little bit a little bit better than we thought we would do and then there's a you know there's a lot of other growth vectors that were growth drivers that were working very hard to secure and and to win so you know lots of opportunities and it's really a case of uh there's certainly no shortage of demand right now we're not in any way demand constrained it's a case of just executing and making sure we capture everything that's out there and deliver on it for our customers so yeah I think HPC will will be a significant growth driver but the others will as well the DCI the new programs in telecom and then other projects that we're working on a data come as well they will be the three three main areas thank you so much

thank you one moment for our next question our next question comes from the line of Mike Genovese with Rosenblatt Securities, Inc. Your line is open. Please go ahead.

Thanks. When you look at the telecom growth sequentially, about 15%, $60 million-ish, how many customers were really a significant driver of that sequential growth?

Well, there's a number of customers, Mike, behind that. I mean, if you look at what's in our telecom, it's traditional telecom and also DCI, if you had to kind of break it into two broad areas, both of which are growing nicely for us. So there's a good mix of customers. It didn't come from any one customer or any one product. It's a mix of, you know, DCI, traditional telecom, and also some of the new wins that we've been working on. So it's fairly broad-based and nicely spread between customers.

Great. And then on Datacom, you mentioned other customers, besides the main transceiver one, could you talk both about the kind of Datacom customers and products that are contributing to revenue now, and as well as any upcoming projects that you hope to win, if there's anything likely, what kind of customers and products should we be looking at?

So there's really a few that we've talked about in the past. I guess our biggest driver of datacom revenue is our, you know, our big customer there in the datacom space. You know, we continue to do very, very well with them. They're launching, you know, new products and we're supplying those for them. But we're also working on several other opportunities in that space. So one is Hyperscale Direct, where we would be supplying to hyperscalers with the product directly. that's not our design it would be the hyperscaler's design so we're working on that and the other one would be some of the merchant um transceiver manufacturers that we're also working on where in some cases you know you have to convince the customer to outsource and also to outsource to fabernet so it's a it's a double double sell but we're you know we're working on all of those nothing to announce yet at this stage these things take time i mean typically in our business you know, Mike, it can take from when you engage with a customer who has a real opportunity until you're shipping something, it's generally an 18-month kind of gestation period. So it does take time. It might look like these are quick wins and that everything is always up and to the right, but I can tell you there's an awful lot of work that goes on behind the scenes to win these opportunities. So several, I would say several irons in the fire on all of those fronts that I mentioned but nothing nothing specific to report at this stage and we generally won't report until you know on particular customers until we get to the end of the fiscal year and we we talk about our 10% customers outside of that we we try to we generally tend to steer here of giving too much specifics on the individual customer opportunities we're pursuing all right but just quickly on the on the revenue that you have now outside of that the biggest customer is Is that mostly the merchant type of stuff, or is it something else? It's mostly merchant outside of the biggest customer. Yeah, it would be mostly merchant, let's say, non-NVIDIA transceiver business and other datacom products that we're making. Thanks so much. Thanks, Mike.

Thank you.

And one moment for our next question. our next question comes from the line of george notter with wolf research your line is open please go ahead i think a lot um i was just curious on the uh the share repurchase i noticed you didn't buy uh many shares back for this quarter i'm curious if there was something to that is it um just capital going into the manufacturing expansion or or some other thing that's uh driving your decisions there and then separately i would just love to drill down into the manufacturing building 10 expansion a little bit more deeply from memory I think the expansion was several hundred thousand square feet can you just remind

us kind of what the update there is or is it is it as you envision three months ago or has there been any change to that thanks a lot hi I'll take the share purchase questions George so where our buyback last quarter was given by our 10b5 plan which is as you know an automated and depending on our price tiers that is set up initially and that that plan is going in place for one year so we haven't changed on that with regards to overall capital allocation strategy as as you have pointed out our main focus still remains in investing in our future growth that that obviously includes working capital as well as building 10 capacity additions so we did have an outsized capital spent in last quarter but that has nothing to do with the share repurchase activities again repurchase was done by the 10b5 plan and we we remain committed to return the surplus cash we generate to shareholders through a 10b5 on open market we were not active in the open market nevertheless we we still have 10b5 in place which we continue to this is a follow-on there um i'm sorry did i hear you say you intend to change that going forward is that is that right i think we're having trouble hearing guys can you hear me hello we can hear you can you hear me i think we have we're having trouble hearing yeah i can hear you yeah can you hear me now is that all right could you repeat your your answer each other i'm sorry i'm my line must have dropped so uh sorry about it so uh our sharing purchase was driven by a 10b5 plan uh last quarter we didn't participate in the open market open market uh last quarter so where the repurchases were triggered through the 10b5 plan Our capital allocation that remains around, our priority remains to invest in our future growth, so including working capital and capex investment. So our capex throughout the quarter was higher than our maintenance capex level driven by our building 10, which we are pulling in a portion of the building, which will be a 2 million square feet facility. and should add in approximately about $2.4 billion revenue, give or take, for the future. And we are, as communicated earlier, we are pulling a portion of that building in into our June quarter to have that space available.

Got it. So I assume that that incremental space that you're expecting is the same as you were looking to do three months ago. I guess that's my question.

That's correct.

Thank you.

Thank you. And one moment for our next question. Our next question is going to come from the line of Ryan Koontz with Needham & Company. Your line is open. Please go ahead.

I want to ask about DCI in particular. And, you know, obviously that's getting boosted here, shift from cloud to AI infrastructure, higher attach rates for ZR. And my question for you is from your discussions with customers, you know, there's this concept of the distributed cluster. to the power requirements and do you think that the distributed cluster due to power grids is already affecting your demand for zr or do you think that's still to come um i'm not sure ryan i think uh you know for us we we honestly don't spend too much time trying to figure out the reasons for the demand when when the demand is so strong we generally focus most of our energy and just trying to fulfill it.

But, you know, I think you may have a point as that need rolls out and continues to go, I think it should drive the need for more DCI, more 400 ZR and 800 ZR. But, you know, the exact reasons behind the strong growth we don't spend too much time thinking about. We're too busy just trying to make sure we have everything in place and lined up to meet the demand. And on the non-DCI telecom, I know you might have touched on it briefly, earlier but as you think about that growth uh it was up you know several 10 million sequentially is is that mostly share or do you have any new wins in the mix there for the non-dci telecom it's a little bit of both so we've been continuing to you know chip chip chip away at our competitors and continuing to win business um it's you know primarily i think ramping you know ramping existing or programs that we've won that are kind of becoming existing programs at this point but it's but it's mostly new newer programs that are ramping newer programs that we've won in recent

times that we're we're ramping thank you thank you and as a reminder if you would like to ask a question at this time please press star one one on your telephone one moment for our next question our next question comes from the line of tim savageo with northland capital markets your mine is open, please go ahead.

Hey, good afternoon, and congrats on the results. Thank you, Tom. And I think it was a couple quarters ago, Seamus, where you'd made a reference to, you talked about the 19% growth in fiscal 25, and made a reference to the potential for accelerating growth in 26, and didn't have you quite there, but pretty close. Now, you're guiding to 25% growth in the first half of the year, that certainly would represent acceleration. Is that, you know, in your mind? It looks like a reasonable baseline for the year, but I wonder if you have any thoughts on maintaining or even accelerating that growth rate.

Yeah, I think as you rightly point out, you know, yeah, we had last year we grew 19% last quarter, 22% this quarter at the midpoints. as chavis mentioned we're projected to grow 29 percent uh you know we're just going to focus on executing the demand is strong i wouldn't i wouldn't want to put a number on what the growth would be for the for the full year because we we don't guide for a full year we only guide one quarter at a time uh but yeah certainly we're we're quite optimistic about what's in front of us you know we're we're it's a it's an unusual time demand is very strong and it's it looks to be robust it looks to be sustainable and it's across multiple product categories and customers so uh you know our focus is on execution and hopefully delivering another quarter and hopefully another year of outsize outsize growth it's a it's an exciting time we're um we're very positive about the the trends we're seeing because you know as fast as we can build the products the customers need them. The demand is very strong across all the segments that we, all the sectors that we service. So we hope it continues on for a long time.

Great. And I'm going to take another crack at this kind of the composition of the sequential guide. I think you did in your prepared comments mention, you know, DCI, Datacom, and HPC. I don't know if there was any rhyme or reason to that ordering, but should that be, could that be interpreted as kind of the relative demand drivers, maybe on an absolute dollar basis, or is that just an alphabetical list?

Yeah, Datacom, DCI, HPC, it's just alphabetical, Tim. I'm joking. There's no particular order to that. I wouldn't read too much into that. It's just, you know, it's probably more likely that sequentially, as we think through the numbers, you know, we kind of tend to focus on telecom first, because that's where the, if you like, the origin of the company, then Datacom has become a much bigger part of our revenue, and then HPC is more recent. And so it's probably more to do with it's the sequence in which each of the categories has grown, frankly. But all three of those look to be very strong. You know, DCI is just it's been a fantastic set of products for us and customers. Of course, DataCom is great for everybody. And then HPC. So I wouldn't read too much into the ordering of those, Tim.

Fair enough. And last one for me. I know you commented on it, but I guess you mentioned some of the component shortages are still there. Can you say whether that's improving at all or looks to be? And is that part of your maybe fairly strong guidance for Datacom in December?

Yeah, I mean, I think these issues always have a way of resolving themselves or of getting resolved. You know, if, you know, there are times when you look out to the future and if you're kind of hosed in terms of component supply, but you have to make certain assumptions and take certain actions. And, you know, generally our customers and our own team working with the supply base generally do a very, very good job of making sure we get what we need in the end, even if in the beginning it doesn't look like we're going to get what we need. So I think it is improving, you know, the certain component categories that are just in, you know, extremely tight supply. But, you know, fortunately, we have some pretty, you know, blue chip type customers who tend to get their share and sometimes their unfair share of the available components. So it's not something we're overly concerned about, and we do think it will right itself as the component suppliers ramp up additional capacity. It does take time to add capacity, especially for these complex components. But so I think it will improve, Tim, but there's probably another quarter or two of tight supply. But in the end, I think we'll get what we need.

Thanks very much.

Thank you, Tim.

Thank you. And I would now like to turn the conference back over to Seamus Grady for closing remarks.

Thank you for joining our call today. We're excited by our first quarter performance with record results that exceeded our guidance ranges. We're also optimistic that we can deliver an even stronger second quarter with multiple growth drivers as we continue to expand our market leadership. We look forward to speaking with you in the future and to seeing those of you who will be attending the JPMorgan Tech Conference in Asia and the Needham Conference in November, as well as the Barclays and Northland Conferences in December. Goodbye.

This concludes today's conference call. Thank you for participating and you may now disconnect. Everyone, have a great day.