Fabrinet (NYSE:FN) reported third-quarter financial results on Monday. The transcript from the company’s third-quarter earnings call has been provided below.
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The full earnings call is available at https://edge.media-server.com/mmc/p/j8jygw47/
Summary
Fabrinet reported record revenue of $1.214 billion for Q3 FY2026, a 39% year-over-year increase, driven by strong performance in telecom and interconnect revenue.
The company is actively working on narrowing the supply-demand gap in Datacom due to component shortages, with expectations for improvement over time.
Fabrinet has made strategic progress, including starting shipments for two Datacom transceiver programs to a hyperscale customer and preparing to ramp multiple merchant transceiver programs.
Non-optical communications also saw significant growth, with high-performance computing revenue up 25% from Q2, and the company is expanding its manufacturing capacity to meet demand.
Fabrinet made a minority investment in Raytech Semiconductor to enhance its capabilities in the co-packaged optics (CPO) space, positioning itself for future growth in advanced optical technologies.
The company expects Q4 revenue to be between $1.25 billion and $1.29 billion, with continued margin pressures due to FX headwinds and ramp costs, but remains optimistic about long-term growth.
Full Transcript
OPERATOR
Good afternoon. Welcome to Fabrinet’s financial results conference call for the third quarter of fiscal year 2026. 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 Gaura Tumadanian, Vice President of Investor Relations. You may begin.
Gaura Tumadanian (Vice President 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 third quarter of fiscal year 2026 which ended March 27, 2026. With me on the call today are Seamus Grady, Chairman and Chief Executive Officer and Chavez Vera, Chief Financial Officer. This call is being webcast and a replay will be available on the Investor section of our website located@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 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 February 3, 2026. We will begin the call with remarks from Seamus and Chava, followed by time for questions. I would now like to turn the call over to Fabrinet’s Chairman and CEO Seamus Grady.
Seamus Grady (Chairman and Chief Executive Officer)
Seamus thank you, Gaura Good afternoon everyone and thanks for joining our call. Today we delivered an outstanding financial performance in the third quarter along with several notable achievements that we believe can extend our strong growth Trends into the fourth quarter and fiscal year 2027. Revenue is above our guidance range at a record $1.214 billion, with year over year growth accelerating to an impressive 39%. Record non GAAP EPS of $3.7 also exceeded our guidance range, reflecting continued excellent execution. Looking at our quarter by product area, Optical Communications revenue growth increased to 35% from a year ago. This was driven by 55% year over year growth in telecom revenue, which was fueled by strong growth in a wide range of products within telecom datacenter. Interconnect revenue grew a robust 90% from a year ago and 38% from Q2 and we believe strong longer term Data Center Interconnect (DCI) growth trends remain firmly intact. This remarkable telecom performance more than offset softer than expected Datacom revenue, which grew 4% year over year but declined 6% from Q2. Underlying Datacom demand remains exceptionally strong. In fact, demand during the quarter far exceeded what we were able to ship, meaning our reported revenue does not fully reflect the true momentum of the business. Right now demand is outpacing the broader supply of certain components and we are actively working to narrow that gap. While we expect the supply demand imbalance to persist into the fourth quarter, we remain optimistic that supply conditions will improve over time. The strong demand we are seeing today positions us well as that improvement unfolds. As we have outlined, our Datacom strategy is to continue supporting the strong demand trends we are seeing with our largest customer while actively expanding into new high growth channels such as direct engagement with hyperscalers and partnerships with merchant vendors. With that in mind, we are happy to report that we have made meaningful tangible progress on both fronts. First, we’re excited to share that we have successfully completed qualification and have already begun shipping two Datacom transceiver programs directly to a hyperscale customer with initial ramp starting in the fourth quarter. We expect volumes to ramp steadily throughout fiscal 2027 with these programs becoming a meaningful contributor to our Datacom revenue over time. Second, building on the groundwork laid over the last several quarters, we are on track to qualify and ramp multiple merchant transceiver programs, including several for data center scale out applications with existing and new customers. We expect production to begin in the second half of the calendar year, aligning with the early part of fiscal 2027 with additional ramps progressing into the second half of the fiscal year. We expect this combination of hyperscale and merchant program wins to further diversify our Datacom revenue and provide multiple new growth vectors in the new year and beyond. In non optical communications, revenue jumped 52% year over year and 8% sequentially from Q2. This growth was driven primarily by high performance compute revenue which continues to ramp as we support our customers transition to their latest product generation. At the same time, we are seeing encouraging traction beyond the current ramp with new program wins and expanded scope across additional products that we will be manufacturing to support their accelerated computing infrastructure. We’re also increasing capacity to align with the customer’s ambitious growth plans, reflecting a deepening and increasingly strategic relationship. Automotive revenue moderated in the third quarter as anticipated with revenue decreasing modestly from Q2. This decline was more than offset by continued growth in industrial laser revenue which was up 9% from a year ago and 7% from Q2. An important area of strategic focus for us over the past several years has been CO packaged Optics or CPO. In this space we are deepening our engagement with customers across the CPO ecosystem including optical components, external laser source pluggables as well as other integrated precision optical packaging solutions. Building on our long standing silicon photonics expertise. CPO relies heavily on advanced semiconductor packaging technologies and we have been actively investing to expand our capabilities in this area with a focus on scalable, high quality manufacturing processes and broader system level integration. This includes leveraging and extending our in house silicon photonics expertise while also partnering with key technology providers to enhance our ability to deliver more integrated end to end manufacturing solutions. With that backdrop, we have made a minority investment in Ray Tech Semiconductor Semiconductor, a Taiwan based provider of advanced wafer level packaging technologies. As an ecosystem partner. We already serve a number of common customers and expect this collaboration to further strengthen our capabilities and extend our offering. This investment supports our continued evolution from silicon photonics into more advanced packaging and integration solutions, reinforcing our role as a key manufacturing partner within the CPO ecosystem. Looking at our business as a whole, we are very excited by both the number and size of customer engagements for our advanced manufacturing services. The breadth and depth of these projects provides us with significant opportunities to demonstrate our differentiation and expertise that we’ve established as a key enabler for the success of our customers. Most Advanced Products as you know, we have been expanding our capacity to support our accelerating growth trends. We continue to make progress in the construction of Building 10, which will add 2 million square feet to our current 3.7 million square feet of space. With plans to be fully completed around the beginning of the new calendar year, we are on track to have a portion of building 10 ready by next month consistent with what we described last quarter. In addition to that, with our accelerated construction timeline, we now expect to commission an additional floor in this five storey structure by the end of September, with the rest of the building still scheduled to be completed by January. Beyond Building 10, we have sufficient land available at our campus in Chonburi for two additional buildings of more than 1 million square feet each. While this means we expect to have ample capacity available for the next several years, we continue to think ahead. In that context, we have recently acquired a building and land in the Nawanakhore Industrial Estate in Thailand not far from our Pinehurst campus. We have already begun renovations to make the existing 200,000 square foot building a world class clean room factory with sufficient space on the 8 acre site for additional expansion at a later time. In summary, our success in the third quarter extends well beyond our strong financial performance. We are particularly encouraged by the multiple new growth vectors we are adding across our Datacom business, while our diversified telecom portfolio continues to show solid momentum and our non optical communications segment expands further. This combination of execution and strategic progress reinforces our confidence in sustaining our growth trajectory, extending our leadership position in the fourth quarter and carrying that momentum into fiscal year 2027. Now I’d like to turn the call over to CHABA for more details on our third quarter results and our outlook for the fourth quarter.
Chavez Vera (Chief Financial Officer)
CIABA thank you Seamus and good afternoon everyone. We delivered another record breaking performance in the third quarter of fiscal year 2026. Revenue of $1.214 billion exceeded our guidance range, with revenue growth accelerating to a remarkable 39% from a year ago and 7% from the prior quarter. Strong execution and FX evaluation tailwinds led to non GAAP EPS of $3.72 that also exceeded our guidance range. Turning to revenue by Market in the third quarter, optical communications revenue was $889 million with revenue growth accelerating to 35% from a year ago and 7% from Q2. Within optical communications, telecom revenue was a record $628 million, climbing 55% from a year ago and 13% from Q2. Within telecom, revenue from Data Center Interconnect Modules or DCI jumped to $197 million, growing 90% from a year ago and 38% from the second quarter. Datacom revenue of $260 million increased 4% from a year ago, but moderated 6% from Q2 due to broadening component and material supply constraints in the quarter. Turning to non optical communications revenue reached $326 million, growing 52% year over year and 8% sequentially from Q2. This strong performance was once again driven primarily by continued momentum in our HPC program which delivered $107 million in revenue, up 25% from Q2. Automotive revenue declined slightly as anticipated to $115 million while industrial laser revenue increased to $44 million. As I discussed, the details of our P and L all expense and profitability metrics will be presented on a non GAAP basis unless otherwise Noted gross margin in the third quarter was 12.1%, a 10 basis point improvement from a year ago and a 30 basis point decline from Q2. As anticipated primarily due to foreign exchange headwinds. We continue to demonstrate operating leverage with operating expenses declining to 1.4% of revenue. This resulted in an operating margin of 10.7%, a 50 basis point improvement from a year ago and 20 basis point decline from Q2. Interest income was $7 million and we saw a foreign exchange evaluation gain of $7 million in the quarter. Our effective GAAP tax rate for the quarter was 6.7%. We expect our tax rate to moderate in Q4 resulting in a mid single digit effective GAAP tax rate for the year. Net income was a record $135 million or $3.72 per diluted share. Turning to our balance sheet, we ended the third quarter with cash and short term investments of $946 million, down $16 million from the end of Q2. Operating cash flow for the quarter was $53 million. Capital expenditure spending of $64 million reflects continued accelerated construction of Building 10 as well as capacity expansions to support the rapid growth across the business. As a result, free cash flow was an outflow of $11 million in the quarter. Before getting into our guidance, I want to provide some additional color on our recent capital allocation decisions. As Seamus mentioned, we have made a minority investment in Ray Tech Semiconductor Semiconductor to support our efforts in advancing manufacturing solutions for CPO. In April we completed a private placement of approximately $32 million for 20 million shares of Ray Tech Semiconductor, representing approximately a 14% position. This investment deepens our partnership and supports our joint efforts toward bringing CPO technology to market at scale. Early in the fourth quarter, we expect to complete the purchase of an 8 acre campus in Nawanakhore Industrial Estate, Thailand. Located approximately 15 minutes from our Pinehurst campus, the Nawanakhore facility currently consists of a 200,000 square foot building with additional space on the site for future expansion. We have already initiated minor renovations to support world class green room manufacturing capabilities and we expect to begin utilizing the space early next quarter. The total purchase price of $11 million will be reflected in our fourth quarter financials. With our very strong balance sheet, we are well positioned to deploy capital efficiently, support our growth initiatives and continue to generate superior returns while remaining committed to returning surplus cash to shareholders through our share repurchase program. In the third quarter we did not repurchase a meaningful number of shares. However, our share repurchase program remains active and we ended the quarter with approximately $169 million available under our current authorization. Now turning to the details of our guidance, we expect revenue in all major product categories to increase in the fourth quarter despite a broader supply constrained environment with Datacom growth expected to be more measured as we continue to navigate component availability that is not keeping pace with strong demand. At the same time, we are excited by the number of new customer programs coming online, which we expect will contribute more meaningfully to our performance in fiscal year 2027 than in the fourth quarter. With that backdrop, we expect total revenue to be in the range of 1.25 to $1.29 billion, representing year over year growth of approximately 40%. At the midpoint, we expect gross margin dynamics to be similar to Q3 with continued operating leverage as top line growth continues. As a result, we expect non GAAP EPS to be in the range of $3.72 to $3.87. In summary, our third quarter results were exceptional with record revenue and earnings that exceeded our guidance. As growth continued to accelerate, we also made strong progress against our longer term strategic priorities, establishing additional vectors of sustainable growth that we expect to begin contributing as early as the fourth quarter, positioning us to extend our strong track record into fiscal 2027 and beyond. Operator, we are now ready to open the call for questions.
OPERATOR
Thank you ladies and gentlemen. To ask the question, please press START 11 on your telephone, then wait for your name to be announced. To withdraw your question, please press Star one one again. Please stand by while we compile the Q and A roster. Thank you. And our first …
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