Good day, ladies and gentlemen. Welcome to Fabrinet's Financial Results Conference Call for the first quarter of fiscal year 2018. At this time, all participants are in a listen only mode. Later, we will open up the 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 over to your host, Garo Toomajanian, Investor Relations. Sir?
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 first quarter of fiscal 2018, which ended September 29, 2017. With me on the call today are Tom Mitchell, Founder and Executive Chairman, Seamus Grady, Chief Executive Officer, and Toh-Seng Ng, Fabrinet's Chief Financial Officer. This call is being webcast, and the 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 recent SEC filings, in particular, the section captioned "Risk Factors" in our Form 10-K filed on August 23, 2017. We will begin the call with remarks from Tom, Seamus, and T.S., followed by time for questions. I would now like to turn the call over to Fabrinet's Executive Chairman, Tom Mitchell. Tom?
Thank you, Garo, and good afternoon, everyone. I am pleased our first quarter revenue of $357 million was within our guidance ranges and increased 8% from a year ago. Despite near-term challenges in certain end markets, we believe that new business and further customer diversification will enable us to deliver continued profitable growth over the long term. I'd like to now introduce Seamus Grady, our newly named CEO, and invite him to make some introductory comments.
Thank you, Tom. Good afternoon, everyone. I'm very happy to be joining the Fabrinet leadership team at this exciting time in the company's growth. While we are experiencing near-term challenges in certain end markets, as Tom mentioned, Fabrinet is well positioned for long-term profitable growth. We continue to attract and grow new business while increasingly diversifying our customer base across a broader range of end markets. We are doing this in a deliberate and strategic manner by leveraging our strengths in high-mix, low-volume production that takes advantage of the advanced manufacturing capabilities we have developed to serve the Optical Communications space as well as adjacent markets. For example, our new product introduction facilities, Fabrinet West and Fabrinet UK, are already attracting new customers for volume manufacturing in Thailand across a variety of end markets.
I am looking forward to furthering this strategy to diversify Fabrinet's customer base while strengthening our leadership position as the manufacturer of choice for the Optical Communications market. What I saw makes me very optimistic. We have a strong and expanding customer base, and we have excellent people and first-class manufacturing capabilities. I am very positive about the long-term opportunities at Fabrinet, and I'm looking forward to getting to know our investors and analysts. Now, let me turn the call over to T.S. to discuss the details of our first quarter performance and our outlook. T.S.?
Thank you, Seamus. I'm looking forward to working together to build long-term shareholder value. I will provide you with more details on our performance by end market and our financial results in Q1 of fiscal year 2018, as well as our guidance for Q2. Total revenue in the quarter was $357.3 million, an increase of 8% from a year ago, and within our guidance range. Recall that the first quarter of fiscal year 2017 was a 14-week quarter. Adjusting for the extra week in 2017, our growth would have been 16%. Non-GAAP net income was $0.75 per share, compared to $0.80 per share in the same quarter a year ago. However, in the first quarter of fiscal year 2018, we experienced a $1.9 million, or $0.05 per share foreign exchange loss headwind.
Adjusting for this foreign exchange loss headwind, non-GAAP net income per share would have been at the upper end of our guidance range. While these results are within our expectation after adjusting for foreign exchange, we are not pleased with our overall performance. As I will describe in a moment, based largely on declining orders for Telecom products, we anticipate a sequential revenue decline in the second quarter. In order to help protect our historical strong margin, we have already taken actions to reduce costs, including a reduction in force. We do not take this decision lightly, but believe they are in the best interest of all of our stakeholders. While this near-term outlook is discouraging, numerous factors make us optimistic about our long-term ability to drive profitable growth.
For example, looking at the first quarter in more detail, we saw a sequential and year-over-year increase in new business, which represented 33% of our total revenue at $ 119 million, an increase of 15% from a years ago. Looking at the first quarter in more detail, Optical Communications revenue was $ 275.6 million, an increase of 7% from a years ago and represented 77% of total revenue. Non-Optical Communications revenue was $ 81.7 million, an increase of 9% from a years ago and represented 23% of total revenue. Within Optical Communications, Datacom again grew faster than Telecom. Datacom was 39% of optical revenue at $ 107.8 million, up 21% from a years ago. Telecom was 61% of optical revenue at $ 167.8 million and was roughly flat compared to the first quarters of fiscal year 2017.
We believe the continued strength in Datacom reflects secular growth drivers in that market, which offset some of the volatility we see in the Telecom market. 100G solutions continue to dominate the optical market at 57% of optical revenue and 44% of total revenue, driven by demand for advanced components and modules including QSFP28 transceiver and silicon photonics modules. In fact, QSFP28 revenue was $ 48 million in the first quarter, up 12% sequentially and more than five-fold from a years ago. 400G solution represented 6% of optical revenue as in the fourth quarter. In the first quarter, we also started sampling 1.2 terabit solution. silicon photonics revenue increased 24% from a years ago and was consistent with the fourth quarter, representing 22% of total revenue in the quarter compared to 21% of revenue in the prior quarter.
Note that we achieved this performance despite a meaningful sequential decline in silicon photonics revenue from one customer who is going through a product transition. Looking at Non-Optical Communications, revenue from lasers was $ 37 million or 10% of revenue compared to $ 38 million a years ago. Sensor revenue was down slightly from Q4, but stable from a years ago at approximately $4 million, while automotive revenue was up 1% from a years ago at $ 21 million. Other revenue was $ 19 million, up 67% due to strong performance from both Fabrinet West and further contribution from Fabrinet UK. Now turning to the details of our P&L and reconciliations of 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 11.8%, which is below our target range of 12%-12.5%, primarily due to seasonal trend with annual merit increases in the first quarter, but also from strengthening of the Thai baht and Chonburi start-up costs previously reported in operating expenses. The cost-cutting measures I discussed earlier are squarely aimed at returning our gross margin to within our target range. We have already started a reduction in force of approximately 200 indirect staff member in order to bring our costs in line with revenue. Non-GAAP operating income in the first quarter was $ 31.9 million, and operating margin was 8.9% compared to 9.4% in both the years ago quarter and in Q4, with the decrease primarily due to lower gross margin.
Taxes in the quarter were a net expense of $1.7 million, and our normalized effective tax rate was 6.3%, which was in line with our expected range of 6%-7%. We continue to anticipate the effective tax rate of 6%-7% for fiscal year 2018. Non-GAAP net income was $28.6 million in the first quarter, or $0.75 per diluted share compared to $29.7 million or $0.80 per diluted share in Q1 of fiscal year 2017. On a GAAP basis, which includes share-based compensation expenses and amortization of debt issuing costs, net income for the first quarter was $21 million, or $0.55 per diluted share, compared to $22.8 million, or $0.61 per diluted share in the first quarter of fiscal year 2017.
As I mentioned earlier, we experienced a $1.9 million, or $0.05 per share, negative impact from a stronger Thai baht on our GAAP and non-GAAP bottom line result for the first quarter. Moving on to the balance sheet and cash flow statement. At the end of the first quarter, cash and investment were $266.7 million. This represents a decrease of approximately $22 million from the end of the fourth quarter, reflecting typical cash flow seasonality, including an operating cash outflow of $3.1 million, CapEx expenses of $11.2 million, and loan repayments of $4.4 million. In fiscal year 2018, we continue to expect CapEx to be approximately $40 million. Note that we did not repurchase any shares during the quarter, and $30 million remain in our repurchase authorization. I would now like to discuss guidance for the second quarter.
As Tom and Seamus mentioned, we have seen near-term demand temper in certain customer end markets. As a result, committed order levels suggest that our revenue will decrease from the first quarter. While this near-term dip in demand, mainly from Telecom-related products, is disappointing, we expect Datacom products to deliver more stable results. At the same time, we have made tremendous inroads into the Non-Optical Communications market to support our diversification objective and expect to see continual sequential growth from this product, with particular strength expected from the industrial laser and automotive markets. We expect revenue in the second quarter to be between $328 million and $332 million. We anticipate non-GAAP net income per share in the first quarter to be in the range of $0.69 to $0.71, and GAAP net income per share of $0.43 to $0.45, based on approximately 38.2 million fully diluted shares outstanding.
In summary, we are disappointed in the impact that the near-term pause in some end markets are having on our financial results. We have made appropriate adjustments to our cost structure and believe that our strategy to win new business and diversify the end markets we serve will enable us to deliver profitable growth as we look forward. Operator, we would now like to open the call for questions.
Thank you. Ladies and gentlemen, at this time, if you have a question, please press star and then one on your touch-tone phone. If your question has been answered or you would like to remove yourself from the queue, you can do so by pressing the pound key. Again, that is star and then one. Our first question is from Patrick Newton of Stifel. Your line is open.
Yeah, thank you. Good afternoon, Tom, Seamus, and T.S. I guess my first one is I'm trying to bifurcate on the data center. You seem to be talking about it being roughly flat. We've heard several of your customers speak to some QSFP28 trends that are relatively challenged. Can you help us understand for your business what's happening with QSFP28 relative to silicon photonics sequentially?
Hey, Patrick. How are you? This is T.S. Yeah. We produce Datacom for a couple of customers. The one customer or two customers you heard about Datacom's weakness may not necessarily reflect on our entire portfolio. We are still looking at Datacom year-over-year will continue to deliver stable results.
Okay. No noticeable difference on QSFP28 versus silicon photonics within that outlook?
Yeah. It's the same story goes. QSFP28, we have almost half a thousand customers, and some of them are ahead of the curve. They're doing very well in the CWDM. Some of them are having some challenge transition from LR4 to CWDM. In aggregate, we see overall on QSFP28 is doing okay for us. Silicon photonics is the same thing. We mentioned about one customer has a product transition, and the other customer in their earnings call, they talk about downward guidance. All these are reflected in our guidance.
Pertaining to the silicon photonics customer that you said is going through the product transition, is this somebody that's transitioning to another product line that Fabrinet makes and it could prove somewhat temporary, or is this a customer that may be moving more to a merchant market solution, meaning that this could prove to be a multi-quarter headwind?
My understanding is they are doing it with us. Okay? That's my understanding.
Okay, just last one for me is, you previously, I guess, discussed a customer who wanted to sell direct to hyperscale, I was wondering if you could provide us with an update on progress with that solution and when we could expect a meaningful revenue contribution, maybe $ 10 million or more in quarterly revenue.
In general, we don't comment on the specific customer program. I can tell you that we are actually progress on plan on the initiative.
Great. Thank you for taking my question, Seamus. Welcome to the team.
Thank you.
Thank you. Our next question is from Alex Henderson of Needham & Company. Your line is open.
Thanks. I was hoping you could talk a little bit about the industrial laser segment, what you're seeing in terms of trends there. That should be, I would think, a bright spot, a place that's picking up. Is that reasonable?
That is reasonable, Alex.
What about on the automotive side? There was a fair amount of discussion about some new projects in the automotive segment. Have you seen those come to fruition?
Yeah. The automotive, the legacy customer, we continue to do well. Pretty stable. As we discussed before, we are in the new product for some of the customer, and those parts are doing well. That's why in the prepared speech, we talk about Non-Pptical Communication. We actually guided up in that segment.
I see. Some of those are car sensing technologies?
That's correct, Alex.
Right. Going back to the data center side of the business for a second. You've got a number of new customers ramping over there. You've got some older customers that are maybe in product transitions. Can you talk a little bit about the mix between new customers and existing customers over the next couple, two, three quarters? Do you see that mix shifting to some of the new customers, or do you see a continuation of the same rough share between new and old?
Alex, most of the legacy customer, you heard their earnings call. They are actually guided down on the Datacom. They are a little bit pessimistic on Datacom, as you can hear from the earnings call. Again, most of our offsets is on the new customer, as you correctly pointed out that. In terms of mix, we don't normally give out the mix. I can tell you that most of the offset is on the new customer.
Yeah. What I was trying to get at is, are the newer customers that are in that space accelerating enough that after we get through the initial comparable offset, that we actually see growth coming back driven by these new customers?
We like to think that way. In the short term, what we guide is what we guide. Datacom will be down.
All right. Okay. I'll cede the floor. Thanks.
Thank you.
Thank you. Our next question is from Paul Coster of JP Morgan. Your line is open.
Yeah. Thanks. I wonder if you can give us some sense of the duration of this downturn. You're shedding head count, and that implies usually a fairly long-term view of resourcing requirements. Talk to us a little bit about how to interpret the reduction in head count.
Yeah, Paul, not necessarily. We are actually taking out only the indirect labor. We never touch the direct labor, even in our previous reduction in force. Those are the guy, we need them to generate product. When the business turn, we definitely have the workforce to capture that business. These are the indirect labor, things like technician and some of the low-level engineer. We found with the latest business condition, we are a little excess, and that's why we take out those redundancy.
Okay, got it. Is this a one-quarter downturn or six months? Can you give us some sense of when you think it will recover?
You probably know that we get 13-week forecast from the customer, so that is the visibility we have. Beyond that, our guess is as good as anybody else guess.
Got it. The telecom side of the business, was there anything to be said about the different regions, or was it a uniform slowdown?
I wouldn't say region. It's more a new customer versus legacy customer. As you know, we did quite well in our new businesses, and we continue to ramp that new businesses segment.
I'm sorry, maybe I misunderstood that. In telecom, it was new customers, or? I'm just trying to focus in on the telecom sector.
That's right
specifically.
Yeah. We had some new customer came online. We classify a new customer or new business is a business we never have. Remember 2014, we start tracking from there. Those are the business we acquire, and then we continue to ramp their production. Those are the area where we concentrate on. Most of the legacy customer, except one customer mentioned in their earnings call that they are looking at up on the Telecom. I think majority of them are guided down. That is reflected in our guidance.
Okay, got it. My last question is, the 400G and 1.2 terabit transition, is it possible that this is starting to slow the adoption of 100G?
Again, you're getting into the customer application territory. I really don't want to make comment on that.
Okay. Thanks very much.
Thank you, Paul.
Thank you, Paul.
Thank you. Our next question is from Tim Savageaux of Northland Capital Markets. Your line is open.
Hi, good afternoon and apologies in advance. I'm in an airport here. I just wanted to clarify guidance along two fronts. One, Datacom revenue, two, silicon photonics revenue. Are you guiding those to be, I think you made a comment about Datacom being flat year-over-year. Does that mean down sequential? Same comment about silicon photonics. What sort of sequential performance do you expect out of silicon photonics? Thanks.
Okay. Obviously the quarter is not over. The way we look at it, Datacom is stable to slightly down a little bit. Silicon photonics, hopefully we can be flat on that because, again, we've got half a thousand of customers, some up and some down. We have new customer who contribute to the growth. At this moment, we really don't want to get into segment guiding. Datacom is stable and flat, and silicon photonics, I hope that it'll be flat also.
Okay. Just to follow up briefly, and I think you did, and it's not sort of surprising to hear talk about the potential for sequential growth on the non-communication side. Obviously that implies a pretty significant decline in Telecom. I guess, looking at the environment, that's probably more concerned about the Datacom side, which seems relatively okay. Any additional color you might be able to provide in terms of drivers on the Telecom side? One thing I wanted to throw in there that I forgot is if you can in any way characterize the magnitude of the decline in one of your legacy silicon photonics customers you mentioned.
Okay. On the Telecom, obviously, we see the data in front of us. Obviously, I hope that China will come back. That will really contribute to the Telecom. Also one of my customers saying that they are pretty optimistic about the ROADM ramp. If that happen, they will benefit over there. That are the two major driver we are keeping an eye on it. Okay. On the silicon photonics, really nothing much I can say because there are five or six customer which has a different levels of ramp, and some ramp faster than the other. As I mentioned earlier, I like to see at least flat in that technology segment.
Okay, thanks. I'll pass it on.
Thank you.
Thank you. At this time, I see no other questions in queue. I'll turn to Mr. Mitchell for closing remarks.
I want to thank you for joining us, and I look forward to our next call.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes your program. You may now disconnect. Everyone, have a great day.