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Fabrinet (FN) Q3 2019 Earnings Call Transcript

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Fabrinet (NYSE: FN)
Q3 2019 Earnings Call
May. 06, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to Fabrinet's financial results conference call for the third quarter of fiscal-year 2019. [Operator instructions] As a reminder, today's call is being recorded. I would now like to turn your call over to your host, Garo Toomajanian, investor relations.

Garo Toomajanian -- 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 third quarter and fiscal-year 2019, which ended March 29, 2019. With me on the call today are Seamus Grady, chief executive officer; and TS Ng, 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. Please refer to our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation.

I would like to remind you that 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-Q filed on February 5, 2019.

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We will begin the call with remarks from Seamus and TS, followed by time for questions. I would now like to turn the call over to Fabrinet's CEO, Seamus Grady. Seamus?

Seamus Grady -- Chief Executive Officer

Thank you, Garo, and good afternoon, everyone. I am pleased that we exceeded our guidance for revenue and earnings per share in the third quarter. Revenue in the third quarter of $399 million was $7 million above the high end of our guidance range and non-GAAP net income of $0.92 per share also exceeded the high end of guidance. These results also drove strong cash flows in the third quarter with operating cash flow of nearly $36 million and free cash flow of $33 million.

In addition to these strong headline results, we executed well in the quarter to produce non-GAAP gross margins of 12.1%, representing a return to our target range of 12% to 12.5%. Component supply constraints that we experienced in the first half of the fiscal year diminished significantly in the third quarter, supporting the return to our industry-leading gross margins. From an end market perspective, optical communications revenue of $298 million, or 75% of total revenue, moderated 1% from the second quarter. As anticipated, we saw continued sequential growth for telecom applications with revenue of $217 million, up 5% sequentially, and representing 73% of optical communications revenue.

Also, as anticipated, datacom revenue decreased sequentially and was $81 million or 27% of optical communications revenues. By technology, silicon photonic-based optical communications revenue was $82 million or 27% of optical communications revenue, a slight improvement from Q2. Revenue from QSFP28 and QSFP56 transceivers was $44 million, a decrease from the second quarter as growth in QSFP56 programs was more than offset by declines in QSFP28 programs as our customers transitioned to next-generation designs. By data rate, 100 gig programs continue to represent about half of optical communications revenue or $146 million.

Products raises at speeds at 400 gig and above grew 15% from the second quarter to $23 million or 8% of optical communications revenue. Looking at nonoptical communications. Revenue was $101 million, up 3% from Q2. Revenue from industrial lasers was $48 million compared to $50 million in the second quarter.

Automotive revenue increased 6% to more than $24 million with the majority of this growth coming from new automotive applications. Sensor revenue was roughly flat at $4 million in the third quarter. Finally, other nonoptical communications revenue increased 17% from the second quarter to $24 million. Revenue from new business increased 4% from the second quarter to $152 million and represented 38% of total revenue in the quarter.

While we don't generally disclose specific transactions, during the third quarter, we entered into an agreement with an existing customer that could have a meaningful impact on our results in the coming quarters, and hence, warrants further discussion. We typically engage with our customers during the design phase and early in the manufacturing process to help them transition from new product introduction into volume manufacturing. During the third quarter, we signed an agreement with Infinera, an existing customer, to assume manufacturing responsibilities for the products currently being manufactured at their Coriant division in Berlin. We already have staff in Berlin to support this program and anticipate migrating the products currently being manufactured at this location to our facility in Thailand in the coming quarters.

While we expect the revenue impact from this program to be small in fiscal 2019, we believe that it could lead to Infinera becoming a greater-than-10% customer in fiscal 2020 in what we believe is a win-win relationship. With this transaction, as well as other new business wins, we expect our first building in Chonburi to reach a level of 70% that is either occupied or spoken for in the coming months. In summary, we are pleased to have exceeded our expectations for the third quarter with revenue above the high end of our guidance and to have delivered earnings per share that were also above the high end of expectations. We are pleased to see gross margins return to our target range and are optimistic that our new program with Infinera will further support the momentum we see across our business.

Now let me turn the call over to TS to discuss the details of our third-quarter performance and our outlook. TS?

TS Ng -- Chief Financial Officer

Thank you, Seamus, and good afternoon, everyone. I will provide you with more details on our performance by end market and our financial results for Q3 as well as our guidance for Q4 of fiscal-year 2019. Total revenue in the third quarter for fiscal-year 2019 was $399 million. Note that our adoptions of ASC 606 this fiscal year reduced our revenue by approximately $3 million in the third quarter as compared to what our revenue would have been under ASC 605.

Because we provide guidance under ASC 605, this means that we will have exceeded the top end of our revenue guidance of $384 million to $392 million by $10 million if we had reported under ASC 605. Non-GAAP net income was $0.92 per share and was also above our guidance range, even after an $0.08 per share foreign exchange headwind in the quarter. Adoptions of ASC 606 further reduced our net income by approximately $0.01 per share as compared to our guidance provided under ASC 605. Looking at the third quarter in more detail.

Our quarter played out as anticipated. We saw continued growth from telecom product. The sequential revenue declined from datacom products and nonoptical communications revenue that were slightly up from the second quarter. Optical communications represents 75% of revenue with nonoptical communications represent 25% of revenue.

Now turning to the details of our P&L. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release and investor presentation, which you can find on our website. Non-GAAP gross margin in the third quarter was 12.1%, an increase of 50 basis points from the second quarter and within our target range of 12% to 12.5%, as component supply constraints have eased, and as we continue to improve productivity. Non-GAAP operating expense was $10.1 million in the third quarter.

As a result, non-GAAP operating income was a record of $38 million, an increase on the second quarter despite slightly lower revenue. Non-GAAP operating margin was 9.5%, up from the 9.3% in the second quarter. Taxes in the quarter were $1.5 million, and our normalized effective tax rate was 5.2%. We continue to anticipate an effective tax rate of 6% to 7% for the fiscal year.

Non-GAAP net income was above our guidance range at $34.3 million in the third quarter or $0.92 per diluted share despite the foreign exchange headwind of $0.08 per share. On a GAAP basis, which includes share-based compensation expenses and amortization of debt issuing costs, net income for the third quarter was $28.6 million or $0.76 per diluted share, also $0.01 above the high end of guidance. Turning to the balance sheet and cash flow statement. At the end of the third quarter, cash and investments were $408.9 million, an increase of $26.4 million from the second quarter.

Operating cash flow in the quarter was $36.2 million and with capex of $3.5 million, free cash flow was $32.7 million in the third quarter. During the quarter, we purchased 100,000 shares of our stock at an average price of $53.78, for a total cash outlook of $5.4 million. In addition, our board of directors has approved a repurchase of an additional 50 million of Fabrinet's ordinary share, bringing the aggregate size of our repurchase program to 110 million with 61.2 million remaining. I would now like to turn to our guidance for the fourth quarter of fiscal-year 2019.

This guidance is based on ASC 605, and we will provide a reconciliation with our fourth quarter results. Starting in fiscal 2020, our guidance will be under ASC 606. For the fourth quarter, we expect revenue to be consistent with the third quarter with a relatively flat performance on telecom, a modest improvement in datacom, and a relatively flat nonoptical communications performance. As Seamus mentioned, we entered into an agreement with Infinera in the third quarter, whereby we will be assuming manufacturing responsibility of products currently being produced at Infinera former Coriant facility in Berlin.

We expect this program to ramp over time, and that we will ultimately transfer this manufacturing to our facility in Thailand. While the near-term revenue contribution is still fairly small, we believe that when fully ramped, this program could generate enough revenue to move Infinera from a less-than-10% customer to a greater than 10% customer. While this program will be accretive to non-GAAP profitability, we expect gross margin headwind to push us closer to the low end of our target range of 12% to 12.5% when fully ramped. As for our customer specific program, we do not plan to break out revenue from this relationship, but may provide incremental color from time to time that could be useful to investors.

With that backdrop, for the fourth quarter of fiscal-year 2019, we anticipate revenue to be in the range of $396 million to $404 million, representing growth of 15% to 17% from a year ago,and growth of approximately 15% for all of fiscal-year 2019. From an earnings perspective, we anticipate non-GAAP net income per share in the fourth quarter to be in the range of $0.92 to $0.96, and GAAP net income per share of $0.78 to $0.82 based on approximately 37.6 million fully diluted share outstanding. In summary, we delivered financial results that exceeded our guidance in the third quarter, and we are well positioned for continued momentum across our business as a leading contact manufacturer for the industry's most complex optical and electronic components and devices. Operator, we would now like to open the call for questions.

Questions & Answers:


Operator

Thank you, sir. [Operator instructions] And our first question will come from the line of Alex Henderson with Needham. Your line is now open.

Alex Henderson -- Needham and Company -- Analyst

Thank you very much. So I guess I'm a little puzzled by the guidance on the revenue sequentially being flat in the June quarter. It's very much against the historical trends that suggest that this June quarter is sequentially always considerably up and seasonally much stronger quarter given what goes on in the first quarter, particularly in the telco, but even in the datacom side. I was hoping you might give us some sense of what it is that is causing that to be sequentially flatter.

Is it capacity constraints? Is it timing of new capacity adds on some of the products? What's behind the mechanics there?

TS Ng -- Chief Financial Officer

OK. I'd like to thank for the question. This is TS. I think a mixture of all the things you mentioned.

First of all, the datacom is still pretty unsettled. Although we guided a little bit higher than in Q3, but again, still away. We have probably less than 20% of the market share. A lot of our customers do not participate in broad range of datacom.

So a lot of customers who are in the datacom, major players are not doing business with us. So I really cannot tell -- align that with the industry. So datacom we believe there will be a little uptick, and telecom, as we mentioned, a lot of capacity constraints, and depends on how well we can execute those capacity together with the customer.

Seamus Grady -- Chief Executive Officer

If I could just add Alex. Historically, you're right, historically, some years we have seen strong sequential growth in Q4 over the years that has been a little more modest. I guess our forecasts are based on the committed orders we have from our customers. So it's really a reflection of what we're seeing from our customers.

We are pleased, I would say, that after a challenging fiscal 2018, we have returned to year-over-year growth for every quarter in FY '19 and we're looking at about 15% growth for the year.

Alex Henderson -- Needham and Company -- Analyst

So just to the point though, I mean, it seems that this implies that there's some constraints that are a little artificial, harder for us to forecast, And I was hoping you might help with a little bit of that. To the extent that some of this is capacity constraint issues, are you anticipating that after a quarter-over-quarter flatness, which is unusual in June quarter that you might have more capacity coming on that would help you in the back half of calendar '19, and therefore, it's just a timing of when the growth kicks in. How should we be thinking about that beyond the current constraints?

TS Ng -- Chief Financial Officer

I would say, obviously, we just guide one quarter at a time, but it's not a secret that we are installing capacity to support some of the capacity constraints we have had historically. And also with the new business coming our way, the new program we've announced from Infinera, we do see that having a positive impact in the back half of the year for sure.

Alex Henderson -- Needham and Company -- Analyst

So just to be clear. So the capacity constraints here are your capacity constraints or capacity constraints in particular products? What exactly we are referring to?

Seamus Grady -- Chief Executive Officer

It's with specific products where our customers make investments in, I would say product-specific unique equipment that can sometimes become the pacing item, usually a piece of test equipment item. That's -- it's not a piece of, let's say, standard equipment. It's more piece of unique equipment. So typically our customers will make that investment ideally in an ideal world, ahead of the ramp curve, but in some cases, the demand is outpacing the supply and it just takes a little bit of time for capacity to catch up with the demand.

Alex Henderson -- Needham and Company -- Analyst

So this isn't a function of say move to Chonburi or anything of that sort?

Seamus Grady -- Chief Executive Officer

No, no. Nothing at all to do with Chonburi. It's to do with specific, I would say, product-specific to be more precise, test equipment. Not at all a function of physical capacity.

Alex Henderson -- Needham and Company -- Analyst

Great. That's very helpful. Thank you very much.

Operator

Thank you. And our next question will come from the line of Troy Jensen with Piper Jaffray.

Troy Jensen -- Piper Jaffray -- Analyst

Congrats on the nice quarter and the new win.

Seamus Grady -- Chief Executive Officer

Thanks, Troy.

TS Ng -- Chief Financial Officer

Thanks.

Troy Jensen -- Piper Jaffray -- Analyst

So I guess, I'd love to get just a little bit more color on how big Infinera is. You said it could grow to greater-than-10% customer, but to my knowledge your current customer, so can you just kind of give us some form of reference? Are they close to 10% now, and this is a modest win? Or are they well below that, and this is more material?

Seamus Grady -- Chief Executive Officer

Well, they're a less-than-10% customer. Obviously, we're not going to put a number on that, Troy, I'm afraid. We really only report the 10% customers once a year and only when they become a 10% customer. So we reported, looking back at some time in the future, but there are less-than-10% customer today, they're a very important customer for us.

They've been a long-standing customer for us and just an excellent customer. It's been a great partnership between the two companies. The Berlin business or the Coriant business, I would call it, really what we're transferring and we have a team on the ground right now in Berlin managing that transfer. We're transferring all of the business, or all of the products that are currently being manufactured in Coriant in Berlin are being transferred to our operations in Thailand.

We're not, just to be clear, we're not acquiring a facility in Germany or anything like that, we're just managing the transfer of those activities to Thailand. And the products, it's a range of, I would say, line cards for transponders, filters, optical amplifiers, interface cards, power management cards and then as well as complete network systems for transport for both long-haul and metro applications. And then in addition to that, there's also the repair center support and reverse and forward logistics that goes with that. So it's the full suite of offering or services that are currently being done out of the Berlin operation will be transferred to Bangkok.

And it's an excellent fit with our core competencies, and it really strengthens our already, I would say, our already excellent relationship with Infinera. We do expect that they will become a greater-than-10% customer with this transaction, but we're not putting a timing -- a time line on that.

Troy Jensen -- Piper Jaffray -- Analyst

OK. All right, understood. And how about just to dive further into the datacom business. It was down a lot sequentially, but now you're guiding it up.

So can you just tell us about the visibility you have for the datacom business? And are you expecting to see growth in QSFP28? Or different datacom products?

Seamus Grady -- Chief Executive Officer

So we're, I guess, it's kind of a mixed message. As you know, Tory, we don't break it out by individual customer, but what I would say is there's a number of factors going on. So there is some price, I would say, price erosion for our customers are giving fairly significant price reductions to win market share. We're working with our customers to make sure when that happens, that we're able to match that for cost reduction so that we preserve our margin.

So there's a combination of price reductions coupled with some product transitions where some of our customers, one or two of them are transitioning to new generation, new technology products. And usually when that happens, there's a significant improvement in performance. So for example, a customer goes from a 100 gig product to 400 gig product, the average selling price of the product goes up, but the volume will drop in the short term. So we're seeing a little bit of that where there's a little bit of price erosion coupled with some product transitions.

Overall, I mean, we're very optimistic about the datacom market. I mean data center rollouts around the world are just going at a phenomenal pace. So I would say over the long-term, we still feel very positive about that market. We think we have the right customers that we're supporting in that marketplace.

But -- so it's a couple of thing. It's not any one thing. It's a couple of things, and we're looking at a slight uptick than in Q4 with those same set of customers.

Troy Jensen -- Piper Jaffray -- Analyst

Understood. Well, congrats again and keep up the good work. Thank you.

Operator

Thank you. And our next question will come from the line of John Marchetti with Stifel. Your line is now open.

John Marchetti -- Stifel Financial Corp. -- Analyst

Thanks very much. Just following up on some of the guidance on the telecom side. You mentioned the capacity constraints there. Just curious, Seamus, in your conversations with customers, and I'm certainly not asking for any one name in particular, but just curious if you're hearing about them seeing any sort of slowing growth whether it's because of inventory buildups or some of the renewed risk that seems to be coming back in on in China? Just curious in your conversations with customers there, how that may be impacting some of the telecom demand? Or if they're sharing any of that color with you?

Seamus Grady -- Chief Executive Officer

A little bit. I think what we're hearing, so again, you'll appreciate, we're a couple of steps removed from the end customers, let's say, you mentioned China, for example, the end customers in China. But what we do hear from our customers is they tell us that they are not really seeing big inventory builds maybe like what was seen a couple of years ago. And if there are inventory builds going on, this I think was talked about on a couple of our customers' earnings calls the last few days, the last week-or-so, that if there is inventory builds going on, it's more in support of tenders that are going on where there is a fairly aggressive trial maybe running at the moment.

And then subject to the trial going well, there would be an installation in -- later in the year. Again, that's a little bit secondhand or maybe even third hand information so take it with a pinch of salt, I would say. But we're -- I'll put it this way, we are not hearing from our customers that there's big inventory buildup is going on. We're not hearing that.

And the demand, we -- the demand does remain quite strong in the telecom space.

John Marchetti -- Stifel Financial Corp. -- Analyst

Got it. And then if I can just ask another question on the datacom side. You mentioned that transition from 28 to 56. I'm curious, in your mind, sort of where the industry is in that transition? And you mentioned obviously the uptick a little bit in datacom expected in the current quarter.

Is that starting to be resolved? Or am I reading too much into those 2 sorts of comments together?

Seamus Grady -- Chief Executive Officer

Yes. Maybe reading a little bit too much. But bear in mind, we're, especially with datacom, we're not in any way, a kind of a proxy for the industry. We don't have all the players, and we don't make all the products for all the companies that we do support.

Having said that, on the transition to QSFP56 we're probably, again, it depends on which customers we're talking about. We're probably in the middle of that transition, I would say, at the moment, in the early stages of it. And the uptick we're seeing in the current quarter, it's with a couple of customers, in other words, I suppose, the softness we've seen. We don't see it is a long-term trend.

We see it more as a transition to newer products with higher ASPs with lower values to begin with, coupled with some price erosion from some of our customers.

TS Ng -- Chief Financial Officer

If you look at Q3, we are down $17 million, $18 million on datacom. So the only way to go up, so we just guided a little bit. Maybe back to normal count, normal time line, but this quarter was down significantly.

John Marchetti -- Stifel Financial Corp. -- Analyst

Understood. Understood. And then one last question, if I could, TS. You mentioned with Infinera coming on as it starts to become more than a 10% customer, that pushes you down toward the lower end of the 12 to 12.5 kind of gross margin guide.

Does that have to do with them sort of now reaching certain volume breakpoints and some things like that? Is the business that you're bringing over say structurally different than maybe what you're seeing with some of the other customers? Just trying to get a little color there on how we should think about once that business hits, how gross margin maybe trends after that?

TS Ng -- Chief Financial Officer

Yes, John, you're probably aware that in any product transfer, there's many moving parts. And everything has to be lined up, the moon, the sun, the universe we have, so with a fully ramp. We'll get to the more-than-10% customer, but again, in the process, anything can just go sideways. So we have to be cautious obviously.

The margin also relates to some of the products. Most of the products we transfer, my understanding is, it is a mixed production. It's not a new product. If you listen to our earnings call in the past, we always said that this is a brand new product, we have better opportunity for gross margin, so these are the existing products.

We are transferring the whole thing into Thailand. So depending how smooth it goes, and that's why we cannot say the timing when they become a 10% customer. But yes, obviously, we'll try to strive for the higher gross margin. But again, there are a lot of moving parts, as I say.

John Marchetti -- Stifel Financial Corp. -- Analyst

Got it. Thanks very much.

Operator

Thank you. [Operator instructions] And our next question will come from the line of Timothy Savageaux with Northland Capital Markets. Your line is now open.

Timothy Savageaux -- Northland Capital Markets -- Analyst

Hi. Good afternoon. Question on datacom. In the quarter, did you see any impact from the exit of your largest customer? Or at least the sale of that unit to a third party in China? And if not, what sort of impact do you expect to see from that transaction as well as kind of the broader exit of the datacom module business of that customer? Thanks.

TS Ng -- Chief Financial Officer

So Tim, just make sure that we get the question right, you are referring to our top customer who want to diversify some of their datacom products, correct?

Timothy Savageaux -- Northland Capital Markets -- Analyst

Yes.

TS Ng -- Chief Financial Officer

Yes. It's in progress. Again, so far, this or next quarter, we do not see a major shift. This will take some time to transition to maybe another customer.

And I understand that. They are trying to sell their business to another customer, and hopefully, we continue to build those products. But so far in the Q4 guidance, we did not factor a significant drop in a particular customer. Is that helpful?

Seamus Grady -- Chief Executive Officer

I think the question by Tim was related to Q3, so no particular impact in Q3.

TS Ng -- Chief Financial Officer

Q3, no. Yes. Q4, maybe a slight, but it's not significant. Yes.

Timothy Savageaux -- Northland Capital Markets -- Analyst

OK. Well, then a the follow-up on the Q3 datacom results, can you characterize trends in your datacom business kind of relative to silicon photonics or more traditional datacom modules? Is there any kind of divergence there or anything notable? I'm going to assume, you did see an uptick in silicon photonics, the small one, that was driven by telecom, primarily?

TS Ng -- Chief Financial Officer

That's fair observation, Tim. Yes. Most of the silicon photonic uptick came from telecom. That's correct.

Now in terms of datacom, again, we only have -- our customer collectively probably participate about 20% of the datacom business. If you look at a major player, a lot of them, we don't have business with them. So we can only look at the customer we have, their 13-week rolling forecast and try to do guidance based on that.

Timothy Savageaux -- Northland Capital Markets -- Analyst

OK. One last one for me, and I know you probably don't disclose this sort of thing, but in the past, Infinera has had some good times and bad times, can you say whether they were ever a 10% customer for any particular quarter over the, I don't know, last five years or so?

TS Ng -- Chief Financial Officer

Again, as I say, we only report 10% customer once a year. In the last couple of years, they never make it to the 10% customer from a total year standpoint. Quarter to quarter, honestly, I don't have the data in front of me so it's hard for me to say.

Timothy Savageaux -- Northland Capital Markets -- Analyst

OK. Great. Thanks and congrats. I'll pass it on.

Operator

Thank you. And our next question will come from the line of Alex Henderson with Needham. Your line is now open.

Alex Henderson -- Needham and Company -- Analyst

Yes. I just hoped there we could try another way of slicing and dicing the Infinera pumpkin. So is there -- if I exclude existing Infinera business and just look at the business that's being transported, is that roughly a 10% contribution excluding any business that you already had with them? Is that the magnitude of what's being transferred over?

Seamus Grady -- Chief Executive Officer

Well, what we said is the total will be, we think, will make Infinera the combination of Infinera plus Coriant a 10% customer. We're not really breaking it out, Alex, for Coriant.

Alex Henderson -- Needham and Company -- Analyst

And so in terms of time line, if you think about the process flow here, I assume it's a gradual fade-in as opposed to a hard flashover. Can you talk a little bit about the mechanics of it to help us think about how we should feather it in. Is it -- is 10% of the benefit upfront and then 20% in the next quarter and 20% the quarter after that, it's that kind of slope? Or is it 5% here, 8% there and then 30% in a quarter? Is there any window where we should be more aggressive or less aggressive to help us on the out-year slope of that?

Seamus Grady -- Chief Executive Officer

Sure. I think, first of all, if I talk a little bit about the mechanics of the transfer, you're right. It is a gradual transfer. The question, of course, is how gradual and over how many quarters.

So these are, as you know, we say, these are complex products with existing customers who have to qualify a new production site. We've actually started that process. We have over 80 people currently on sites in Berlin that will grow to over 100 people over the coming weeks. We're transferring, as we speak, the revenue impact this quarter will be, I'd say, minimal.

And really we'd start to see revenue impact next quarter and beyond. I think it's probably a two to three quarter time line to get everything transferred, and fully buttoned down, and qualified and ramped up in Bangkok. So I would say over a two to three quarter time horizon.

Alex Henderson -- Needham and Company -- Analyst

One more question if I could. So when we were talking last year, the baht had been setting up for a pretty good benefit. And I think you just talked about it potentially adding as much as one point to your gross margin if it had been at that level for a full-year trailing? We've seen a lot of movement in it. It obviously hasn't come back all the way to where it was, so I assume that you're still getting some benefit.

Is it reasonable to think that there's a little bit of a benefit from that to help offset some of the costs associated with the lower margins associated with this business move?

TS Ng -- Chief Financial Officer

Obviously, I like to think that way. But if you follow Thai political situation here, they just had election about maybe a month ago. They haven't announced the result yet. So -- and they go through the crowning of the king, the new king, which was done last Monday, and they are supposed to announce the election results this week.

So depend on who from the customer, the baht may go either way, depends on. But right now, based on a prediction is that the pro-military camp is probably going to take control, become a prime minister, run the government. In that case, the baht will continue to be stable and strengthen, which is a little bit worry there because the country is doing well under the military regime. So baht tends to be stable and becomes stronger.

But I watch it very closely. Again, we stick to our hedging policy, 100%, 50% and 25% for the next three quarters. Again, the impact -- there will be a delaying factor. It will not impact right away because of the hedging program.

And also, based on the advice in the past, I'm trying to look at document, all these had a cash flow hedge, so there we will take you to the balance sheet, that is the direction given to me. So I'm trying to maybe beginning FY 2020, we will try to get a good documentation and get all this thing into the other comparison income, which is in the balance sheet.

Alex Henderson -- Needham and Company -- Analyst

So would you then stop reporting negative currency or positive currency translations of the balance sheet because they're functionally not really ongoing operational expenses?

TS Ng -- Chief Financial Officer

Yes. It is not in the...

Alex Henderson -- Needham and Company -- Analyst

And you're not GAAP?

TS Ng -- Chief Financial Officer

Yes. Well, if it's not in the P&L then I won't highlight unless it's significant gain and loss, right? If you look at this year, year to date, I can't breakeven. Q1, I have a gain, $3 million; Q2, I have slight loss; and at Q3, I have a loss. So year to date, I'm OK.

But then again, from a quarter to quarter, it fluctuates. So that will be on a case to bring the holding to the balance sheet rather than impact every quarter in the earnings.

Operator

Thank you. I'm showing no further questions in the queue. So now it is my pleasure to hand the conference back over to Mr. Seamus Grady, chief executive officer, for any closing comments or remarks.

Seamus Grady -- Chief Executive Officer

Thank you, operator, and thank you for joining our call today everyone. We're excited to deliver strong results and a positive outlook as we continue to position the company for sustainable growth and diversification over the longer term. We look forward to speaking with you again. Thank you, and goodbye.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Garo Toomajanian -- Investor Relations

Seamus Grady -- Chief Executive Officer

TS Ng -- Chief Financial Officer

Alex Henderson -- Needham and Company -- Analyst

Troy Jensen -- Piper Jaffray -- Analyst

John Marchetti -- Stifel Financial Corp. -- Analyst

Timothy Savageaux -- Northland Capital Markets -- Analyst

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