Good day, ladies and gentlemen. Welcome to Fabrinet's Financial Results Conference Call for the first quarter of fiscal year 2019. 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 given at that time. As a reminder, today's call is being recorded. I would now like to turn the call and conference over to your host, Garo Toomajanian, Investor Relations. Please go ahead.
Thank you, operator. 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 2019, which ended September 28, 2018. With me on the call today are Seamus Grady, Chief Executive Officer, and Toh-Seng 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. 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 SEC filings, in particular the section captioned "Risk Factors" in our Form 10-K filed on August 22, 2018. 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 CEO, Seamus Grady. Seamus?
Thank you, Garo. Good afternoon, everyone. Revenue in the first quarter came in well above the high end of our guidance range at $377 million, an all-time record for quarterly revenue. Strong revenue, combined with the foreign exchange gain, produced non-GAAP net income of $0.92 per share, which was also above the high end of our guidance. This earnings performance also helped drive strong cash flows, with operating cash flow of nearly $35 million in the first quarter and free cash flow of $29 million. We had anticipated that our modest sequential growth in the fourth quarter would continue into the first quarter, and our actual performance was considerably better than we had anticipated. As TS will detail in a moment, we expect fiscal Q2 to represent another quarter of sequential growth. With increasing demand, we continued to see component constraints during the first quarter.
We were again able to successfully mitigate these shortage risks during the quarter. We will continue to take appropriate steps to manage these supply challenges going forward. In the last several months, there have been a lot of discussions related to tariffs on products coming to the U.S. from China. I can report that we have not seen any negative impact from these tariffs. We don't anticipate that we will in the future. With the vast majority of our manufacturing in Thailand, we could actually benefit from tariffs on products being manufactured in China if component and equipment makers look for suppliers in other countries. Looking at our first quarter performance by end market, both Optical Communications and Non-Optical Communications business grew from a year ago.
Optical Communications revenue of $281 million was up 2% from a year ago and up 16% from the fourth quarter, with revenue for both Telecom and Datacom products growing double digits from the fourth quarter. Telecom revenue was $179 million, an increase of 14% from the fourth quarter. Datacom revenue was $102 million, up 19% from the fourth quarter. By technology, silicon photonics-based Optical Communications revenue was $83 million, up 19% from the fourth quarter. Variants of the QSFP28 form factor, which can be both silicon photonics and non-silicon photonics based, generated revenue of $45 million, which was up marginally from a strong Q4, which saw a 20% sequential growth. By data rates, 100G programs continue to dominate Optical Communications production and grew slightly faster than Optical Communications overall to $155 million or 41% of total revenue.
Speed rated products at 400G and faster data rates represented more than 4% of total revenue. Turning now to Non-Optical Communications, revenue was $96 million, compared to the record $103 million we generated in the fourth quarter. Still, quarterly revenue for Non-Optical Communications was the second highest in our history, with Industrial Lasers again delivering a strong performance with revenue of over $49 million. Automotive revenue declined slightly from a record fourth quarter to $22 million. Revenue from sensors and from other products were both up from a year ago, but down from the fourth quarter, with sensors at $4 million and other revenue at $21 million, representing normal quarter-to-quarter variability. While this variability is likely to continue, especially as newer programs ramp, we remain optimistic about our long-term growth opportunities in our Non-Optical Communications business.
Revenue from new business reached nearly $138 million, up 10% from $125 million in the fourth quarter. Our New Product Introduction, our NPI services, continue to be an important driver of new business, as these services can turn into long-term programs generating significant revenue over several years. As we have mentioned previously, we are in the process of looking to establish a New Product Introduction facility in Israel to support our existing customers there, as well as to develop new customers. This would enable us to replicate the success we have seen in Fabrinet West and Fabrinet UK. We are working closely with our existing customers in Israel to determine the best approach going forward. In summary, we are off to a strong start in fiscal 2019, with first quarter revenue and earnings above our guidance ranges.
Moreover, with strong momentum across our business, we are forecasting continued growth in the second quarter, which TS will detail in a moment. Let me turn the call over to TS to discuss the details of our first quarter performance and our outlook. TS.
Thank you, Seamus. Good afternoon, everyone. I will provide you with more details on our performance by end market and our financial results for Q1, as well as our guidance for Q2 of fiscal year 2019. Total revenue in the first quarter of fiscal year 2019 was $377.2 million, which was $22 million above the high end of our guidance range. Non-GAAP net income was $0.92 per share and was also above our guidance range. Net income in the first quarter benefited by $0.08 per share from a mark-to-market foreign exchange gain. Excluding this impact, non-GAAP net income was still slightly above the top of our guidance range. Note that as of the first quarter of fiscal year 2019, these results are being reported under ASC 606. Though the change had an immaterial impact on our results.
Under the previous accounting standard, ASC 605, our revenue would have been $300,000 less, or a difference of less than 0.1%, and net income would have been a negligible $30,000 less. Looking at the first quarter in more detail, as Seamus mentioned, we saw strong sequential growth from Optical Communications programs in first quarter, with a pause in the sequential growth of Non-Optical programs after a record fourth quarter. Optical Communications increased to 74% of revenue, the highest level in a year, with Non-Optical Communications representing 26% of revenue. Turning to the details of our P&L. A reconciliations on 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 first quarter was 11.2%, reflecting an anticipated sequential decline in gross margin that we previously discussed as we absorb the impacts of annual merit increase that take effect in the first quarter. During the quarter, as Seamus noted earlier, we were able to overcome industry-wide component supply challenges, which helped us exceed our revenue guidance for the quarter. Notwithstanding this, these component supply challenges caused some operating inefficiency and less favorable material pricing that negatively impacted our gross margin for the quarter. We remain optimistic, however, in our target range for non-GAAP gross margin remain 12%-12.5%, and we expect to return to this range on a quarterly basis during fiscal year 2019. Non-GAAP operating expense was $10.2 million in the first quarter, down slightly both year-over-year and from the fourth quarter.
As a result, non-GAAP operating income was $32 million, an increase from the fourth quarter and a year ago, and non-GAAP operating margin was 8.5% compared to 8.6% in the fourth quarter. Taxes in the quarter were $1.9 million, and our normalized effective tax rate was 6.7%. We continue to anticipate an effective tax rate of 6% to 7% for the fiscal year. Non-GAAP net income was $34.1 million in the first quarter on $0.92 per diluted share, up from $0.81 in fourth quarter and $0.75 a year ago. On a GAAP basis, which include share-based compensation expenses and amortizations of debt issuing costs, net income for the first quarter was $27.9 million or $0.75 per diluted share, a record performance. Turning to the balance sheet and cash flow statement. At the end of the first quarter, cash and investment were $352.4 million.
This represent an increase of $16.7 million from the end of the fourth quarter, primarily from operating cash flow of $34.6 million, offset by CapEx of $5.4 million, withholding tax related to net share settlements of RSUs of $8.9 million, the release of $3.5 million in the restricted escrow related to our Exception UK acquisition, and repayments of long-term bank loans of $0.8 million. Free cash flow, which is operating cash flow less CapEx, was $29.2 million in the first quarter. We did not repurchase any share during the first quarter. As such, as of the end of the quarter, $17.6 million remain in our repurchase authorization. Management will continue to evaluate the buyback program based on stock market conditions and our cash position each quarter. I would now like to turn to our guidance for the second quarter of fiscal year 2019.
While we are now reporting under ASC 606, this guidance is based on ASC 605, and we will provide a reconciliation with our second quarter results. With continued demand in the Optical Communications market and ongoing momentum in a varieties of Non-Optical Communications programs, we are optimistic that our sequential growth will extend into the second quarter. For the second quarter of fiscal year 2019, we anticipate revenue in the range of $380 million-$388 million. From an earning perspective, we anticipate non-GAAP net income per share in the second quarter to be in the range of $0.91-$0.94, and GAAP net income per share of $0.77-$0.80, based on approximately 37.6 million fully diluted shares outstanding. In summary, we are off to a good start in fiscal 2019, with financial results that exceeded our expectations.
We are enthusiastic about our momentum, which we expect to continue into the second quarter. Operator, we would now like to open the call for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star then one on your touch tone telephone. If your question has been answered or you wish to remove yourself from queue, you may press the pound key. Once again, that is star then one to ask a question. Our first question comes from Troy Jensen with Piper Jaffray. Your line is now open.
Hey, gentlemen. First off, congrats on another really good quarter here.
Thank you, Troy.
Thank you.
Thanks, Seamus. Maybe I'll start with you. I guess, you've had a little bit more time now to look at options for Fabrinet, and just would love to get an update on maybe your M&A strategy and whether or not you think 2019 will be a bigger year for strategic moves for the company.
Yeah. We continue to evaluate M&A opportunities that come our way. As we've mentioned previously, we're being very, I suppose, selective and very deliberate in our approach, and I think it's fair to say we're being picky. We do want to add capabilities, not just revenue. We continue to look. We're looking for complementary businesses that will contribute to our profitability, that we can acquire at a reasonable price. We don't have anything to report at this point, but we continue to evaluate several opportunities. It still remains a key part of our strategy, and we'll update once we have some news. As you can appreciate, Troy, it's not the type of topic we give-
Sure
unfortunately, we give updates on till we have some news. We continue to look at a lot of opportunities that come our way.
All right. Perfect. Maybe just for T.S., could you talk about, I understand why the margins kind of got hit here this quarter in September. What do you think they look like maybe over the next two quarters, and how quickly do we get back to this 12%-12.5% range?
Okay. In our prepared remark, we still anticipate return back to the 12% sometime in this fiscal year. If you look at the guidance we provided, again, if you work backwards, it's pretty close to that level.
It is. Okay. All right. Perfect. I'll go with that. How about just maybe last question from me. I guess I'd be curious to know how the Automotive business is. T.S., I think you gave a revenue number, but I didn't get it. If you could repeat that, would love to just get an update and direction with that.
Yeah. The Automotive is $22 million, down from $26. $26 is kind of pretty high. I wouldn't say all-time high, but it's one of the historical high.
Troy, this is Seamus. Our Automotive business is made up of, as we've talked about previously, traditional Automotive and some of the newer technologies, newer programs we're working on. The traditional Automotive last quarter continues to be very stable. New programs tend to be more variable, though, as the programs ramp. The decline we saw last quarter in the overall Automotive revenue, as T.S. said, Q4 was a record quarter for us in Automotive. At the time, we said not to expect Automotive to grow, if you like, in a straight line.
Right
Since the new programs, you can see variability as they ramp. That's really what we saw going on last quarter, was variability on the new programs. The new programs, sometimes quite new technology, so there's a little bit more choppiness than with the traditional Automotive. That's really what we saw last quarter. We didn't lose any programs. We didn't lose any customers. We actually gained a few programs, but the overall revenue did decline. It's like I say, it's more choppiness on newer programs than any overall trend.
All right. Understood. Keep up the good work, gentlemen.
Thank you.
Thank you, Troy.
Thank you. Once again, ladies and gentlemen, if you would like to ask a question, please press star then one on your touch tone telephone. Our next question comes from Alex Henderson with Needham. Your line is now open.
Thanks. Clearly, that's a pretty steep sequential improvement in gross margins off of the 11.2%. I assume that some of that is related to an improvement in the component supply chain, where you're getting some of the issues resolved on the supply constraints. Is that an accurate guess what's causing that improvement?
I think so, Alex. I think that's a fairly good assessment. We had a couple of, if you like, gross margin headwinds this past quarter. One was the merit increase, which we had talked about previously. The other one then was the component shortage situation. We did manage to exceed our revenue, but at a little bit of a cost. The way we look at it is one of the key reasons customers outsource to us is our ability to deliver on time, including, and maybe especially, in tight supply situations. When the components that we source are in short supply, we really do everything we can to make sure we get those components and meet our customers' commitments. This is something we're actually very proud of, that our customers ultimately reward us for with more business.
In previous quarters, when we saw the potential for component shortages, and again in Q1, we acted very quickly to secure the supply, and sometimes that means overlooking volume discounts or other arrangements to make sure we get the parts. We want to make sure we get the parts for the customers so that they can make their revenue. While it did create near-term drag on gross margins, we really believe it's absolutely the right thing to do to drive revenue and strong customer relationships. That component shortage headwind, if you like, it manifested itself really in two ways. One was the, as I mentioned, maybe giving up a little bit on volume discounts and paying a little bit more for components. Also, frankly, we also probably carried some operating inefficiency due to some idle capacity.
If you have all the parts except for that last component, if the last component doesn't come in on time, we still incurred most of the operating cost. That's really what drove it this past quarter. We do see the situation improving over the next couple of quarters. That was the primary driver this past quarter.
Would it be reasonable to think that at the lower end of your revenue guidance, that your gross margins might be a little higher, and at the higher end, that ironically, it might be a little lower as a result of pushing on that envelope again as we go through the December quarter?
I think it really comes down to the mix. It's hard to say. Unfortunately, Alex, it's not quite that straightforward because a lot of it does come down to the mix. As you can imagine, while the average gross margin last quarter came out to 11.2%, within that, there's a fairly wide range. It really does come down to the mix at the end of the day.
Right.
We do feel we're targeting to get back to that 12% this year. As TS said, if you reverse engineer the EPS guidance we're giving, we're there or thereabout this quarter, we think.
Yes.
The other line of questioning I wanted to address is, can you talk a little bit about the uptake of floor space in your new facility? It seems like that's coming on faster than you might have thought. Is that a function of people trying to move at an expedited rate out of China? What's driving that, and what kind of floor space metrics can you provide us in terms of how much of it's taken up at this point? Finally, along the same lines, at what juncture would you be considering starting up the process for the next 550,000 sq ft facility?
A couple of points there. I think, yeah, the uptake is pretty strong on the new building. Right now, we're above 50%, I would say late 50s, heading towards 60% in terms of a combination of occupied and spoken for in the new building. Once we get to probably 70%-75%, we'll pull the trigger on the next building. We've started the process of getting the permits in place. Timing-wise, we think in all likelihood, we feel we probably will start that process rolling this fiscal year. It really does depend on how quickly some of their new programs ramp and some of the uptake happens. As we said in our prepared remarks, the tariffs in China, they're certainly not a headwind for us. We do think they could be a tailwind.
While we're not building our business plan based on tariffs, it does hopefully blow some business in our direction as customers who are producing in China come our way. We are seeing a little bit of that, but it is quite slow. As you can imagine, Alex, even when customers in China come our way and ask us to look at building products for them, the qualification process can be quite long. You could be looking at a kind of a 4-6 month qualification process for that to take hold. Again, the tariff situation could change quickly, and that could be no longer a tailwind for us. Like I say, we're not building our business based on it, but it does certainly help us, we think.
One last question, and then I'll cede the floor. The Industrial Laser business sounded a little bit stronger than we had anticipated. There's been a number of other companies in the space that have suggested some weakness, mainly driven off of the semi equipment market slowdown. Can you talk about your mix relative to semi equipment versus fiber laser, and if that's something that differentiates you from the rest of the market, and what you're thinking there?
Alex, this is TS. I think your observation is fairly accurate. In fact, we have five or six customers there. We are gaining market share, so I can tell you that. One of the customers, we continue to gain more program, but the rest are pretty flat, so to speak. It is because of the gaining market share in one customer, and that's why it show $2 million growth, from $47 last quarter to $49 in Q1. Moving forward, we believe that the one or two customers we gain market share will continue to grow. And the rest, we'll see what happens with the marketplace on semiconductor.
Great. I'll cede the floor and get back in the queue. Thanks.
Thank you.
Thank you. Once again, ladies and gentlemen, if you have a question or a follow-up, please press star then one. Mr. Henderson, your line is back open.
Wow. That's fabulous.
Yeah.
Could you give us some granularity on what you're thinking relative to the Optical and the Datacom piece in the guidance? You talked a little bit about the mix in the current quarter, but didn't really specify how you see that playing out sequentially.
Alex, the Telecom is pretty strong, as you know. We grew 23% to $23 million quarter-over-quarter, $156 million-$179 million. Although we don't break down guidance for FQ2, we still anticipate continue to double-digit growth in the coming quarter, December quarter. For Datacom, also grew very nicely, 19% quarter-over-quarter. Moving forward, the number in front of me is flat to slightly up a bit. Is that helpful?
That's very helpful. I would assume that the mix towards silicon photonics is also accelerating into the upcoming quarter. Can you give us any thoughts on how that looks on a prospective basis?
Yeah. We have a very nice growth, up $13 million silicon photonics sequentially growth, $13 million, excuse me, 19%. Moving forward, we anticipate continue to grow.
So-
Just look at the program we have with the customer, we will continue to grow that technology.
Do you think it's growing faster than your overall Optical Communications business at this point as we look forward?
I would say close to the same level.
Okay. I'll cede the floor again. Thanks.
Thank you. Thank you, Alex.
Thank you. With that, I'll turn the conference back over to Mr. Grady for closing remarks.
Okay. Well, thank you for joining our call today. We appreciate the interest in our company. We're excited to deliver strong results and a positive outlook as we continue to position the company for continued growth and diversification over the longer term. We look forward to speaking with you again soon. Thank you and goodbye.
Thank you, ladies and gentlemen. That concludes today's conference. Thank you very much for your participation. You may all disconnect.