Fabrinet at Rosenblatt Summit: Navigating AI Era with Strategic Growth

On Tuesday, 10 June 2025, Fabrinet (NYSE:FN) executives addressed the Rosenblatt’s 5th Annual Technology Summit - The Age of AI 2025, outlining the company’s strategic direction amid evolving industry dynamics. While showcasing robust financial growth and expansion plans, Fabrinet also acknowledged challenges such as macroeconomic uncertainties and tariff implications. The company remains optimistic about future growth driven by advancements in optical communications and partnerships with major industry players.

Key Takeaways

• Fabrinet expects an 18% revenue increase in fiscal year 2025 compared to 2024.
• The company is transitioning to 1.6 terabit products, anticipating growth from new customer launches.
• Partnerships with industry leaders like Cisco, Sienna, and NVIDIA are driving telecom and datacom segments.
• Fabrinet maintains a low tax rate due to its operations in Thailand and employs forex hedging strategies.
• The company is expanding vertically, enhancing packaging and network systems offerings.

Financial Results

Fabrinet has achieved a revenue compound annual growth rate (CAGR) of 16% and an earnings CAGR of 21% over the past decade. For fiscal year 2025, the company expects an 18% revenue increase compared to 2024. Gross margins typically range from 12% to 13%, with operating expenses approximately 1.8% of revenue, resulting in an operating margin of 10% to 11%. The telecom sector reported $406 million last quarter, with 400ZR technology contributing to 10% of overall revenue. Fabrinet benefits from a mid-single-digit tax rate, which it plans to maintain through continued investments in Thailand.

Operational Updates

Fabrinet’s manufacturing base is primarily located in Thailand, with additional facilities in Santa Clara and Israel. Over 70% of its business focuses on optical communications, split between datacom and telecom. The company is transitioning from 100G to 200G per lane, supporting both 800G and 1.6 terabit products. Recent system wins with Cisco, Sienna, and Nokia are bolstering telecom growth. Fabrinet is also working on co-packaged optics projects with NVIDIA and other clients, emphasizing high-volume production at competitive yields and costs.

Future Outlook

Fabrinet anticipates significant growth in 1.6 terabit products, driven by customer launches. The company is preparing for a ramp-up in its Amazon business in fiscal year 2026, with revenue expected across multiple categories. Sienna’s new business is also projected to grow throughout 2026. Fabrinet aims to maintain margins through value-added services and cost control, despite potential headwinds. The company plans to report high-performance compute as a separate revenue category starting in fiscal Q1.

Q&A Highlights

During the Q&A session, Fabrinet addressed its transition to 1.6 terabit technology, emphasizing the role of customer product launches in driving growth. The company noted a downward trend in customer inventory levels, which stabilized last quarter. System wins with Cisco and Sienna were highlighted, along with early-stage collaborations with Nokia. Fabrinet remains optimistic about maintaining its favorable tax rate, supported by its operations in Thailand. Forex hedging strategies are in place to mitigate Thai Baht exposure.

Readers are encouraged to refer to the full transcript for a more detailed account of Fabrinet’s strategic insights and future plans.

Full transcript - Rosenblatt’s 5th Annual Technology Summit - The Age of AI 2025:

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Hi, everybody. Welcome. Good morning, good afternoon, depending on where you are. Welcome to the Rosenblatt Age of AI conference, to our June session. I am Mike Genovese, the cloud and communications equipment infrastructure analyst.

I’m super happy that you’re all joining us today and very pleased to have the management team from Fabrinet. We have Seamus, we have Saba, and we have Garo, CEO, CFO, and head of investor relations. Great to see you guys. Welcome.

Seamus, CEO, Fabrinet: Thanks, Michael.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Thanks, And, for those of you in the audience who wanna ask questions, the best way to do it is through the widget on your your Zoom interface there. If you type in the questions, they’ll come to me, and I will make sure that, in the next forty five minutes, we we ask the question, to these gentlemen. Well, let’s just, you know, start at a high level, Seamus, you know, just kind of a standard, you know, where you see the company right now, the strategy, the positioning, the key opportunities. For those on the call who may be a little bit newer to Fabrinet, just kind of frame the company in this point of time for us, please.

Seamus, CEO, Fabrinet: Sure, Mike. Hi, Mike. And thanks for thanks for having us. We appreciate it. Yeah.

So FibroNet is a precision optoelectronics contract manufacturer. We focus on the optoelectronics space, primarily optical communications, which accounts for about 70% plus of our business, a little bit more. And that’s split roughly, you know, split split between datacom and telecom. The datacom business has been growing, quite well over the last couple of years, but our telecom business is also back to seeing some strength this this past while. We are our primary manufacturing base is in Thailand.

We have two campuses, Pattonthani and Chonburi. We also have a couple of on ramp locations or new product introduction facilities, one in Santa Clara here in California and another one in Israel. We we see ourselves as the leading contract manufacturer for the optical communications space. Most of the you know, about 50% of the outsourced optical communications business, is with us. The other 50% is split between a number of of companies, We continue to focus on that industry and and similar related industries.

We may be a little bit different to some of our our contract manufacturing peers and that we don’t have any of our own products. We are a pure play contract manufacturer, and we we plan to stay that way. We don’t have any of our own products, and and we we won’t be. We’re we’re a service company. We provide a manufacturing service.

We’ve we’ve been growing nicely over the last, you know, number of years. If you look at the last ten years, our our, revenue has grown, compound annual growth rate of 16%, and we’ve compounded our earnings 21% over that time period. So growing, you know, faster than the the industries that we serve, but also faster than the contract manufacturing industry. As we were in q four of our fiscal twenty five and at the at the midpoint of our guidance, if if it were to come to pass, we’d be up about, I think, about 18% versus, f y twenty four. And then we’re, you know, we’re positioned well for the year ahead with the number of growth vectors in our favor as we as we enter into a new fiscal year.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Okay. Perfect. Yeah. You know, kinda keeping it at a high level and sort of what makes the company unique. You know, it seems like you’ve always compared to contract manufacturer peers.

Right? You’ve specialized in in optical. Right? There’s this this optical sort of subsystems and component specialty. And that’s think, I’d like to talk more about this, but sort of allowed you to have higher margins, higher gross margins, higher operating margins than your peer group, looking at contract manufacturers.

And now we see maybe more advanced packaging wins, more systems wins. Kind of frame that for us, your core competency in optical, how that plays into other sort of adjacencies, how maybe large of opportunities those are, and if those support sort of the exact same margin structure as as the optical business.

Seamus, CEO, Fabrinet: Yeah. Our our margin has tended to be a little bit higher than the than the industry peers. Our gross margin has been in the kind of 12 to 13% range. Our operating our OpEx is less than 2%. It’s about 1.8%.

So our operating margin tends to be in the, you know, 10 to 11% range, which is, you know, could be higher than our than our competitors. But not because our prices are higher, it’s because our costs are lower. So we have a very compact footprint. We have a very low cost footprint. You know, we have a we take a compelling combination of very high capabilities and unique capabilities coupled with low costs.

So we, you know, we we focus very much on making sure we keep our costs under control. We keep our costs low. Again, our footprint is quite compact. But we have we have been expanding, you know, over the last few years, if you like, vertically. We we like to do more for our customers than just if you look at essentially the start of the company, we were an optical component manufacturer.

And then over the last several years, we’ve expanded the offering down deeper into the stack by doing more packaging. We’re we’re able to do a lot of of the the precision packaging for our customers and also up the the stack into the complete network systems or subsystems. And we’ve been able to do that while, you know, maintaining and actually improving our margins because we we we really index with our customers on on stickiness and doing more for them and making sure we we, you know, enable them to get their leading edge products to market faster than they would if they were using somebody else or maybe a number of suppliers. So, you know, we’re able to do that while maintaining and improving the margin. So we’re we’re we’re pretty, pretty excited about the opportunities as well that that brings us, you know, that there’s not too many contract manufacturers who can do what we do.

Roughly 70% of our manufacturing space is clean room space. So that’ll give you an indication of how much of the precision packaging we do. And and we are quite unique in the in terms of the capabilities that we have, which, like I say, has allowed us to expand deeper into the stack, but also vertically to do more system build, which has allowed us to grow nicely while maintaining the margins.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yeah. I mean, it’s I don’t think I’ve I’ve ever really heard you talk about sort of how big I mean, if we look at the optical communications piece, right, then we leave the auto and the other nonoptical stuff separate. But but but but but, you know, how much can systems or an advanced packaging sort of what percentage of the business of of the of of the communications piece that could become? Have have you thought have you thought about that?

Seamus, CEO, Fabrinet: We we have thought about it. We haven’t we haven’t talked about it publicly. We haven’t we don’t we don’t break it out that way. We we break it out, you know, by kind of industry segment, if you like, or or by by end markets that we that we serve. We haven’t broken it out that way.

And, you know, a lot of the packaging that we do, we don’t really offer packaging as a standalone service. So, you know, you won’t see we don’t have a a party revenue line in our reported numbers for for packaging. We do the packaging for our own use and our own consumption. So, you know, a lot of those services that we provide there, we provide them for our own our own use and our own consumption. So like I said, there is no party sales.

But it’s it’s a significant driver of growth and and we, you know, we call it stickiness with the customers when we’re we’re doing more for them. But they’re they’re significant drivers. I would say that the packaging is a a driver of stickiness, and then the system business is a driver of growth. And the the the combination of the two is what allows us to maintain our our margins.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Right. Great. I’m you know, I kind of asked this question, this next question just to sort of get it out of the way unless there’s something, you know, we really need to kind of dive into and and keep to frame the discussion. But but but but just the tariff and the macro concerns. Right?

I mean, it seems like that hasn’t been such a big issue on last quarter’s earnings or the guide for this quarter or what we think about the quarter after or or certainly any macro impact there. But, just tell us what you’re seeing from a from a tariff and a macro perspective, and and if that’s something we can kinda just move past or something we really have to think about, in the story here.

Seamus, CEO, Fabrinet: I think, for me, like a like a lot of companies in our position, we’re we’re just kinda waiting to see what happens in the future. The future might be tomorrow, it might be a month from now. Who who knows? I think the the unpredictability is certainly not helping anybody. The the macro, you know, because the vast bulk of our of the products we make for our customers, if not all of the products we make for our customers, are are for infrastructure type products.

They’re not for consumer facing products. So we tend to be somewhat insulated from consumer sentiment and and things like that. So, you know, there a lot of the products we’re making there for capital projects that are rolling out over several years, and they tend to be quite stable and maybe less volatile and less less, you know, susceptible to consumer sentiment or or, overall nervousness around tariffs. The the products we make for our customers, we you know, the the terms we have with our customers are FOB, our factory. So the customer takes up takes possession of the product at our back dock, and then the customer is responsible for the for the tariffs.

We haven’t seen any any particular impact, other than maybe a little bit of, I think from everybody, you know, maybe confusion because nobody really knows what’s going on. The the the tariff situation seems to be quite, we we call it changeable. So I think until things settle down and we we figure out what the what the long term tariff position is, I think, nobody really knows what the what the impact will be.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Okay. Great. You know, I’m getting questions coming in from the audience. We already have a handful of questions here, and I want to incorporate them into my own questions. So, you know, one topic is that if we if we kind of move into the Datacom side of the business now, I think you’ve been talking about converting capacity from 800 gs to 1.6 terabit for your your main customer and kind of implying that if we’re gonna see a reacceleration of growth sequentially here, it’s gonna be, I think, more tied to 1.6.

So can you talk about the timing of that? And you know, I guess, you know, if I fold in this question from the audience, it’s sort of saying, Hey, 800 gs was that cycle kind of lasted longer. It was stronger. 1.6 got pushed out, but now we’re shifting capacity to 1.6. And so sort of what are the Datacom expectations for the half of this calendar year?

Should we see that reacceleration tied to 1.6? What else can you tell us about that transition?

Seamus, CEO, Fabrinet: I mean, the the the 1.6 terabit product that that we’re making for our customer, it’s it’s 200 gig per lane. You know, maybe be more precise precisely, we should be saying we’ve been converting from, you know, 100 gig per lane to 200 gig per lane. We’ve we’ve been converting our capacity. But at 200 gig per lane, you can have 1.6, but you you can also have 800 gig. So, you know, we’ve been we’ve been converting capacity, as we as we talked about.

And the the driver for 1.6 certainly would would seem to be the the new product that the customer is launching. The timing of that, you know, it’s certainly our our place to say we’ll we’ll follow the customer’s lead and we would expect this to start shipping at 1.6, probably one quarter ahead of when the customer is launching the product. Mhmm. But, you know, there’s there’s, there’s still plenty of demand, I would say, at at 800 gig. And we, you know, we we could see an acceleration.

I think for us, the the real growth at 1.6 would be tied to the the new product that the customer is launching. Okay.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Just remind me, for the June guide, did you did you say data I can’t remember if you break if you broke out telecom and datacom in the guide that, you know, and and said it would be sort of sequentially flat, sequentially up. What did you say about Datacom for for June?

Saba, CFO, Fabrinet: We we said that all all of our segments will be up sequentially, and Datacom will be up as well at midpoint on the guidance along with other segment.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: And I assume we’ll see, like, there’ll be some 1.6 t in that number. I mean, even if it’s very small, there’d be there’d be something in that number for 1.6. Is that true? Yep. That’s correct.

Yeah. Okay. And and and when you talk about 100 to 200 g transition, is that I I don’t know if this is a 100% overlap here, but, I mean, is that kind of synonymous with sort of going from a VCSEL based transceivers to EML based transceivers? Is that is that what we’re seeing in this 100 to 200 transition? Yes.

Okay.

Seamus, CEO, Fabrinet: Going from pixel based to EML based.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Right. And then as you said in the past, the product that’s so so so I think, like, if we talk about Blackwell, right, g v 200, that’s an 800 g product still. The g v 300 Blackwell Ultra, that’s that’s where we get to 1.6?

Seamus, CEO, Fabrinet: There’ll be there’ll be one point six and eight hundred gig for for for BlackHole Ultra. Yeah. The the switching at the the switch level is 800 gig, whereas it was 400 gig at the at the pre for the previous product.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yeah. Now, I mean, if we think, you know, the last several quarters for your 800 g sales, I think we’ve been somewhere roughly between sort of $2.50 and $2.70 in quarterly revenues for 800 g product. Do we do we kind of think that that’s okay. So billion dollar run rate, like, that’s kind of the business, or does the does the 1.6 I mean, even even if you’re kind of lead on the competitors as you know, not as long maybe as it was in the 800 g and and and and and the pricing, right, is not you know, it’s not gonna be double the price or even 1.5 the price, but it’ll be it’ll be something probably below 1.5. But but with all that factored in, mean, should we get to new peaks for the business with 1.6, or or is this like, like, we on our way to a 2,000,000,000 Datacom business, or are we kind of happy that gonna be a $1,000,000,000 datacom business?

Seamus, CEO, Fabrinet: You know, we we we guide one quarter at a time. I think the number you mentioned, we’re mixing apples and oranges a little bit because the the $2.70 number is our overall and and Chabot can correct me if I’m wrong here, but that that’s our overall 800 gig and above business, which is a combination of, the the products we make for for our our main AI customer. But also there’s a lot of other products in there, and there’s some telecom products in there as well. So it’s not quite a clear cut. That’s that’s not our shipment number, let’s say, to NVIDIA.

I I think we, you know, we we could get to new highs when when 1.6 launches. But at the same token, you know, in the early days of 800 gig, at the at the very start, the the NVIDIA designed transceiver was the only approved transceiver for the whole network. You know, eventually that changed when other, you know, merchant transceiver manufacturers, you know, got approved. But we were the only, the the let’s say the transceiver that we made for our customer was the only one that was approved for a while. I don’t think we’ll we’ll have that luxury, when 1.6 launches.

I would assume that the merchant manufacturers will will get approved quite quickly. So I think the, you know, the the length of time that we have exclusivity, we call it, will be will be much shorter, if at all.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: And on the pricing, I mean, do you is it like a 1.3, 1.4, 1.2? I mean, how do you think about, you know, in terms of the the multiple on the 800 g price?

Seamus, CEO, Fabrinet: We haven’t really disclosed that, but it will be, you know, closer to the to the to the 800 gig price than than than you would imagine. And it also is is a function of how much content we’ll be producing in house. Generally, we find if there’s components that we’re purchasing from parties, if we can produce those components in house, we can do it at a much lower cost and higher yield than than, party suppliers and save the customer a lot of money. So we’ll be we’ll be working very hard to to make sure we, you know, we’re ready to ramp and the customer is ready, but also that we have as much fabricated content as possible. That’s the best way to get the price down, but also to improve improve our margin and improve the stickiness.

So it’s there’s lot to be to be worked on still. Yeah.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: So so early, you know, you made the distinction between yourself and some of the other the optical component players in transceiver space, the Lumentum’s Coherent’s, InnoLights, which do design products customers. But just from a decision making process for the hyperscalers, Nvidia, you know, we’ve got NVIDIA, and and I guess there’s other GPU players out there as well that could decide to design their own transceivers. There’s hyperscalers that could decide to design their own transceivers. You know, as somebody who does what you do and you’re watching kind of the I don’t know if buy build buy buy versus build or, you know, design versus outsource decision for transceivers for these large, large customers. Do you think in the future more are going to design their own?

I mean, are things moving in that direction, or do do we know yet? What are you what are you looking at?

Seamus, CEO, Fabrinet: Yeah. We we we think so. We think it’s inevitable. If you look at the the the margin, elimination, if you like, that the that these very large customers are able to achieve, it’s a it’s a pretty compelling. You know, the economics of it are pretty compelling.

If they can develop their own transceiver and have fiber net make it, you know, our our margins are much more modest than than product company margins. You know, we don’t have the same expenses or or cost structure that the that the product companies have, so we don’t need the same gross margin. So we’re able to produce at a much lower cost. And if they you know, if the hyperscalers are able to get the product designed at a at a at a cost that’s, you know, affordable for them and we’re able to produce it, they can save a lot of a lot of money. So it’s it’s really, as as the volumes, you you know, become very significant, which they are now for for 400 gig, for 800 gig, the short reach, you know, low low power, low latency, transceivers, the volumes are are staggering.

So, you know, if they’re able to develop their own transceiver and have fiber net make it, they can save themselves a lot of money. So I think it’s I think it’s pretty inevitable.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yeah. Okay. And, you know, you know, as investors, we’re still kind of not super clear on what you’re doing with Amazon, where you announced, you know, working with them that would be tied to warrants. And I think you said on the last conference call that, you know, kind of going forward, your Amazon revenues would hit a number of your different revenue categories. I think there’s some in datacom, some in telecom, some in non optical.

So it seems like you’re engaged with Amazon on multiple sort of fronts. Right. But but but but in terms of tying it into what we just talked about sort of designing their own transceivers, is there any of that going on? You know, what what can you tell us about about it about this Amazon win?

Seamus, CEO, Fabrinet: Well, Mike, as I’m sure you can appreciate, it’s not really our place to to disclose what Amazon is is doing and what products they’re they’re working on our designing. But we’re we’re, you know, we’re very happy with the relationship and and with the the range of of services we’ll be providing to Amazon. You know, we believe it will we will be shipping revenue in in a number of categories. We’re currently shipping revenue that’s in our telecom, category. We will have, high, high performance compute as a as a category.

We’ll be introducing that, next fiscal year. So in our in our q one, we’ll we’ll be showing that as a separate category. And then, of course, datacom will be producing hopefully, in the in the future, we’ll be producing products in the datacom space as well. So all all three and and, you know, they’re just an amazing an amazing company, really. When they put their minds to something, they they they really know how to how to go about achieving things that are that seemingly impossible.

So, we’re very much looking forward to that relationship expanding and and and becoming a, significant relationship for Fabrinet.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Now when you now so it’s so it sounds like I mean, that’s that’s a decision to report segmentation with the high performance computing category in one q. Does that I mean, does that imply that the the level of revenues for this new category are are are inflecting in one q and are higher, or that’s just a new year we’re gonna we’re gonna break this out?

Seamus, CEO, Fabrinet: Well, this it’s a it’s a practical matter, really. of all, in in for the you know, quarter or or two, we’re we’re really just shipping qualification volumes. So it’s included in our other category. But then as it starts to ramp, as the product starts to ramp, it doesn’t belong in any of the other categories. It’s not, obviously, not automotive.

It’s not laser. It’s not telecom, and it’s not datacom. So it kind of requires us to create a new category. The logical point to to start disclosing that category is when we report our our our q one. So we’ll be reporting that in our q one results.

Okay. That’s great. You know, if it if it was, you know, if it was going to stay at the, you know, low level that that would allow us to to keep it under other, we would probably do that. But, you know, it’s it’s, hopefully hopefully going to be, going to be too big to remain in the other category, so we decided to report it separately.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yeah. Now, I mean, I’m used to all of your product mean, seems like unless there’s a forex movements or something like that, we’ve kind of very consistently have these near 13% gross margins, 11% operating margins. I’m not used to seeing sort of business mix making a big difference on on margin, but, you know, since you’ve got this whole new revenue category, I think I’ll ask on the Amazon if there’s any kind of difference in the margin profile of that business versus your other businesses.

Seamus, CEO, Fabrinet: Well, we work we work very hard to, you know, to maintain our margins. It’s it’s not easy, it’s also a function of what we’re what we’re doing, you know, on a on a much value add we’re providing for the customer. So, you know, we’ll be working hard to maintain our margins as we as we continue to to deliver outsized outsized growth. That’s our that’s our that’s our job. We have to make sure we do that.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Okay. And you’re very good at it. All right. So it’s a kind of roadmap for the rest of the conversation. Certainly, just for the people in the audience who asking questions that we’re gonna get to, we’re certainly gonna get to the the telecom side of the business and talking through some of these systems wins with, you know, Cisco and CNN and Nokia.

I just wanna finish up the data center conversation maybe by touching on co package optics because, you know, since OFC, you know, you have been announced by NVIDIA as being part of the the co package optics solution that they’re doing. Yeah. I’m wondering if there’s any other customers that you’re working with. Can you kind of tell us more about what you’re you’re doing with them? And then, of course, the question for copackage optics is is this sort of all additive and incremental, or is there any kind of cannibalistic aspect to what you’re already doing?

And then maybe if we can touch on the margins for co package optics as well. There’s a lot in there, so let’s let’s let’s start on, you know, touch on CPO.

Seamus, CEO, Fabrinet: Yeah. So we’re working with three customers on CPO products of which, NVIDIA is one. NVIDIA is the one that the the customer disclosed at at GTC. So I guess we’re we’re okay to talk about that one because the customer already disclosed it. The other two that we’re working on, the customers have not disclosed those projects, so we’re we’re we’re not in a position to to name the customers or talk about the specifics.

But other than to say, our main focus for co packaged optics is helping the customers figure out, okay, how do you how do we produce these products in volume at a at an acceptable yield and an acceptable cost. That’s really our our where we bring value to the customer. So we have we have a couple of projects. You know, the the margin profile probably a little bit higher than our our regular business because the the material content would be lower. A lot of the work that we’re doing is, you know, precision packaging where we we don’t we don’t own the wafer, so the material content is is lower.

Therefore, the margin should be should be higher. And then the is it is it additive? So far for us, what we’ve what we’ve seen is it’s it’s additive. You know, we’re not at the point yet where co packaged optics is is, just about to replace transceivers or anything like that. The opportunities for us are more at the switching the switching level, which would be new for us.

So it’s additive for us, and we think it presents a new a number of new opportunities that we’ll be we’ll be focusing on.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: When does it become kind of meaningful, or or is it already in the revenues?

Seamus, CEO, Fabrinet: I think it’s probably a little bit away before it becomes meaningful. You know, the the work that’s going on right now is is kinda developmental in nature with with with a couple of our customers. It’s probably a little bit further out before it becomes meaningful.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Okay. That’s great. Very, very helpful.

Seamus, CEO, Fabrinet: Welcome.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Well, like I said, I mean, know, now we’ll get to the telecom. You know, obviously, it’s been very notable. When the telecom business took a downturn a couple years ago, the the datacom business, you know, really took off. When datacom has taken a bit of a sequential pause in the in the last couple few quarters. Telecom’s really driven a lot of growth.

And I think part of that, right, I mean, some of it seems to be return of the kind of the bread and butter component business, but then on top of that, there’s systems wins. I believe with, at a minimum, Cisco, Nokia, Infinera, and Sienna. Not not not sure if there’s any more. But but, yeah, talk about kinda help us dimensionalize telecom in terms of the the base business coming back and then adding in these wins. And, you know, any wins that haven’t come into revenue yet, but that are ahead of ahead of us, you know, kind of call that call that out.

And if you could talk about the customers individually to, you know, as much as you’re allowed to

Seamus, CEO, Fabrinet: Mhmm.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: That would be that would be helpful.

Seamus, CEO, Fabrinet: Sure. So, yeah, we we we do have this counter cyclicality in our business when, like you say, when one part is down, another part seems to be up. Some of it is good good luck. Some of it is targeted. We we try to target, customer wins and products so that we will have this counter cyclicality effect when when it’s inevitable that one area of the business is gonna be softer than the than the rest.

But we have seen we have benefited from that over the last few years. Like you say, when telecom was soft, datacom was very strong and and and vice versa at the moment. Our telecom revenue, the high point for us was was in it’s about seven quarters ago, 405,000,000, of telecom revenue. Then that declined because of inventory digestion. We didn’t lose any customers, we didn’t lose any business, but because of inventory digestion that dropped all the way down to I think $2.85, two ninety, something like that at one point.

And then last quarter, we were back up at 406,000,000. So in the face of which you could say we were at four zero five seven quarters ago, we’re back to four zero six. Therefore, we’re back to where we were, but not really. The the the the the tail of the tape, underneath the headline number is, the baseline business is back to growth, but but not back to anywhere near the same level as it was. So it’s back to growth, but but at a lower level.

And then what has brought us what has brought our overall revenue back up above the the the high watermark from the past is really two things. One is new system wins. You’ve you’ve mentioned a few of them. And and secondly, DCI, more specifically 400 z r. Very nice growth in 400 z r, which now represents about 10% of our overall revenue.

Actually, it was at 1.10% of our optical revenue. Now it’s about 10% of our total revenue and and growing nicely. You know, as these, super clusters get rolled out around the world, I need DCI to connect them together. And, we we we manufacture for a number of of companies, you know, several of whom are seeing nice steady growth in in ZR, 400 ZR, ZR plus, and and more recently 800 ZR is beginning to to take hold as well. The data the, the system wins, you’ve you’ve mentioned a few of them.

The the, the Cisco wins that we’ve had, we’ve we’ve we’ve had a number of successes, I would say, with Cisco with taking share away from from competitors, and that’s that’s going that’s going well for us. We’re very happy with that relationship. The customers are very happy with our performance, you know, and we continue to to do a good job do a good job. The the best way to grow the business is to do an excellent job on the business that you have. So that’s really our focus.

It’s just on executing very well for our customer. Sienna, as well, we’ve we’ve won some new business there recently, with a newer product. So that’s that’s starting to ramp and probably will ramp as we go throughout, you know, f y twenty six. That business will will ramp. Nokia Infinera, it’s really early days with Nokia.

Yes. Obviously, Infinera was a was a customer for us and continues to be a customer, and we just have a, you know, an excellent relationship with Infinera. And we’d be looking to capitalize on that with, with the Nokia team. But it’s early days yet in that Nokia relationship. And there’s a there’s a number of others as well that we’re we’re working on, but either too early to talk about or sometimes the customer doesn’t like us to to talk about these things.

But we’re working very hard on on all of those.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yeah. But with your I mean, with your expectation this quarter for telecom to be up and kind of the trends in the market and, you know, the expansions and I mean I mean, it sounds like we’re we’re certainly headed to new peaks on the telecom revenue. Right? I mean, we don’t know how big it can get, but it’s it’s already past peak, we’re growing, so we’re gonna we’re gonna find out.

Seamus, CEO, Fabrinet: Yeah. We we we think it’s gonna continue to grow. You know, we have some, like I said, the baseline business, the the traditional a lot of it is non speed rated component business. That’s back to very nice growth rate, you know, real strength there. The the system wins.

They continue to we continue to work very hard on those when they when they happen. They’re not gradual. They happen as a big chunk usually. And then, you know, DCI, especially ZER, is growing very nicely. So some really nice growth factors there for us in telecom space.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yep. Okay, great. I wanna work through some of the questions that have come in from the audience, and some are very strategic and high level, some are very focused. And I just gonna run through them and kind of bounce back and between high level and very focused questions. So starting with a focused one, how much do you expect your tax rate to increase in light of OECD OECD pillar two in fiscal twenty six, which I I guess I I don’t really know about.

So No. What is that?

Saba, CFO, Fabrinet: We we have been operating at a mid single digit tax rate, so our major footprint is in Thailand, and we had, pretty nice tax benefits over the last several years. And, as you as we continue to invest in Thailand, we continue to enjoy these benefits. So we are optimistic that, we will be able to maintain our tax rate going forward. So we we don’t anticipate a significant increase at this stage.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Okay. Great. All right. Next question. So I think I mean, we went through this.

I’m just gonna ask one more time because, you know, we just had a long answer going through this. But just all the systems wins, Cisco, Sienna, Amazon, any others disclosed or not disclosed. I’m not sure what else there is to say about Cisco, Sienna, Amazon, but but but if you think of anything to add, we also touched on Nokia briefly. Anything else in there, or does that pretty much cover the systems wins?

Seamus, CEO, Fabrinet: They cover the ones we’ve we’ve talked about. There’s there’s a number of others that, again, we’re we’re working very hard to to win, but too too early to talk about yet. But they’re they’re the the main ones that we’ve we’ve talked about. Did we miss anything, Csaba?

Saba, CFO, Fabrinet: I think we we covered all of them that we were able to announce.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yeah. Okay. How about inventory levels across the space? Inventory days are are higher than they were in pre pre COVID. Is this a structural thing, and and does that create any risk to the story?

Seamus, CEO, Fabrinet: Do you mean Fabrinet’s inventory days or the industry?

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: I think we’re talking about your customers. Right? I mean Yeah.

Saba, CFO, Fabrinet: So we

Seamus, CEO, Fabrinet: we track we track that very closely and have been for for some time. If you if you go back maybe a year ago, you know, let’s say before the telecom industry recovered, we were able to predict because our CFO tracks our customers and they’d be even the companies that are, you know, big players in the industry would not not necessarily our customers. We’ve been tracking everyone’s inventory very closely. So we were able to see whose inventory was getting depleted, and and from that, we were able to kind of predict when we felt the inventory would recover. Maybe I’ll let Chaba talk about the state of the inventory in the industry.

It is improving and and, may not be back to pre COVID levels, but I think it is improving.

Saba, CFO, Fabrinet: Yeah. But we we certainly, from our customers’ perspective, we have been seeing a downward trend in the last three quarters. So, I think, generally, the inventory levels have stabilized last quarter compared to the prior quarter. So we’d like to think that this this environment will stabilize without any bubble or or anything that we have seen during the component crisis and post inventory pre inventory correction prices. So in general, we see growing environment compared to to the last two years, but it’s certainly not there before the COVID, and I I’m not sure if it will ever be there.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yeah. Yeah. I agree with that. I mean, so it’s good to hear that you’re seeing improvement. I think before COVID, right, we were kind of more in a just in time world and sort of like three months or less for for for most things.

And, you know, maybe now, like, the new normal is more like like a six month type of We don’t want to be caught short again that short. So I think it’s structural that we just more of a six month normal lead time than a three month normal lead time is kind of, to me, the new normal is is is the way that I would I would read it.

Seamus, CEO, Fabrinet: The other thing that I think we we see because, of course, with with uptick in the telecom business that we’re seeing, one of the questions we’re asked is, well, how do you know it’s not inventory build again? And, course, whether the the short answer is what we don’t know for sure. However, we can tell by the customer’s behavior. You know, when the customer if the customer’s building inventory, what they tend to do is load the orders and then leave us to produce it. But in the in the case of the uptick that we’re seeing in in the telecom business, yeah, customers are are are loading us up.

They’re they’re increasing forecasts in some cases, but then they’re expediting us, you know, two, three times a week. This is for components that they really need to satisfy customer orders. So we don’t believe there’s a whole lot of inventory build going on right now. It seems to be, you know, demand the demand is is what’s driving the the upturn.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yeah. Alright. I I you know, because I’m gonna get to all the audience questions, I got a very high level one. We kind of tried to just start with this, with the questions we were asking in the beginning, but it’s gonna give you another chance to come back to this question, Seamus, which is what makes Fabrinet unique versus others? And as you grow, you know, how do you maintain that that that that kind of specialness and uniqueness to, you know, add so much value for your customers?

Seamus, CEO, Fabrinet: I think we’re we’re we’re a specialist. That’s the thing. We’re we’re very focused on being really excellent at a handful of things. We don’t we’re not obsessed with being in 20 different industry segments. We like to stay very focused on being the leader in in in a handful of of industries.

That’s the thing. Secondly, I think we’re we’re trusted by the by the customers. They know us very well. Our reputation is very good, and and we we execute very well. So I think our our our consistent track record of just excellent execution for the customers is is what gives them confidence to reward us with with more business.

And and then I think the fact that we’re not a we’re not a product company, we never will be. The customers know that they can rely on us, that we will never bring out a Fabrinet badged product. So therefore, we will never compete with them. That’s something that some of our customers are very concerned about when they see contract manufacturers becoming ODMs. They get very they get very nervous about that.

They don’t like it. So we we can we can look the customer in the eye and tell them we will never do that. We will never have our own products. We will always be a pure play contract manufacturing service company. You know, in a sense, what we do is is it’s the origins of the contract manufacturing industry.

It’s where the industry came from. It’s quite traditional in a sense that that’s that’s what we do, but we do it really well, and we stay focused on being excellent at a number of things. And then I think the final is our costs are very low. We keep our costs under very tight control. You know, a a good measure of a a contract manufacturing company.

People look at gross margins. Gross margin is important, but you have to look at gross margin, OpEx, and therefore operating margin. You know, you can you know, if if you for example, if you get into the product space as a contract manufacturer, you can improve your gross margins. But if you’re adding four or five points of OpEx to get there to fund all the r and d, then you’ll consume, you know, more than you generate. So, so I I just think it’s you know, we we’re very clear on what we’re all about.

We’re very clear on what we do for our customers, but we’re also clear on what we what we won’t do and and the areas of the business that we’re not going to get into. So we’re I think we’re quite unique in that sense. We’re we’re we’re very happy with with being the leader in our industry, and it’s it’s what the customers need from us. So we’re we’re going to we’re gonna keep doing that.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Great. Perfect. Well, that would be a good place to end, but I think I think we have five more minutes and we’re gonna use it. So so so, Saba, just remind me, do you guys do you do any hedging on the forex? Or

Saba, CFO, Fabrinet: Yeah. We we do we we do hedging on Thai baht. So most of our, spending is in US dollars, but we have our value and labor and overhead cost in Thailand is in Thai baht. So we do we do hedge three quarters ahead. We maybe hedge 100%, to the next quarter, 50% in the following, and 25% on.

So we have a layered hedge structure to, eliminate the volatility. So that has been working well for us, and and as we continue to do that. Yeah. Nevertheless, if the exchange rate environment in the recently, we have seen some strength from the bottom, also some weakness in dollars. So this may present some headwind in the, I would say, in the q two twenty six period depending on the hedge.

And in q three, we are seeing a bit of headwinds compared to the current levels of exchange rate.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Okay. Okay. But, again, like, you know, outside of that, we really shouldn’t expect the margin I mean, the margin structure of the company is not changing. Right? It’s it’s it’s it’s very stable, it seems.

Saba, CFO, Fabrinet: No. Structure of company, so we we are very focused to make sure that we we maintain our margin structure. We we did call out a little bit of short term headwinds in this quarter and in q one because of the number of product ramps that we have. So we have some extra costs incurred before the revenue start ramping, but that should be temporary and and should be behind us in the part of the fiscal year.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Okay. Great. So, I mean, so this is a company who I mean, over time, this sort of, you know, very consistent, you know, 15 to 20% top line, has it been even better than that? Has it been 20%, or has it been 15 to 20%?

Seamus, CEO, Fabrinet: It has been, yeah, it has been hard hardened up from time to time. But, you know, over the over the ten year period, 16% compound annual growth rate in the in the top line, 21% in the in the earnings. In an industry that, you know, if you look at the EMS industry, it’s it’s kinda low single digit growth rates. And the other thing that’s important to point out, we should have said this, that’s without acquisitions. We we we tend to not be very acquisitive.

We’ve we’ve done one acquisition in the last ten ten plus years. It’s a very small acquisition. So we that that growth has come through organic growth without acquisition.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Right. And then if we just think about kind of the catalysts, kind of new projects in fiscal twenty six that we kind of know should be coming in. I I mean, we’ve got 1.6. We’ve got Amazon. We’ve got Sienna.

Is that is that fair? Am I missing anything?

Seamus, CEO, Fabrinet: They’re the main they’re the main ones. You hit the you hit you hit it on the on the head there. Like you say, at 1.6, the ramp on 1.6 is in front of us. This this Sienna new business win is, you know, will ramp in f y twenty six, and the Amazon business will ramp in f y twenty six. So, yeah, some nice growth, growth drivers as we as we enter the fiscal year.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Well, fantastic. That sounds like a great story for me to be covering, and and I’m I’m looking forward to following the progress. All we

Seamus, CEO, Fabrinet: have all we have to do is execute.

Mike Genovese, Cloud and Communications Equipment Infrastructure Analyst, Rosenblatt: Yeah. Well, thanks thanks so much for joining us today. I hope your your meetings and the conference I I I really enjoyed the conversation today. It’s it’s great to see Seamus and Saba and and Yarrow.

And, thanks everyone in the audience for your questions and for your attention.

Seamus, CEO, Fabrinet: Thanks everyone for

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