Fabrinet reported record revenue of $731.5 million and non-GAAP net income of $2.39 per share in Q3 2024.
Revenue increased by 10% year-over-year and 3% sequentially from the second quarter.
Optical communications revenue stood at $591.4 million, constituting 81% of total revenue, marking an 18% increase from the previous year.
Datacom revenue, a subset of optical communications, was $305.5 million, up 150% from a year ago, largely driven by high data rate products for AI applications.
Telecom revenue, another component of optical communications, was $286 million, down 25% from the previous year but up 2% from Q2.
Non-optical communications revenue, including automotive products, was $140.1 million, with a slight decline from Q2.
Gross margin remained stable at 12.6%, with operating income of $78 million and an operating margin of 10.7%.
The company benefited from $8.5 million of interest income due to high interest rates and a strong balance sheet.
Net income on a GAAP basis was $80 million or $2.21 per diluted share.
Cash and short-term investments were $794 million at the end of Q3, with strong operating cash flow contributing to this increase.
Fabrinet repurchased approximately 153,000 shares at an average price of $193.76 per share during the quarter.
Q4 2024 Outlook
Datacom revenue is expected to increase slightly in Q4, primarily driven by high data rate products for AI.
Telecom revenue is projected to decline sequentially in Q4 due to ongoing industry-wide inventory adjustments.
Non-optical communications revenue, especially from automotive, is anticipated to rise sequentially in Q4.
Revenue for Q4 is expected to be in the range of $720 million to $740 million, with net income projected at $2.20 to $2.27 per share.
Fabrinet expects to conclude the fiscal year with record revenue and profitability, positioning the company for continued success.
Question and Answer
Telecom Revenue Outlook and 400ZR Demand
Question
Can you provide more color on the telecom revenue outlook, the sustainability of DCI demand, and the duration of inventory digestion?
Answer
Telecom softness is expected to continue for a few more quarters, potentially into early to mid-2025, due to ongoing inventory digestion.
Growth in telecom is driven by 400ZR technology, which is experiencing some lumpiness but remains a strong point with 5 customer engagements.
Datacom Sequential Growth and 1.6T Product Ramp
Question
What was the underlying sequential growth in datacom excluding the rolling off of the 100 gig business, and any thoughts on the timing of the 1.6T product ramp?
Answer
Datacom business grew 6% sequentially and 150% year-over-year, demonstrating strong growth even with the 100 gig product rolling off.
The industry is transitioning to higher data rate products, with less than 10% of optical revenue coming from products rated at less than 100 gig. 800-gig demand remains robust, and the introduction of 1.6T products is expected to complement rather than replace 800 gig.
Customer Design Wins and Engagements for 800G and 1.6T
Question
Can you discuss the broadening of customer design wins and engagements for both 800 gig and 1.6T, and how this ties in with the better-than-expected product transition for 800 gig?
Answer
800 gig demand remains strong, and the company is optimistic about supporting the next-generation 1.6T products.
While there are other engagements outside the main customer, they are still in early stages, and the focus is on supporting the main customer and being well-positioned for both 800 gig and 1.6T products.
AOC vs. Active Copper Cable Products in Data Centers
Question
Can you highlight the opportunities for AOC-based products versus active copper cable products in data centers for 800 gig and 1.6T, and if there is any cannibalization between in-rack and short-reach connectivity?
Answer
The company has not observed any cannibalization of demand with copper, and there are specific applications where copper interconnects are used without significantly impacting the company’s offerings.
Optical interconnect demand in AI data centers appears to grow exponentially with data center expansion, and the introduction of 1.6T products is not expected to cannibalize 800 gig; both are anticipated to coexist and drive growth.
AI Connectivity Market Size and 1.6T Adoption
Question
Can you share your impressions of the size of the AI connectivity market and how the conclusion that 1.6T will be additive to the mix, rather than cannibalize 800 gig, speaks to the overall size of the opportunity?
Answer
The view that 1.6T will be additive is based on the architecture of products in the pipeline, particularly from Nvidia, where 1.6T appears to complement rather than cannibalize 800 gig.
There has been no significant change in perception in the last 90 days, and the timing and magnitude of the 1.6T ramp remain to be seen.
Capacity Planning and Facilities Expansion
Question
Are there any plans for increased capacity or facilities expansion to accommodate potential growth in demand for 800 gig and 1.6T products?
Answer
The company evaluates capacity needs regularly and has some space opening up with the 100 gig program transferring out.
Building 8 is nearly full, but the capacity expansion into Building 9 is progressing well and ahead of expectations.
While there are no immediate announcements, the company is closely monitoring capacity requirements and the pace of expansion in Building 9, and is prepared to add additional capacity as needed.
Timeframe for Capacity Expansion
Question
What is the typical timeframe from making a decision on capacity expansion to breaking ground and ramping up capacity?
Answer
From the decision-making process to being fully operational, the timeframe is approximately 18 months, with some variability.
The company has the necessary experience and processes in place to execute a similar expansion to previous projects.
