Good day, ladies and gentlemen. Welcome to Fabrinet's Financial Results Conference Call for the Fourth Quarter of Fiscal Year 2018. At this time, As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Garo Tumaginian, Investor Relations.
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 fourth quarter of fiscal year 2018, which ended June 29, 2018. With me on the call today are Tom Vigil, Vabinet's Founder and Chairman of the Board, Chamus Grady, Chief Executive Officer and TS 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 a 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, 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 particular, the section captioned risk factors in our Form 10Q filed on May 8, 2018.
Will begin the call with remarks from Tom, Seamus, and TS followed by time for questions. I would now like to turn the call over to Fabrinet's Chairman, Tom Mitchell. Tom?
Thank you, Daryl, and good afternoon, everyone. I am pleased that we exceeded our revenue expectations for the fourth quarter, and I'm proud of the company's performance under Seamus' leadership as our CEO. As you may have seen from recent filings I have stepped away from my operational role at Fabrinet as Executive Chairman. This marks the completion of the CEO transition we started several quarters ago. However, I plan to remain highly involved as Chairman of the Board at Feverton.
I'd like now to turn the call over to Seamus for his remarks.
Thank you, Tom, and good afternoon everyone. I'm pleased to share with with non GAAP net income of $0.81 per share, also above the high end of our guidance range. Operating cash flow was $48,000,000 in the 4th quarter And for all of fiscal year 2018, we generated operating cash flow of $138,000,000 and free cash flow of 104,000,000. We entered the quarter anticipating modest growth across most of the markets we serve, and I'm pleased to report that we experienced strong growth in our non optical communications revenue and modest but still positive growth in our optical communications revenue. Moreover, as TS will detail, we anticipate that this sequential growth will continue as we enter fiscal year 2019.
With increasing demand, certain components came under supply constraints during the fourth quarter. We were able to successfully mitigate these shortage risks during the quarter, and we will continue to take appropriate steps to manage these supply challenges. Looking at our 4th quarter performance by end market, our performance was in line with expectations. Overall optical communications revenue of $242,000,000 was up marginally by $1,000,000 from the 3rd quarter. Within optical, telecom revenue of 156,000,000 represented 2% sequential growth, more than offsetting a 1% sequential decline in datacom revenue.
We are particularly pleased with the growth we saw from non optical communications programs. Both our industrial laser and automotive businesses saw all time record quarterly revenue, with industrial laser revenue growing 36% from a year ago and 8% from Q3. To $47,000,000 and automotive revenue increasing 34% from a year ago and 20% from Q3 to $26,000,000. Overall revenue from non optical communications programs was $103,000,000, up 30% from a year ago and up 13% from Q3. While we expect there to be some quarter to quarter variation as we look ahead, we remain optimistic about our long term prospects in the non optical communication space.
Revenue from new customers and new programs from existing customers grew to $125,000,000 in the 4th quarter. Or 36% of total revenue, increasing over $9,000,000 from the prior quarter. New business growth in the 4th quarter came from both optical programs as well as from non optical programs such as industrial lasers and new automotive applications. Silicon photonics based products saw their first sequential increase in the year, contributing $70,000,000 to revenue in the 4th quarter, up 5% from Q3. QSFP28 transceivers, which are both silicon photonics and non silicon photonics based, also saw their first sequential growth in the year.
With revenue of $45,000,000, up 20% from Q3 as increased volumes of lower price variance have now more than offset price decreases. By data rate, 100 G programs continue to dominate optical communications production and represented 39% of total revenue in Q4. Consistent with last quarter. 400g and 1.2 terabyte products are in the early stages of ramping, each representing 2% to 3% of total revenue. Our new product introduction or NPI services are an important on ramp for new business.
With our investments at Fabrinet West And Fabrinet UK playing a critical role. Last quarter, we introduced strategic plans to establish our next NPI facility in Israel. And we look forward to sharing more on that as we progress beyond these early stages. In addition to continued progress in industrial lasers and automotive, we also won a number of medical programs. Which we expect will contribute over time as they ramp into volume production.
We're expanding our advanced packaging capabilities at Fairburnet West to further strengthen our NPI manufacturing solutions for new and emerging technology based products such as lidar, 3d sensing, and laser based lighting products for the automotive industry. We're optimistic our core competencies and manufacturing solutions for products in systems requiring precision optical, mechanical and electrical assemblies will continue to enable our expansion into these new markets. In summary, we are pleased to have exceeded our revenue and earnings expectations in the fourth quarter, and we continue to generate solid and predictable cash flow. We're enthusiastic about the first quarter and beyond, with stabilizing our proven trends across the markets we serve. And we're excited about the many opportunities ahead.
Now let me turn the call over to TS to discuss the details of our fourth quarter performance and our outlook.
TS? Thank you, Seamus and good afternoon everyone. I will provide you with more details on our performance by end market and our financial results for Q4 and fiscal year 2018, as well as our guidance for Q1 of fiscal year 2019. Total revenue in the fourth quarter of fiscal year 2018 was $345,300,000, above the high end of our guidance range. Non GAAP net income was $0.81 per share and was also above our guidance range.
Net income in the 4th quarter benefited by $0.03 per share from a partial reversal of deferred tax asset valuation allowance which was partially offset by a $0.02 unrealized loss from a mark to market foreign exchange adjustment. Excluding the positive $0.01 impact of this adjustment, non GAAP net income was still above the high end of our guidance range. For the full year, revenue was $1,372,000,000 and non GAAP net income was $2.98 per share. Looking at the fourth quarter in more detail, as Seamus mentioned, we saw modest sequential growth from optical communication program in 4th quarter with a small sequential increase in telecom revenue. Slightly offsetting a modest decline in datacom's revenue.
Our strong 13% sequential growth in non optical revenue to $103,000,000 was a highlight in Q4. As we set a quarterly record, driven primarily by growth in industry lasers and automotive revenue. For the fourth quarter, optical communication represented 70% of revenue in the quarter and non optical communication was 30% of revenue. Now turning to the details of our P and L. A reconciliation on GAAP to non GAAP measure is included in our earnings.
Press release and investor presentation, which you can find on our website. Non GAAP gross margin in the 4th quarter was 11.8% slightly below our target range of 12% to 12.5%. We expect non GAAP gross margin to return to within our target range during fiscal year 2019. Non GAAP operating expense was $10,800,000 in the fourth quarter. An increase on the third quarter, primarily due to a one time reverses of management bonus accrual in Q3 as we discussed last quarter.
Non GAAP operating income in the 4th quarter was $29,700,000, a small decrease from Q3 though operating margin declined slightly to 8.6 percent. Texas in the quarter were net credits of 900,000 and our normalized effective tax rate was less than 5% due primarily to strengthening supply bus, which created losses on U. S. Dollar denominated liability that are tax deductible. For all of FY18, our effective tax rate was approximately 5%.
We anticipate that our effective tax rate will return to Non GAAP net income was $30,700,000 in the 4th quarter or $0.81 per diluted share compared to $0.71 in Q3 and 86¢ a year ago. On a GAAP basis, which include share based compensation expenses, and amortization of debt issuing costs. Net income for the fourth quarter was $22,800,000 or $0.60 per diluted share compared to $27,400,000 or $0.72 per diluted share in the fourth quarter of fiscal year 2017. Turning to the balance sheet and cash flow statement. At the end of the 4th quarter, cash and investment were 335,700,000 This represents an increase of $20,300,000 from the end of the third quarter, primarily from the operating cash flow of $48,300,000 offset by a CapEx of $5,600,000, share repurchase of $20,000,000 and repayments of long term bank loans of $1,000,000.
Free cash flow, which is operating cash flow, less CapEx was $42,700,000 in the 4th quarter. For all of fiscal year 2018. Operating cash flow was 138,100,000 After subtracting CapEx of $33,800,000, free cash flow for the year was $104,300,000. Representing a significant increase from fiscal year 2017 due to a meaningful decrease in CapEx and improving working capital. During the fourth quarter, we were active in our share repurchase program and brought back approximately 551,000 shares at an average price of $36.3 per share.
As of the end of the 4th quarter, $17,600,000 remain in our repurchase authorization. I would now like to turn to our guidance for the first quarter of fiscal year 2019, with improving demand from optical communication customer and continuous momentum in our non optical business. We are looking forward to another quarters of sequential revenue growth. Not that with the discussions of tariffs on product manufactured in China in the news, we currently do not expect a meaningful impact of our revenue as Chinese component represent a de minimum portions of total values of our manufactured products. In addition, we'll be adopting ASC 606 as of the first quarter of fiscal year 2019 using the modified retrospective transition method.
Our revenue guidance today is being provided on an ASC 605 basis. And we will provide a reconciliation from ASC 606 to ASC 605 when we discuss our first quarter results. With that in mind, we anticipate 1st quarter revenue to be in the range of 347 to $355,000,000. From an earning perspective, we anticipate non GAAP net income per share in the first quarter to be in range of $0.80 to $0.83 and GAAP net income per share of 58 to $0.61 based on approximately $37,900,000 fully diluted share outstanding. Keep in mind that in Q1, we will bear the additional cost of annual merit increases resulting in seasonal pressures on our gross margin.
Before I conclude my remarks today, on a personal note, I would like to announce that at my request, the company had initiated a search for a new CFO as part of our leadership succession plan. To assume my duty at an appropriate time. After being with Evinan for an exciting 12 year, and edge catching up, I have decided it is time to search for and identify a qualified replacement who will be ready to take on a new and ever changing challenges in a fast moving business. There's no timeline for this transition as I'm not going anywhere and I will continue to support Shamus and a management team in the day to day operations of the company. In addition, I'll be actively involved in and supporting the search and the eventual transition of my duty to the best CFO replacement for the company.
In summary, we are pleased to have delivered 4th quarter financial results that exceeded our expectations. We are encouraged to see improving demand dynamic among our optical communication customers and are optimistic that we will enter fiscal year 2019 with another quarters of sequential growth and believe we are well positioned to strengthen our presence in both the optical and non optical communication market as we look ahead. Operator, we will now like to open the call
questions. Our first question comes from the line of Troy Jensen of Piper Jaffray. Your line is open.
Thank you, Troy.
I guess seeing that you made a comment that Silicon Photonics grew sequentially and QSFP28 also grew sequentially. I'm curious now, was that the same customer that drove that result?
It's across a number of customers, actually. It's across a number of customers.
Okay. All right. Fair. And then how about 3 months ago, when you gave us guidance for this quarter, you talked about the ZTE sales band impacting sales by $7,000,000. I'm just curious when you look at the guidance for this upcoming quarter, is there a dollar amount that's still being impacted?
Are you expecting kind of a full recovery?
So, yes, so looking back in last quarter, yes, we had guided we had mentioned last quarter that there was about a $7,000,000 impact of ZTD factored into our guidance. We have no way to know really what the sales actually would have been without the sanctions, but we think about $7,000,000 was the right ballpark based on the conversations we have with our customers at that time. Then for this quarter, We don't expect to see the full impact of the sanctions being lifted in fiscal Q1 Remember, the sanctions were officially lifted in mid July and it takes a little bit of time for orders to restart. So we would we would expect much less than $7,000,000 of a benefit in Q1, let's say.
Okay. But so then the recoveries probably post that understood.
Yes.
And then how about, Seamus on the automotive sector? I mean, I think you said 22% sequential growth. Just confirm that. And then, how many customers do you have in the automotive category that can move the needle like that?
We have a number of customers and the growth in our automotive business, we have a 44 customers approximately represent the majority of our automotive revenue. The growth that we're seeing is predominantly on what we refer to kind of internally as new automotive applications. And it's across a number of customers and it's in some of the newer some of the newer technology in the lighting space and in the lidar space in particular.
Okay. All right. Well, TS, I'm sorry to hear you're leaving, but I wish you the best. And then a demo keep up your work.
Thank you, Troy. Thank you.
Thank you. Our next question comes from Alex Henderson of Needham. Your line is open.
Great. Thank you very much. And I agree with that last statement, TS will miss you when you leave. Congratulations on a great career. So the first question I wanted to ask you, is when you're looking at the mix of business for the upcoming quarter, you said that optical would improve.
Can you give us a little granularity between datacom and telecom. And within the datacom, what are you seeing in terms of pricing pressure how should we be thinking about that? It looks like pricing and datacom moderated somewhat.
Yes, Alex, in the guidance last quarter, we were expecting telecom to grow faster than this datacom, but as you turn out telecom grew a little bit offset by the datacom flat and down a little bit. So in terms of datacom, we have 6 or 7 customer In fact, most events are growing with the assessment of 1 or 2 customer specific program, maybe due to the product transitions and so on, and they are down. So overall datacom, you know, excluding the customer, you know, seems like everybody is growing. So in terms of pricing, it's mostly felt by our customer. Because we are again, we are not really involved with our pricing.
We look at our costs and then put a profit markup to cover our margin. So, but then I suffice to say that, you know, most of our customer had transitioned to a low cost variance within the QSFP28, for example, and the low cost variable transition has meaningfully offset or comfortably that volume increase, okay. So the transition to a low cost volume has been mitigated so to speak.
And going back to the bot per second, it's pretty clear that there's been a pretty significant move in that exchange rate. It takes a little while for that to matriculate through your numbers But I would assume if we assume a flat exchange rate at the current levels that it's a considerable positive going forward for the next couple of quarters, is Can you quantify or give us some sense of the degree to which that's helpful?
Yes. The valve fluctuate quite a bit. Okay. And you're right, recently, it's kind of depreciated to 33,000,000, but 33.5 or so. Level.
But again, remember we hedged 6 months, okay, I hedged, forward just to protect the downside. If there's any upside, you know, assuming it's sustained, assuming the bus stay at this level, I will see the benefit you know, at least 1 1 a half quarter out, you know, so not in the immediate quarter because in the immediate quarter, I bought all these parts, you know, about 3 to 6 months ago. So yeah, if that continue to stay at this level, I will see some tailwind into the gross margin and into the P and L.
So would that be more of a CY 4Q, FY 2Q and CY 2H 2019? Back half of FY twenty nineteen benefit?
Yes. I will say it will be CY20181. This November, December, I might get some benefits, right? Right now, I still have some spending left, unhedged okay. And then of course, the March quarter, if I buy it today, assuming I can lock in today, you will see the benefit.
That's correct.
Yes. And the last question that I'll see before, you had made a comment, I think, on the gross margin on GAAP, improving, somewhat as we go forward to normal level. Can you remind us what you consider your normal levels And within the context of the forward guidance, I know you don't want to give specifics on 606, but what do you think the dynamics are? Is it helpful to hurtful to your revenues, helpful to hurtful to your to your margins. Can you give us a little bit of taste of what you think might occur?
Okay. On the gross margin, we always mentioned ourselves between 12% to 10.5%. We say that all the time in a conference call. And if you look at our track record here, we are at 11.6 last quarter ex Q3, I mean. And then at Q4, we are in charge to 11.8%.
We are not quite at a 12% yet. Okay, but we believe that in FY 2019, within the fiscal year, we'll return to 12, at least to 12. So there's internal management goal to get to 12. Then again, at Q1, we see some win again because we give merit increase once a year and we will see some seasonal, pressure on the gross margin at Q1. But we expect moving forward will fully recover to the learning curve and cost reduction efforts and so on.
In terms of 606, I just look at the July closing a little bit. There's really no major impact. If there's any impact, we'll be in the of about maybe $3,000,000 to $5,000,000 revenue swing. And in terms of margin, we'll be very, very small impact on that. So but we reported in September earning call to show you how big is the gap.
But as of today, we don't any material impact to the revenue line and gross margin line.
Thank you. Our next question comes from Tim Savageaux of Northland Capital.
Hi, good afternoon. And I'll add my congratulations to TS.
Thank you, Tim.
Following up
on that last response, to the extent, and I don't know if you already hit this, but I think you just indicated you expect some seasonal pressure on gross margins in Q1 from Q4 levels. If that's the case, do we Are you looking for a pretty sharp decline in OpEx sequentially from elevated levels in Q4? And is there any further tax benefit kind of informing the EPS guide for Q1?
Tim, good question. The seasonal impact is coming from Mary increase, we give to our folks in Thailand once a year and actually all over the world once a year. The impact will be mitigated by other area obviously as part of our business. We try to find offsets to the merit increase and may not necessarily recover within a quarter, okay. Typically, if you look at history, it will take at least about close to two quarters to recover that.
New improvement, OpEx reduction as what you said and so on. So we have spending control just offset the merit increase. So yeah, I we we don't guide the gross margin, but you can see that, you know, some of the foreign exchange loss we experienced in the past, hopefully, we're subsided a little bit because it's about now become cheaper.
Okay. Thanks. And kind of moving on to the product side, I want to touch on datacom again. In fiscal Q4 just to see if we can understand the moving parts a bit better. You did report a sequential increase in Silicon Photonics and a pretty sharp sequential increase in QSFP28.
You did see modest declines in the overall Datacom segment. I guess my first question, what would be offsetting the QSFP28 growth, principally?
So Tim, this is Seamus. I think we saw a nice increase in our telecom business. Our datacom business, as you said, was flat to down, very slightly down about 1%. And that's on an aggregate basis when you when we add up all the customers and all the products. What I would say is the reductions were isolated to 1 or 2 customers who are maybe going through combination of product transitions and a little bit of price pressure.
So we had some some reductions on 1 or 2 customers. But the majority of the customers, I would say probably 90% of the customers, we did see some nice growth on. So while the number in aggregate is down a little bit, we wouldn't want to give the impression that data comes down. Datacom, we think is quite strong and the reductions were limited to 1 or 2 customers. That makes sense.
Okay, great. And that follows right into my last question, which is As you look forward, and I think you might have said you expect sequential growth across the businesses you obviously had a pretty sharp increase on the non communication side. In Q4, in terms of kind of relative performance across the business segments. It sounds like you might expect datacom to resume sequential growth, though I'm not Sure. If you have any comments on that in datacom versus telecom or within both of those silicon photonics, or whether you might expect non communications to maybe flatten out for a bit as the communication stuff, catches up in Q1?
Yes, I think we're, we're, we were very happy with the growth, as you say, in the non optical communications business in Q4. If you look at TS's remarks, optical communications business is now 70% of our business down from 72 historically. And it was actually a high of, I think, 78 at one point. So we're making nice steady progress there growing our non optical communications business, while at the same time growing our optical communications business. So it's always a challenge.
They're both growing. We want both things to happen. We want to grow all of the business, but we also want to, you know, to, reduce the percentage of the optical communications business. As we look out to Q1, I think it would be fair to say we're seeing solid growth in the communications business the communications business and it's across both telecom and datacom and then continued growth in the non optical, the laser business remains very strong. Industrial laser business remains very strong as does the automotive business quite strong.
So it's really across the board Tim, it's thankfully, we're kind of benefiting from some nice growth across a number of sectors that we're participating in right now.
And Tim, this is TS, you know, if you listen to our customer earning call recently, right? Most of them are pretty upbeat on the optical communication. So we hope to write on that optimism on that one of the customers talking about pretty robust in a modem, you know, and so on and also their fiber laser and, you know, their laser business. And another datacom guy is talking about really robust in the datacom. So we hope our customer is right and then we are riding on those things.
Okay. Thanks very much. I'll pass it along.
Thank you. Our next question comes from Alex Henderson of Needham. Your line is open.
Well, that was unexpected. Yes, I just wanted to ask about the, lumentum plant that's being built next to your facility. And the conversations you've had relative to that, there's been a lot of speculation on whether that's a good thing for you or a bad thing for you.
And I
was hoping you might just give us some sense of what your read is relative to the relevance of that plant. I know that momentum has said that they're moving substantial portion of business out of China's Sam Nina facilities into that plant and to Thailand. But, I was hoping you could give us a little bit of clarity around it.
I mean, I would say, Alex, you know, I think we've kind of talked about this before. Lumentum used a number of contract manufacturers where, by no means, they're only contract these a number of them. And our understanding is that their plan is that they're consolidating manufacturing at some of their suppliers in China. And for the most part, that business is moving to Thailand. We're We're not the sole beneficiary of that.
Some of that business, we understand they're moving into their own facility. But there are number one customer, they're our biggest customer, they're a really excellent customer. Their business is just really strong at the moment and we're really very fortunate to have them as a customer to be able to participate with them our relationship with them remains strong. Our business with them is growing, I would say. Yeah, they've established their own facility in Thailand and it's it's actually near quite close to our Pinehurst campus.
So we do believe that this signals a closer rather than a more distant cooperation between the two companies. So overall, we see it as a positive in the sense that the their moving business to Thailand, yes, they're moving business into their own facility. But, for the most part, the business that's coming to Thailand is coming from Chinese suppliers. So we see that as a positive.
Thank you. We have a follow-up question from Tim Savageaux of Northland Capital. Your line is open.
Okay. And maybe following on that, response briefly and I realize this is information that's likely to be in your annual filings, but you mentioned that Lumentum is your largest customer. I wonder given that we're at the end of the year, if you might quantify that or, tell us, how many 10% type customers you had for the year? And then maybe if you were to look at Lumentum and Oclaro together, given the pending merger, how significant would they be as a combined customer?
Tim, this is TS. In today's time, you'll see our K But again, I can tell you that the lumentum is our number one customer last year. We only have 1 10% customer lumentum at 17% of the revenue when Oclaro mergers go to, you'll be 23% 17.6%.
Perfect. Thank you.
Thank you. As there are no further questions in queue, I'd like to turn the call back over to Seamus Grady for any closing remarks. Sir?
Thank you. Thanks everyone for joining our call today and for your continued interest in Fabrinus. We're optimistic about the improving dynamic that we're seeing in the markets. And we look forward to speaking with you all again on our next earnings call in November. For those of you attending Jefferies Investors Summit in Chicago next week and the Piper Jaffray Tech Select Conference in Southern California the week after.
We look forward to seeing you. Thanks again and goodbye.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation and have a wonderful day.