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Fabrinet (NYSE:FN) This autumn 2023 Earnings Convention Name August 21, 2023 5:00 PM ET
Firm Members
Garo Toomajanian – Vice President, Investor Relations
Seamus Grady – Chief Govt Officer
Csaba Sverha – Chief Monetary Officer
Convention Name Members
Alex Henderson – Needham
Joe Cardoso – JPMorgan
Tim Savageaux – Northland Capital Markets
Dave Kang – B. Riley
Operator
Good afternoon. Welcome to the Fabrinet Financials Outcomes Convention Name for the Fourth Quarter and Fiscal Yr 2023. Right now, all members are in a listen-only mode. Later, we are going to conduct a question-and-answer session and directions on how you can take part might be offered at the moment. As a reminder, as we speak’s name is being recorded.
I might now like to show the convention over to your host, Garo Toomajanian, Vice President of Investor Relations.
Garo Toomajanian
Thanks, operator, and good afternoon, everybody. Thanks for becoming a member of us on as we speak’s convention name to debate Fabrinet’s monetary and working outcomes for the fourth quarter and financial 12 months 2023, which ended June 30, 2023.
With me on the decision as we speak are Seamus Grady, Chief Govt Officer; and Csaba Sverha, Chief Monetary Officer.
This name is being webcast and a replay might be out there on the Traders part of our web site situated at investor.fabrinet.com.
Throughout this name, we are going to current each GAAP and non-GAAP monetary measures. Please seek advice from the Traders part of our web site for vital info, together with our earnings press launch and investor presentation, which embrace our GAAP to non-GAAP reconciliation.
As well as, as we speak’s dialogue will include forward-looking statements concerning the future monetary efficiency of the corporate. Ahead-looking statements are topic to dangers and uncertainties that would trigger precise outcomes to vary materially from administration’s present expectations. These statements replicate our opinions solely as of the date of this presentation, and we undertake no obligation to revise them in gentle of latest info or future occasions besides as required by regulation. For an outline of the danger components which will have an effect on our outcomes, please seek advice from our current SEC filings, specifically, the part captioned Danger Elements in our Kind 10-Q filed on Could 9, 2023.
We are going to start the decision with remarks from Seamus and Csaba, adopted by time for questions.
I might now like to show the decision over to Fabrinet’s CEO, Seamus Grady. Seamus?
Seamus Grady
Thanks, Garo. Good afternoon, everybody, and thanks for becoming a member of us on our name as we speak.
Our fourth quarter monetary efficiency exceeded our steering for each income and earnings per share. Income of $655.9 million grew 12% from a 12 months in the past. We continued to generate double-digit working margins, which helped to provide non-GAAP earnings per share of $1.86 within the quarter.
Our monetary outcomes for the 12 months replicate our potential to develop and execute by way of provide headwinds that we skilled early within the 12 months and the stock changes that we encountered within the second half of the 12 months. Income of over $2.6 billion elevated 17% year-over-year. Non-GAAP working margin expanded greater than 50 foundation factors to 10.8% for the 12 months. And we generated document non-GAAP earnings per share of $7.67, a rise of 25% from fiscal 2022, as we proceed to display robust execution.
Trying on the fourth quarter in additional element. Income was primarily flat sequentially for optical communications. Inside optical communications, telecom income noticed a sizeable lower on account of stock digestion at our prospects and their prospects. The decline in telecom income was offset by document income development in datacom on each the year-over-year and sequential foundation. In actual fact, datacom income greater than doubled from a 12 months in the past and grew greater than 50% sequentially. This datacom development was primarily pushed by an 800-gig AI information middle transceiver program for one in every of our prospects. In our non-optical communications enterprise, income elevated virtually 25% from a 12 months in the past, however declined barely sequentially.
Seeking to the primary quarter and past, we count on the near-term stock correction that our prospects are experiencing to persist. Nevertheless, we’re assured that the very robust datacom efficiency we noticed within the fourth quarter will proceed to largely offset these inventory-related headwinds in our fiscal first quarter. In actual fact, we’re very optimistic about our total market place, together with the potential for continued development in AI-related packages as we glance forward.
In abstract, our strong fourth quarter efficiency contributed to document outcomes for the total fiscal 12 months. We’re enthusiastic about our robust trade place and are assured that we are able to proceed to ship glorious monetary leads to the approaching 12 months.
Now, I might like to show the decision over to Csaba for added monetary particulars on our fourth quarter and financial 2023 and our steering for the primary quarter of fiscal 2024.
Csaba Sverha
Thanks, Seamus, and good afternoon, everybody.
Income and EPS had been above our steering ranges within the fourth quarter. Income was $655.9 million, up 12% from a 12 months in the past and down 1% from the third quarter. This robust efficiency fell to the bottom-line, leading to non-GAAP earnings per share of $1.86.
For the total 12 months, income was $2.645 billion, a rise of 17% from the prior 12 months. In fiscal 2023, we had 4 prospects that every contributed 10% or extra to income. Cisco contributed 16% of income, adopted by Lumentum at 15%, Nvidia at 13% and Infinera at 12%. Our prime 10 prospects collectively made up 84% of income and included a various vary of shoppers in telecom, datacom, automotive and industrial laser markets.
Taking a look at income in additional element, optical communications income was $502.1 million, up 8% from a 12 months in the past and primarily flat with Q3.
Inside optical, telecom income was $309.6 million, which was down 17% from a 12 months in the past and 19% from the third quarter. This lower was primarily on account of stock changes within the trade.
However, datacom noticed super development with the biggest sequential and year-over-year income enhance in our historical past. Datacom income within the fourth quarter was a document $192.5 million. This represents development of 107% from a 12 months in the past and a rise of 57% from the third quarter. The largest contributor to our datacom development was an 800-gig program for AI functions.
By expertise, silicon photonics income of $88.1 million declined 19% sequentially as a result of stock changes we mentioned.
By pace, income from merchandise rated 400-gig and sooner, grew to a brand new document of $266.8 million, up 49% from a 12 months in the past and up 21% from Q3. Income from 100-gig packages was $96 million, down 32% from a 12 months in the past and 14% from Q3. As we anticipated, income from 100-gig merchandise continued to say no on account of stock digestion and as 400-gig and sooner merchandise gained momentum. Income from non-speed rated merchandise was $120 million or 24% of optical communications income.
Non-optical communications income was $153.8 million, up 25% from a 12 months in the past, however down 5% from our document third quarter and representing 23% of complete income.
Automotive income continues to be in the identical vary because the prior two quarters, reflecting improved part availability. Automotive income of $92.9 million was up 66% from a 12 months in the past, however down 1% from Q3.
Industrial laser income was $28 million, down 10% from Q3.
Different non-optical communications income was $32.9 million, up 10% from a 12 months in the past, however down 12% from Q3.
As I talk about the main points of our P&L, expense and profitability metrics offered are on a non-GAAP foundation, until in any other case famous. A reconciliation of GAAP to non-GAAP measures is included in our earnings press launch and investor presentation, which you will discover within the Investor Relations part of our web site.
Gross margin within the quarter was 12.8%. As anticipated, gross margin declined about 30 foundation factors from Q3 on account of international change fluctuations and our forex hedging program.
Working bills within the quarter had been $14.9 million or 2.3% of income, which was barely increased than anticipated on account of some one-time gadgets and year-end changes.
This produced working revenue of $69 million, representing an working margin of 10.5%. We benefited from a rise in curiosity revenue, which was $4 million, in addition to a achieve of $1.9 million from international forex asset and legal responsibility revaluations on the finish of the quarter.
Efficient GAAP tax charge was 9.4% within the fourth quarter, reflecting year-end changes. For the 12 months, our efficient GAAP tax charge was 4.7% and we anticipate that our tax charge will stay within the mid-single digit in fiscal 2024.
Non-GAAP web revenue was $68.4 million, or $1.86 per diluted share, and above our steering vary. On a GAAP foundation, web revenue was $1.65 per diluted share.
For the total fiscal 12 months 2023, working margins had been 10.8%, a rise of fifty foundation factors from the prior 12 months; non-GAAP web revenue was a document $7.67 per diluted share, a rise of 25% from a 12 months in the past. As in fiscal 2022, EPS development considerably outpaced income development.
Turning to the stability sheet and money move statements. On the finish of the fourth quarter, money, money equivalents, restricted money and short-term investments had been $550.5 million, up $11.7 million from the top of the third quarter.
Working money move was a quarterly document of $71.1 million, with CapEx of $17.9 million, free money move was $53.2 million, additionally a quarterly document. For the total 12 months, we generated document working money move of $213.3 million and a document free money move of $152 million.
We had been energetic with our share repurchase program within the fourth quarter. We took benefit of favorable market circumstances to repurchase over 400,000 shares at a mean worth of $94.78 for a complete money outlay of $38.4 million. For the total 12 months, we repurchased roughly 488,000 shares for a complete money outlay of $47.6 million, reflecting our dedication to return capital and drive worth to shareholders. Consequently, $52.4 million remained in our share repurchase authorization on the finish of fiscal 2023. Since then, our Board has approved a further $47.6 million for repurchases, leading to $100 million at the moment out there for repurchases.
Now, I’ll flip to our steering for the primary quarter. We count on stock changes at our prospects and their prospects to proceed into the primary quarter. These results might be seen primarily in our telecom income. We consider that energy in new excessive information charge datacom packages for AI utility will largely offset the affect of this stock changes. We count on automotive and industrial laser income to be comparatively flat. We’re, subsequently, anticipating that complete income within the first quarter might be reasonably increased than the fourth quarter. We anticipate income to be between $650 million and $670 million.
From a profitability perspective, within the first quarter, we count on seasonal near-term stress on gross margins on account of our annual benefit will increase. As in prior years, we count on to proceed executing effectively and to ship enhancing efficiencies as we work our means by way of the 12 months. With year-end changes to working bills behind us, we count on working bills to return to the two% vary. Taking these components under consideration, we anticipate non-GAAP web revenue to be within the vary of $1.83 to $1.90 per diluted share.
In abstract, we exceeded our fourth quarter steering whereas efficiently navigating by way of some uncommon trade dynamics. Whereas our enterprise has been negatively impacted by stock absorption, new packages have largely offset these headwinds, enabling us to ship wholesome outcomes as we proceed to deal with extending our observe data of robust execution.
Operator, we at the moment are able to open the decision for questions.
Query-and-Reply Session
Operator
Thanks. [Operator Instructions] Our first query comes from the road of Alex Henderson with Needham. Your line is open.
Alex Henderson
Nice. Thanks a lot. I do know that you’ve got had a very nice quarter right here and a superb strong information within the September quarter, however trying on the information move out of just about each OEM buyer on the market, whether or not that be 20-some-odd-percent decline at Fi, whether or not that be sharp declines at Juniper, whether or not that be a 37% decline of their service supplier enterprise at Cisco, whether or not it’s Adtran, I imply, actually throughout the board, there’s been a dozen corporations, and throughout each single one in every of them they’ve given some fairly weak steering. And I do know that you just guys lock-in 90 days prematurely due to the eight- to 12-week manufacturing window. So, whereas the September quarter is a pleasant aid from that dangerous information, it looks as if numerous that dangerous information got here within the June and July timeframe, and subsequently may be much less consultant within the September quarter. I additionally know you do not like to present steering for 1 / 4 out, however clearly, that is an uncommon state of affairs and this case does require us to ask, are you able to give us any sense of what is going on on in that December timeframe primarily based on what you have seen of late?
Seamus Grady
Hello, Alex. Sure, a few issues I might say. We consider the — as an example the stock digestion headwinds and the trade headwinds that basically everyone seems to be experiencing, that’s factored into our September quarter information. For those who take a look at our total enterprise, in case you take a look at our This autumn outcomes, our telecom enterprise is down, primarily pushed by stock digestion. And our datacom enterprise is up properly, primarily pushed by a major development in AI transceiver, let’s name it, AI transceiver enterprise.
So, we do not really feel like we’re lacking one thing within the September information. We expect it is consultant. I am going to put it this manner, Alex, it is consultant of the enterprise that we have now. And all we are able to do actually is cope with what’s in entrance of us. We’ve 13 weeks rolling forecast from our prospects. We information one quarter at a time, as you rightly level out. However primarily what we’re seeing occurring, in case you had been to distill it down right into a type of a brief snapshot, our datacom enterprise is up strongly. Our telecom enterprise is down due to stock digestion, however we expect that can come again. So, subsequently, when…
Alex Henderson
May you discuss a bit of bit concerning the capability availability for the Datacom piece? That is a fairly steep ramp on a year-over-year foundation, going from primarily zero to a really massive quantity in AI. What does the slope appear like when it comes to your potential to proceed that ramp when it comes to capability availability? Thanks.
Seamus Grady
Sure. So, we have now ample capability, Alex. As you already know, we not too long ago opened the 1 million sq. foot Constructing 9 facility in Chonburi. So, we have now ample capability and we have now a number of room to increase and construct extra buildings as wanted. The ramp is steep, however that is what we do. That is one of many companies we offer is that type of burst capability when the client has a really massive ramp, a really steep ramp, one of many companies we offer is the power to ensure we’re not the pacing merchandise. There’s a number of different, as an example, pacing gadgets at all times, however we have now to ensure we’re not the pacing merchandise. So, we’re very targeted on that, Alex, and we’re very assured…
Alex Henderson
I completely perceive, Seamus, however you could have some visibility when it comes to testing, tools and different line capability that the client wants to put in with a purpose to get it in, which is the gating issue to ramping that datacom.
Seamus Grady
That is appropriate. We do, nevertheless it would not actually be for us to talk to that, Alex.
Alex Henderson
Okay. Thanks. I recognize the candid solutions. Thanks.
Seamus Grady
Thanks, Alex. Thanks.
Operator
Thanks. Please standby for our subsequent query. Our subsequent query comes from the road of Samik Chatterjee with JPMorgan. Your line is open.
Joe Cardoso
Hello, that is Joe Cardoso on for Samik Chatterjee. My first query is simply on the stock digestion that you just’re seeing within the telecom trade. I suppose type of simply given your relationships together with your prospects and your expertise within the trade, is there any visibility at this cut-off date when it comes to the longevity of this digestion cycle that we’re going by way of? Like, I believe traditionally a number of the people have pointed to love a two-quarter digestion. Is that lining as much as the way you guys are excited about it at this present time? Any coloration you’ll be able to present about round that, it will be useful. After which, I’ve a fast follow-up. Thanks.
Seamus Grady
So, stock digestion, it is a tough one to name, and it is fairly tough for us to differentiate between the precise causes, as an example, of adjustments so as of patterns or demand from our prospects and from their prospects. We’ve returned to getting 13 weeks dedicated orders from our prospects, and we’re probably not seeing the longer-term visibility that we had throughout the provide chain disaster. So, our prospects are again to regular 13-week order patterns, however they do not essentially inform us why the order measurement is what it’s, in case you observe me. And whereas everyone seems to be speaking about stock digestion, it is probably not attainable for us to inform what’s stock digestion and what’s the change within the demand and the underlying demand.
And secondly, the timing of the stock digestion is sort of tough for us to be exact about. We hear the identical — I suppose the identical trade observations that others have made that it appears to be a two quarter — the timing of this appears to be about two quarters and, as we get in the direction of the top of the calendar 12 months, we should always begin to see order patterns come again to regular within the early a part of calendar 2024. We simply do not know. And I believe we’ll have to simply wait and see like all people else, however that is what we’re listening to. However till we have now the acquisition orders, we’re reluctant to type of name it at this level.
Joe Cardoso
No. Acquired it. And I recognize it, Seamus. I suppose my follow-up is simply across the 800-gig and — perhaps I ought to simply name it, the AI alternative for you guys in datacom. Clearly, you probably did — you are doing tremendously effectively with the present program that you just gained. I am simply curious like what’s the alternative for you guys to win a further program past the present buyer that you just’re in? Do you will have any visibility round it? Is that chance materializing in any means? Simply curious to listen to your ideas round expanded past simply this present buyer to maybe a unique provider. Thanks.
Seamus Grady
Sure. So, we’re not — initially, we’re not going to interrupt out, in case you like, the AI program itself, as a result of it is proper now, as you rightly level out, it is coming from one buyer, and we’ll actually allow them to — we’ll allow them to converse to what is going on on in that enterprise. What we are able to say is that, that exact program is ramping very quick, and has clearly turn out to be a significant contributor to our income and our development charges and has actually helped us to soak up the decline within the telecom enterprise. The timing could not have been higher actually.
However we additionally consider we’re very a lot within the early days of this program and this chance, very, very a lot within the early days. We’re actually simply a few quarters into this of what we consider, as we perceive, it will likely be a really lengthy cycle and a really lengthy development. So, we’re trying ahead to increasing, as an example, past — yeah, positively past one buyer, but additionally to a number of packages with the client base that we have now at the moment. So, nothing actually to announce at this level, nevertheless it does appear to characterize a really important alternative and we’re very enthusiastic about it.
Joe Cardoso
Thanks, Seamus. Recognize the responses, and congrats on the outcomes.
Seamus Grady
Thanks.
Operator
Thanks. Please standby for our subsequent query. Our subsequent query comes from the road of Tim Savageaux with Northland Capital Markets. Your line is open.
Tim Savageaux
Hey, good afternoon, and congrats from me as effectively on the quarter.
Seamus Grady
Thanks, Tim.
Tim Savageaux
You — I do not know if I missed it, however when it comes to the information, which is type of flattish total, though, clearly higher than might need been feared, do you count on the developments that you just noticed within the fourth quarter to proceed when it comes to a major decline in telecom and continued robust enhance in datacom, or do you count on that to type of perhaps flatten out a bit of bit? And I’ve a follow-up.
Csaba Sverha
Hello, Tim. That is Csaba. Sure, we expect a fairly related sample in our Q1. I identified that we’re anticipating telecom to be down sequentially in Q1, and we’re anticipating datacom to be up. So, the developments have not actually modified quarter-on-quarter. And we additionally mentioned that auto and laser, we’re anticipating to be flat. So, telecom, down; datacom, up; and flat, auto and laser.
Tim Savageaux
Okay. I suppose I might attempt to come again for a bit of extra coloration on that, simply the given the diploma of volatility we noticed in This autumn, which could be very important will increase in datacom, very important declines in telecom. If you say count on an identical sample, is that what you proceed to count on, large actions on either side?
Csaba Sverha
Sure.
Tim Savageaux
Or — sure?
Csaba Sverha
Sure, that’s appropriate.
Tim Savageaux
Okay, nice. I wish to follow-up on the entry or PON programs facet. You introduced a cope with Nokia not too long ago. I think about that is going to take some time to ramp up. However between that and your pre-existing relationship with DZS, I imply, at what level, I suppose, in fiscal ’24 would you count on that to begin to get materials for you? And was it materials in any respect in This autumn?
Seamus Grady
So, initially, I believe it wasn’t vastly materials in This autumn, I might say. And in case you take the enterprise with Nokia, it is vital for certain and we’re very, very joyful to be increasing the connection with Nokia, however we do not consider it will likely be a cloth or a ten% buyer or something like that. We — it is an vital piece of enterprise. It is an vital deal. It is vital to Nokia, it is vital to us to assist them with their onshoring actions. However when it comes to the income affect, I would not need you to depart considering that it is a vastly important income driver, it is not.
Tim Savageaux
Properly, perhaps a bit of bit extra broadly, given they’re in the identical type of neck of the woods or rivals. For those who take a look at the entry programs space on the whole, perhaps refocus the query on that when it comes to timing and decree of materiality in fiscal ’24, together with DZS.
Seamus Grady
Sure, it is tough to say at this level, Tim. We’re actually targeted on getting the merchandise launched. Clearly, DZS is now launched and is in our — it is in our numbers, in case you like, it is in our forecast. It is in our Q1 quantity, Nokia’s 30 days. However we expect there’s numerous alternative there each within the entry area, however within the onshoring typically — alternatives for onshoring typically. And likewise, in case you name it, in case you like friend-shoring. Thailand is a pleasant location to fabricate for our prospects. So, we’re very targeted on that, nevertheless it’ll be very tough to measurement it at this level, Tim.
Tim Savageaux
Okay. Thanks very a lot.
Seamus Grady
Thanks, Tim.
Csaba Sverha
Thanks, Tim.
Operator
Thanks. Please standby for our subsequent query. Our subsequent query comes from the road of Dave Kang with B. Riley. Your line is open.
Dave Kang
Sure. Thanks. Good afternoon. My first query is, what was the provision chain affect in fiscal fourth quarter? And what’s your expectation for this upcoming quarter?
Seamus Grady
So, Dave, we had thought-about — in case you look again at our final earnings name, we had forecasted or thought-about about $15 million of a income headwind from provide chain constraints in This autumn. And that is the way in which it panned out actually. It was there and thereabouts, about that degree. The excellent news is that the provision setting continues to enhance and we’re now at very manageable ranges for provide headwinds, simply regular provide challenges that everybody faces. And we actually do not feel the necessity to name out that affect at this level. So, we’re truly not — we’re not calling out any particular quantity in our Q1 steering, and we can’t until one thing adjustments significantly sooner or later.
Dave Kang
Acquired it. And my follow-up is, so final quarter, you talked about three tailwinds: 400-gig intra-DC, 800-gig intra-DC and 400-gig ZR DCI. Have they modified since then? And which is the strongest of the three for you now? And do you count on them to stay tailwinds for you subsequent calendar 12 months or fiscal 12 months?
Seamus Grady
Yeah, fiscal 12 months. I believe all of them stay tailwinds. I believe the 800-gig AI information middle transceiver program, if I needed to rank them when it comes to the importance, that is most likely the largest alternative adopted by 400 ZR when it comes to development after which 400-gig, I believe they’d be the order during which I might put them. However I believe we’re very excited. We’re ideally positioned. We actually suppose we’re ideally positioned. The expansion in datacom, once more largely pushed by these three product areas, in case you like, is greater than offsetting the declines in telecom. So sooner or later, as telecom comes again, we expect the expansion in datacom is sustainable and is long run. So, we should always profit we expect properly when telecom comes again after all of the stock has been digested.
Dave Kang
And simply to be clear, you count on these rankings to be type of stay as is in fiscal ’24, or may they alter?
Seamus Grady
I believe perhaps the 2 and three may change. For example 400-gig development may outpace 400 ZR. However 400 ZR is rising properly. We’ve a variety of prospects in that space, as you already know. It is rising properly. So I might say 800-gig is the largest development alternative after which adopted by both 400 ZR or 400-gig inside the info middle, each of these characterize sizable alternatives as effectively.
Dave Kang
Acquired it. Thanks.
Seamus Grady
Thanks, Dave.
Operator
Thanks. Right now, I want to flip the decision again to Seamus for closing remarks.
Seamus Grady
Thanks for becoming a member of our name as we speak. We executed effectively in a dynamic setting to provide fourth quarter outcomes that exceeded our steering ranges. We stay effectively positioned to proceed our observe document of robust execution, and we stay optimistic concerning the constructive long-term developments within the markets we serve. We stay up for talking with you once more. Bye-bye.
Operator
Women and gents, this concludes as we speak’s convention name. Thanks in your participation. You might now disconnect.
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