Afternoon. Welcome to Fabrinet's Financial Results Conference Call for the Q1 of Fiscal Year 2023. As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Garo Tomajanian, VP of 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 Q1 of fiscal year 2023, which ended September 30, 2022. With me on the call today are Seamus Grady, Chief Executive Officer and Chavis Ferra, Chief Financial Officer. This call will be webcast and a replay will be available on the Investors section of our website located at investor. Fabrinet.com.
During this call, we will present both GAAP and non GAAP financial measures. Please refer to the Investors section of our website for important information, including our earnings press release and investor presentation, which include our GAAP to non GAAP reconciliation. In addition, today's discussion will contain forward looking statements about the future financial performance of the company. Forward looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. These statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise them in light of new information or future events except as required by law.
For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular, the section captioned Risk Factors in our Form 10 ks filed on August 16, 2022. We will begin the call with remarks from Seamus and Chhaba, followed by time for questions. I would now like to turn the call over to Fabrinet's CEO, Jim McGrady.
Thank you, Yaro. Good afternoon, everyone, and thank you for joining us on our call today. We're off to a strong start in fiscal 2023 with 1st quarter results that exceeded our guidance. Total revenue was 655 $400,000 with a better supply situation than anticipated, which contributed to our strong performance. Revenue increased 21% from a year ago or 17% when we adjust for the contribution of approximately $20,000,000 Due to the 14 week quarter.
In other words, revenue would have been $20,000,000 lower if not for the additional week. Demand remains strong across the board with sequential growth from nearly all the end markets that we serve. Supply for some automotive components saw relief in the quarter, resulting in a supply headwind to revenue that was only about half of the 25 $30,000,000 we had anticipated. We also executed well to produce non GAAP operating margins of 10.7%, consistent with our record 4th quarter and a full percentage point higher than the prior year. Revenue upside and strong margins helped drive non GAAP EPS of $1.97 Looking at the quarter in more detail, We delivered a record quarter for both optical communications and automotive revenue, even after considering the extra week in the quarter.
In the Q2, we expect to start seeing optical communications revenue further supported by our new partnership with DZS, a global leader in access networking infrastructure, service assurance and consumer experience software solutions. Through our partnership, DZS will transition sourcing, procurement, fulfillment and manufacturing activities in its Seminole, Florida facility to Fabrinet. We believe this new systems win has the potential to be a significant contributor to our growth when fully ramped. Turning to non optical communications, we had an especially strong quarter. Automotive revenue was up more than $30,000,000 or more than 50% sequentially as improved component availability allowed us to capture more revenue than anticipated in the quarter.
Overall demand from our customers remains very strong, which makes us optimistic about our future. While supply constraints remain a limiting factor on our growth, We continue to focus on managing supply conditions as effectively as possible. From a capacity perspective, we are very well positioned to serve increasing demand. Last week, we held an official ribbon cutting ceremony for Building 9 at our Chondri campus, adding approximately 1,000,000 square feet of space. While we are maintaining our practice of letting our customers take the lead and announcing relationships, we are very pleased with the early demand and traction at Building 9.
Looking at the Q2, we remain optimistic that strong demand trends will continue to drive growth, both year over year and sequentially After factoring the additional week in the Q1, we also remain confident that we can continue to realize incremental operating efficiencies as revenue grows faster than expenses. In summary, we had a strong Q1 with results that exceeded our guidance. We are optimistic about continued demand in our markets and we are well positioned to extend our track record of success as we look ahead. Now I'd like to turn the call over to Chava for additional financial details on our Q1 and our guidance for the Q2 of fiscal 2023. Chava?
Thank you, Seamus, and good afternoon, everyone. We delivered strong first quarter results that were above our guidance ranges. Revenue in the quarter was $655,400,000 and represented strong year over year and sequential growth, even after backing out the approximately $20,000,000 contribution from the additional week in the Q1. With excellent execution, we delivered our best ever non GAAP growth and operating margin for the Q1. The strong margins combined with foreign exchange tailwinds and higher interest income produced record non GAAP earnings per share of $1.97 which was $0.18 above the high end of our guidance range.
Looking at the revenue in more detail. Optical Communications revenue was $497,600,000 Note that growth comparisons to prior periods should be adjusted by the additional week in Q1, but we believe that optical communications revenue Within optical, telecom revenue was a record $404,900,000 Datacom revenue was $92,700,000 My Technologies Silicon Photonics revenue was $138,900,000 an increase of 3% from a year ago And decline of 8% sequentially. The sequential decline is primarily due to approximately $15,000,000 revenue that had shifted from Q3 Although datacom business tends to be more variable on a quarterly basis And continues to be impacted by supply chain headwinds, we anticipate that our datacom revenue will increase sequentially in Q2. Revenue from products rated at speeds of 400 gig or more was $195,200,000 up from a year ago as well as sequentially. Revenue from 100 gig products remained stable and was $139,600,000 up modestly from a year ago, but down sequentially.
Non optical communications revenue was very strong in the Q1 at a record $157,900,000 and represented 24% of total revenue. Growth in non optical communications was driven primarily from automotive revenue of $86,800,000 up 80% from a year ago and up 55% from last quarter. During the quarter, we took advantage of availability of components that had been in short supply, enabling us to deliver meaningful growth. While the component supply environment remains challenging and may result in declining automotive revenue in Q2, We anticipate that strong demand will produce healthy year over year growth. Industrial laser revenue was $35,400,000 down 5% sequentially, but remaining stable in longer term trends.
Other Non Optical Communications revenue was 30 As I discussed the details of our P and L, expense and profitability metrics provided which you can find in the Investor Relations sections of our website. We executed very well in the Q1 to produce particularly strong gross margins for the Q1 at 12.9%, just below our 4th quarter performance. We achieved these strong results despite the headwinds from annual merit increases, which were largely offset by increasing efficiencies And continued foreign exchange tailwinds. Operating expense in the quarter were $14,700,000 or 2.2 percent of revenue. This produced operating income of $70,000,000 or 10.7 percent of revenue.
This performance represents our 9th quarter in a row of generating record operating income. As a reminder, the vast majority of our revenue is in U. S. Dollars as are the majority of material and component costs. However, a significant portion of our labor and operating costs are in Thai Baht.
Through the cash flow hedging program we have been Following for many years, we are able to enhance our visibility and smooth out the impact of foreign exchange fluctuations over time. Nevertheless, from time to time, we could see larger impact as a result of currency revaluation of balance sheet items. And in Q1, This resulted in $2,100,000 or $0.06 per diluted share foreign exchange gain. The current interest rate environment combined with our strong balance sheet contributed approximately $1,200,000 or approximately $0.03 per diluted share. Non GAAP net income was $72,400,000 or $1.97 per diluted share, which is another quarterly record and was above our guidance range.
On a GAAP basis, net income was 1.76 dollars per diluted share. Effective tax rate was 1.1% in the 1st quarter. But for the year, we anticipate an effective tax rate in the low to mid single digits consistent with our history. Turning to the balance sheet and cash flow statements. At the end of the Q1, cash, cash equivalents and restricted cash That's $499,900,000 up $21,400,000 from the end of the 4th quarter.
Operating cash flow was $60,600,000 with CapEx of $10,300,000 Free cash flow was a quarterly record at $50,400,000 In fiscal year 2023, we will continue to execute on our plan to return surplus cash to shareholders. During the Q1, we repurchased approximately 47,000 shares for a total cash outlay of $4,900,000 Approximately $95,000,000 remains in our share repurchase authorization. Now I will turn to our guidance for the Q2. We continue to be optimistic about demand across our business as well as our ability to effectively manage supply constraints. While the component supply environment saw specific pockets of relief in the Q1 and we continue to expect improvements over time, These supply headwinds continue to persist in many areas of our business.
As such, our Q2 guidance assumes a supply chain headwind of $25,000,000 to $30,000,000 For the Q2, we anticipate revenue in the range of $640,000,000 to $660,000,000 This represents both year over year and sequential growth after backing out the contribution of approximately $20,000,000 from the additional week in the Q1. We anticipate non GAAP net income to be in the range of 1.86 dollars to $1.93 per diluted share. In summary, our Q1 results provided a strong start to Fiscal year 2023 with record revenue and earnings, which both exceeded our guidance. With continued favorable business conditions, we are optimistic that our track record of success will extend into the Q2. Operator, we are now ready to open the call for questions.
Our first question comes from the line of Alex Henderson of Needham. Please go ahead.
Thanks. Just a little clarity to start off with on the supply chain comment. So And $30,000,000 in the automotive was an impressive improvement. But I guess, To a large extent, most of the people following Fabrinet are more focused on the optical side. Did your supply chain improve on the Because if I just take the $30,000,000 out of the revenues, you're in line with our prior forecast.
Yes. Hi, Alex. Yes, we called out the improvement on the automotive. And just to remind, our automotive business is made up of The improvement was in the new automotive business, which is made up of electric vehicles and also LiDAR. We have to see Some improvement.
It's too early to declare victory yet, but we have started to see some improvement. And I think what's particularly encouraging for us is having Specific component charges get cleared. We're seeing that demand that we've been we've had some pent up demand, let's call it, for some time. Once those component shortages are clearing, we can see the revenue impact is almost immediate. So this past quarter, the most of the biggest part of the impact was on automotive, Some on the optical side as well, but mostly on the automotive side.
And like I said, as we clear those shortages that have been plaguing us and Taking us and everybody else for some time, it is converting to revenue very quickly.
So does that imply that the majority of the Number that you threw out, I think it was $25,000,000 to $30,000,000 of supply constraints And the quarter has a shift in the mix to more optical supply constraints and maybe less auto supply constraints. I mean, how do we measure it? How do we think about that?
Yes, for last quarter, yes, I think that would be fair way to look at it. Most of the constraints were on the optical side.
I see. I see. And just going back to the baseline businesses, you gave A fair amount of granularity on the outlook, but I think could you talk about what you think the datacom and telecom, 400 gigs silicon photonics are going to do on a year over year basis since we have that extra year confusion. How do you expect those to behave year over year as opposed to quarter to quarter or adjusted for the quarter to quarter if there's Some way to do that.
Hi, Alex. This is Trevor. Let me take that one. So I think you meant to say extra week we had in Q4 Strong both sequentially and on quarter on quarter on year on year basis as well. So we continue to see 400 gig growing.
The primary driver that we earlier spelled out was driven by 400 ZR, which came off from a low base Obviously, this year, we continue to see very strong demand in that space. So both silicon photonics And obviously, the higher data rates remain very stable, even though on a sequential basis, you see a Slight decline in silicon photonics revenue, but that has to do with the $15,000,000 extra revenue that we had in Q4 from the prior quarter. So overall, we are very optimistic about both silicon photonics and the higher data rate businesses that are coming down the track, both on telecom and datacom as well. And again, the year on year growth was primarily driven by the 400ZR, which remains very strong for us.
Yes, I was really talking about in the guide for the Q4, whether you thought Datacom and Telecom We grow on a year over year basis, any calibration of that within the guide is what I was looking for.
So we anticipate that the higher data rates will continue to grow. So I in the prepared remarks, I mentioned that our Datacom business It remains very strong, although some of the supply constraints were mostly in our datacom business. Again, those supply headwinds are still ahead of us, but we are very optimistic about the growth rate there. So we do anticipate probably Slightly higher growth rate in datacom and for going into next quarter.
And on telecom This is
subject to the price constraints.
And telecom, any sense?
I'm sorry?
And what about telecom?
Telecom also continues to be strong. Again, that's impacted by supply constraints, but we do anticipate that to continue to grow, yes. Again, the demand is holding very strong across the board. The caveat here is still that we are not out of the boots from supply perspective. We still have about $25,000,000 baked in our guidance.
So that's mostly across the board, but subject to those supply constraint, we do
Thank you. Our next question comes from the line of Samik Chatterjee of JPMorgan. Please go ahead.
Hi. Thanks for taking my questions and congrats on the strong print here. I guess I had a couple. So I'll just sort of Go through those. One, I mean, if you can talk a bit more about the DZSI business win.
And I know you said that business starts to ramp up in the fiscal Q2, but sort of how to think about the contribution From that business or that new win for the year, how big do you see that opportunity being in the long run? Maybe if you can give some more color around that? The second one, I did sort of adjust your fiscal Q1 revenue for the extra week, the $20,000,000 that you said. And it's still the sequential growth That you are implying at the midpoint of your guide going into 2Q is a bit softer than what we saw you sort of execute on last couple of So I'm just wondering like if you can talk to the sustainability of the non optical revenue in the quarter. Is it that you had supply improvement Then pull through a lot of backlog, which is somewhat limiting sort of the sequential improvement that we see or sequential growth that we see
Thanks, Samik, and thank you for the comments. I'll take the first question around DZS and then I'll turn it over to Chava for the question about the outlook. Yes, The DZS business, as you know, we don't size specific deals, but this is a meaningful program The transfers production from DZS' Seminole facility in Florida to our facilities in Thailand. It's part of our strategy. We continue to execute our strategy to add selective complete network system business, and we have a good track record of that now over The last couple of years.
In this case, we're transferring from high cost location to a low cost location. Again, with a meaningful revenue upside, we're not going to But it's a meaningful revenue upside and it really is a perfect fit with our strategy and capabilities and our track record of executing transfers Very effectively and efficiently and allowing our customers to realize savings quickly. DGS has other manufacturing capabilities. So this represents a portion of their production, but it is a meaningful deal that we're proud to have We worked hard to win this deal. The competition was strong, we believe.
And we're very, very happy to have been awarded in business and look forward to engaging with DCS To transfer production. And again, it reflects the overall opportunity in the system space, which we've been very optimistic about and I think we've proven to be If you go back to the Infinera Coriant win a few years ago, then the Cisco business that we transferred, this will be the 3rd, let's call it meaningful or significant Complete network system win that we've had in the last few years.
So, Sanjay, this is Chaval. Let me take the Guidance section, the growth part of it. So as you mentioned, if you back out the extra $20,000,000 from our Q1 revenue Year on year, you would see about 17% growth in Q1 versus last year. And our guidance at the midpoint for Q2 calls For about 15% growth on year on year basis. Again, as a reminder, in Q1, we saw Significant improvement in supply availability.
So that explains a little bit higher growth rate than what you anticipate in the Q2 guidance. Nevertheless, again, if you go back to the supply headwind commentaries I had, we baked in about $25,000,000 to $30,000,000 So overall, I think our growth rate is and has been consistent with our longer term plans of about 15% growth rate. And I don't see any major change in the trajectory of the demand environment. We are still operating in a supply constraint area. So that's one of the reasons why we are a bit cautious about the guide, which is still very strong 15% on a year on year basis.
Got it. Thank you. Thanks for taking my questions.
Thank you, Suneet. Thank you, sir.
Thank you. Our next question comes from the line of Fahad Najam of Loop Capital. Please go ahead.
Hey, thank you for taking my question. I'm still trying to get my head around the Your comment about improved supply chain. If my math is correct, the automotive revenue You grew comprehensively, probably more than the entirety of the supply chain headwinds that you've talked about. So is it that the automotive supply improved and the optical communication supply chain worsened? Can you just help us understand maybe clarify things a little bit more?
No, I
think the non automotive or the optical Performed pretty much in line with our expectations, but automotive did improve better than we had anticipated. And we were able to convert those. It's a handful of components that have been in short supply for some time once they became available. We were able to convert that kind of pent up demand into revenue quickly. But the I think the revenue on the optical side of the business was Pretty much in line with our expectations.
Appreciate that. So given that there is a massive backlog in the automotive Segment for you. How should we be thinking about growth in the automotive space? It seems like Your commentary seems to suggest that optical communications supplier remains challenging, but how is it looking Out for automotive and how should we be thinking about automotive revenue throughout the rest of the year?
I think it remains challenging for having across the Our business, I think we've had a couple of breaks, let's call it in the automotive business, but the supply situation remains challenging across the board. If anything, The breakthrough we had in automotive last quarter, what it demonstrates we think is, I know there's been a lot of concern about is the demand real, is the Double ordering going on. What we've been seeing is as component availability clears, that demand is converting into revenue immediately. So the demand is there. The demand is real, we believe.
But the supply constraints, It continues to be challenging across the board. I wouldn't see it as particularly better in automotive or better or worse in optical. It's similar across the board.
Got it. And then one last question for me, and then I'll hand it over to the floor. In Building 9, how much of the square footage is now spoken for?
Yes, we don't report that metric, Fahad, we had an opening ceremony there last quarter. We're very happy with I'm sorry, last week. Last week, we had the opening ceremony in I'm actually in Thailand right now. I was here for the opening ceremony. We're very happy with the progress there.
We have a number of customers, but we're not going to be announcing or communicating Metrics like occupied spoken for those type of metrics because they don't really mean a whole lot. Other than to say, the vast bulk of the growth will be seeing over the next We'll be in the Building 9 location. Our Pinehurst facility is more or less at capacity. Building 8 is at capacity. So the growth over the next slide will be in Building 9.
But I would say we're very happy with the progress there.
Sorry to call, I think last quarter you guys said you had 2 anchor customers for Building 9. So anything else you can provide like Customer count, just kind of how much better is it getting?
Well, we have yes, we have 2 anchor customers. We have other customers who we're actively working with, nothing to announce yet, but actively working with to get capacity set up there. And again, a lot of the new business that we talked about, like for example, the DZS win That will be ramping in Building 9. So most of the growth, as I say, there'll be exceptions here and there, but for the most part, The majority of the growth for the next 5 will be in Building 9. I would say, if I compare it to Maybe if I can answer it this way.
If I compare the let's say the rate of expansion, the rate of revenue growth that we envisage in Building 9, Which again, just remind you, is a 1,000,000 square foot facility. If I compare it to where we were at the same period In Building 8, let's say back in 2016, 2017 in Building 8, I think the rate at which We will grow Building 9. Certainly right now it feels faster because when we opened Building 8, it was our first facility, Our first factory in the new campus in Chonburi, there was a certain amount of maybe reluctance on the part of customers to be the first one to go there. So there was a little bit of reluctance. But now we're 5 years down the line, that building is full.
And from the customer's point of view, they don't really differentiate between Building 8 or Building 9, it's all the Chonburi campus. It's fully ramped. It's going very, very well. So I think our the willingness of our customers to ramp in Building 9 It's completely different to what we had 5 years ago in Building 8. So we feel very good about our ability to grow and add business to Building 9 quickly.
Appreciate the color, Seamus.
Thank you.
Thank you. Our next question comes from Alex Henderson of Needham and Company. Please go ahead.
Great. Thanks. So I just wanted to dig into the interest line and the FX line. So when you look at the guide that you gave for the December quarter, I'm assuming that the $2,000,000 in FX falls out of it and that it's effectively back towards 0. And similarly, if I look at the interest line, I'm Thinking that with interest rates going up certainly here, but probably on a global basis and I assume that you've got a Fairly short term orientation to your current massive cash balances.
Should we be
Hi, Alex. So yes, your math on the FX is probably right. We typically don't guide the revaluation below the line FX So we as we realize the actual evaluation, we will that we have flow to the bottom line in the actual basis. The interest in the elevated interest rates, obviously, are going to translate to a higher interest income for us. So The trends have been going on in the last couple of quarters.
So obviously, you can see that picks up in our interest rate line. With Our strong balance sheet and cash balance sheet, we do anticipate a strong contribution going forward. So again, to simplify your question, FX out interest rate to continue to contribute.
Just going back to the interest rate line, it's up about $1,000,000 Sequentially, is that predominantly a result of the change in interest rates or is there something else going on there? And should I be thinking of That rate of increase is what you're likely to do over the next 2 or 3 quarters on a sequential basis given rates are up At least in the U. S, 4%, which is a pretty big increase on your cash balances. I would think That would have a pronounced impact on interest income. Can you just give us some sense of what the trajectory over time looks like there?
So yes, indeed, the incremental sequential increase And our interest income has to do with the increased interest rate. So again, we don't like to speculate how is that going to work out in the future, but Indeed, we have a very strong balance sheet, and we do anticipate that to be a meaningful contribution as we look at it.
Well, you're not really speculating if you just assume existing interest rates. So no further guidance of whether that Magnitude increase that we saw quarter to quarter is at least the assumption they used in the December quarter?
I'd like to stick to our core business when we give guidance out and leave the interest rates and the exchange rate as a side commentary. So I wouldn't go through Further details in terms of guiding interest rates.
Okay. I just wanted to go back a little bit And to the other areas, have you seen any change in The demand as a result of your ability to supply the auto segment, I mean, so With $30,000,000 extra shipping, there could be 2 responses. 1, oh boy, I just got all the stuff I wanted. Or 2, wow, I got what I wanted. Here's orders because if you can get more, I'd like more, which could certainly play into your backlog.
So can you talk a little bit about whether What happened when you delivered that extra business to that segment?
Yes. I think, Alex, It hasn't resulted in really any change in the demand. Demand is just very strong. And it really is a case of once we get the components, We can convert that pent up demand into revenue and get it shipped. We've had strong backlog in Really all of the markets we serve, automotive in particular, and in this case, once we were able to clear that component or a couple of components, We were able to very quickly convert to revenue and get it out the door.
But no, it hasn't resulted in additional demand. I think the demand is already very strong. We'll be happy if the demand remains and just converts over time as we're able to get a breakthrough on these component charges.
And just to be clear, when you talk about your backlog, you're not taking into account the I don't remember what the number was, but I guess we'll get an update around tomorrow with Lumentum, but I think there was something like $75,000,000 for the backlog there. And that's not taking into account the $4,400,000,000 backlog at Ciena. None of that's factored in, correct?
Yes. We don't actually talk about our backlog, Alex. We don't size it. We don't really talk about our backlog other than to say It's very strong and we have visibility for much further out than we would normally have because of the component supply situation. The backlog is very strong, We don't actually size it.
And then trying to foot how much of Lumentum's backlog is included in our backlog, how much is the end as we We don't know. We just go by the demand that we get from our customers. We don't try to round it with the numbers that they're projecting to the street, I'm afraid.
Appreciate the time.
Thanks, Alex.
Thanks, Alex.
Thank you. At this time, I'd like to turn the call back over to Seamus Grady for closing remarks. Sir?
Thank you for joining our call today. We're off to a strong start in fiscal 2023 With Q1 results that exceeded our guidance ranges, we executed well to deliver strong margins despite seasonal headwinds, which increases our confidence that we can continue to deliver strong performance as we look ahead. We look forward to speaking with you again and seeing those of you who will be attending the Needham Conference next week. Goodbye.
This concludes today's conference call. Thank you for participating. You may now