Fabrinet Q4 2024 Earnings Report

Fabrinet EPS Results

• Actual EPS: $2.41
• Consensus EPS: $2.06
• Beat/Miss: Beat by +$0.35
• One Year Ago EPS: $1.68

Fabrinet Revenue Results

• Actual Revenue: $753.26 million
• Expected Revenue: $732.63 million
• Beat/Miss: Beat by +$20.63 million
• YoY Revenue Growth: +14.80%

Fabrinet Announcement Details

• Quarter: Q4 2024
• Date: 8/19/2024
• Time: After Market Closes
• Conference Call Date: Monday, August 19, 2024
• Conference Call Time: 5:00PM ET

Fabrinet (NYSE:FN) is a global provider of advanced optical packaging and precision optical, electro‐mechanical and electronic manufacturing services (CEM). The company specializes in complex manufacturing processes for original equipment manufacturers (OEMs) in communications, data center, industrial, instrumentation and medical markets. Key capabilities include high‐precision fiber alignment, micro‐assembly, testing and diagnostics, and integration of electro‐optic subassemblies.

Incorporated in 2000, Fabrinet operates under a corporate structure headquartered in Singapore with additional regional offices and design centers in the Americas, Europe and Asia. Its principal manufacturing operations are located in Thailand, where the company maintains multiple clean‐room facilities and capacity for high‐volume production. This geographic footprint enables Fabrinet to serve a diverse, global customer base with scalable production and localized support.

Since its initial public offering on the New York Stock Exchange in 2001, Fabrinet has expanded both its technical capabilities and production throughput to meet growing demand for optical communications and precision manufacturing solutions. The company continues to invest in process development, automation and quality systems designed to support next‐generation networking and high‐reliability applications.

Fabrinet Q4 2024 Earnings Call Transcript

Key Takeaways

• Fabrinet delivered a record Q4 (revenue $753 M, up 15% YoY, non-GAAP EPS $2.41) and record FY24 results (revenue $2.9 B, up 9%, EPS $8.88), both above guidance.
• Datacom revenue surged over 120% in FY24, led by 800 G+ products, while telecom fell over 20% due to inventory digestion—though new system wins should bolster H2 FY25 telecom trends.
• Automotive and other non-optical communications rebounded with 12% sequential growth in Q4, as automotive revenue rose 17% from Q3.
• The company approved ~ $110 M to build a 2 million sq ft Building 10 at Chonburi, expected online in ~18 months, to support long-term capacity needs.
• Q1 FY25 guidance calls for sequential revenue growth in all segments, EPS of $2.33–2.40, backed by record cash flow and an expanded $200 M share buyback authorization.

Presentation

[Operator]

Good afternoon, and welcome to Fabrinet's Financial Results Conference Call for the Q4 of Fiscal Year 2024. 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, Garo Toomajanian, Vice President of Investor Relations. Please go ahead.

[Garo Toomajanian, Vice President of Investor Relations at Fabrinet]

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 Q4 of Fiscal Year 2024, which ended 28 June 2024. 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 investor 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 investor 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.

[Alex Henderson, Analyst at Needham & 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 7 May 2024. 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, CEO at Fabrinet]

Thank you, Garo. Good afternoon to everyone joining our call. Our very strong fourth quarter results capped off an outstanding year for Fabrinet. Fourth quarter revenue of $753 million was above our guidance range and grew 15% from a year ago and 3% from Q3. We executed very well to produce non-GAAP EPS that also exceeded our guidance range at $2.41 per share. It's also notable that Q4 marks the fourth quarter in a row for both record revenue and EPS for the company. For the full year, revenue was $2.9 billion, an increase of 9% from fiscal year 2023. Our continued focus on cost management helped us to again grow non-GAAP earnings faster than revenue to a record $8.88 per share, or a 16% year-over-year increase.

[Alex Henderson, Analyst at Needham & Company]

2024 was quite a remarkable year for Fabrinet. Datacom revenue grew over 120%, while telecom revenue declined more than 20% for the year due to the protracted inventory digestion across the telecom industry. Our strong results throughout the year demonstrated the strength of our flexible and resilient business model. Entering the fourth quarter, we anticipated continued revenue growth in Datacom and declines in telecom, and that's what we experienced. We also anticipated a return to sequential growth in automotive revenue, which we also saw. Within optical communications, Datacom revenue continues to drive growth, while the sequential decline in telecom was more modest than anticipated. In Datacom, 800 gig products for AI and related applications remained the biggest revenue contributor, offset in part by the completion of the wind down of a long-running 100 gig program, as we've discussed previously.

[Alex Henderson, Analyst at Needham & Company]

We are very encouraged by the strong demand trends we are seeing for both current generation and next generation Datacom technologies. We believe that our industry-leading expertise and trusted reputation positions us particularly well to continue benefiting from long-term Datacom growth. In telecom, ongoing inventory digestion continues to dampen revenue from traditional telecom products. In the fourth quarter, this impact was partially offset by data center interconnect products, as well as contributions from new telecom system program wins. In fact, we expect recent system wins of varying sizes to begin making more meaningful revenue contributions towards the second half of our fiscal 2025. These new wins make us optimistic about Fabrinet's long-term telecom revenue trends overall. Turning to non-optical communications, we saw double-digit sequential revenue growth in the quarter.

[Alex Henderson, Analyst at Needham & Company]

As anticipated, this increase was primarily due to growth in automotive revenue, as short-term inventory absorption issues are now behind us. All in all, we had a very robust and successful quarter and year, and we remain positioned particularly well for continued momentum as we look ahead. In fact, in the first quarter of our fiscal year 2025, we anticipate sequential revenue growth from all of our major product categories. Beyond Q1, we continue to carefully evaluate our long-term capacity requirements. In that regard, we have made the decision to break ground on Building 10 at our Chonburi campus during the new fiscal year. Our first building in Chonburi was Building 8, with all 500,000 sq ft now being utilized. Building 9, which is about 1 million sq ft, opened about two years ago and is quickly filling up.

[Alex Henderson, Analyst at Needham & Company]

Building 10 will be 2 million sq ft in size. We expect construction to take approximately a year and a half to complete once we break ground. Capital expenditures for construction of the 2 million sq ft facility will be approximately $110 million. Beyond Building 10, we have ample space to further increase our manufacturing capacity. We'll keep you posted on our construction timeline as we move ahead. In summary, we delivered a record fourth quarter with revenue and EPS that were above our guidance ranges, as well as a remarkable fiscal year. We're increasingly optimistic about our future, and we have numerous drivers that position us to extend our track record of success into fiscal 2025 and beyond.

[Alex Henderson, Analyst at Needham & Company]

Now I'll turn the call over to Csaba for more financial details on our fourth quarter and fiscal 2024, and our guidance for the first quarter of fiscal 2025. Csaba?

[Csaba Sverha, CFO at Fabrinet]

Thank you, Seamus, and good afternoon, everyone. We had a terrific fourth quarter to end a very strong year. Record fourth quarter revenue of $753 million was above our guidance range and represented an increase of 15% from a year ago and 3% from Q3. This strong revenue helped produce record non-GAAP earnings per share of $2.41, which was also above our guidance. For the full fiscal year, revenue was a record $2.9 billion, an increase of 9% from fiscal 2023. As in recent years, non-GAAP earnings grew faster than revenue, reaching a new record of $8.88 per share, up 16% from the prior year.

[Alex Henderson, Analyst at Needham & Company]

Details of our revenue breakdown are included in the investor presentation on our website, and I will now focus my comments on some of the more notable metrics. In the fourth quarter, Optical Communications revenue was $596 million, or 79% of total revenue, an increase of 19% from a year ago and 1% from Q3. Within Optical Communications, Datacom revenue was $315 million, or 53% of Optical Communications revenue, an increase of 63% from a year ago and 3% from the prior quarter. Telecom revenue was $282 million, or 47% of Optical Communications revenue. Telecom revenue declined approximately 1% from Q3, which was a smaller decline than expected due to continued growth from Data Center Interconnect products.

[Alex Henderson, Analyst at Needham & Company]

With the optical communication industry transitioning to higher data rates, we continue to see strong growth from 800 gig and faster products that are now clearly the key drivers of our growth. Therefore, we are now breaking out revenue by speed into two categories: 800 gig and faster, and below 800 gig. In the fourth quarter, revenue from products rated at 800 gig and faster was $259 million, up 54% from a year ago. Revenue from products below 800 gig was $223 million, up 4% from a year ago. Revenue from optical communications products that are non-speed rated, including ROADMs, amplifiers, fiber arrays, and other devices, was $114 million, down 5% from a year ago.

[Alex Henderson, Analyst at Needham & Company]

The historical two-year trend of this breakout is provided in the most recent investor deck on our website. From that breakout, you will observe that in fiscal 2024, products rated at 800 gig and above started to dominate and were the biggest contributor to growth. Although products below 800 gig continued to grow, thanks to 400ZR programs, which reached 10% of optical communications revenue in Q4. Revenue from non-optical communications saw healthy growth in the fourth quarter to $157 million, up 2% from a year ago and 12% from Q3. This increase was primarily the result of increasing automotive revenue as we have moved past a short-term inventory correction period. Automotive revenue was $86 million in the fourth quarter, up 17% sequentially.

[Alex Henderson, Analyst at Needham & Company]

As I discuss the details of our P&L, expense and profitability metrics will be on a non-GAAP basis, unless otherwise noted. Gross margin in the fourth quarter was 12.5%, a 10 basis points decline from Q3, and was within our guidance range. Operating expenses were $14 million, slightly less than 2% of revenue. Operating income was $80 million, representing an operating margin of 10.7%, consistent with the third quarter. The combination of our strong cash balance and elevated interest rate environment provided record interest income of $11 million. Effective GAAP tax rate was 4.6% in the fourth quarter. We anticipate that our tax rate will remain in the mid-single-digit % in fiscal year 2025. Non-GAAP net income was a record $88 million, or $2.41 per diluted share.

[Alex Henderson, Analyst at Needham & Company]

For the full year, revenue was $2.9 billion, up 9% from fiscal 2023. In fiscal 2024, we had two customers that contributed 10% or more to revenue. NVIDIA at 35% and Cisco at 13%. Our top 10 customers together made up 86% of revenue, up from 84% in fiscal 2023. For the fiscal year, gross margins were 12.6%, down 40 basis points from fiscal 2023, primarily due to the absence of FX tailwinds that we benefited from last year. Operating margin for the fiscal year was 10.6%, a decrease of 20 basis points from fiscal 2023. You will note this is a smaller decline than we saw in our gross margin, reflecting operating leverage inherent in our model.

[Alex Henderson, Analyst at Needham & Company]

Non-GAAP net income was a record $8.88 per share, an increase of 16% from a year ago, with EPS growth again outpacing revenue growth. We maintained a very strong balance sheet throughout fiscal year 2024. We closed the year with cash and short-term investments of $859 million, up $65 million from the end of the third quarter. The primary driver of this increase was strong operating cash flow of $83 million. With CapEx of $13 million, free cash flow in the quarter was $70 million. For the full year, we generated record operating cash flow of $413 million, a remarkable increase of 94% from fiscal 2023.

[Alex Henderson, Analyst at Needham & Company]

Free cash flow in fiscal 2024 was also a record at $368 million, an increase of 142% from a year ago. In the fourth quarter, we repurchased approximately 21,000 shares at an average price of $170 per share, for a total cash outlay of $3.5 million. For the full year, we repurchased approximately 212,000 shares at an average price of $186 per share, for a total cash outlay of $39 million. We remain committed to investing in our growth while also returning capital to shareholders with our 10b5-1 and open market share repurchase programs. Since the end of the quarter, our board has authorized an additional $139 million for repurchases, so that we now have $200 million available for share buyback.

[Alex Henderson, Analyst at Needham & Company]

This is double the size of our repurchase authorization at the beginning of fiscal 2024. Now, I will turn to our guidance for the first quarter of fiscal year 2025. After a year of breaking quarterly records for revenue and EPS, we are optimistic that the first quarter will represent another strong quarter for Fabrinet. In fact, we anticipate that revenue will be up sequentially in all of our major product areas. We expect Datacom growth to be driven mainly by advanced high data rate products. We expect Telecom revenue to increase from the combination of growth in data center interconnect products and recent new programming. And we believe that automotive and laser revenue will also grow sequentially. Overall, we expect first quarter revenue to be in the range of $760 million-$780 million. We also expect strong performance from profitability perspective.

[Alex Henderson, Analyst at Needham & Company]

Keep in mind that in the first quarter, we will see the seasonal impact of annual merit increases, which puts temporary downward pressure on margins. As in the past, we expect operational efficiencies to offset these cost increases as we progress through the year. Based on recent strength in Thai Baht, we expect a foreign exchange revaluation loss in the first quarter. With that in mind, we are anticipating EPS to be $2.33-$2.40 per share. In summary, we had another record quarter with results that exceeded our guidance for both revenue and EPS. We expect our momentum to continue in fiscal 2025, beginning with a strong first quarter as we extend our track record of solid execution. Operator, we are now ready to open the call for questions.

[Operator]

Thank you. And as a reminder to ask a question, simply press star one one on your telephone and wait for your name to be announced. To remove yourself from the queue, press star one one again. Please stand by for our first question. And our first question comes from Samik Chatterjee with J.P. Morgan. Please go ahead.

[Joseph Cardoso, Analyst at J.P. Morgan]

Hey, good afternoon. Thanks for the question. This is Joe Cardoso on for Samik. So maybe first one here, just on the datacom business. Curious if you could talk about the timing around 1.6T, and whether you think that could start to or whether that's beginning to materialize as early as your September quarter. And then second part of this question is just like, how are you thinking about 400 gig and 800 gig demand going forward? Both of these look like strong growth drivers in 2024, just doing kind of the back of the envelope, math here on the new disclosures. And I think in the past, you highlighted expectation that 800 gig demand continues as you don't expect 1.6T to cannibalize it. You know, is that still the same case, still expectations going into 2025?

[Alex Henderson, Analyst at Needham & Company]

And does that apply to 400 gig as well? And then I have a quick follow-up. Thank you.

[Seamus Grady, CEO at Fabrinet]

Thanks, Joe. Yeah, 1.6, you know, we don't talk about the specific timelines for our customer's product before they do, but certainly, you know, we're working hard with our customer on 1.6 T. But we think that 800 gig will be around for a while. You know, it's used extensively in a lot of the products and the networks we make for our customers. And we think 800 gig will be around for a long time. Our aim is always to be working with the customers on the next generation products while we're building the current generation products. 1.6 T transceivers, you know, they're quite complex and they don't ramp up overnight.

[Alex Henderson, Analyst at Needham & Company]

But you know, and again, the timing of the announcement of a new product like that is really up to our customers, so we wouldn't really, we wouldn't really comment on that. But we're, you know, we're certainly making sure that we're ready from a capacity perspective. 800 gigs, like I say, 800 gig, the demand is very strong. 400 gig, you know, still remains, but, you know, like I say, the timing of 1.6, we leave that to our customers to talk about.

[Joseph Cardoso, Analyst at J.P. Morgan]

No, fair, Seamus. And then maybe just in terms of my second question, and maybe bigger picture, obviously, great to hear the news around Building 10 expansion. You know, as we think about the portfolio and what's driving the conviction to break ground there, is this all related to further confidence in terms of around the datacom business? Or are there other areas of the, you know, your portfolio that's driving conviction here and supporting the additional facility build out? Just curious, high-level thoughts, you know, how you're thinking about it and what's driving the conviction there. Thank you. We appreciate the question.

[Seamus Grady, CEO at Fabrinet]

No problem. It's really our overall conviction about the overall business. It's not any one particular, if you like, segment. You know, Building 9 and actually Building 8 before it, they filled faster than we had anticipated. You know, Building 10 is a good use of our cash. We have the cash available. We get better economies of scale by building a 2 million sq ft facility rather than a 1 million sq ft. And it's just a better overall use of the land available to us to build the 2 million sq ft facility. And really, you know, we have conviction in the pipeline and in the business. The upside opportunity is significant.

[Alex Henderson, Analyst at Needham & Company]

You know, if you, if you do the math on the, on the revenue per square foot, it would suggest that the revenue capacity in Building 10 should be about $2.4 billion, plus or minus $2.4 billion. So the, the upside opportunity is, is significant, and the downside risk is very small. You know, even if we were to build a Building 10 and didn't put any business in there for a period of time, the, the gross margin headwind would be about 15 basis points, so it's very small. So it's a combination of all those factors, the conviction, the business, we, we believe it's a, it's a good use of our, of our cash, and it's also, you know, good upside potential with very little downside risk.

[Operator]

Thank you. One moment for our next question, please. And it comes from the line of Karl Ackerman with BNP Paribas. Please proceed.

[Karl Ackerman, Analyst at BNP Paribas]

Yes, thank you, gentlemen. I've got two questions. First, your 800 gig transceiver revenue to date has been primarily driven by your largest customer, and some investors have been concerned that a push out of the latest GPU would impact your near-term outlook. That does not appear to be the case, so does your September quarter outlook imply that you are seeing a broadening of your datacom customer base for 800 gig, as several hyperscalers are beginning to deploy broadly, 800 gig networking switches?

[Seamus Grady, CEO at Fabrinet]

Yeah, I mean, we don't really comment on our customers' product launches. We know that our big customer, as you say, for 800 gig, has been NVIDIA. You know, they continue to see strong demand for their products. You know, our understanding is that they will extend and expand production based on current GPUs to meet the demand that's there, and we're happy to continue to support them. You know, we're working, Karl, on a number of opportunities. We've talked about these before. There's really three categories of, if you like, AI-related growth vectors. There's outside of NVIDIA, obviously. We're very happy with the growth of NVIDIA, but we're pursuing others.

[Alex Henderson, Analyst at Needham & Company]

There are other GPU companies, there are other merchant transceiver opportunities, and then there's hyperscalers who are looking to maybe go direct, and we're pursuing all three. So, you know, our outlook is really a function of continued strength, continued strength in the datacom business. And, you know, the telecom softness that we've seen for the last while, we are seeing indications that that demand is beginning to recover. So I suppose in simple terms, the datacom growth looks to be sustainable, and the telecom weakness is temporary, we think. We've also had some success with winning some new complete network system business, as well, as we'll be, you know, introducing over the next while. So we want to make sure we have ample capacity for that.

[Alex Henderson, Analyst at Needham & Company]

We've been able to pick up some additional complete network system business.

[Karl Ackerman, Analyst at BNP Paribas]

Yep. Thanks for that, Seamus. To that point, could you discuss the breadth of customer adoption and growth of coherent ZR optics, using telecom and DCI? And then at the same time, if I may, you spoke in your prepared comments about new programs within telecom beginning to flow into the model in the second half of fiscal 2025. I'm curious whether the reason to expand Building 10, of what appears to be twice as large as your previous plans, is driven by the outlook, within the telecom, programs, or if it's driven predominantly by the datacom opportunity that you see. Thank you.

[Seamus Grady, CEO at Fabrinet]

Yeah, Karl, it's actually both. It's the continued strength in datacom and, you know, we believe our ability to pick up additional business there, but also what we see as some recovery in telecom, but also some new wins. You know, we have been picking up some new business. We've had some success with a number of system wins of varying sizes over the last one. And, you know, if you go back a few years ago, we had the Infinera win, then we had some, you know, considerable success with Cisco. And, more recently, we've been awarded one of these is an award from Ciena. Actually, who's been a customer of ours for some time, but they've been a customer more on the component side.

[Alex Henderson, Analyst at Needham & Company]

They haven't been a 10% customer, so they haven't been in the 10% chart, if you like, but they're a very important customer for us and an excellent customer. And we're very happy that we've been awarded the manufacturing of the majority share of their next generation network modem business, along with all of the associated vertically integrated optical components. So we'll be making the majority of the modems and all of the optics for those modems. And we expect this program, you know, really in our fiscal Q4, which means this win will be, it can be more important for fiscal 2026 revenue than fiscal 2025 revenue.

[Alex Henderson, Analyst at Needham & Company]

But over the next kind of six to nine months, we'll begin to ramp that, and we're very happy with the expansion of this relationship with Ciena. So it's a combination of, you know, returning to strength in telecom, plus some additional business we've been picking up in telecom, and of course, sustainable datacom demand and datacom growth as well.

[Karl Ackerman, Analyst at BNP Paribas]

Very helpful.

[Seamus Grady, CEO at Fabrinet]

In relation to ZR, sorry, you asked also about ZR. So, you know, our telecom business overall, year on year, it's down 23% year on year. But within that, we've had some very nice growth in DCI, which is not just ZR, but it's a lot of it, that growth has been ZR. And we have had some success in 400ZR and also 800ZR and ZR+. And right now we have six ZR customers of varying sizes. So, ZR optics with, in particular for DCI applications, has been a real source of strength for us, and we've been very happy with the adoption of ZR in the DCI space over the last while.

[Karl Ackerman, Analyst at BNP Paribas]

Very helpful. Thank you.

[Seamus Grady, CEO at Fabrinet]

You're welcome.

[Operator]

Thank you. Our next question comes from the line of Alex Henderson with Needham & Company. Alex, your line is open.

[Alex Henderson, Analyst at Needham & Company]

Thanks so much. Wow, you got Ciena in there, the systems business. That's fabulous. Congratulations. That's good news.

[Seamus Grady, CEO at Fabrinet]

Thanks, Alex.

[Alex Henderson, Analyst at Needham & Company]

I was hoping you might talk a little bit about whether you're gonna break that out as a category now that it's become, you know, a multiple vendor, you know, group, as opposed to one or two customers. And then second, within the, you know, the systems business, a lot of systems inventory out there, but it seems to be clearing faster on the systems side than the component side. So do you expect the systems business to pick up faster than the overall telecom component business?

[Seamus Grady, CEO at Fabrinet]

Certainly I think our systems business will, because we've had some success there. I mean, we have, we've obviously had some success on the component business as well, but that is still hampered by inventory digestion. And again, we can't really easily distinguish between inventory adjustments and market demand, so it's not always clear to us. But based on what we are seeing from our customers, it does feel as though inventory digestion, and again, on the component side, for traditional telecom products, it's starting to stabilize. Doesn't really mean we're off to the races yet, doesn't necessarily mean we're off to the races yet, but there could still be some remaining digestion. But the big year-over-year and sequential declines, we think are largely behind us at this point.

[Alex Henderson, Analyst at Needham & Company]

On the systems side, yeah, so for us, we think the system business would probably grow faster than the component business. We haven't broken it out that way yet. We may, as you say, at some point in the future, you know, up to now, we've had one or two customers in that space, but as we add to that customer portfolio, we may at some point in the future, but not, we would probably wait until the end of a fiscal year to do that. But that's our plan to do that.

[Alex Henderson, Analyst at Needham & Company]

In your remarks, you made a comment that the AI has multiple alternative growth vectors outside of NVIDIA. Are any of those three categories that you identified anywhere near the possibility of an announcement? Do you think that that's something that could happen during this upcoming fiscal year, or do you think that's really 2026 or and beyond type of business?

[Seamus Grady, CEO at Fabrinet]

As you know, Alex, we generally tend to not announce anything unless until there's something to announce, as evidenced by the Ciena news. Our approach is to work very hard with our customers to try and win these opportunities, but until such time as we've actually won it, we generally don't talk about it. But there's three, as you said, the three growth vectors we're pursuing. We're pursuing with vigor and with energy and working very, very hard on those. And we're, you know, we're quite optimistic that there's a lot of business to be won in all three of those areas.

[Alex Henderson, Analyst at Needham & Company]

And again, the three areas being other GPU companies, other merchant transceiver opportunities, and thirdly, hyperscalers who want to go direct with their, maybe with their own optical interconnect. So we're working hard on all three of those, but nothing to announce at this point, but we're optimistic, but they take time. They take a long time to land, these opportunities.

[Alex Henderson, Analyst at Needham & Company]

One last question, then I'll cede the floor. So, I think you've talked about pricing pressure being larger than the 10%-15% normal price pressure that has been evident in this category for, I don't know, now it's a decade or plus, with the exception of the COVID window. And you're clearly selling predominantly into a single customer who's now got qualification from multiple customers or multiple alternative suppliers. The combination of those two with some slowing of the overall growth rate expected in this category in 2025 and 2026. Does it suggest to you that this category could decelerate to pretty modest growth or you know, as you have share loss against you know, your major customer and the pricing pressures there?

[Alex Henderson, Analyst at Needham & Company]

Or do you have visibility that the new capacity coming on stream from that customer, coming in quarter after quarter after quarter, is going to continue to drive, you know, solid five to 15% kind of growth, which is what you've been producing, you know, quarter to quarter over the last year? How do we think about this dynamic, from your perspective? Thanks.

[Seamus Grady, CEO at Fabrinet]

Yeah. So, yeah, we've been growing about 15% compound annual growth rate over the last three or four years. Our top line has grown about 15% each year. Our earnings have grown about 24% in the same period each year. And, you know, from a customer's perspective, yeah, cost is a factor, but it's not the only consideration. First of all, in terms of cost, we're very, you know, I would say, confident in our ability to meet any cost targets that any of our customers need us to meet. We're very cost competitive. We have a low cost footprint.

[Alex Henderson, Analyst at Needham & Company]

We have a very compact footprint, and we don't have any redundant capacity in any geographies around the world, so we don't have a capacity overhang that we have to deal with. So we're, you know, we're very cost conscious, we're very cost competitive, and we're very compact. But our customers really care about several factors, cost being one, but it's not the only one. You know, technology, and really the ability of their supplier to be a technology leader to make sure they can get to market first with their new products is critical. And then quality and delivery are absolutely critical. And the ability to ramp quickly when an opportunity comes along. So having capacity available is critical as well, and of course, cost. So it's all of the... It's all of those factors.

[Alex Henderson, Analyst at Needham & Company]

It's not any one factor. It's all of those factors that we, you know, we believe our customers are most preoccupied with, and so are we. So we're confident in our ability to continue to grow the business. We don't give long-term guidance, as you know, Alex, we guide one quarter at a time. But, you know, I think our optimism about the business is, you know, you can see our... the steps we're taking to continue to expand our capacity and make sure we're ready for the future. It is a good indication of how we feel.

[Alex Henderson, Analyst at Needham & Company]

Great. Thanks.

[Seamus Grady, CEO at Fabrinet]

Thanks, bud.

[Operator]

Thank you. Our next question comes from the line of Tim Savageaux.

[Tim Savageaux, Analyst at Northland Capital Markets]

Hey, good afternoon.

[Operator]

With Northland Capital Markets. Go ahead.

[Tim Savageaux, Analyst at Northland Capital Markets]

Yeah, okay. Sorry about that. My congratulations as well.

[Seamus Grady, CEO at Fabrinet]

Thank you, Tim.

[Tim Savageaux, Analyst at Northland Capital Markets]

Let me just try and put that in a little more context, in terms of the win here. You'd mentioned, you know, Infinera and Cisco historically. I think we started out with relatively muted expectations there, but, you know, clearly, you know, they're very sizable customers for you. I think the increment there is, you know, $200 million-$300 million. I don't know whether you said it there. I think you mentioned Ciena was not a 10% customer currently. I assume they will be in fiscal 2026. Is that fair to say?

[Seamus Grady, CEO at Fabrinet]

I guess if you dial in approximately twelve months from now, we'll find out. But it's too early to say, Tim, and I think you know, it's early days. Obviously, it's not early days in our relationship with Ciena. They've been a customer for a very long time and an excellent customer. But this latest win, you know, we're just getting geared up to begin to ramp it. So it's early days, but we're you know, we're very happy with the win, very happy with the relationship.

[Tim Savageaux, Analyst at Northland Capital Markets]

Okay. And you mentioned modems. I assume that's the kind of the mainline, kind of coherent line cards and, you know, the associated optics that go with that. And I don't know if you can say this, but would that include pluggables as well? CR pluggables, or maybe you already do that.

[Seamus Grady, CEO at Fabrinet]

Yeah, I'd prefer probably not to go into that level of detail. I mean, we do a lot of work with Ciena. Like I said, they have not been a 10% customer, so... And again, it's not really our place to disclose the specific components we make for our customers, but it's a pretty broad-based relationship and a very successful one.

[Tim Savageaux, Analyst at Northland Capital Markets]

Great. Understood. Well done. Thanks very much.

[Seamus Grady, CEO at Fabrinet]

Thank you.

[Operator]

Thank you. And as a reminder to our tele audience, if you do have a question, simply press star one one to get in the queue. And our next question comes from the line of Mike Genovese with Rosenblatt Securities. Please proceed.

[Michael Genovese, Analyst at Rosenblatt Securities]

Great. Thank you. So Seamus, you know, the Ciena win sounds very positive, and the ZR commentary was positive. I'm just wondering, on the telecom side of the world, are there any other green shoots to point out, or are those the two main things? Is there a third and a fourth?

[Seamus Grady, CEO at Fabrinet]

I think the other couple of comments are on the overall, let's say, our traditional telecom business. We think it's stabilizing. We're starting to see demand coming back. We're starting to see it stabilize. Early days, but we think our traditional telecom business is starting to stabilize. And then the other point would be on DCI. DCI continues to be a good growth driver, especially 400ZR, but also 800ZR has been a good solid beacon of lights and growth for us over the last while. They will be the four main telecom comments, if you like.

[Michael Genovese, Analyst at Rosenblatt Securities]

Right. And then just to clarify and kind of put, you know, kind of your business in context with other people's business in the industry, is it correct to assume that everything you make for the customer is a multi-mode, you know, transceiver? Is that correct?

[Seamus Grady, CEO at Fabrinet]

No. We make all kinds of transceivers, single mode, multi-mode, everything.

[Michael Genovese, Analyst at Rosenblatt Securities]

Okay. So, you know, I guess, though, but, you know, how would you position like the products that you make versus other people's products out there, for instance, that use EMLs? Is there significant overlap in those applications, or do you think that they're kind of different products for different parts of the network?

[Seamus Grady, CEO at Fabrinet]

I think, again, it's probably more of a question for our customer than for us. I mean, we make whatever the customers want us to make. You know, and again, in broad terms, right now with our big customer there, there's really two sources, if you like, for products that they have. They have their own design, which we make, their own designs, plural, which we make, and then there's the merchant transceiver suppliers as well.

[Michael Genovese, Analyst at Rosenblatt Securities]

Yeah.

[Seamus Grady, CEO at Fabrinet]

But the puts and takes around, you know, kind of who does what and which one is best suited to which application, we leave that to our customers to talk about.

[Michael Genovese, Analyst at Rosenblatt Securities]

Yeah. Okay, then finally, and I actually even feel a little bit embarrassed asking this question, because it really seems to be trying to read the tea leaves way too closely. But if we just look at the 800G business, and thanks for breaking that out, you know, just the sequential growth looks like maybe it was at a low point in the fourth quarter, and from the guide, it sounds like it may be a little bit faster sequentially in the first quarter than it was in the fourth quarter. And is there anything at all to read into about the market by that?

[Seamus Grady, CEO at Fabrinet]

I don't think so. I don't think there's a whole... I wouldn't read a whole lot into that. We certainly don't read anything significant into that, Mike.

[Michael Genovese, Analyst at Rosenblatt Securities]

Okay. Thanks so much. Appreciate it.

[Seamus Grady, CEO at Fabrinet]

Thanks, Mike. Appreciate it. Thank you.

[Operator]

Thank you. One moment for our next question. It comes from the line of George Notter with Jefferies. Please proceed.

[George Notter, Analyst at Jefferies]

Hi, guys. Thanks very much. I wanted to ask about Building 10. I think the way you phrased it, Seamus, was that you were gonna make the decision on Building 10 during this fiscal year. Have you made that decision during the June quarter, that you're breaking ground in the June quarter, or did you mean to infer that you could break ground in any one of the next several quarters?

[Seamus Grady, CEO at Fabrinet]

No, we've made the decision, and what we said in our prepared remarks was that we would break ground in the new fiscal year, which we're now in. So we've taken the decision. It's a 200, sorry, 2 million sq ft facility, or will be a 2 million sq ft facility, so double the size of Building 9, and we'll break ground on that in this fiscal year.

[George Notter, Analyst at Jefferies]

Got it. Okay, so you mentioned it's a year and a half to get it up and running. Is that a year and a half from today? Is that a year and a half from, you know-

[Seamus Grady, CEO at Fabrinet]

From when we break ground.

[George Notter, Analyst at Jefferies]

A quarter, quarter or two? Gotcha.

[Seamus Grady, CEO at Fabrinet]

From when we break-

[George Notter, Analyst at Jefferies]

I guess what I-

[Seamus Grady, CEO at Fabrinet]

From when we break ground, and I mean, you know, we generally, once we make the decision, you know, obviously these are significant investments, and it's a major undertaking, major project, we will typically, you know, make the decision, then, of course, we have to go out to tender and make sure we have all the permits lined up, so that takes a little bit of time, and then, you know, we'll break ground at some point in the next few quarters. We'll update on that in the future, and then from once we break ground, it's about eighteen months.

[George Notter, Analyst at Jefferies]

Got it. Okay. Cool. Okay, so I can assume that you're at a 70% utilization rate then right now on Building 9? I think in the past, you've talked about that as being the threshold at which you guys make a decision.

[Seamus Grady, CEO at Fabrinet]

We don't break that number out anymore. You can, you can assume anything you like, really. We don't break that number out. We did historically, and it just wasn't productive. And that's the guideline we had set ourselves in the past, that when we get to 70% on the last building, we would pull the trigger on the next building. But really, there's, like I said, there's very little downside risk to building our next building a little bit earlier, even if, even if we don't end up filling it, there's really very little downside risk, about 15 basis points, and the upside opportunity is huge.

[Alex Henderson, Analyst at Needham & Company]

So we're not going to confirm the utilization percentage, other than to say Building 8 filled up much faster than we thought it would, and so is Building 9. It's filling up faster than we had anticipated. So we don't want to. We want to make sure we don't get caught flat-footed. If some of these big opportunities, if and when they come our way in the future, we want to make sure we're ready.

[George Notter, Analyst at Jefferies]

Got it. Great. And then just one last follow-up. So on the Ciena win, I guess, from the timing of Building 10, breaking ground and then, you know, being up and running, I assume the Ciena win is gonna come on relatively slowly. Like, if I look at Ciena's optical business, obviously they're multiples of the size of Cisco. You know, Cisco is a 10% customer for you. I guess I'm just wondering if it's fair to say that it'll take some time to really get that business ramped.

[Seamus Grady, CEO at Fabrinet]

Yeah, it'll really begin to ramp, you know, in early calendar, we call it 2025, or, you know, the second half of our fiscal year. So really into the March or even into the June quarter, our fiscal Q4. So the ramp will be more of a FY 2025 story than an FY... Sorry, an FY 2026 story than an FY 2025 story. We'll be, and we already are working on elements of it, but we really don't start to ramp it in earnest until the March and the June quarter.

[George Notter, Analyst at Jefferies]

Great. Thank you. Congrats on the win. Thanks.

[Seamus Grady, CEO at Fabrinet]

Thank you very much. Thank you.

[Operator]

Thank you. That's all the time we have for Q&A today. I will turn the call back to Seamus Grady for closing comments.

[Seamus Grady, CEO at Fabrinet]

Thank you. Thank you for joining our call today. We're very pleased with our record quarter and fiscal year. We're optimistic that our business momentum will continue into the first quarter as we extend our leadership position in the markets. We look forward to speaking with you again and to seeing those of you who will be attending the Jefferies conference next week. Goodbye.

[Operator]

With that, thank you all for participating in today's conference. You may now disconnect.

Participants

Executives

• Garo Toomajanian, Vice President of Investor Relations
• Seamus Grady, CEO

Analysts

• Alex Henderson, Analyst at Needham & Company
• Csaba Sverha, CFO at Fabrinet
• George Notter, Analyst at Jefferies
• Joseph Cardoso, Analyst at J.P. Morgan
• Karl Ackerman, Analyst at BNP Paribas
• Michael Genovese, Analyst at Rosenblatt Securities
• Tim Savageaux, Analyst at Northland Capital Markets