Earnings Call Transcript - FN Q1 2026

Operator, Operator

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the First Quarter of Fiscal Year 2026. 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.

Garo Toomajanian, VP of Investor Relations

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 2026, which ended September 26, 2025. With me on the call today are Seamus Grady, Chairman and 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 19, 2025. 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 Chairman and CEO, Seamus Grady. Seamus?

Seamus Grady, Chairman and CEO

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 $978 million, an impressive increase of 22% from a year ago and an increase of 8% from Q4. Non-GAAP earnings were also outstanding at $2.92 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 a 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 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 Csaba for more financial details on our first quarter results and our outlook for the second quarter.

Csaba Sverha, CFO

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 or $0.06 per share FX revaluation 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, surging 59% from a year ago and 15% from Q4. This impressive growth was driven primarily by continued strong demand trends for data center interconnect products. In the first quarter, DCI revenue was $138 million, representing remarkable growth of 92% from a year ago and 29% from Q4. Datacom 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-GAAP 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 absorb FX headwinds, in addition to the seasonal impact of annual merit increases. This small sequential decrease in gross margin was partially offset by our continued operating leverage. Operating expenses were $16 million or 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 revaluation 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. Capital expenditures of $45 million 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 repurchases. 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 the major markets we serve, except automotive, which we expect to be flat to 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 billion 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 the 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 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, Operator

Our first question will come from Karl Ackerman with BNP Paribas.

Karl Ackerman, Analyst

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 EML laser capacity to support that growth?

Seamus Grady, Chairman and CEO

Thank you, Karl. We're not going to comment on specific components or customers at this time. However, we are in the early stages of a generational shift to photonics that has been developing for a while. Fabrinet is well-positioned to take advantage of this transition. We handle a lot of complexity for our customers, and as we've experienced, growth doesn't always follow a linear path. For any company, past performance is often the best indicator of future results. Looking at our 10-year history, we achieved a compounded annual revenue growth of 16% and compounded earnings growth of 21%. Last year, our revenue grew by 19%, and last quarter, it increased by 22%. According to our guidance, we project a growth of 29% for this quarter. Our goal is to ensure we have ample opportunities to maintain this level of significant growth. We are enthusiastic about the current period and believe we are well-positioned to keep moving forward, seizing opportunities, and executing plans to sustain our growth trajectory in the future, just as we have in the past.

Karl Ackerman, Analyst

Yes. Seamus, if I could ask one more question. You mentioned your HPC program as your first HPC program in your prepared remarks. Considering the significant scaling potential of this business, does it also include any other customer engagements or discussions related to additional HPC programs with new or existing customers?

Seamus Grady, Chairman and CEO

Yes. I think 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 datacom, it's data center, but it's not communication. So we decided to call it HPC, not to break it out into its own category. And of course, the other reason we decided to was we're quite optimistic about this segment or category as an area for us to really expand and continue to grow. It's early days, but our initial foray into this category is going very well. It takes a little bit of time to get off the ground. These are complex products. There's a qualification process that has to be gone through. We're working with our customer, making sure we have a very efficient, highly automated process in place. And that's going very well. 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 builds on and really just started 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, but it's early days yet. But yes, we would be optimistic that at some point in the future, we would have more than 1 customer in that category. We would have multiple growth vectors like we have in all of the markets we serve. So yes, we think it's the first customer, but we hope not the only one. There's others we're working on.

Operator, Operator

Our next question will come from the line of Samik Chatterjee with JPMorgan.

Samik Chatterjee, Analyst

Seamus, if I can maybe start with a question on asking you to compare the ramps of the HPC customers vis-a-vis the new telecom customer that you were going to ramp on in this quarter. Our impression going into this quarter was that the HPC customer would ramp faster than the new telecom customer. But just looking at the results, it seems to have been like a lot more skewed towards the new telecom customer, but anything to share on that front, how those 2 ramps are going relative to your own expectations? And how much of a contribution are you getting getting from the new telecom customer that's ramping and how you're thinking about that ramp? And I have a follow-up.

Seamus Grady, Chairman and CEO

Yes, I believe the ramp-up is occurring differently for each of them. They are quite distinct products. The high-performance compute product is an established offering that is already in high demand, and we are one of several suppliers of that product. We are just starting to get into that. On the other hand, the new telecom program you referred to is a new product. Both products will see growth over time, but the telecom product requires market growth before we see our own growth. The HPC product may begin with a somewhat slow ramp because it is complex and involves a great deal of automation and other factors that need to be established. However, we are optimistic about seeing strong growth in that area in the short to medium term. Both products will serve as significant growth drivers for us. It's important to note that the growth of these products is not linear. We help our customers manage steady growth, and if a new product is coming from another supplier or experiences exceptional growth, we are equipped to handle that as well. We accept both positive and negative aspects of growth. Our primary focus remains on executing well for our customers, ensuring excellent delivery, high quality, and competitive costs.

Samik Chatterjee, Analyst

If I may follow up, you're estimating an increase in revenue of around $100 million from quarter to quarter, give or take. I'd like to discuss your commentary, which suggests that the majority of this increase is due to the HPC ramp. Could you provide a ranking of the main factors contributing to that $100 million increase from quarter to quarter?

Seamus Grady, Chairman and CEO

Yes, I would say it’s feasible, but we think it’s not the best course of action for us. Clearly, we established a plan at the beginning of the quarter, and we currently have a strategy in place. As we approach the midpoint of the quarter, we have a solid idea of how things will unfold. We still have some robust growth drivers in play, including the HPC program we discussed, the new telecom product we are scaling up, and the overall strength of DCI. Datacom has also performed better than we anticipated going into the quarter, exceeding our expectations. We’re putting in a lot of effort into securing and winning additional growth factors. There are numerous opportunities, and we are certainly not facing a shortage of demand right now. Our challenge is to effectively execute and ensure we capture everything available to deliver for our customers. So, I believe HPC will be a major growth driver, along with DCI, the new telecom initiatives, and other datacom projects we are currently pursuing. These will be our three main areas of focus.

Operator, Operator

Our next question comes from the line of Mike Genovese with Rosenblatt Securities, Inc.

Michael Genovese, Analyst

When you examine the sequential growth in telecom, it's about 15%, or $60 million. How many customers were a major factor in that sequential growth?

Seamus Grady, Chairman and CEO

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 2 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 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.

Michael Genovese, Analyst

Great. You mentioned there are other customers in datacom besides the main transceiver one. Could you discuss the types of datacom customers and products that are currently generating revenue, as well as any upcoming projects you expect to win? What kind of customers and products should we be focusing on?

Seamus Grady, Chairman and CEO

We've discussed a few key points in the past. Our main source of datacom revenue comes from a significant customer in that sector, and our relationship with them continues to thrive as they introduce new products that we are supplying. Additionally, we are exploring several other opportunities in this area. One involves direct supply to hyperscalers, using their own designs, rather than ours. We're also engaging with some merchant transceiver manufacturers, which requires us to persuade customers to outsource production and choose Fabrinet specifically. This can be a challenging dual sales effort, but we are actively pursuing all these avenues. There’s nothing to announce at this time, as these processes take time. Generally, it can take around 18 months from the initial engagement with a customer until we begin shipping products, so progress may not always seem quick. While it may appear that these are fast wins, much work is happening behind the scenes to secure these opportunities. We have multiple initiatives underway, but there are no specific updates at this moment. We typically refrain from disclosing detailed information about individual customer opportunities until the end of the fiscal year when we discuss our key customers.

Michael Genovese, Analyst

All right. But just quickly on the revenue that you have now outside of the biggest customer, is that mostly the merchant type of stuff? Or is it something else?

Seamus Grady, Chairman and CEO

It's mostly merchants outside of the biggest customer, yes. It will be mostly merchant let's say, non-NVIDIA transceiver business and other datacom products that we're making.

Operator, Operator

Our next question comes from the line of George Notter with Wolfe Research.

George Notter, Analyst

I was just curious on the share repurchase. I noticed you didn't buy many shares back for this quarter. I'm curious if there was something to that? Is it just capital going into the manufacturing expansion or some other thing that's 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? Is it as you envisioned three months ago? Or has there been any change to that?

Csaba Sverha, CFO

I'll take the share purchase questions, George. So our buyback last quarter was driven by our 10b5 plan, which is, as you know, automated and depending on price tiers that we set up initially. And that plan is going in place for one year, so we haven't changed on that. With regards to overall capital allocation strategy, as you have pointed out, our main focus still remains in investing in our future growth. That obviously includes working capital as well as Building 10 capacity addition. So we did have an outsized capital spend in last quarter, but that has nothing to do with the share repurchase activities. So again, repurchase was done by the 10b5 plan and we remain committed to return the surplus cash we generate to shareholders through 10b5 in an open market. We were not active in the open market. Nevertheless, we still have a 10b5 in place which we continue to.

George Notter, Analyst

And then just as a follow-on there. I'm sorry, did I hear you say you intend to change that going forward? Is that right?

Seamus Grady, Chairman and CEO

I think we're having trouble hearing you.

Csaba Sverha, CFO

Guys, can you hear me? Hello?

Seamus Grady, Chairman and CEO

We can hear you. Can you hear me? I think we're having trouble hearing you.

Csaba Sverha, CFO

I'm sorry, my line must have dropped. I apologize for that. Our share repurchase was based on a 10b5 plan last quarter, and we did not engage in open market transactions during that period. The repurchases occurred through the 10b5 plan. Our capital allocation continues to focus on investing in future growth, including working capital and capital expenditures. Our capital expenditures during the quarter exceeded the maintenance level due to the 10b5 plan related to Building 10. We are pulling in a part of that building, which will be a 2 million square feet facility and is expected to generate approximately $2.4 billion in revenue in the future. As we mentioned earlier, we are bringing a portion of that building into our June quarter to have that space ready.

George Notter, Analyst

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.

Csaba Sverha, CFO

That's correct.

Operator, Operator

Our next question is going to come from the line of Ryan Koontz with Needham & Company.

Ryan Koontz, Analyst

I wanted to ask about DCI in particular. And obviously, that's getting boosted here, a shift from cloud to AI infrastructure, higher attach rates for ZR. And my question for you is, from your discussions with customers, 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?

Seamus Grady, Chairman and CEO

I'm not sure, Ryan. Honestly, we don't spend much time figuring out the reasons for the demand. When the demand is strong, we primarily focus on fulfilling it. You may have a point that as the need develops and continues to grow, it should lead to an increased demand for more DCI, as well as 400 ZR and 800 ZR. However, we don't concentrate on the specific reasons behind the strong growth. We're too occupied with ensuring we have everything set up to meet the demand.

Ryan Koontz, Analyst

Yes, fair. Great. Great execution. And on the non-DCI telecom, I know you might have touched on it briefly earlier, but as you think about that growth, it was up several $10 million sequentially. Is that mostly share? Or do you have any new wins in the mix there for the non-DCI telecom?

Seamus Grady, Chairman and CEO

It's a little bit of both. So we've been continuing to chip away at our competitors and continuing to win business. It's primarily, I think ramping, we're ramping existing programs that we've won that are kind of becoming existing programs at this point, but it's mostly newer programs that are ramping, newer programs that we've won in recent times that we're ramping.

Operator, Operator

Our next question comes from Tim Savageaux with Northland Capital Markets. It's a little bit of both. We've been continuing to chip away at our competitors and win business. Primarily, I think we're ramping existing programs that we've won, which are becoming established, but it's mostly newer programs that we've won recently that we're ramping.

Timothy Savageaux, Analyst

Congratulations on the results. A couple of quarters ago, Seamus, you mentioned the 19% growth in fiscal '25 and hinted at the possibility of accelerating growth in '26. While you weren't quite there, you were pretty close. You're now guiding to 25% growth in the first half of the year, which would certainly indicate acceleration. Do you think this is a reasonable baseline for the year, and do you have any thoughts on maintaining or even accelerating that growth rate?

Seamus Grady, Chairman and CEO

Yes, we grew 19% last year, 22% last quarter, and at the midpoint this quarter, we're projected to grow 29%. Our focus is on execution, and the demand is strong. I wouldn't specify a number for full year growth as we only guide quarter by quarter. However, we are optimistic about the future. It’s an unusual time with strong demand that seems to be robust and sustainable across multiple product categories and customers. We're hopeful to deliver another quarter, and ideally, another year of significant growth. It's an exciting time, and we're very positive about the trends. The faster we can build the products, the more our customers need them. Demand is very strong across all sectors we service, and we hope this trend continues for a long time.

Timothy Savageaux, Analyst

Great. I want to revisit the composition of the sequential guide. In your prepared comments, you mentioned DCI, datacom, and HPC. I'm curious if the order of these was intentional or if it can be seen as a reflection of the relative demand drivers in terms of absolute dollar amounts, or if that's unclear.

Seamus Grady, Chairman and CEO

Yes. The order of DCI, datacom, and HPC is just alphabetical. There's no specific reason for that arrangement, and I wouldn't read too much into it. It's likely that we focus on telecom first because it's the company's origin, with datacom having become a significant part of our revenue, and HPC being the most recent addition. The order reflects the sequence in which each category has grown. However, all three are performing very strongly. DCI has been an excellent set of products for us and our customers. Datacom is beneficial for everyone, and HPC is also performing well. So, the order of those categories shouldn't be interpreted as having any special significance.

Timothy Savageaux, Analyst

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?

Seamus Grady, Chairman and CEO

I think these issues tend to resolve themselves over time. Sometimes, we face limitations in component supply while planning for the future. However, our customers and team generally do a great job of securing what we need, even if it doesn't seem like it at first. Overall, the situation is improving, although some component categories remain in very tight supply. Luckily, we have reliable customers who typically receive their fair share, and sometimes even more, of the available components. Therefore, we're not overly worried and believe things will normalize as component suppliers increase their capacity. Adding capacity takes time, particularly for complex components, so there might still be a quarter or two of tight supply ahead, but ultimately, I believe we'll get what we need.

Operator, Operator

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

Seamus Grady, Chairman and CEO

Thank you for joining our call today. We are 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 see 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.

Operator, Operator

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