Fabrinet (NYSE:FN) Q1 2024 Earnings Call Transcript
Fabrinet (NYSE:FN) Q1 2024 Earnings Call Transcript November 6, 2023
Operator: Good afternoon. Welcome to the Fabrinet Financial Results Conference Call for the First Quarter of Fiscal Year 2024. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions on how to participate will be provided at that time. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Garo Toomajanian, VP of Investor Relations. Please go ahead.
Garo Toomajanian: 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 2024, which ended September 29, 2023. With me on the call today are Seamus Grady, 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 Web site 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 Web site 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 22, 2023. 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 CEO, Seamus Grady. Seamus?
Seamus Grady: Thank you, Garo. Good afternoon, everyone, and thank you for joining us on our call today. We set new quarterly records for revenue and EPS in our first quarter, both of which were above our guidance ranges. Free cash flow also reached a new quarterly record. We achieved triple-digit year-over-year growth in datacom revenue, driven by next-generation optical interconnect for AI applications. This datacom growth more than made up for continued but diminishing sequential declines in telecom revenue as inventory absorption runs its course. Overall revenue was $685.5 million, representing an increase of 5% from the fourth quarter, as well as from a year ago. Recall that the first quarter of fiscal 2023 was a 14-week quarter, adding approximately $20 million to revenue a year ago.
Excluding this impact, revenue would have grown 8% year-over-year. Our strong revenue growth contributed to a record bottom line, with non-GAAP net income up $2.00 per share. Looking at the first quarter in more detail, optical communications revenue increased from both a year ago and the fourth quarter. Within optical communications, telecom revenue decreased sequentially, though by a smaller amount than anticipated. Datacom growth more than offset the telecom decline again, with sequential growth of 26% from a very strong fourth quarter, and year-over-year growth of over 160%. As in Q4, datacom growth was driven primarily by AI optical interconnect. In our non-optical communications business, revenue was relatively flat, as anticipated. A small sequential decline in automotive revenue was largely offset by growth in industrial lasers and other non-optical communications revenue.
Looking to the second quarter, we expect the industry-wide inventory adjustments in telecom to continue. We believe that datacom growth, particularly in AI will more than offset these headwinds again in the second quarter. In short, we are optimistic that the telecom inventory-related issues are temporary, whereas the demand strength in datacom is sustainable. In summary, our record top and bottom line results represented a strong start to the fiscal year, and we are confident that we remain well-positioned to continue delivering solid results as we look ahead. Now I'd like to turn the call over to Csaba for additional financial details on our first quarter of fiscal 2024 and our guidance for the second quarter. Chaba?
Csaba Sverha: Thank you, Seamus, and good afternoon, everyone. Revenue was above our guidance range at $685.5 million, up 5% both sequentially and from a year ago. Keep in mind that the first quarter of the prior year benefited by approximately $20 million due to an additional week. Our strong revenue helped to produce record earnings. Non-GAAP net income was $2 per share, which was above our guidance range. We have published additional details regarding our revenue breakdown in the investor presentation, which you can find on our website. So, in looking more closely at revenue, I will focus my comments on the most notable changes. Optical communications revenue of $533.3 million was a new quarterly record, very strong sequential datacom growth of 26% more than made up for a smaller than anticipated decline in telecom revenue of 6%.
Datacom growth is being driven primarily by 800 gig technology for AI applications. We believe there is still excess inventory in the supply chain, and in the second quarter, we expect datacom revenue to again more than offset telecom declines by a wide margin. Looking at optical communications revenue by data rate, growth in revenue from product rated 400 gig and faster was substantially greater than revenue declines from 100 gig programs. Non-optical communications revenue was consistent with the fourth quarter at $152.2 million and represented 22% of total revenue. Automotive revenue declined 5% from the fourth quarter due to some inventory absorption. This was partially offset by a smaller sequential increase in industrial laser and other non-optical communications revenue.
As I discussed the details of our P&L, expense and profitability metrics will be on a non-GAAP basis unless otherwise noted. Gross margin in the quarter was 12.6%. As anticipated gross margin declined seasonally by about 20 basis points from Q4 primarily due to annual merit increases which take effect in the first quarter. Operating expenses in the quarter were $14.9 million or 2.2% of revenue, an improvement of 10 basis points from the fourth quarter. We anticipate that operating expenses will continue to decline as a percentage of revenue as our business scales. Operating income was $71.7 million representing an operating margin of 10.5%, consistent with the fourth quarter. Our strong balance sheet again benefited our interest income, which was $5.9 million in the quarter.
Our gain from foreign currency asset and liability evaluations at the end of the quarter was relatively small at $0.4 million. Effective GAAP tax rate was 7.2% in the first quarter, which is above the mid-single-digit level we continue to expect for the fiscal year as a whole. Non-GAAP net income was a new quarterly record of $72.8 million or $2 per diluted share. On a GAAP basis, net income was $1.78 per diluted share. Turning to the balance sheet and cash flow statement, at the end of the first quarter cash and short-term investments were $670.8 million, up $120.3 million from the end of the fourth quarter. This increase was driven primarily by strong operating cash flow of $145 million wit CapEx of $11.4 million, free cash flow was a quarterly record at $133.6 million.
Our share repurchase program was not active in the first quarter. As a result, $100 million remained in our share repurchase authorization at the end of the quarter. Now I will turn to our guidance for the second quarter. As I mentioned, we expect inventory adjustment at our customers primarily in the telecom space to continue into the second quarter. We expect sequential revenue growth from high-data rate data from AI programs to, again, more than offset these telecom headwinds. We anticipate automotive revenue to decline sequentially, and expect industrial laser revenue to be relatively flat. In total, we expect revenue to be between $680 million to $700 million. From a profitability perspective, we anticipate non-GAAP net income to be in the range of $1.98 to $2.05 per diluted share.
In summary, we are happy to have exceeded our first quarter guidance by producing record revenue, net income, and free cash flow. We continue to balance consistent growth with improving profitability. We are optimistic that we can continue to execute well to deliver strong results as we look ahead. Operator, we are now ready to open the call for questions.
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