Fabrinet Q4 FY2025 Earnings Call Transcript

Fabrinet (NYSE:FN) reported its fourth-quarter financial results after Monday’s closing bell.

Below are the transcripts from the fourth quarter earnings call.

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OPERATOR:

Good afternoon. Welcome to Fabrinet’s financial results conference call for the fourth quarter of fiscal year 2025. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions on how to participate will be provided at that time. As a reminder, today’s call is being recorded. I would now like to turn the call over to your host, Kiro Tumajanian, VP of Investor Relations.

Garo Toomajanian (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 fourth quarter of fiscal year 2025 which ended June 27, 2025. 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. 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 as well as additional details of our revenue breakdown. 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 10Q filed on May 6, 2025. We will begin the call with remarks from Seamus and Chaba, followed by time for questions. I would now like to turn the call over to Fabrinet’s CEO Seamus Grady.

Seamus Grady (Chief Executive Officer)

Thank you, Garo. Good afternoon and thanks to those joining our call today we had an excellent fourth quarter ending an outstanding year with tremendous momentum. Fourth quarter revenue was $910 million, which was above our guidance range and up more than 20% from a year ago and 4% from Q3 with margins that were a little better than expected. We also achieved record non GAAP earnings of $2.65 per share for the full year fiscal 2025. Revenue reached a record $3.4 billion, representing a robust 19% increase over the prior year. Non GAAP EPS also hit an all time high at $10.17 Looking back, fiscal year 2025 was an exceptional year of execution and growth for Fabrinet. We navigated a significant product transition at a major Datacom customer, while our telecom business and overall revenue reached record highs. We established a significant partnership with Amazon Web Services, which we anticipate will be a meaningful revenue driver in fiscal year 2026. Construction began on Building 10, which will add 2 million square feet of capacity to our overall footprint. We also marked the 15th anniversary of our IPO by ringing the opening bell at the New York Stock Exchange. Additionally, we returned $126 million to shareholders through our buyback program, with continued repurchases expected in fiscal 2026. We begin fiscal 2026 with strong broad based momentum. Robust customer demand across our business leaves us better positioned than ever to capitalize on the many significant opportunities ahead of us. In fact, with multiple growth drivers providing clear visibility toward reaching $1 billion in quarterly revenue, we are now evaluating options to accelerate the completion of a portion of Building 10 to meet increasing customer demand. Looking more closely at our fourth quarter results, optical communications revenue delivered strong growth. Telecom revenue increased 46% from a year ago and 1% from Q3, with system programs and demand for data center interconnect products driving the bulk of our growth. In fact, DCI revenue represented one quarter of our total telecom revenue and grew 45% from a year ago. We expect our telecom momentum to continue into Q1, especially as we begin to ramp volume production of a next generation system program for a major customer. As anticipated, Datacom revenue was down from a year ago but increased double digits sequentially as we enter a meaningful growth phase for 1.6t products. With demand still increasing, we are very optimistic about Datacom growth trends for fiscal 2026. In the near term, this surge in demand has created some temporary component supply challenges which we are working closely with a major customer to overcome. Within non optical communications, Automotive performed better than expected for the quarter with only a slight sequential decline, while industrial laser revenue remained stable. Looking ahead, multiple simultaneous growth drivers give us strong optimism for fiscal 2026. These include the launch of a new telecom system, continued growth in DCI, increasing demand for 1.6T transceivers, and the ramp of a prominent high performance compute program. We remain confident in our ability to maintain excellent execution while continuing to grow both revenue and earnings. In summary, we are pleased with our outstanding performance in Q4 and throughout fiscal 2025. More importantly, we enter fiscal 2026 in a very strong position, reinforcing our optimism for the future as we further solidify our leadership position in the marketplace. We look forward to carrying this momentum into a strong Q1. I’ll now turn the call over to CSABA for more financial details on our fourth quarter results and our outlook for the first quarter of fiscal 2026.

Csaba Sverha Thank you Seamus and good afternoon everyone. We had a very strong fourth quarter, achieving new quarterly records for both revenue and non GAAP Net income revenue in the fourth quarter was $910 million above our guidance range and an increase of 21% from a year ago and 4% from Q3. Non GAAP EPS was $2.65, a new quarterly record. This result includes the impact of a $4 million or $0.10 per share FX evaluation loss. Looking at revenue performance by category in the fourth quarter, optical communications revenue was $689 million, up 15% from a year ago and 5% from Q3. Within optical communications, telecom revenue reached a robust $412 million, up 46% from a year ago and 1% from Q3. This performance reflects growing demand driven primarily by continuous strength in data center interconnect products. For the first time, we are reporting DCI revenue which reached $107 million in the fourth quarter, representing 12% of overall revenue. To provide investors better insight into this important growth area, we have included historical DCI revenue data in the investor presentation available on our website. Datacom revenue of $277 million was down 12% from a year ago, but swung to a strong growth of 10% sequentially driven by very strong demand for new, higher data rate products. In optical communications, revenue from 800G and faster products was $313 million, up 21% year over year and 32% sequentially, driven primarily by the ramp of new 1.60 Datacom products. Importantly, we have now begun volume shipments of 1.60 transceivers, a major milestone, and expect demand trends to continue ramping in fiscal 2026. In contrast, revenue from products below 800G was $233 million, up 4% from a year ago but down 18% from Q3, reflecting the industry’s transition to next generation products. Revenue from optical communications products that are non Speed rated was $143 million, up 4% from Q3. We expect strong revenue momentum from 800 gig and faster products to continue, while revenue from lower speed products is expected to decline gradually as the industry transitions towards higher data rates. As a result, beginning next quarter we will no longer report revenue by data rate. Similarly, starting in Q1 we will discontinue the breakout of silicon photonics revenue as the vast majority of it is now captured under DCI. Non optical communications revenue was $221 million, representing a healthy 41% increase year over year and 3% sequential gain. Automotive revenue came in better than expected at $128 million, experiencing a modest quarterly decline following several quarters of rapid growth. Industrial laser revenue was stable at $40 million. Other revenue was $53 million, up 38% year over year and 20% from Q3, with the sequential increase primarily reflecting the absence of a non cash contra revenue Item recorded in Q3. As I discussed, the details of our P and L expense and profitability metrics will be on a non GAAP basis unless otherwise noted. Gross margin in the fourth quarter was better than anticipated at 12.5%, with operational efficiencies offsetting a smaller than expected impact from large project ramps. Operating expenses remained below 2% of revenue, resulting in record operating income of $97 million or an operating margin of 10.7%, a 50 basis point improvement from Q3. Interest income was $8 billion in Q4. As I mentioned, we also incurred a foreign exchange evaluation loss of $4 billion. Effective GAAP tax rate was 6.5%. Non GAAP net income was $96 million or $2.65 per diluted share for the full fiscal year. Revenue was a record $3.4 billion, up 19% from fiscal 2024. Non GAAP EPS was $10.17 for the year, which includes the impact of an $0.11 headwind from non cash contra revenue and a $0.26 impact from FX evaluation losses. Looking at customer concentration in fiscal 2025, we had two customers who represented more than 10% of our total revenue, with Nvidia at 28% and Cisco at 18% of revenue. Our top 10 customers made up 86% of total revenue for the year, consistent with last year. Turning to our balance sheet highlights, we ended the year with cash and short term investments of $934 million, down $16 million from the end of Q3. Operating cash flow in the quarter was $55 million. Capital expenditures rose to $50 million, primarily driven by building tent construction costs and investments to support new program ramps resulting in fourth quarter free cash flow of $5 million. As Seamus mentioned, we are actively evaluating options to accelerate the construction of Building 10 in response to growing customer demand. If we move forward, quarterly capital expenditures could temporarily increase from current levels. With our very strong balance sheet, we believe we have ample cash to support our top capital allocation priorities, which are first, investing in our future growth and second, returning value to shareholders through our buyback programs. In the fourth quarter, we remained active in our share repurchase program. We repurchased 108,000 shares at an average price of $206 per share for a total cash outlay of $22 billion. For fiscal year 2025, we repurchased $126 million worth of FiberNet shares, which is the most we have ever spent on repurchases in a single fiscal year. We entered fiscal 2026 with $174 million available for repurchases. Now, turning to our guidance for the first quarter of fiscal year 2026, we remain very well positioned to extend our track record of excellent growth and execution. In telecom, we expect our very strong revenue growth trends to extend into the first fiscal quarter, driven particularly by ramping system program. In Datacom, we are excited to see growing demand, especially for next generation products. However, the surging demand has resulted in near term supply constraints for some critical components and as a result we expect to see a sequential dip in Datacom revenue. In Q1, we are working with our customer and suppliers to resolve these supply issues which we expect to be temporary. In non optical communications, we anticipate strong growth driven primarily by a new high performance computing program. Since this new revenue stream does not align with our current disclosure categories, beginning in Q1 we will be introducing a new revenue category called HPC. In automotive, we expect the near term softness experienced in Q4 to continue into Q1, but we remain optimistic about a return to more normalized growth trends. Industrial laser revenue should be relatively flat. Taking all of this together, we anticipate healthy year over year and sequential growth in the first quarter with total revenue in the range of 910 to $950 million. From profitability perspective, please keep in mind that our annual merit increases take effect in Q1, creating seasonal margin pressure of about 10 to 20 basis points that we typically recover through ...