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Fabrinet (FN) Q3 2023 Earnings Call Transcript

Fabrinet (FN)

Q3 2023 Earnings Conference Call

Company Participants

Garo Toomajanian - Vice President, Investor Relations

Seamus Grady - Chief Executive Officer

Csaba Sverha - Chief Financial Officer

Conference Call Participants

Samik Chatterjee - JPMorgan

Alex Henderson - Needham & Company

Troy Jensen - Lake Street Capital Markets

Presentation

Operator

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the Third Quarter of Financial Year 2023. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, today's call is being recorded.

I would now like to turn the conference to your host, Garo Toomajanian, Vice President of Investor Relations. Please go ahead.

Garo Toomajanian

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 third quarter of fiscal year 2023, which ended March 31, 2023.

With me on the call today are Seamus Grady, Chief Executive Officer; and Csaba Sverha, 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.

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-Q filed on February 7, 2023. We will begin the call with remarks from Seamus and Csaba, followed by time for questions.

I would now like to turn the call over to Fabrinet's CEO, Seamus Grady. Seamus?

Seamus Grady

Thank you, Garo. Good afternoon, everyone, and thank you for joining us on our call today. We exceeded our guidance for both revenue and non-GAAP EPS, in the third quarter. Total revenue in the quarter was $665.3 million, an increase of 18% from a year ago.

During the second quarter, supply headwinds impacted revenue by $30 million to $35 million as anticipated. We continue to see a gradual loosening of component supply, and we expect further improvements in availability over the next few quarters. Our strong revenue performance and solid execution produced non-GAAP EPS of $1.94 in the quarter, above our guidance range and up $0.44 from a year ago.

Looking at the quarter in more detail. Revenue was essentially flat sequentially for both, optical and non-optical communications, and was a little better than our expectations. Within optical communications, telecom revenue decreased sequentially as anticipated. This was primarily due to specific component constraints we called out last quarter, impacting silicon photonics programs and to a lesser degree from ongoing commodity semiconductor constraints. Datacom revenue was similarly affected by supply constraints, but the supply impact was more than offset by growth from some next-generation non-silicon photonics programs. As a result, we had a record datacom performance, producing strong quarterly and year-over-year growth.

For non-optimal communications, our business was up more than 30% from a year ago and was relatively stable with the second quarter as we maintained strong automotive revenue levels.

Looking to the fourth quarter and beyond, we are not immune from the near-term inventory corrections being experienced in the broader optical ecosystem. While we are not a proxy for the industry, we expect the impact of inventory absorption in some product areas to be a headwind to our revenue in the fourth quarter.

On the other hand, we continue to see gradual improvements and component availability. Longer-term, we believe end market growth drivers remain intact, and we continue to be optimistic about our position in the markets and our ability to execute efficiently.

In summary, we delivered strong third quarter results with revenue and non-GAAP EPS that exceeded our guidance. We are seeing some demand variability as a result of inventory adjustments in the industry as well as persistent, but improving supply constraints. We remain confident in our ability to execute in this environment and deliver strong financial results.

Now I'd like to turn the call over to Csaba for additional financial details on our third quarter and our guidance for the fourth quarter of fiscal 2023. Csaba?

Csaba Sverha

Thank you, Seamus, and good afternoon, everyone. Our revenue and non-GAAP EPS exceeded our guidance changes for the third quarter. Revenue was $665.3 million, which was up 18% from a year ago and down 0.5% from the second quarter. Demonstrating the leverage in our business model, profitability grew faster than revenue with non-GAAP earnings per share of $1.94, up 29% from a year ago and also above our guidance range.

Looking at revenue in more detail. Optical communications revenue was $502.6 million, up 14% from a year ago and slightly down from Q2 as anticipated. Within optical, telecom revenue was $380.2 million, which was up 6% from a year ago, but a decline of 3% from the second quarter. This decline was primarily due to increased supply constraints for certain semiconductors used in this product as we discussed last quarter....

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