Hello, everybody. Thank you for joining. Tim Long here, Barclays' IT hardware, comms equipment analyst. Very happy to have Fabrinet with us today. Seamus Grady, CEO, with us. So thank you very much for joining. Obviously, really hot space, and you guys are in the heart of a lot of the, you know, key technology, you know, growth areas now. So got a bunch of questions here. I wanna start with kinda the maybe four top ones that we get a lot of questions on, and I'm sure you do as well. So maybe we'll start with telecom and DCI. It's been, you know, it's nice you guys started breaking that out recently.
So we could see it a little bit better. Just talk a little bit about, from a Fabrinet side, what products and solutions are really seeing that growth, on one side, and then talk a little bit about kinda the breadth of, you know, customer base and who's driving that strong growth.
Yeah. We decided to break out DCI because I think for the feedback from our investors was DCI has always been in our telecom number. But of course, it's what's going on in the Datacom world that's driving the growth in DCI. So we decided to break it out so that you can clearly see, okay, yes, it's in telecom, but here's the number. You can see it separately. And it's been growing very nicely for us. We have five, most of our DCI, data center interconnect, most of it is 400ZR and 800ZR, 400ZR, ZR Plus, and more recently some 800ZR. It's been growing, you know, very nicely for us, as you can see from the numbers. And we really have five customers that we deal with there.
There's one that we don't have that we're working on, but we have five customers there. Most of the volume comes from probably two of those five.
Mm-hmm.
It's been, you know, ZR, DCI is a really good solution for these distributed networks where you just can't get enough physical, electrical power into a data center. So by having the data centers further apart, you can connect them together with ZR products and really, you know, get the full effect of the processing power that you have in the data center.
So it's kind of a scale across.
Yes. Yeah.
What they're.
Our telecom business overall, let's say, excluding, so DCI has been growing very, very strongly for us, and I think the demand seems to be very robust and continues to be. For our telecom business outside of DCI, that has also been growing for us, driven more by, I suppose, share gain, somewhat by growth in the business, but also share gain where we've been winning business with a few companies.
Right. Okay. And then you mentioned five customers. I mean, one is reported as a, you know, 10% customer. The other one is kind of in ramp mode, I believe. So, is it, you know, is this the type of thing where looking at all the CapEx announcements and power being committed, that you feel there's a very sustainable DCI opportunity the next multiple years, particularly as, you know, those two customers continue to do pretty well? And if you get the sixth one, that'll probably add to it also.
We hope so, certainly. The demand looks to be very robust. I mean, we only guide one quarter at a time, but the visibility we do have, obviously, beyond that. But the visibility it gives us, you know, we're very encouraged by the demand for DCI. It just seems to be increasing.
Okay. And it seems like the telecom side is strong, the traditional telecom.
Yeah.
But that's not gonna have the same growth dynamic over time. It's a little bit more, you know, stable growth.
Yes.
Rather than k inda exponential, what we're seeing.
Exactly.
Great. Okay. Great. Maybe, you know, second topic here, HPC, so also started breaking this out, which is also helpful. I think it was $15 million or something last year, early stages where you're, you got one line running and, you know, there's a ramp throughout the year, so maybe if you could start by talking a little bit about, you know, obviously, it's a Fabrinet's a company that does really well in optical and transceivers and pluggables. This is a little, you know, obviously, a little bit different, so maybe talk about, you know, the technology angle, the learning curve, you know, the ramp first, and then we'll get into a little bit more on it.
Yeah. So our customer is AWS. It's in the high-performance compute category. We decided to break it out as a separate category because it's a new category for us. It doesn't fit in any of the other categories. It's data center, but it's not Datacom. So it didn't fit in Datacom. It would be too big to be in the other category.
Right.
And we also think it's a good, you know, potential market for us to win other business with other customers. You know, we're producing a range of products for our customer, mostly very, very densely populated, very complex PCBAs. And the approach we've taken is we've put a very cost-competitive solution in place, we believe, for our customer. So far, as you said, we did $15 million last quarter, which was really just qualification-type volumes. So we just really got off the ground last quarter. And you know, we're very optimistic about that business. We think it has a lot of potential to grow. You know, we have to earn our way into the business and do a good job and execute very well for the customer.
But we really think with a very, very high level of performance and execution coupled with what we believe to be a very cost-competitive solution, we're optimistic we can grow that business nicely over the next while.
Okay. Great. And you guys are clearly differentiated on the transceiver optical business. Do you think HPC will be something where once you're fully up and running, you'll be able to demonstrate the same level of differentiation compared to, you know, the competitive landscape?
We think so. And we certainly think there's a lot of opportunity there for us. Again, we're a pure contract manufacturer. We don't have any of our own products. So that's maybe an, you know, in one sense, an area of the business where we don't participate. Some of our contract manufacturing competitors do have ODM-type offerings and the like. We don't. We're a pure contract manufacturer.
Mm-hmm.
You know, the target customers for us are ones who have those type of products, but where they own the design themselves. We don't want to be a product company.
Right. Right. Yeah. And there's obviously news every day about a very large, you know, TPU, you know, custom ASIC platform. When you say there's other opportunities, I'm assuming something like that is.
Yeah.
You know, a next phase for you in the HPC business. And what would it take to break into, you know, another large program like that?
I think, you know, in our business, what it takes to break in is you have to do an excellent job for the customer at a very competitive cost. It's our business is not a complicated business, not an easy business, but it's not a complicated business. It's all about performance, you know, delivery, responsiveness, quality, and doing all of that at a competitive cost. So, you know, and we also have a lot of expertise in, you know, putting together really excellent manufacturing processes. We're our first foray into this. We have a completely automated production line, one line qualified, two lines in qualification, and again, so far, we're very happy, and the customer seems very happy with the job we're doing in terms of, you know, delivery, quality, cost, etc.
Okay. Great. Great. Maybe we'll move over to capacity a little bit. You got the Building 10 coming on next year. You've talked about pulling forward a little a portion of that capacity. So maybe walk us through how you're thinking about capacity more broadly and, you know, what the space is earmarked for. And obviously, demand is good, the fact that you're trying to move some forward. So any thoughts around that would be helpful.
Yeah. So the construction is underway, Building 10, which will, when it's finished. So just to maybe level set first, our capacity right now in our current footprint, we have capacity for our current run rate, I would say. We're at about a $4.5 billion run rate. We still have room to grow with our current footprint, but, you know, call it a $4.7 billion-$4.8 billion capacity that we currently have. The new building, Building 10, when it's finished, will be 2 million sq ft with capacity for an additional $2.5 billion of revenue. We announced our decision to pull in about 250,000 sq ft of that to June. So we'll be, you know, as soon as that's ready, we'll be occupying that fairly quickly while we finish out the rest of the factory.
You know, that should see us through in terms of capacity for the next while. Then we have room on that campus to build two more factories, each of which would be 1 million sq ft. So $2.5 billion capacity with Building 10. And then if we were to build out the other two buildings, Building 11 and 12, that would give us capacity for another roughly $2.5 billion.
Okay. And how flexible is the space from a product solution standpoint?
It's, you know, completely flexible. The way we build these buildings, you know, it's the capacity is very fungible. We build the building, we fit it out in terms of, you know, facilitation and whatnot. But then the specific fit out for each individual customer depends on what the customer needs from us. But, you know, at any point in time, if a customer decided that they wanted to, you know, move out of a building into a bigger building, we can repurpose that space very quickly. So we're very flexible and can, you know, repurpose and reassign that space very quickly.
Okay. Yeah. So the CapEx that you're gonna need to spend is pretty success-based. You have visibility into.
Yes.
Needing that capacity at this point.
And also the decision for us to, you know, to expand the capacity is a very easy decision for us to make. So to build that 2 million sq ft facility, the CapEx is about $130 million, which we can fund from our own resources. We have about $1 billion of cash. We have no debt. So we're able to fund that out of our own cash with no debt. And, you know, God forbid, but even if we woke up one day and it turns out the whole industry collapsed and we never filled up Building 10, the gross margin headwind, if the building were to sit idle, is 15 basis points.
Okay.
So the gross downside risk is tiny.
Right.
The upside opportunity is that incremental $2.5 billion of business, approximately.
Yeah.
When you do the math based on our operating margin, about six months' worth of operating profit.
Right.
A full run rate would pay for the building.
Yeah. Yeah. It seems like we might be getting into areas where if you have capacity, you're gonna win.
If you don't have capacity. Because all of these opportunities are time-based. If you don't have.
Yeah.
Like if you go back a couple of years ago when, you know, when we engaged with NVIDIA and we had a huge ramp with NVIDIA, if we weren't able to ramp, you know, we wouldn't have been successful. So you have to have capacity.
Right. Right.
Especially now these days with demand.
Yeah, and then if there's more success and the two other million sq ft buildings, is it kind of 6-12 months to get one of them up and running?
It's probably more like 12 months, 12 months.
Yeah.
And then we're also repurposing other space in both campuses. We have two campuses in Thailand.
Yeah.
We're repurposing other space to, you know, to create more manufacturing space. We're also looking for additional land and additional factories as well, so.
Okay. Great. Great. You mentioned NVIDIA. So maybe we'll talk Datacom a little bit. Maybe start with the demand profile. It's still, you know, there's obviously cycles in there, but maybe just high level on demand for the Datacom business.
Yes. Overall, demand seems very robust, you know, and if anything, it's very robust and increasing. You know, I think with the rollout of all of these AI data centers, it just seems that the demand for transceivers in particular is insatiable. So, you know, we have our main customer, our kinda marquee customer is NVIDIA, but we have other, you know, other customers that we're working on as well. But demand is very robust.
Okay. And as far as the ZRs you guys aren't talking 400G, 800G, 1.6T much anymore, but where are we in, you know, kinda the node progression for the large customer on the Datacom side?
We're producing, you know, let's say, 200 G per lane EMLs. We're producing 1.6 T and 800 G transceivers. We don't produce much 100 G per lane these days.
Okay.
And we, you know, we're producing, you know, a significant volume. We could produce more if we had more components. We're constrained on a couple of components. But if we had more components, we could produce a lot more. But demand is very robust.
Right. Right. And that demand doesn't go anywhere if there's a shortage of a specific component 'cause the industry is short.
The industry is short.
The industry is short. If anything, the demand is increasing.
Okay. Then you mentioned, you know, other customers other than the large one. Where are you in that process? How do you think about scale for the other potential customers?
So we're working with a number of other customers. Nothing really to announce at this point, but we're working with a number of other customers, some of whom would be maybe some of the traditional companies who are planning to get into the space. Or, you know, we're also working on hyperscale, on our abilities to supply direct to hyperscale, with their design, again, not our design, but their own design. So several kinda growth factors that we're working on.
Okay. You know, back to the HPC business with AWS, obviously, there are warrants associated with that customer. How do you think about you talked about the success of that program to help you do better in that program at AWS and maybe do better at other, you know, HPC players.
Mm-hmm.
How do you view your success at AWS for other products at, you know, transceivers or other, you know, how, how do you view that?
Yeah. So the nice thing about our agreement with AWS, there are no particular products that are excluded from that arrangement. So, yeah, we'd certainly be using this business as a kind of a proof point with our customer to show them that, you know, the really excellent job we can do for them with a view then to expanding into other areas of the business with them in, you know, including optical interconnect and various other aspects of the business. But really, it's a step one for us, and it's a fairly sizable step one.
Right.
But we think it will open the door for us to other lines of business with AWS.
Okay. Now, when you think about, like, diversification, you know, maybe from optical strength that you lead with, you have this, you know, high-profile HPC program. Is that, you know, gonna occupy the next few years ramping HPC, or do you see an opportunity for a different product set or, like, a switch or a power system or, you know, something else?
I think we can, you know, we can do both, or we can do all of the above. You know, we have a lot of, you know, new program ramps in front of us. We have the HPC ramp. You know, the big growth with NVIDIA is really in front of us on 1.6T and 800 G. We're ramping new products with Ciena. Our business with Cisco is growing. So we have a lot of growth going on at the moment, but we're happy to continue to grow if AWS or any of the other, you know, hyperscalers want us to do more than just HPC. We're very happy to do that.
Okay. And this, you know, back to this HPC business, should we think about it as a comparable margin structure to, is there any reason to believe it could ultimately be better? It's probably, it might, you know, it's a pretty complicated product generally, just like, you know, a transceiver is as well.
Yeah. I mean, all of these, you know, products, we have to produce them at industry standard margins, if you like, or hopefully industry-leading margins.
Yeah.
But, at the same time, when we get into a new line of business, we're always quite careful to, you know, do everything we can to make sure we don't do anything to dilute the margins. So it should be comparable in terms of margins.
Right. Okay. You know, maybe back to the DCI part, when you talk about having the five, like, what does it take to get the other player? Like, what you're trying to get the sixth customer. What is it, like, engineering, you know, co-development, or is there something else that has to happen for you to convert?
They use a different supplier today. They use another contract manufacturer. So we would have to displace the other contract manufacturer . And, you know, most of these other companies, they're very good. They do a very good job.
Yeah.
It's not easy. It's not easy to displace our competitors. They do a very good job.
Right. Right. Okay. And then, you know, I know you're not the CFO, but when we're thinking about, you know, the mix of all this stuff going on, is the model generally, you know, maybe the gross margin doesn't move around much, but if you get incremental revenue growth, there's a little bit better leverage on that? Is that kinda the way to think about the margin structures?
Yeah. I think that's right. I think we're somewhat range-bound on the gross margin. We're in the kinda 12.5%-13% range, which, for country manufacturing, is kinda leading. Our OpEx is very low. It runs at about 1.6% of revenue, maybe 1.7%. It's very low. It was 2%. And as we've been growing the company, we've been able to add these big pieces of new business with effectively zero incremental OpEx. So the leverage is really on the OpEx and the operating margin. So we should see I think the gross margin would stay in that range. And then the operating margin, we should see improve over time.
Okay. Maybe let's touch a little bit outside the AI world for a little while, the auto business. You know, obviously, everyone's been having struggles with the auto end market. How do you view your participation there? Is there an end in sight, or what? What do you see for turnaround in that business?
So our auto business is not that exposed to, so one part of it is, but it's not that exposed to, let's say, the consumer-facing piece, you know. We have one customer, which is kinda, we call it traditional automotive. That's quite steady, so that business has been very steady for us. It hasn't really grown that much. It hasn't shrunk that much. It's very stable, and then the two other parts of automotive for us, one is EV charging, which is more on the kind of infrastructure side of automotive, so that business has been, you know, growing nicely for us over the last while, and then the third part of automotive for us is the whole area, we call it LiDAR and sensors generally.
You know, we did capture really all of the LiDAR customers, you know, and as time has gone by and as the number of companies in that space has shrunk as they've either acquired each other or whatever, you know, we really have most of the players there, so I think that part of the business could grow nicely as and when LiDAR as a technology starts to take off.
Okay, and then I'm sorry, I'm hopping around a little bit here, but back to the HPC business 'cause I think there's a lot of attention 'cause it's a huge, you know, opportunity.
Yeah.
I think you talked about the one line. Just walk us through the timeline of the ramp, how you go from, like, the trial, you know.
Mm-hmm.
Ramping to, you know, full production, and is this gonna remain PCB only, or will there be other, you know, elements of their HPC program that you could participate in? I think the main incumbent does the PCB, but they also do the card as well, so is there other, you know, maybe talk about the ramp and then talk a little bit about not just, like, transceivers, but related to the HPC.
We do that as well. We do the main and the.
Okay. You do both.
Yeah, I think there's opportunities to do more than just the PCBA. You know, for now, last quarter was just about getting qualified. So we got qualified. We had that $15 million of revenue last quarter. So we're qualified now. We're up and running. We have one line qualified, two other lines that are in qualification at the moment. And I think we'll ramp, you know, to that kinda first plateau of revenue probably by the June quarter, maybe a little bit earlier, but probably by the June quarter. And then really, it's all about how well we perform. You know, if we do a good job, we perform well, we execute very well, and we're easy to do business with, and they make significant savings, then I think there's an opportunity to take more share there and grow that business.
So it's really down to how we perform.
Okay. And I'm assuming currently it's maybe you don't have full view on market share, but it's starting out with a, you know, whatever percentage of the business, and then if you perform, then that has the opportunity to move higher?
Yes. Yeah, but again, there's no guarantees.
Right.
We have to earn every piece of business, and what goes up can also come down, you know.
Yeah, and there's been a lot of discussion about that program with, you know, going to the third version from the second. There's 2.5-3 . Is Fabrinet, with the ramp phase, are you able to participate in evolutions of the program?
Yeah.
So you don't have to be requalified or anything?
I mean, the new product would have to be requalified for, you know.
But we're qualified as a supplier. The last time around, there was really two things. We had to be qualified, and we had to qualify the product. So that f irst part is done now. It should be a more straightforward exercise.
And I believe the competitor in that one is more of an ODM model. So from a pricing standpoint, could be beneficial. You said if there's cost savings, that would.
Yeah. As far as I know, they do have some ODM business, but certainly the products that we're making are contract manufacturing.
Yeah.
Where the customer owns the IP.
Right. Right.
So, you know, from that point of view, it's kind of interesting for us to see that kind of overlap between ODM and contract manufacturing. Yeah, in theory, it's ODM, but it's not ODM. It's contract manufacturing.
Right. Right.
So, 'cause ODM is not. It's not for us. We don't have any of our own products.
Yeah. Maybe, you know, a higher-level one, you know, when you think about as a CEO, you got the capacity stuff we talked about. You got some pretty massive opportunities, right? This HPC deal could be $15 million now and, you know, 10x that in a year, right? How do you plan, you know, not just capacity, but infrastructure in the company, investment? How do you, you know, how do you manage with, you know, uncertainty and to just how big some of these revenue ramps can be?
Yeah. We take a really long-term view, so we have a couple of processes that we use internally that work really well for us. We have a rolling eight-quarter revenue forecast that's frighteningly accurate because we're very plugged into the customers, and when we build our revenue plans, they're bottom-up revenue plans. We don't build the top-down, so believe it or not, we don't say we have to get to be a $10 billion revenue company. That's not our goal. Our goal is to grow. We always like to grow at 2x the rate of growth of the industries we serve, 3x the rate of growth of the country manufacturing industry. That's what we like. That's how we like to grow.
Over the last 10 years, up to the fiscal year ended in June of this year, in the prior 10 years, our compound annual growth rate was 16%. We compounded the earnings 21% in that same time period. So we have, we think, a good track record of growth and, you know, success. As we look ahead, like I say, we have an eight-quarter, you know, really close-in rolling eight-quarter revenue forecast. We have a three-year, and we have a five-year. So we use that five-year. You can't be reviewing and sitting down looking at strategy every month.
It's something we sit down periodically, usually kinda once a year, more frequently if something big comes along, and we set out our plans for the years ahead 'cause these things take, you know, if you build a new building, it takes a year and a half to.
Right.
To get it off the ground, but we're in a fortunate position that our, I feel like, our footprint, our geographic footprint is quite compact. You know, we're financially very strong, so our balance sheet is very, I would say, pristine and strong. We're able to fund our own growth. You know, we really just sit down and look out five years all the time and make plans accordingly, so we're in the very fortunate position that the customers are very happy to share their demand and their plans with us, and we're able to take that and use it to build our own plans, and, you know, the customers know when they share their plans with us, we're not gonna hold them to it.
It's not like we're gonna turn around in five years and tell them you told me you'd need this.
Right.
In 2029 or something. No, but it's really good to get that information from the customers and so the customers are really good at sharing their plans. What also helps is, you know, we're always working with the customers, not just on the current product, but on the next generation product and the one after that, and in some cases, two or three generations out, so when you have that kind of visibility, it just allows us to see what's coming down the tracks and hopefully see around corners a little bit.
Okay. Yeah. You could feel free to send me that eight-quarter rolling. That'd be lovely. Okay. I think that we got a minute, a few minutes left, but I think that does it for me. Thank you so much for the time. Really appreciate it. I know it's a very busy time. So thank you. Thank you, everybody.
Thank you. Thank you very much.
Thanks, everyone. Take care.
Thank you.