Welcome to Fabrinet's Financial Results Conference Call for the 2nd Quarter of Fiscal Year 2021. 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 Tomajanian.
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 Q2 of fiscal year 2021, which ended December 25, 2020. With me on the call today are Seamus Grady, Chief Executive Officer and Chavis Ferra, 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 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 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 3, 2020.
We will begin the call with remarks from Seamus and Chava, followed by time for questions. I would now like to turn the call over to Fabrinet's CEO, Seamus Grady. Seamus?
Thank you, Garo, and good afternoon, everyone. We had another record quarter with Q2 results that exceeded our guidance and support our longer term optimism. In fact, based on our current outlook, We are positioned to deliver another record quarter in Q3 with strength across all key areas of our business. Revenue in the Q2 was a record $453,800,000 representing year over year as well as sequential growth. We remain focused on driving efficiencies, which helped generate margins that were at their highest levels in over a year.
As a result, EPS also increased year over year and sequentially to a record $1.10 On today's call, I will focus my comments on the broader themes that drove our strong performance and support our outlook and Chava will provide more details on our financial results and guidance. Our Q2 played out largely as anticipated, combined with an unexpected positive surprise from automotive programs, which represented the most significant driver of upside in the quarter. In fact, automotive revenue grew more than 30% from the Q1 and more than doubled from a year ago. We continue to see a recovery from traditional automotive customers And even stronger growth from new automotive programs such as LiDAR, which are beginning to contribute to our growth in a more meaningful way. We are optimistic that this momentum in the automotive space will continue into the Q3.
Revenue from Industrial Lasers was approximately flat and was slightly better than expected. We expect industrial laser revenue to improve in the 3rd quarter and we remain optimistic about the longer term potential for increased outsourcing from this market. In optical communications, we had anticipated that continued telecom strength would offset continuing softness from datacom products that are deployed inside the data center. In fact, we saw modest growth in optical communications revenue in the 2nd quarter. Datacom revenue did moderate as we anticipated.
However, this was more than offset by stronger telecom revenue. We are optimistic that datacom revenue will show an improvement in the 3rd quarter and that both datacom and telecom revenue should increase sequentially. Part of our telecom growth was driven by our optical transport systems program at Cisco, which we have discussed on past calls. This transfer has been progressing very well and is ahead of plan. We had been anticipating that the transfer would be largely complete by the end of our 4th quarter And we now believe we are nearly a full quarter ahead of expectations.
This faster ramp will also contribute to our anticipated growth Communications revenue in the Q3. Due to the combination of the earlier Cisco ramp, growth from new automotive customers and continuing optimism as we execute on our strategy, we were advancing our plans to expand our manufacturing footprint. We recently broke ground on a new 1,000,000 square foot building at our campus in Chonburi, Thailand. This is twice the size of our originally contemplated expansion, reflecting confidence in our ability to further scale our business over the longer term. This expansion will roughly triple our footprint in Chonburi and will increase our global footprint by approximately 50% to 3,000,000 square feet, providing us with considerable capacity to serve our anticipated growth.
We expect construction to take approximately 1.5 years, which means we could start to see revenue from this facility in approximately 2 years. To summarize, We are very pleased that our Q2 represented record revenue and earnings with results that once again exceeded our guidance. Our continual focus on efficiency helps produce improvements in gross margin and operating margin in the quarter. As we continue to expand on our market leadership, We are optimistic that Q3 will be another record breaking quarter for the company. And we believe that growth from new products and programs will continue to demonstrate success of our growth strategy as we look ahead.
Now, I'd like to turn the call over to Chava for additional financial details and our guidance For the Q3 of fiscal 2021. Chava?
Thank you, Seamus, and good afternoon, everyone. We were excited to deliver a record performance that exceeded our guidance ranges. Revenue of $453,800,000 was nearly $14,000,000 above the high end of our guidance range. This was our strongest revenue beat in 2 years and a new record. Optical Communications was $347,800,000 or 77% of total revenue, up 1% from Q1.
Non optical communication revenue was $106,000,000 or 23% of total revenue and increased 14% from Q1. Within optical communications, telecom revenue was $273,200,000 up 5% from last quarter. Datacom revenue was $74,600,000 down 10% sequentially. While datacom revenue declined as expected, We were pleased to see growth in telecom more than offset this in Q2. We are also optimistic that datacom revenue will return to growth in the Q3.
Silicon Photonics revenue was $101,800,000 down 6% from a very strong Q1, but up 24% from a year ago. Revenue from 100 gig products saw a decline as faster data rate products saw very significant growth. 100 gig revenue of 128 $2,000,000 was down 50% from Q1, while revenue from 400 gig and faster was 104,200,000 up 50% from last quarter and more than doubled from a year ago. Looking at our non optical communications business, Automotive has grown to become the largest category with record revenue of $47,000,000 in the 2nd quarter, up 34% sequentially and more than 100% from a year ago. As Seamus mentioned, new automotive programs, which include LIDAR, saw strong growth And we continue to be optimistic in this market.
Industrial laser revenue was $33,700,000 down about a percentage point from Q1. Sensor revenue was stable at $2,800,000 and other non optical communications revenue was up 5% to $22,500,000 Now turning to the details of our P and L. Unless otherwise noted, profitability metrics are on a non GAAP basis. 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. Gross margin was 12.1%, up from 12% in the prior quarter.
This improvement was the result of our ongoing focus on manufacturing efficiencies and cost reductions. Operating expenses in the quarter were $12,800,000 or 2.8 percent of revenue. This produced record operating income of $41,900,000 or 9.2 percent of revenue. Taxes in the Q2 were $1,000,000 and our normalized effective tax rate was 3%. Due to tax incentives at our Cheungri facility, which represents a growing portion of our profit, we now expect our effective tax rate to be about 4% for the year.
Non GAAP net income was also a record at $41,500,000 or $1.10 per share. On a GAAP basis, net income was $35,400,000 or $0.94 per diluted share. Turning to the balance sheet and cash flow statement. At the end of the Q2, cash, restricted cash and investments were 488,600,000 Operating cash flow was an inflow of $6,800,000 a decrease from the prior quarter primarily due to increased working capital in Our strong revenue growth. With CapEx of $10,100,000 free cash flow was an outflow of $3,300,000 in the 2nd quarter.
As Seamus mentioned, we have already broken ground on a new building at our Chonburi campus. We expect incremental CapEx of approximately $50,000,000 over an estimated 1.5 year construction period. This investment is in alignment with our capital allocation to invest in our longer term growth. During the quarter, we repurchased approximately 102,000 shares at an average price of $69.64 for a total cash outlay of $7,100,000 These repurchases are also consistent with our capital allocation strategy. At the end of the quarter, we had $93,000,000 remaining in our share repurchase program.
I would now like to turn to our guidance for the Q3 of fiscal year 2021. We are optimistic that the positive trends we have been Experiencing will continue in the Q3, and we expect revenue growth across all key categories. We expect optical communication to grow sequentially. Telecom growth is being driven by continued demand at higher data rate products combined with the earlier than expected ramping of our In non optical communications, we also anticipate sequential growth. We expect strength we have seen The new automotive programs will continue in the Q3.
We also anticipate industrial laser revenue to increase sequentially as well. We expect total revenue in the Q3 to be between $455,000,000 $475,000,000 And EPS to be in the range of $1.10 to $1.17 per diluted share. In summary, We are pleased to deliver a record second quarter result and are optimistic that the Q3 will produce another record performance. We are excited with the growth from new programs in multiple areas, coupled with our ability to expand margins. We continue to aggressively pursue new opportunities that will further strengthen our position and driving growing revenue and profitability and enhance long term shareholder value.
Operator, we are now ready to open the call for questions.
Thank you. Our first question is from Alex Henderson with Needham. Your question please.
Thanks guys. So a couple of questions, just a little off subject. Wanted to make sure that you didn't have any issues as a result of any of your Customers getting penetrated with SolarWinds, Hack and Experience Lateral or did you have any issues with SolarWinds?
Hi,
Alex. This is Seamus. No, we did not have any issues. We were quite fortunate not to be hit by the SolarWinds Ishu, we're not aware of any impact to our customers. So we've been quite fortunate.
We do have obviously Very tight controls, but I think there's an element of good fortune as well. So thankfully, we haven't been impacted.
I'm glad to hear that. Thanks Perfect for answering that one. The second question I wanted to ask is really could you just tell me what the Tax rate comment was because I couldn't understand you when you gave the tax guide.
Hi, Alex. This is Karel. So basically, what we are commenting On our tax rate, we are anticipating more and more profit coming from our Tchonburi campus where we have tax incentives. So that's obviously driving our tax rate down.
Yes, I know, but you gave a guidance. I just couldn't hear the number. Could you please repeat that? Sorry about
that. It's about 4%.
About 4%. Thanks. The second question I wanted to ask is, obviously, Acacia and Cisco merger looks like it's going to get done. Does that have any impact on you? And Given that closure, would it change your trajectory at all?
Yes. So far, we feel good about that relationship. I think in the past, we've said, If the deal went through or if the deal didn't go through, we didn't really have strong views, frankly, one way or the other. So we're happy to see the deal go through. We think it's good for both companies.
And we're very happy with obviously with our relationship there, again with both companies now Cisco. So no major impact from our point of view.
And how about the Lumentum acquisition That was announced, any impact to you from that one way or the other?
Yes. So obviously, we've had a strong relationship with both With dementia for many years, they were our largest customer for some time and Coherent is also a customer of ours. They're less than a 10% customer, but they are a customer of ours. And our work with Coherent has been focused on the industrial laser side. So it's kind of in our sweet spot.
It's very early to say, time will tell. We haven't had any conversations actually with either company at this stage related to the acquisition. But we're optimistic given our long standing relationship with both companies, we're optimistic that any impacts From the combination would not negatively impact us. And historically, we've tended to benefit from these type of business combinations, but it's very early stages yet.
From what I understand, Rofin's foot manufacturing footprint inside of Coherent is Extremely distributed and the company said that 65% of their benefits momentum said 65% of their synergies are coming from Rationalizing footprint into Thailand, I assume that that means you and therefore that shouldn't that be a considerable positive for you Because obviously, Coherent was not moving as fast as management seems to intend to do.
Well, we'd certainly like to think that, but I'd point out we're not the only manufacturer in Thailand. We're not Lumentum's only manufacturer and of course Lumentum have their own facility in Thailand too. So I certainly wouldn't want to speak on Lumenta's behalf, but we'll be doing everything we can to try and win our share of that business.
I see. And then finally, if I just go back to the comments on Cisco happening faster, Just a last question. So does that mean that we should anticipate that coming on faster and therefore having less Growth impact as we move into the back half of the year and get against those comps as we move forward? Or
do you
think that the fast move is actually going to incent them to continue to move more production over to you?
No, I think your first assumption is correct. It's really pulled everything in by about a quarter. But The business is what it is. It's the business that we've moved from our competitor in Chonburi. That's the transfer that's about a quarter ahead of schedule.
But it just means that The growth is accelerated, but it's not necessarily going to result in more revenue,
Our next question comes from John Marchetti with Stifel. Your question please.
Thanks very much. Seamus, The announcement of the breaking ground on the new building in Chamboree, it sounds like it really got pulled forward a little bit for you. And I'm curious if that's Just a function of the Cisco business being completed from a transfer process a little bit ahead of schedule or if it's Some of this new LiDAR strength that you've alluded to, just curious because it does seem like a fairly big departure from where we were even just a quarter ago.
Well, it's been I suppose it's been in the works and in consideration for a while. We always say we never wait until The previous factory is full. We're going to pull the trigger on the next one in anticipation of growth. And if you think about a lot of where the growth has come from in the last while, It just come from new customers that we've been adding into Chonburi. So the Cisco transfer is a big one.
The big chunk of the business we transferred from Infinera in Berlin Went to Chonburi. And of course, a lot of our new automotive programs, in particular, LiDAR, laser lighting and a few others Have gone to Chonburi. So we've got to the point where we're getting quite busy in Chonburi and it's the right time To pull the trigger on the next building. So for us, it's we don't really I suppose we don't indicate when we're going to do it until we do it, John. So it might look like it's a surprise or Big news, if you like, from last quarter, but really we haven't been indicating precisely when we would be planning to build that next building.
So We see it as a it's a good indication of our optimism in the growth trajectory that we're on. And it will be a much bigger For Princeton than the last building.
Got it. And then if I just think about the 100, 400 gig split, We've been talking a little bit in these last several quarters about sort of some of the challenges you've had on the datacom side because of that Transition, it seemed like it put pretty strongly this quarter. Do you think that inflection point is behind you? And I'm just curious as we're looking out Going forward, is the expectation now that that $400,000,000 plus revenue continues to scale up, but I guess How much risk is there that the 100 continues to decline at that kind of rate that we recently just saw?
Yes, it's an interesting one. I think We talked about our datacom revenue. We're guiding up on that. We expect it to increase a little bit in Q3. And that's just to remind, we're talking inside the data center.
So for us, datacom is inside the data center, outside the data center or data center interconnect, we categorize in telecom. We have seen, I would say, a fairly strong transition from 100 gig products to, Let's say, 204 100 gig inside the data center. We have a few customers there who have transitioned to 200 or 400 gig products. It started, I would say, 2 quarters ago and it's really beginning to accelerate now. And our anticipated Sequential growth in Datacom comes from those customers who are really transitioning.
And also, we talked in the past about that trade off between price and volume. We think that the demand trends and the pricing are now more, If you like more in equilibrium than they were in the past. So we see the Datacom business going up now. So yes, we think that inflection point is kind of we're kind of in it or it's Maybe slightly behind us at this point. We should see those higher data rates, data center products start to ramp now.
Got it. And then one last question for you all. Given some of the strength that you've recently showed in auto and how you're talking about it going forward, We've certainly been hearing about some supply constraints, particularly within that market vertical. Just curious if there's That's something that we have to be aware of or be thinking about as we're looking at that business strike continuing as we go through the year.
Yes, I think it's always a it seems to be a pattern in our industry that there's always some Challenge every 1.5 to 2 years, there seems to be some big supply constraint that hits us all. And for us, it has become part of our, If you like our standard operating procedure for us to figure out how to identify and secure these critical parts, We work very closely with the customers and our supply chain partners to make sure we get our share and hopefully our unfair share of the parts. We have seen like others I think I've spoken about, we have seen longer lead times mostly related to our automotive business. But this we factor this into our guidance and we will continue to do so. So it is an issue, but we wouldn't want to make too much of it.
We have to make sure we secure the parts, work with the customers, work with the suppliers to make sure we secure the parts. And like I say, we have factored it into our guidance.
Great.
Our next question comes from Samik Chatterjee with JPMorgan. Your question please.
Hi, guys. This is Joe Cardoso on for Samik. So my first question is a follow-up on the automotive question that was just asked. I guess relative to our expectation, automotive continues to outperform expectations. And it sounds like the primary driver is LiDAR and then to a lesser degree the traditional business.
I guess if we compare it to like 90 days ago or 180 days ago, has this demand kind of caught you guys by As well and like what's really driving this demand for LiDAR specifically is this going into production vehicles, any color there would So
for us, the growth in automotive has come from a couple of areas. It's traditional automotive, But more so as you correctly point out on LiDAR. We go by our customers 13 week rolling forecast. We don't Unfortunately, Joe, we don't necessarily have visibility into what specific applications our customers are planning for those LiDAR modules that we're producing and shipping. So it's probably a question better directed to our customers, but we're just very happy to be participating in that supply chain.
We do feel we have a lot of strengths That position is very well to capitalize on the hopefully explosive growth that the world will see in LiDAR Business, we're very well positioned. We believe we're the strongest country manufacturer in that space. But to answer the question, Specific applications that are behind us, we wouldn't be so sure, I'm afraid.
Got it. No, that's fair. And then my second question is more of a clarification or confirmation. I believe in the past, and this is related to the Chonburi build out. In the past, you've disclosed that roughly one plant and equates to 550 square or 550,000 square feet or $100,000,000 of total revenue opportunity.
So is it correct to think the new building will account for roughly $1,000,000,000 of revenue?
Yes. I mean, the ballpark math would be correct, yes. But it really does depend on the mix. If for a given 10,000 square feet, it If you're producing a very densely populated, very small, physically small transceiver Versus a big system that has a lot of air in us, the revenue mix would be different. But that's they are the numbers we've used in the past, roughly 550,000 square feet is about $500,000,000 revenue capacity.
So, yes, that's the correct assumption at this point.
Got it. Appreciate the insights, guys. Congrats on the quarter.
Thank you, Joe. Appreciate it.
Thank you. Our next question is from Tim Savageaux with Northland Capital. Your question please.
Hi, good afternoon and congrats on the results.
Thank you, Tim.
All right. I wanted to follow-up on the kind of capacity addition question. Because of the way you put it Upfront realizing that you may not have kind of telegraphed the timing of breaking ground. You did And it was twice what the original plan was. So I guess when was that original plan developed and how recently did it change and why did it
Well, when I say the original plan, I mean, I guess we had always envisaged at a high level The building that we call it Building 8, we don't have a very exciting naming convention, but Building 8 in Johnbury, We had always envisaged that Building 9 would be, if you like, a carbon copy of Building 8, again, without having given it much thought. And then we got closer to making the decision, there's always a trade off between the size and then the cost per square foot. So obviously, the bigger the building, The lower the cost per square foot to build the building. So that was the trade off really. So we just felt the time was right to make a bigger investment in capacity.
And again, like a lot of our operations, there will be a disproportionately high amount of cleanroom space relative to other contract manufacturers. And that does take time to bring on and get ready for. So it's been an iterative process. There wasn't, if you like, a big bang event that drove us this decision, it was more of an iterative process as we looked at. We have ample land.
We have enough land that lasts us for a long, long time. The size of the lot or the land was never going to be a constraint. It was more about how big we wanted to build the building, Taking into account parking space for employees and future growth and expansion capabilities. So I hope that answers your question, Tim.
Not quite, but let me try one more thing and then I'll move on to More detailed questions, which is, you mentioned a number of factors kind of driving current capacity at Chonburi. Cisco is ramping faster, but it's Not ramping larger in magnitude, I would imagine. I think that's kind of what you said. So I guess I'm still looking for Outside of parking spaces, what sort of opportunities may have arisen in the last quarter or 2, assuming if I'm correct That Cisco is just happening quicker, but in terms of its overall contribution is about in line with expectations. Are there any things that you can point to that might have Given you a sense that you could make use of greater capacity.
Sure. Well, of course, The Cisco opportunity that I mentioned, it's ramping in line with Our expectation that we had when we won that business. But Cisco is a very large company and we'd be very determined to make sure we continue to expand that relationship. Maybe the specific program that we're transferring, it is what it is in terms of the size and scale of that program, We'd certainly be working very hard to make sure we win additional business from Cisco. So that's one opportunity.
Then the other is that there are a lot of other System opportunities that we're pursuing. We've had some considerable success we think with Infinera and with Cisco, but there are a lot of other companies out there that we'll also Be pursuing. In addition, our automotive business is growing and LiDAR is becoming a bigger share Of the automotive business. And then also we want to be able to make sure we have capacity for the inevitable Move towards increased outsourcing in the industrial laser market because again we think that industry is very underpenetrated in terms of outsourcing. So it's really to position ourselves to be able to fulfill the pipeline of existing business and new business that we have In the works.
Got it. Crystal clear. And while we're on Cisco realizing there's probably A limited amount you can say, I mean, you have indicated that it's ramped quicker than expected. I assume not To the magnitude where you'd have any additional 10% customers in the second quarter, but Would you expect that that could possibly be the case in Q3 or sometime in the second half The year in terms of adding new kind of logos to that 10% list?
We disclosed the 10 At the end of the year, I think I'd be optimistic we'll have we've talked In the past about Infinera becoming a 10% customer, we believe Cisco will be a 10% customer. And I think we're still on track for that. Beyond that, I wouldn't like to speculate.
Fair enough. And last question for me. You did see a decline in silicon photonics Revenue in the quarter after a couple of quarters of very strong growth, at least sequentially, which seems to marry up To some degree with the decline in datacom, should we assume that headwind came more from the datacom side Versus the your other silicon photonic applications at higher data rates in telecom?
Hi, Tim. This is Trevor. Yes, that's pretty much a fair assumption. We did we do believe that the Datacom have bottomed out. So silicon photonics had also been impacted with that downward trend in the datacom, and we anticipate the growth He's going to come back in Q2.
Great. Thanks very much and congrats again.
Thank you, Tim.
Thank you. Our next question comes from Dave Kemp with B. Riley. Your question please.
Thank you. Good afternoon. My first question is regarding 100 gig and 400 gig. Just wanted some additional color. So I think you said 100 gig declined 15% sequentially, whereas 400 gig plus increased 50% sequentially, is that correct?
Yes, that's correct.
Now, are you lumping both datacom and And if you are, then can you just provide some color between Datacom and Telecom?
Yes, we do have datacom and telecom combined in both categories. We usually not break out by data rate our datacom and telecom However, you did mention that in the datacom space, we are anticipating the 204 100 gs Take a little bit bigger market share from the revenue. However, that's at this point is not meaningful. So The growth on 400 gs is primarily in our telecom segment. And as a reminder, Our data center interconnect is also categorized in that category, which was a quite strong driver there.
Got it. And then of that 400 Good bucket. Can you provide any color regarding 400 versus 600?
No, we don't break out beyond that. So it's 400 and above. It's a combination at this point of 46, $800,000,000 at this stage is not a substantial amount yet. So it's going to be a combination of 46.
Got it. And then you mentioned that Datacom seems to have bottomed. I mean, I think the last Peak was about, what, 9, 10 quarters ago. I think it was fiscal Q1 2019. Looking at the model, It was about $109,000,000 I mean, can we get back to that level?
Or how should we think about this the next cycle?
So again,
since that time, I think what we have been seeing is a significant price erosion, which I The main reason of our revenue decline, why the volumes have been pretty strong in datacom space. So it's a number of factors of that That revenue was primarily driven by price erosion and lower ESPs. When we look at out in the future, we really don't Like to speculate beyond 1 quarter. So at this point, I wouldn't make any comments whether or not it's going to return to that rate. But Again, 400 gs 204 100 gs is starting to ramp, which is obviously driving a higher ASP.
So I would say The pricing, a cyclical trend, it would be fair to say that it should continue as it's been in the last 18 months.
Got it. And then lastly on the auto, I mean, what's the mix rough mix between lighter versus traditional?
We usually don't break that out in terms of traditional LIDAR, particularly So when we talk about newer automotive, it does include LIDAR and other newer automotive programs as well, for example, laser lightings and EV vehicle related business as well. So we are not breaking that out from traditional, but the growth came in the past quarter both from strong Traditional and stronger newer automotive programs.
Got it. Thank you.
You're welcome. Operator, are you still on the line?
And our next question comes from Alex Henderson with Needham. Your question please.
Great. Thank you. A couple of follow-up questions. When we look at the automotive segment, is it concentrated in a few names That are achieving the bulk of that revenue or is it distributed across multiple manufacturers?
It's in a few names, not a huge number of names. I mean, our traditional automotive business, We have one major customer there on what we call our traditional automotive business that's Valeo. They're not a 10% customer, but they're Significant customer for us in our traditional automotive business. And then our newer automotive we have others as well, but Valeo would be the bigger the biggest one in our traditional automotive. And then in the newer automotive business, we've talked about Velodyne in the past.
We brought them on The customer brought them into Fabrinet West originally then transferred them to Bangkok. We didn't name them as a customer Until I think it was maybe last quarter, the quarter before, when with Valeo's agreement, we were able to name them. We have a couple of other, I would call newer automotive customers as well in laser lighting companies, electric vehicle companies and then some other Automotive customers that were just bringing on other lidar companies, solid state lidar and ADAS type companies who are Quite sensitive about us naming them until they're ready to communicate that. But we have a good pipeline. I'd say that The pipeline of new business is almost all on the new automotive side of the business with, I would say, A strong pipeline of LiDAR companies.
There's a lot of LiDAR companies out there today. Obviously, They won't all succeed, but for us, we want to make sure we're working with the ones that we believe have the best chance of success. So we have A good pipeline of LIDAR companies, but not ones where we'd be able to name at this stage.
So these are predominantly People who are then selling to the large auto companies as opposed to directly to the auto companies themselves.
That's correct.
Second question I had, when you do kick this manufacturing plant into Production, should we anticipate the same kind of 10 to 20 basis point pressure to gross margins? It's a fairly modest hit for gross margins relative to the impact when you turn the plant on. Still, is that the right way to think about it?
So obviously, that will involve depreciation expense of the facility. So as anything as we run The absorption should more than offset, but initially the depreciation expense will obviously Put a pressure on our gross margin. Nevertheless, as we have always been driving efficiencies to offset the headwinds In the past, we will continue to do so to make sure that we stay within our gross margin range.
I recall last time you turned up the new facility, it was about a 10 to 20 basis point hit. The question would be, is this Twice that because it's twice the size or should it still be that kind of magnitude?
Well, if you think about it, the depreciation expense of $50,000,000 investment, if you do the math. I haven't done the exact math at this stage, but that's what you should think about in
terms of gross margin Hadwin. Okay. And then I noticed one of the OEMs in the In the networking space, finally launched a co packaged product. Are you starting to see more interest in co packaging? And to what extent is that creating a new growth factor for you?
We are. And I think for us, we co packaged optics is inevitable, given the increase in speed and bandwidth from the networking silicon. It's probably a couple of years out before it becomes, let's say, mainstream, but we're very firmly working with our customers on that. And for us, co packaged optics for us is more of an evolution From what we've been doing with regard to silicon photonics over the last several years. So yes, we're seeing it being a driver for us In the coming years, nothing imminent, but certainly it will become it's inevitable basically the move to co packaged optics.
And then finally, can you talk about the box? Obviously, It strengthened over the course of last year, but it was fairly stable, I think, in the last quarter. How remind us how you're hedged and to what extent do you expect any variance from that hedging program?
So basically, there are two aspects Of the baht situation and overall exchange rate situation, if you look at our income statement, we have had about $500,000 loss in the last Quarter, I mean, the small gain in the prior quarter that represents approximately $0.02 headwinds. But when we look at The broader FX trends, primarily U. S. Dollar has been weakening in the last couple of months. Obviously, there are Two effects, BOT is appreciating, U.
S. Dollar is strengthening, which is representing a headwind for us. So the hedging program we have In place is a layered hedge. We are 100% hedged for the next quarter, 50% hedged for the following quarter And about 25% hedged 3 quarters out. So if you look at the market trends, We have a pretty predictable estimate for the current quarter.
But as we go on in the future, the current market situation will be reflected In our future results. So in Q2, because of that, we didn't really have a significant impact from the baht because of the hedging program. However, as you look out to Q3, the baht has strengthened somewhat in the last 3, 4 months and that impact is going to start Putting a pressure on our Q3 gross margin, so which is baked in our guidance at this point.
Right. It would have been improving further otherwise. Go ahead.
That is correct. So that's really our margin expansion because we have to make up for that has been the improved efficiencies.
All right.
Okay. That's all I had. Thanks.
Thanks, Alex.
Thank you.
Thank you. And this concludes our Q and A for today. I would love to turn the call back to Seamus Grady for his final remarks.
Thank you for joining our call today. We're pleased to have exceeded our guidance with record revenues and EPS in the 2nd quarter. We're optimistic that the coming quarter will represent another record performance, illustrating that our strategy is working. We look forward to speaking with you again soon. Goodbye and thank you.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.