Fabrinet (NYSE:FN) Q3 2024 Earnings Call Transcript May 6, 2024
Fabrinet beats earnings expectations. Reported EPS is $2.21, expectations were $2.12. FN 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 Fabrinet’s Financial Results Conference Call for the Third 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 third quarter of fiscal year 2024, which ended March 29, 2024. 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 February 6, 2024. 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 to those of you joining our call today. We are very pleased with our third quarter results that included revenue and EPS that were above the high end of our guidance ranges. Revenue was a record $731.5 million and non-GAAP net income was also a record result of $2.39 per share. The quarter played out better than anticipated, with sequential revenue growth in optical communications from both datacom and telecom, accompanied by a small decline in non-optical communications, mainly from automotive revenue. Within optical communications, datacom revenue again outpaced telecom, with datacom revenue growing 150% from a year ago. Datacom continues to benefit from demand for 800 gigs technology for AI applications, and we remain very optimistic about our position in that market.
After several quarters of declines, telecom revenue saw sequential growth in Q3. However, it’s important to point out that this growth was driven primarily from data center interconnect products that more than offset continued sequential declines from traditional telecom. We expect to see continued choppiness in telecom revenue as our customers and their clients continue to work down elevated inventory levels. Turning to non-optical communications, we saw a small sequential revenue decline. This was primarily due to near-term inventory digestion for certain automotive products in the quarter. Consistent with our comments last quarter, we are optimistic that automotive revenue will increase sequentially in the fourth quarter. Industrial laser revenue remains stable in the third quarter.
Looking to the fourth quarter, we are well positioned to end our fiscal year on a high note with another strong performance. High data rate datacom products continue to be an important driver of our business momentum, and we are confident we can deliver another quarter of accelerating year-over-year revenue growth in Q4. With this momentum, fiscal 2024 will represent another year of record revenue for the company, with EPS again growing faster than revenue. In summary, we delivered a record third quarter with revenue and EPS that were above our guidance ranges. We’re looking forward to a very solid finish to an outstanding year for our company, and we’re optimistic about what lies ahead as we further extend our leadership in the market. Now I’ll turn the call over to Csaba for more financial details on our third quarter and our guidance for the fourth quarter.
Csaba?
Csaba Sverha : Thank you, Seamus. And good afternoon, everyone. We had a strong third quarter. Revenue was above our guidance range at a record $731.5 million, up 10% from a year ago and up 3% from the second quarter. This drove non-GAAP earnings per share of $2.39, which was also a new quarterly record and above our guidance range. Foreign exchange valuation gain of $0.09 per share contributed to our strong earnings per share, but non-GAAP EPS would still have been well above our guidance even without this tailwind. Details of our revenue breakdown are included in the investor presentation on our website, and I will focus my comments on the more notable metrics. Optical communications revenue was $591.4 million, representing 81% of total revenue, an increase of 18% from a year ago and 4% sequentially.
Datacom revenue was $305.5 million or 52% of optical communications revenue, an increase of 150% from a year ago and 6% from the prior quarter. This growth came primarily from high data rate products for AI applications, which continue to see strong demand. Telecom revenue was $286 million or 48% of optical communications revenue. Telecom revenue declined 25% from a year ago, but increased 2% from Q2 as data center interconnect growth more than offset continued decline from traditional telecom products. By data rate, products rated 400 gig and faster continued to dominate growth, increasing to $426.3 million in Q3, up 93% from a year ago and 13% from the second quarter. Products rated at 100 gig continue to see revenue declines and were below 10% of optical communications revenue in the quarter.
As anticipated, we saw a decline in non-optical communications revenue, which was $140.1 million, down 3% from Q2. This decline was primarily due to previously anticipated inventory absorption of certain automotive products. Automotive revenue was $73.6 million, down 7% from Q2. We expect automotive revenue to increase sequentially in the fourth quarter as near-term inventory issues subside. Industrial laser revenue was flat sequentially. As I discuss the details of our P&L, expense and profitability metrics will be on a non-GAAP basis unless otherwise noted. Gross margin in the third quarter was consistent with the second quarter at 12.6%. Operating expenses were $14.5 million or 2% of revenue. This produced operating income of $78 million, representing an operating margin of 10.7%, also consistent with the second quarter.
Our low fee cost structure helped us to maintain our industry-leading margins, which were in line with our long-term target ranges. Our healthy balance sheet coupled with elevated interest rates helped to provide $8.5 million of interest income. As I mentioned earlier, net income benefited by $3.3 million, or $0.09 per share from foreign currency asset and liability revaluations at the end of the quarter. Effective GAAP tax rate was 2.9% in the third quarter. We continue to anticipate a mid-single digit rate for the fiscal year. Non-GAAP net income reached $87.7 million or $2.39 per diluted share. On a GAAP basis, net income was $80 million or $2.21 per diluted share. Turning to our balance sheet and cash flow statements. At the end of the third quarter, cash and short-term investments were $794 million, up $53.4 million from the end of the second quarter.
The primary driver of this increase was strong operating cash flow of $100.9 million. With CapEx of $13.6 million, free cash flow in the quarter was $87.3 million. Our share buyback program was active during the quarter. We repurchased approximately 153,000 shares at an average price of $193.76 per share for a total cash outlay of $29.6 million. At the end of the third quarter, $64.1 million remained in our share repurchase authorization. Now I will turn to our guidance for the fourth quarter. We expect datacom revenue to be slightly up sequentially in the fourth quarter. This growth is being driven primarily by high data rate products for AI, which are more than offsetting the impact of the end of the legacy 100-gig program. For telecom revenue, we expect a sequential decline in the fourth quarter, as industry-wide inventory absorption continues to impact traditional telecom product demand.
We expect non-optical communications revenue to be up sequentially, driven primarily by an increase in automotive revenue. In total, we anticipate revenue to be in the range of $720 million to $740 million in the fourth quarter. We expect net income of $2.20 to $2.27 per share. In summary, we had another record quarter with results that exceeded our guidance for both revenue and EPS. We are optimistic that we will see strong results again in the fourth quarter, closing out a year of record revenue and profitability. And we believe we are well positioned for continued success as we look ahead. Operator, we are now ready to open the call for questions.
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