Conference Transcript - FN 2026-02-02

Operator

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the second 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 Tumajanian, VP of Investor Relations. Please go ahead.

Garo Toomajanian, Head of Investor Relations

Thank you, Operator, and good afternoon, everyone. Thank you for joining us on today's conference call to discuss Fabernet's financial and operating results for the second quarter of fiscal year 2026, which ended December 26, 2025. With me on the call today are Seamus Grady, Chairman and Chief Executive Officer, and Chabasvera, 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 GAAP and non-GAAP 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 10Q filed on November 4, 2025. We will begin the call with remarks from Seamus and Chava, followed by time for questions. i would now like to turn the call over to fabrinets chairman and ceo jim is ready jim is

Seamus Grady, CEO

thank you gero good afternoon everyone and thanks for joining our call today we had an excellent second quarter revenue and earnings significantly exceeded our guidance ranges with multiple large key strategic programs across our business all contributing to our strong performance second quarter revenue was 1.13 billion dollars a new record for the company which represented growth of 36 percent from a year ago and is the fastest year-over-year growth we've achieved since our ipo over 15 years ago our remarkable top line performance also represents 16 growth from the prior quarter non-gap eps also set a new record at three dollars and 36 cents per share exceeding our guidance range despite stronger fx headwinds in the quarter looking at our performance in greater detail optical communications revenue grew 29 percent from a year ago and 11 from the prior quarter telecom revenue reached a new record increasing 59 from last year and 17 from q1 within telecom dci revenue grew 42 from a year ago and three percent from q1 as strong longer-term growth trends remain firmly intact datacom revenue grew two percent sequentially while the year-over-year decline narrowed to seven percent as demand continues to strengthen in non-optical communications we delivered a very strong performance with revenue surging 61 percent from a year ago and up 30 percent from last quarter as high performance computing revenue soared to 86 million dollars in the quarter we expect this strong sequential growth to continue in the near term particularly as our second and third fully automated production lines get qualified automotive revenue grew 12 percent from a year ago but was down slightly from q1 as anticipated while industrial laser revenue demonstrated respectable growth of 10% from a year ago and 4% from last quarter. We are confident that the same growth drivers that contributed to our success in Q2 will extend into Q3. This includes growth in all major areas of our business, with the possible exception of automotive. We are experiencing sustained telecom demand, including strong DCI module growth, ongoing datacom momentum, and continued growth in HPC as our business ramps. In addition, we continue to aggressively pursue new opportunities across all areas of our business. As our business scales, we remain focused on execution as well as strategic capacity expansion. Construction of Building 10, which will be a 2 million square foot facility, is still on track for completion at the end of calendar 2026. We are making progress on completing about 250,000 square feet of that by the middle of the calendar year. At the same time, we are creating additional manufacturing space at our Pinehurst campus by converting office space into manufacturing space and relocating those offices into a new building on that campus. With this capacity expansion, we are well prepared to continue supporting our anticipated growth in 2026 and beyond. In summary, we delivered an impressive second quarter performance with numerous significant customer programs contributing to our outstanding results. We are well positioned to extend our track record of profitable growth and to meet the increasing level of demand we are experiencing in the third quarter and beyond. I'll now turn the call over to Chaba for more financial details on our second quarter results and our outlook for the third quarter.

Csaba Sverha, CFO

Thank you, Seymour, and good afternoon, everyone. We are extremely pleased with our performance in the second quarter of fiscal year 2026. Revenue exceeded our guidance range, reaching a record $1.13 billion, up 36% from a year ago and 16% from Q1. Strong execution produced non-GAAP EPS that also exceeded our guidance range at $3.36, which includes the negative impact of a $3 million or $0.09 per share FX revaluation loss. Turning to revenue performance by market in the second quarter, optical communications revenue was $833 million, up a strong 29% from a year ago and 11% from Q1. Within optical communications, telecom revenue grew to a record $554 million, surging 59% from a year ago and 17% from Q1. Within telecom, revenue from data center interconnect or DCI modules was $142 million. DCI module revenue delivered another strong year-over-year performance, increasing 42% and grew 3% from the first quarter. Datacom revenue was $278 million. While revenue declined 7% year-over-year, it increased 2% sequentially, and trends appear favorable for continued sequential growth. Turning to non-optical communications, revenue in this category was $300 million, up a sharp 61% from a year ago and 30% from Q1. This exceptional growth was primarily driven by high-performance computing products, which contributed $86 million to revenue in the quarter, compared with $15 million in Q1, the first quarter in which we broke out this category. We are confident that our first HPC program will continue to grow rapidly and is on track to be fully ramped over the next two quarters. Automotive revenue of $117 million was up 12% from a year ago, but was slightly down sequentially as anticipated. Industrial laser revenue grew 10% year over year and increased 4% sequentially, contributing $41 million to the non-optical communications category. As I discuss the details of our P&L, all expense and profitability metrics will be presented on a non-gap basis, unless otherwise noted. Gross margin in the second quarter was 12.4%, a 10 basis point improvement from Q1, and consistent with a year ago, despite foreign exchange headwinds. At the same time, a modest increase in operating expenses combined with strong top-line growth continued to drive operating leverage. Operating margin reached 10.9% in second quarter, up 30 basis points from both Q1 and a year ago. Interest income was $9 million and was partially offset by a $3 million foreign exchange evaluation loss. The effective gap tax rate for the quarter was 5.9%. As a result, net income was $122 million, or $3.36 per diluted share. Turning to our balance sheet, we ended the second quarter with cash and short-term investments of $961 million, down $7 million from the end of Q1. Operating cash flow for the quarter was $46 million. Capital expenditures of $52 million continued to run above maintenance capex level. reflecting construction of Building 10 and capacity enhancements at our Pinehurst campus. As a result, free cash flow was an outflow of $5 million for the quarter. Turning to our share repurchase program. During the second quarter, we repurchased just over 12,000 shares at an average price of $387 per share, for a total cash outlay of $5 million. dollars at the end of the second quarter 169 million dollars remained available under the program turning to our q3 guidance we are confident that the very strong growth trends we have been seeing across our business will continue in the third quarter we expect revenue to grow sequentially in telecom datacom and hpc while anticipating another model sequential decline in automotive revenue we expect total revenue to be in the range of 1.15 and 1.2 billion dollars representing approximately 35 percent year-over-year growth at the midpoint while we anticipate that fx headwind will persist in q3 we expect to offset of that pressure through continuous strong operating leverage as a result we expect non-gap eps to be in the range of three dollars and 45 cents to three dollars and sixty cents representing approximately 40 percent year-over-year growth at the midpoint in summary we delivered an excellent second quarter with strong momentum across multiple areas of our business we are well positioned to extend our track record of success into the third quarter operator we are now ready to open the call for questions and thank you so

Operator

much and as a reminder to ask a question simply press star 1 1 to get in the queue and wait for your name to be announced to withdraw yourself press star 1 1 again one moment for our first question it comes from Samik Chatterjee with JP Morgan please go ahead hi thanks for taking my

Samik Chatterjee, Analyst — JP Morgan

questions and maybe shame is starting with you you had a pretty strong ramp with the HPC customer but maybe if you can sort of share your thoughts in terms of where you are with the ramp with that customer but really I think you talked about a second and third production line I mean what does the fully ramped volume look like relative to the 80 million plus sort of level you did this quarter are you sort of halfway relative to the full ramp or are you sort of only one third in because you are adding two more production lines if you can just share your thoughts in terms of what the full ramp looks like and when to expect that full ramp kind of a follow-up thank you

Seamus Grady, CEO

I think thank you yes we're you know we're a little bit about halfway I would say a little bit more than halfway we expect the revenue from our current HPC program to be north of about 150 million when when it's fully rent we're currently running on two fully automated production lines we had one line we got a second production line qualified and we're in the process of qualifying additional lines. Once, you know, once we're able to achieve that and get the lines around, we'll be well on our way to that run rate, again, which we expect to achieve over the next couple of quarters. After that, we believe there's a couple of growth paths for us in HPC, given our one-stop shop kind of value proposition and competitive cost structure. We're pursuing other HPC customers of course as a relationship but with AWS is not exclusive but the timelines for these is you know can be fairly long meanwhile if we can exceed our main our initial customer if we can exceed their expectations for cost quality and deliveries we may be able to earn a larger piece of our current program because we're currently a second source on that program so you know no matter how you look at it we're very excited to see our our high performance computing business, rapidly becoming a pretty meaningful revenue and growth driver.

Samik Chatterjee, Analyst — JP Morgan

Correct. And then maybe I wanted to ask you on a couple of opportunities as well. I mean, one of your big customers is now closer to commercializing CPO in more large volume. So any more clarity that you have on that front as to what your role in co-packaged optics is going to be and what maybe the content opportunity on that front is going to be? And there's a lot of excitement in the optical space around OCS products as well, optical circuit switches. Do you see that as an incremental opportunity, any customer engagement on that front as well? Thank you. Thanks for taking my questions. No problem. Yeah. So we,

Seamus Grady, CEO

for us, you know, co-packaged optics, it's really an evolution from silicon photonics and the precision photonics packaging capabilities we've developed over many years. You know, we have and will continue to invest heavily and working closely with our customers to align our capabilities with their roadmaps for many uh for many years you know co-package optics has been just on the horizon but for now right now it's it's much more real than it's ever been and we're in an excellent position uh to to benefit from that we're we believe we're far ahead of most of our competitors in in the space in making this technology a reality and we're already seeing some cpo revenue although the amounts are relatively small right now we're working on on co-packed optics programs with three different customers it's not just one customer sonic it's actually three different customers and the specific timings on when the revenue would become more material depends on our customers road maps and schedules but we're very excited about about cpo uh again we don't really want to speak on our customers behalf but but rest assured we're quite excited and we have several several products that we're working on our projects with our customers um you know as we As with other customers, we'd expect to see the impact in line with or slightly ahead of our customers' production schedule. On optical circuit switching, we are engaged on a number of fronts. And again, it's a product, you know, completely new product category. We're quite excited about it and looking forward. You know, nothing to announce, but really will depend on our customers' ramp schedules. But we are working on a couple of projects in that space. and we are quite excited about OCS as a technology. We think it has a significant role to play in the future.

Samik Chatterjee, Analyst — JP Morgan

Great. Thank you. Thanks for taking my questions.

Seamus Grady, CEO

Thank you, Samit.

Operator

Thank you. Our next question is from Carl Ackerman with BNP Paribas. Please proceed.

Carl Ackerman, Analyst — BNP Paribas

Yes, good afternoon, gentlemen. Two questions for me, please. First off, do you remain supply constrained on data comm transceivers? because I would have thought that you might see maybe improving data com mix as laser capacity comes online. I guess as you address that question, could you just speak to the growth opportunities you see within that segment across hyperscale and across merchant transceiver OEMs? Any update on that would be helpful.

Seamus Grady, CEO

Thanks, Carl. So yeah, we have been, as you say, supply constrained in our data com, particularly on the the leading-edge products at 200 gig per lane both 800 gig and and 1.6 demand continues to strip supply and we continue to ship significant volumes to our main customer but of course we could ship more if we had more components we did get approval for a second source for the the ML for the laser which has been the main cause of the supply constraints so we were able to get a second source our customer was able to approve a second source for the laser during the quarter and that should benefit us you know this quarter and in future quarters um so we are making good progress there we've always felt that that supply constraint will resolve itself and we're starting to see that those that resolution come through now uh the mix between 800 gig and 1.6 you know at that 200 gig per lane know what it's it's really not that relevant to us we don't mind which the customer orders we're having to ship what they need from us so again good progress and we're making we're making good progress there um as regards other potential growth drivers in the datacom space again we had several projects that we're working on uh both with hyperscale direct and with other uh potential you know product companies who need our who need our services so several projects that we're working on again nothing to announce yet but several that we're that we're working on again both hyperscale direct and and other let's say merchant transceiver manufacturers got it very helpful perhaps if I could

Carl Ackerman, Analyst — BNP Paribas

talk about telecom development you know over the 80 million dollar sequential increase was that evenly split between SATCOM and the core telecom or off the wide system business just trying to get a relative mix of the sound SATCOM business there and then as you address that do you believe that your SATCOM business opportunity could be similar to your high-performance computing

Seamus Grady, CEO

opportunities over time thank you yeah I mean our as you call it the satellite communications business has been has been growing steadily for us it's been a meaningful contributor for a while we haven't really broken about separately you know a lot of the growth in the quarter was more focused on the DCI, I think. You know, DCI has been very strong for us. We have a number of customers there and really, you know, mostly 400 CR and 800 CR modules. That business has been growing very nicely for us. So, you know, again, we're very optimistic, I would say, about telecom generally, both from a satellite communications point of view and the DCI point of view. And also, you know, complete network systems. Our network system business continue to grow as well. So really solid growth, I think, on all fronts in our telecom business. Thank you, Herr.

Operator

Thank you so much. Our next question comes from the line of Christopher Roland with Susquehanna. Please proceed.

Christopher Rolland, Analyst — Susquehanna

Hi, guys. Thanks so much for the question. I guess my first one is around CPO switches as opposed to scale-up. Are you hearing about increased desire for CPO switches? Is this perhaps upsiding your capacity plans and just generally your outlook for CPO switches versus the typical transceiver setup? How do you think this might move over time?

Seamus Grady, CEO

Yeah, I mean, we're involved in the CPO, let's say, supply chain. We're in the ecosystem there. We haven't actually talked about exactly what we are doing, but, you know, certainly CPO switches and a number of the products that our customers are working on, you know, are very exciting for us. We haven't really, like I say, we haven't really talked about the switch, the CPO switch opportunities in detail, but, yeah, certainly something we're excited about. But I really wouldn't want to go much, much deeper than that at this point, Christopher.

Christopher Rolland, Analyst — Susquehanna

Understood. Perhaps as a follow-up, DCI seemed a little bit disappointing versus at least our model, and then non-DCI under telecom had some upside. If you could perhaps address at least the DCI portion, what's going on there? Is that also laser and supply-based, or is that a pure demand dynamic?

Seamus Grady, CEO

No, it's, you know, demand remains very strong. You know, we continue to see great momentum in our DCI module business. We grew 59% year over year, and we have all of the market-leading customers in the space. And we do believe the long-term demand is durable, and as we work with the customers on the next generation, 800 ER products, which are yet to ramp. Like any leading-edge, leading technology products, there's always going to be constraints here and there. So, you know, with new products and leading technology products, it's not always straightforward. You know, all the components have to line up, the designs have to work, everything has to go perfectly. But the demand remains very strong. Telecom revenue growth was particularly strong as we started to ramp, you know, Sienna's new system program, as well as other new program wins that we're particularly excited about. But specifically on DCI, you know, we broke out our DCI revenue. we talked we want to be clear that in reporting our dcr revenue it's for coherent telecom modules that we have we have high confidence are being used in in datacom interconnect sorry data center interconnect applications and these include both you know 400 and 800zr modules and their variants as well as some embedded coherent line car modules as well so our dci revenue does it does not include telecom systems that's our pure DCI coherent module business so but overall I think we're you know we're we remain very optimistic about DCI there will always be puts and takes it won't always grow in a straight line especially again because as I say when you're leading you're dealing with leading edge products there's always going to be challenges here and there but nothing we're concerned about the demand remains very robust thanks Seamus thank you our

Operator

Our next question comes from the line of George Nauter with Wolf Research. Please proceed.

George Nauter, Analyst — Wolfe Research

Thanks very much. I just wanted to kind of lean in on, you know, new customer opportunities on the telecom side of the business. Like, I think you're kind of suggesting that you're working with other customers. Are these, like, OEM customers that are in the marketplace and shifting existing business from other manufacturers to Fabronet? or are these new product categories? I guess I'm just trying to understand, you know, what you guys are looking at in terms of new opportunity. And, you know, I noticed from Nokia's earnings call, they talked about expanding their optical manufacturing capacity. I'm just wondering if you guys are involved in that.

Seamus Grady, CEO

Yeah, I think, you know, we're very excited about, obviously, not just the strength in the business, but also the new opportunities. It's a really good pipeline we have that we're looking at that's in front of us. And we're always pursuing new opportunities, both with potential new customers as well as existing customers. The kinds of opportunities that we've talked about and continue to pursue, things like, you know, the datacom opportunities we've talked about, you know, including producing transceivers directly for hyperscalers and also building transceivers for merchant vendors. And on the telecom opportunities, yeah, it would include additional systems, wins and further penetrating existing customers and also, you know, new customers or maybe new to Fabronet customers. So we've had some success. We think we have a winning formula where we're able to deliver, we believe, superior technology, excellent delivery, quality, responsiveness at a lower cost because we don't margin stack. And we also don't have our own products, which is very important to our customers. We're a pure contract manufacturer. We don't have any of our own products. And that's actually a positive for many of our customers. They don't want us to have our own products. So, you know, overall, we have several new opportunities there that we're pursuing, George, including existing customers and some new customers that we're trying to win. They take time, though. These things always take time. And we also have additional high-performance compute customers that we're pursuing and additional CPO. So several growth drivers that we're working on right now.

George Nauter, Analyst — Wolfe Research

Great. And then you mentioned potential transceiver designs for hyperscalers and other merchant vendors. I guess at one point I kind of thought that was maybe a number of quarters away, but I'm just curious, like, programs like that, assuming you guys have success, start is that a quarter away multiple quarters away multiple years away like what do you think the timeline would look like thanks I would say you know

Seamus Grady, CEO

we're quarters away I don't think it's years away I think it's quarters away we've been working on it for well over a year probably 18 months at this stage and we're so we're I would say quarters away rather than years away George from from the from that turning into into meaningful revenue super thanks very Thank you very much. Thank you.

Operator

Okay. One moment for our next question. He comes from the line of Stephen Fox with Fox Advisors. Please proceed.

Stephen Fox, Analyst — Fox Advisors LLC

Hi. Good afternoon. I guess I had two questions. First of all, on the hyperscale business, the ramp is obviously substantial. You mentioned that maybe improving from a second source position was possible. the outside looking in it looks like it's ramping it very well like you don't see any sort of holes and margins or anything like that can you just give a little bit more color on your chances of doing that and also i thought there was potentially a second program with that customer that was going to ramp can you just comment on that as well and then i had a follow-up yeah so the i think the

Seamus Grady, CEO

second question first so they the the second program there's multiple programs i mean there's no there's no programs excluded from from what we're working on we're working on current products and and also new products so we are ramping multiple products um you know our chances of of growing the business further like i said in my in my previous answer we have two lines two production lines fully qualified and additional lines being qualified we're a little bit more than halfway into the the ramp to capacity on those production lines but you know we have ample capacity and we can we can build more products uh our chances of growing the business more than that level you know we're reasonably confident but we have to execute it's really a case of of earning earning the business by doing an excellent job uh for the customer excellent job excellent delivery quality uh responsiveness etc at very competitive cost so we're you know we we enjoy the competition we we you know the the existing suppliers is a very good supplier with a long relationship with the customer but uh you know we we're confident that we can continue to grow that business because the business is very strong and we're performing very well so both things we think are in our favor great that's helpful and then just

Stephen Fox, Analyst — Fox Advisors LLC

as a follow-up just on the dollar bot um uh currency issue um so nine cent drag in the quarter you just reported any help on how the direct the eps drag looks this quarter versus

Csaba Sverha, CFO

maybe 90 days ago thanks very much hi steve this is joe uh yes indeed the exchange rate environment has been unfavorable for the last several quarters, so we called out about $3 million drag in the last quarter and below the line, and also on gross margins, we have been seeing unfavorable headwinds. So based on our hedging programs that we have in place, we continue to expect about the same impact going into the third quarter from exchange rate perspective. Obviously, we are not forecasting anything on the regulation and below the line, but we do anticipate about 20-30 basis point headwind in a gross margin. Nevertheless, obviously, we have been able to deliver slight improvement on gross margin even last quarter, as well as we drive continuous operating leverage. So we are hopeful that we will be able to offset most of the exchange rate headwinds in operating leverage by keeping our OPEX in check. And as we grow the top line, we should see continued operating leverage on operating income. But we don't put any guides for exchange rate other than the color that based on the hedging program we have in place. We do anticipate similar headwinds in the gross margin as in the prior quarter.

Stephen Fox, Analyst — Fox Advisors LLC

Great, that's very helpful.

Operator

Thank you. Our next question comes from the line of Mike Genovese with Rosenblatt Securities. Please proceed.

Mike Genovese, Analyst — Rosenblatt Securities

Great, thanks. And congrats on the record results. Maybe my first question is more of a comment, but I think if you counted that Siena business where that stuff was going in DCI, you'd find the vast majority of your telecom growth was driven by DCI and that you had a huge sequential DCI quarter. But that's just like kind of a segmenting thing. Any thoughts on that?

Seamus Grady, CEO

Yeah, I think that's pretty accurate. You know, DCI has been very, very strong for us. The growth is not just DCI, but it's predominantly DCI. It's been very good. And it continues to grow. And the demand looks to be very durable. And it's not just CNETs across multiple customers.

Mike Genovese, Analyst — Rosenblatt Securities

Can you give any details on the data center side or data comm side? I mean, between the 800 and 1.6 mix, whether in terms of what the mix is or what the trends are, is one growing faster than the other? Anything you could tell us about that?

Seamus Grady, CEO

Not particularly. You know, I mean, it's predominantly, you know, 200 gig per lane, almost all 200 gig per lane, 1.6 terabit and 800 gig. The exact mix between the two, we don't really, you know, I won't say we don't care, but we don't put a huge amount of thought into it because it really is the decision that our customer makes and that our customers make. the exact puts and takes as to why the customers would want 800 gig, 200 gig per lane versus 1.6 200 gig per lane it's not really something we're involved in but we're producing everything we can with the components we have and the demand remains very robust but the mix between 1.6 and 800 gig we don't put too much emphasis on because it's not that important they're both produced on the same production line very similar products

Mike Genovese, Analyst — Rosenblatt Securities

This is just a final question. In data comm, I mean, when you, you know, you understand you're projecting sequential growth for this quarter, you usually don't guide more than another, but would you continue, you know, more than one quarter of sequential growth and kind of how many in data comm do you have visibility to?

Seamus Grady, CEO

Well, you know, we have pretty good visibility. I would say our visibility right now, So it's certainly the furthest that I've, in my experience, I think we have more visibility now than we've ever had. Like you say, we guide one quarter at a time, but we're very optimistic. You know, we're adding capacity, as Jabba mentioned in his remarks. We're converting significant, you know, office space and warehousing space into manufacturing space at our Pinehurst campus. We're accelerating the build-out of our 2 million square foot building 10. And in our Chonbury campus, we have 250,000 square feet completed by the middle of the year, by June. And then the balance of that 2 million square feet will be ready by probably early 2026, January, February 2026. So, you know, and there's other ways to expand the capacity that we're looking at. We'll probably talk about it in our next earnings call, but there's a number of activities we have underway that should help us to add additional capacity. So, you know, we're pretty excited, Mike, about the demand we have in front of us. It's a very exciting time, I'd say, when you look at what's going on with our customers and what they need from Fabernet, it's a good place to be right now. We're pretty excited about it.

Mike Genovese, Analyst — Rosenblatt Securities

Thanks very much. Appreciate it.

Seamus Grady, CEO

Thank you, Mikey.

Operator

Thank you. Our next question comes from Ryan Koontz with Needham. Please proceed.

Ryan Koontz, Analyst — Needham

Great, thanks. appreciate the updated milestones such a little more color about where you are in that process you know what kind of shapes all the materials you need as well as you know customers to outfit the building and what that process looks

Seamus Grady, CEO

like over the balance of 26 thank you so we're well underway I was there a few weeks ago we're well underway that the building is a phenomenal building and it will be it will be really showcase when it's when it's finished you know two million square feet it's a lot of it's a lot of factory it's a big factory uh but we're well underway you know we've had no you know no delays or anything like that with with the availability of the material to build the factory it's going very very well um and we'll we'll have about like i say about 250 000 square feet finished and and ready to move into by uh by the end of june so that's that's well ahead of the completion schedule for the full factory uh then the balance of the factory will complete as we go throughout the year uh and i think we'll we'll probably take possession of the balance of the factory in the like january february of 2027 so it's going very well you know the customer uh demand to to consume the factory you know again we we don't ask our customers to to make a hard commitment uh we we have to have capacity in place ahead of demand that's why we're you know moving so fast with this we see you know strong demand and strengthening demand from our customers so you know we we'll put the factory up then the customers we're we're optimistic i would say ryan about our ability to fill the factory you know when we built building eight it was 550 000 square feet and we filled it pretty quickly building nine was one million square feet and that's you know almost full so you know we're pretty optimistic about building 10. we also have room for building 11 and building 12 on the same campus so uh lots of lots of runway in terms of capacity in front of us no problem thank you thank you our next question

Operator

comes from tim salvajal with northland capital markets please proceed good afternoon and

Tim Salvajal, Analyst — Northland Capital Markets

congrats on the results for me as well thank you um couple couple questions first just i guess so continuing on the capacity front so as you look to add that 250 000 square feet um i guess at this point where we're standing right now and I don't know if this is a reference to transceivers being quarters away or do you have an idea about where that capacity is going I guess since it's coming online pretty soon any color on you know what drove that pull in and if there's any particular projects that are driving that and as a quick aside to that still on capacity I wonder if you might be able to size the kind of Pinehurst repurposing in the context of the 250K that you're adding. I assume it's smaller, but anything you can give us there, it's, you know, you look like you're adding, what, $300 million in annual revenue capacity plus Pinehurst. So I just wonder if we have any more visibility on where that's going. Thanks.

Seamus Grady, CEO

Yeah, so I'll let Chava cover the Pinehurst capacity addition in a moment. And, yeah, Chonbury, we're, as you say, pulling in 250,000 square feet. That's six, eight months ahead of the original schedule. There's several customers, Tim. You know, we wouldn't want to quantify them all here, but it's really, you know, several drivers. Again, our telecom business is very strong, and it's not just DCI. It's DCI, but it's not just DCI. There's also some additional new business and new customer wins that we're working on in the telecom space. Datacom, it's, you know, growth with our main customer, but also we're, you know, we're confident in our ability to win other new Datacom customers, both merchant and also hyperscale direct. You know, our business overall, Tim, is just very strong. Our demand profile we have from our customers is very strong. And for us, it's a relatively easy decision to add this capacity because the way we add this capacity, our balance sheet is very strong. As you know, we have a very strong balance sheet. We're able to build these buildings and add this capacity with zero debt. So the downside risk for us is very small. So as we build Building 10, you know, it will be, I don't know, about $130 million of CapEx. Java can correct me if I'm wrong on that, but $130 million of CapEx. It will add, you know, 2 million square feet and capacity for an additional, depends on the mix, but we said 2.5 in the past is probably a little bit north of that at the moment, given the mix that we're looking at. so the upside you know opportunity is huge it's the if you like the operating profit that we can generate from that from that business the downside risk is very small the downside risk for us of building a factory that doesn't get consumed as quickly as we'd like is probably 15 basis points something like that and a full year basis so 15 basis points gross margin headwind so the downside risk is tiny because of the strong balance sheet we have the way able to build these in a very efficient way with no debt downside risk is very small the upside opportunity is huge so it's a relatively easy decision for us to to add this capacity coupled with that you know our our roic is about 40 so really the best return for us is to add capacity fill that capacity general you know with new business that's able to generate you know outsize margins for our industry and also outsize returns so it's a it's a relatively

Tim Salvajal, Analyst — Northland Capital Markets

straightforward decision for us Tim great thanks if I could follow up and you mentioned strength across the business demand wise sounds like that hasn't really changed as you've gone through the quarter and into the new year here but given where you're guiding and then the sharpness of that HPC ramp, while, say, you expect telecom to grow, it seems like, you know, only slightly on a sequential basis, and, you know, relative to very strong results you just put up here in the quarter, and I guess, first, am I reading that right, and second, you know, do you attribute that to anything in particular, seasonality of customers, or anything else, if indeed I'm kind of working through the segments properly.

Seamus Grady, CEO

I'm sorry, Tim. I didn't understand the question. Are you interpreting what correctly? I missed the question.

Tim Salvajal, Analyst — Northland Capital Markets

Just your segment guidance. Basically, I'm saying with HPC likely up another big chunk in the quarter, while you're talking about telecom and datacom growth, it seems like much slower sequential growth than you saw in December in terms of what you're forecasting in March. is that accurate and why would that be I guess would be the question I think I'll let Chad

Seamus Grady, CEO

add a little bit of color but I think our HPC growth you know it's not in a straight line because we are dealing with some new products that don't always grow that the growth is a little bit lumpy I would say so HPC won't necessarily grow in a straight line it looks like a nice straight line but really we only have two two data points two quarters of of revenue and as everyone knows two data points is not a trend. So we have to wait until we have a little bit more HPC experience under our belt. And then maybe I'll let Chava talk about telecom and datacom and also the question you had about the capacity additions in Pinehurst.

Csaba Sverha, CFO

So Tim, hi. So let me give you some pointers on the guidance. So as we mentioned, all the segments we anticipate to grow with the exception of automotives. So HPC, we had a nice bump of about $70 million sequentially last quarter. So that's not going to grow in that space. But we do anticipate double-digit growth in that area. Within telecom, we anticipate that DCI is going to grow faster than we have seen in the past quarter. So that strength continues into our third quarter. And we also anticipate datacom to grow. So that's the color that we can provide at this stage. automotive will probably be down in a similar way as as it has been in the prior quarter and with regards to pinehurst campus to answer your prior question so we we are able to create about 120 000 square feet of space or convert offices and warehouse spaces to manufacturing space a couple of years back we were able to acquire an adjacent piece of land which is in a zone that we are able to build office buildings on those on that land but we are not able to put a factory so we were able to convert some of the office and manufacturing space in the existing campus so that adds up to about 120,000 square feet which if you do the math again it's highly dependent on mix that should give us over 150 million dollar revenue upside opportunity again this is subject to mixed drill. So overall, and again, in terms of customer requirements for additional space, obviously Pinehurst is prime from that perspective because a lot of our legacy customers are there and they would like to have more space in Pinehurst. So hence we are doing the best we can to accommodate all those requirements. Great. And just very quick,

Tim Salvajal, Analyst — Northland Capital Markets

And is the Pinehurst edition, is that on the same timeline as the Building 10 pull-in mid-year? Or is that kind of happening now? Yeah, it is happening now.

Csaba Sverha, CFO

Yes, it is happening now. Seamus doesn't have an office anymore in the campus, so we used to joke when he comes next time to Pinehurst, he will no longer have an office.

Tim Salvajal, Analyst — Northland Capital Markets

So it's happening pretty much. Thanks very much. Thank you, Tiff.

Operator

Thank you so much. and this will end our Q&A session and I will pass it back to Seamus for closing comments.

Seamus Grady, CEO

Thank you for joining our call today. We are very pleased with our excellent second quarter performance and with continued momentum across our business. We're optimistic that we can deliver a very strong third quarter as we expand on our strong market position. We look forward to speaking with you in the future and to seeing those of you who will be attending the Susquehanna Conference later this month and the OFC Conference in Los Angeles next month.

Operator

thanks again and goodbye and with that we conclude our conference thank you all for participating you may now disconnect