Fabrinet (NYSE:FN) Q2 2024 Earnings Call Transcript
Fabrinet (NYSE:FN) Q2 2024 Earnings Call Transcript February 5, 2024
Fabrinet misses on earnings expectations. Reported EPS is $1.89 EPS, expectations were $2.04.
Fabrinet isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. Welcome to the Fabrinet Financial Results Conference Call for the Second 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. You may begin.
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 second quarter of fiscal year 2024, which ended December 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 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-Q filed on November 07, 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 and thank you for joining our call today. We had a very strong second quarter, which again set new records for revenue and EPS, and also exceeded our guidance ranges. Rapid datacom growth continues to fuel our overall performance, driven by next-generation AI interconnect. Telecom revenue remains impacted by inventory absorption in the ecosystem, but we are encouraged that the magnitude of these declines is getting smaller. Total revenue was $712.7 million, an increase of 7% from a year ago, and 4% from the first quarter. Our strong execution helped to improve operating margins from the first quarter, and generate non-GAAP net income of $2.08 per share, a new quarterly record. Looking at the second quarter in more detail, optical communications revenue grew, both from a year ago and the first quarter.
Within optical communications, telecom revenue decreased sequentially as anticipated. However, within telecom, we saw increasing demand for extended reach, pluggable optics, which helped soften the sequential decline. We expect that this trend will continue in Q3. When combined with what appears to be a diminishing impact from inventory absorption, we believe telecom revenue could be up slightly in the third quarter. Datacom revenue growth was strong again in the second quarter, driven by AI optical interconnect products. For the first time in our history, datacom revenue exceeded telecom revenue, largely driven by AI programs. We expect to maintain this higher datacom revenue mix even as sequential datacom growth moderates and as telecom revenue trends improve.
Our non-optical communications business saw a small sequential revenue decline in the second quarter. This was primarily due to continued inventory absorption from certain automotive programs. We expect this inventory digestion in the automotive market to persist into the third quarter, but we currently anticipate a sequential improvement in the fourth quarter. Industrial laser revenue remained stable in the second quarter. Operationally, we performed very well in the second quarter, with operating margins improving to 10.7%, a 20 basis point improvement from the first quarter. Looking to the third quarter, we are optimistic that we can deliver another strong performance for revenue and profitability. Despite softer near-term automotive trends, we believe telecom is positioned to show sequential revenue improvement, led by growth in ZR.
In addition, we expect further growth in datacom revenue, which continues to be driven primarily by strength in AI programs. At the same time, we expect to extend our track record, a strong operational execution and profitability. In summary, we are excited to have delivered another record quarter for both revenue and earnings per share, and we are confident that we can deliver another strong performance in the third quarter. Now I'd like to turn the call over to Csaba for additional financial details on our second quarter of fiscal 2024 and our guidance for the third quarter. Csaba?
Csaba Sverha: Thank you, Seamus, and good afternoon, everyone. Second quarter revenue was above our guidance range at a record $712.7 million, up 7% from a year ago and up 4% from the first quarter. This strong top-line performance led to non-GAAP earnings per share of $2.08, which was also above our guidance range. This record EPS includes the impact of a foreign exchange evaluation loss, which reduced net income by $0.10 per share. Details regarding our revenue breakdown are included in the investor presentation on our website. So my comments today will focus mainly on the most noteworthy areas. Optical communications revenue was $567.9 million, or 80% of total revenue. Datacom revenue was $288.1 million, exceeding telecom revenue for the first time.
Datacom revenue increased 19% from the first quarter, driven primarily by 800-gig AI programs. Although the rate of sequential growth has begun to moderate, datacom revenue still increased by over 150% from a year ago. We expect new high data rate datacom programs to continue making significant contributions to our top-line as we look ahead. Telecom revenue was $279.8 million or just under half of total optical communications revenue. Telecom revenue declined 4% sequentially as we continue to see softness due to excess inventory in the channel. Similar to the first quarter, growing demand for 400 ZR programs helped to offset some of this impact. We are optimistic that in the third quarter we could see a small sequential increase in telecom revenue.
By data rate, products rated 400-gig and faster grew 118% from a year ago and 18% from the first quarter, and represented two-thirds of total optical communications revenue. Non-optical communications revenue decreased 5% sequentially to $144.8 million and comprised 20% of total revenue. This decline was driven primarily by inventory absorption of certain automotive products as we indicated last quarter. We anticipate automotive revenue will continue to decline in the third quarter, but expect to see a return to sequential growth in the fourth quarter. Industrial laser revenue was flat sequentially, and we expect that trend to continue in the third quarter. 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 second quarter was consistent with the first quarter at 12.6%. Operating expenses were $14 million, or 2% of revenue. This produced operating income of $76 million, representing an operating margin of 10.7%, an improvement of 20 basis points from the first quarter. With a strong balance sheet, we benefited from $7.7 million of interest income, which more than offset the $3.8 million FX loss from foreign currency assets and liability revaluations at the end of the second quarter. Effective GAAP tax rates was 5.2% in the second quarter, in line with the mid single digit level we anticipate for the fiscal year. Non-GAAP net income was a new quarterly record of $76.1 million, or $2.08 per diluted share. On a GAAP basis, net income was $1.89 per diluted share.
Looking at the balance sheet and cash flow statements, at the end of the second quarter, cash and short-term investments were $740.6 million, up $69.8 million from the end of the first quarter. The primary driver of this increase was healthy operating cash flow of $84.2 million. With CapEx of $9.8 million, free cash flow in the quarter was $74.4 million. We were active in our share buyback program during the quarter, repurchasing approximately 38,000 shares at an average price of $166.61 per share, for a total cash outlay of $6.4 million. In addition to investing in our growth, returning value to shareholders remains a key capital allocation priority. At the end of the second quarter, $93.6 million remained in our share repurchase authorization.
Now I will turn to our guidance for the third quarter. We remain optimistic about our business momentum and ability to execute well. In the third quarter, we expect further sequential revenue growth in datacom, which continues to be driven by demand for optical communications products for AI applications. In the telecom market, after several quarters of declines, we believe that we could see modest sequential revenue growth in the third quarter. We expect this increase to be driven by further stabilization of industry-wide inventory issues coupled with continued growth of data center interconnect products. We foresee another quarter of softness in our automotive business due to inventory absorption in the channel. And we expect that industrial laser revenue will be flat.
As a result, we anticipate total revenue will be in the range of $705 million to $725 million in the third quarter. We expect to continue to execute well and anticipate net income of $2.08 to $2.15 per share. In summary, we are excited to continue with our strong track record of exceeding guidance as well as achieving new records for both revenue and EPS. We are optimistic that we are well-positioned to deliver strong results again in the third quarter and extend our leadership position in the market. Operator, we are now ready to open the call for questions.
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