Fabrinet (FN) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reflects positive sentiment with strong top-line growth, a 29% revenue increase, and a promising HPC program. Despite a small FX loss, net income and EPS are robust. The Q&A highlights optimism in HPC, CPO, and telecom segments, with growth opportunities and capacity expansion plans. While some details were not disclosed, the overall outlook, especially in telecom and datacom, is strong, leading to a positive stock price prediction.
Key Financial Performance
Revenue Second quarter revenue was $1.13 billion, a new record for the company, which represented growth of 36% from a year ago and 16% from the prior quarter. The growth was driven by multiple large key strategic programs across the business.
Non-GAAP EPS Non-GAAP EPS set a new record at $3.36 per share, exceeding guidance despite stronger FX headwinds in the quarter.
Optical Communications Revenue Optical communications revenue grew 29% from a year ago and 11% from the prior quarter, reaching $833 million.
Telecom Revenue Telecom revenue reached a new record of $554 million, increasing 59% from last year and 17% from Q1. Growth was driven by strong demand, including DCI module growth.
DCI Module Revenue DCI module revenue was $142 million, increasing 42% year-over-year and 3% from Q1, supported by strong longer-term growth trends.
Datacom Revenue Datacom revenue was $278 million, declining 7% year-over-year but increasing 2% sequentially as demand continues to strengthen.
Non-Optical Communications Revenue Revenue in this category was $300 million, up 61% from a year ago and 30% from Q1. Exceptional growth was primarily driven by high-performance computing products, which contributed $86 million compared to $15 million in Q1.
Automotive Revenue Automotive revenue was $117 million, up 12% from a year ago but slightly down sequentially as anticipated.
Industrial Laser Revenue Industrial laser revenue grew 10% year-over-year and increased 4% sequentially, contributing $41 million to the non-optical communications category.
Gross Margin Gross margin in the second quarter was 12.4%, a 10 basis point improvement from Q1 and consistent with a year ago despite foreign exchange headwinds.
Operating Margin Operating margin reached 10.9% in the second quarter, up 30 basis points from both Q1 and a year ago, driven by strong top-line growth and operating leverage.
Net Income Net income was $122 million or $3.36 per diluted share, including the negative impact of a $3 million or $0.09 per share FX revaluation loss.
Operating Cash Flow Operating cash flow for the quarter was $46 million.
Capital Expenditures Capital expenditures were $52 million, reflecting construction of Building 10 and capacity enhancements at the Pinehurst campus.
Free Cash Flow Free cash flow was an outflow of $5 million for the quarter, impacted by high capital expenditures.
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Operating Highlights
High-Performance Computing (HPC) Products: Revenue surged to $86 million in Q2, up from $15 million in Q1. The first HPC program is expected to grow rapidly and fully ramp over the next two quarters.
Telecom Revenue: Reached a record $554 million, up 59% year-over-year and 17% sequentially. DCI module revenue grew 42% year-over-year and 3% sequentially.
Non-Optical Communications: Revenue grew 61% year-over-year and 30% sequentially, driven by HPC products.
Capacity Expansion: Construction of Building 10, a 2 million square foot facility, is on track for completion by the end of 2026. Additional manufacturing space is being created at the Pinehurst campus by converting office space.
Operational Efficiency: Gross margin improved by 10 basis points sequentially to 12.4%, and operating margin increased to 10.9%.
Share Repurchase Program: Repurchased over 12,000 shares at an average price of $387 per share, totaling $5 million. $169 million remains available under the program.
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Risk or Challenges
Foreign Exchange (FX) Headwinds: The company faced stronger FX headwinds in the quarter, resulting in a $3 million or $0.09 per share FX revaluation loss. This challenge is expected to persist in Q3, potentially impacting profitability.
Automotive Revenue Decline: Automotive revenue experienced a slight sequential decline as anticipated, and another modest sequential decline is expected in Q3, indicating potential challenges in this segment.
Capital Expenditures and Free Cash Flow: Capital expenditures of $52 million exceeded maintenance levels due to construction and capacity enhancements, leading to a free cash flow outflow of $5 million for the quarter. This could strain financial flexibility if sustained.
Supply Chain and Capacity Expansion: The company is undergoing significant capacity expansion, including the construction of Building 10 and modifications at the Pinehurst campus. Delays or cost overruns in these projects could impact operational efficiency and financial performance.
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Guidance & Outlook
Revenue Projections: Fabrinet expects total revenue for Q3 FY2026 to be in the range of $1.15 billion to $1.2 billion, representing approximately 35% year-over-year growth at the midpoint.
Earnings Per Share (EPS) Guidance: Non-GAAP EPS for Q3 FY2026 is expected to be in the range of $3.45 to $3.60, representing approximately 40% year-over-year growth at the midpoint.
Telecom Revenue: Sequential growth in telecom revenue is anticipated for Q3 FY2026, driven by sustained demand and strong DCI module growth.
Datacom Revenue: Fabrinet expects continued sequential growth in datacom revenue for Q3 FY2026.
High-Performance Computing (HPC) Revenue: HPC revenue is expected to continue its rapid growth trajectory, with the first HPC program on track to be fully ramped over the next two quarters.
Automotive Revenue: A modest sequential decline in automotive revenue is anticipated for Q3 FY2026.
Capital Expenditures and Capacity Expansion: Construction of Building 10, a 2 million square foot facility, remains on track for completion by the end of calendar year 2026, with 250,000 square feet expected to be completed by mid-2026. Additional manufacturing space is being created at the Pinehurst campus to support anticipated growth in 2026 and beyond.
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Shareholder Return Plan
Share Repurchase Program: During the second quarter, the company repurchased just over 12,000 shares at an average price of $387 per share, amounting to a total cash outlay of $5 million. At the end of the second quarter, $169 million remained available under the program.
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Key Q&A
Q:What is the current status of the ramp with the HPC customer, and what does the fully ramped volume look like?
A:The company is a little more than halfway through the ramp with the HPC customer. The fully ramped revenue is expected to be north of $150 million. Currently, they are running on two fully automated production lines and are in the process of qualifying additional lines. The full ramp is expected to be achieved over the next couple of quarters.
Q:What is the company's role in co-packaged optics (CPO) and optical circuit switches (OCS)?
A:The company is working on CPO programs with three different customers and has started seeing some CPO revenue, though the amounts are small. The timing of material revenue depends on customer roadmaps. For OCS, the company is engaged in several projects and is optimistic about its potential, but specific timelines depend on customer ramp schedules.
Q:Are there supply constraints on datacom transceivers, and what are the growth opportunities in this segment?
A:Yes, there are supply constraints, particularly for leading-edge products like 200 gig per lane (800 gig and 1.6 terabit). A second source for the laser has been approved, which should alleviate constraints. Growth opportunities include projects with hyperscale customers and merchant transceiver manufacturers.
Q:What is the mix of growth between Satcom and core telecom or optical module systems?
A:The growth in the quarter was more focused on DCI (data center interconnect) modules, particularly 400ZR and 800ZR modules. Satcom has been growing steadily but was not the primary driver of growth in the quarter.
Q:What is the outlook for CPO switches versus traditional transceivers?
A:The company is involved in the CPO supply chain and is optimistic about the opportunities, but specific details about CPO switches were not disclosed.
Q:What is the status of new customer opportunities in the telecom segment?
A:The company is pursuing new opportunities with both existing and new customers, including datacom transceivers for hyperscalers and merchant vendors, additional telecom systems, and high-performance compute customers. These opportunities take time to materialize.
Q:What is the timeline for datacom transceiver programs for hyperscalers and merchant vendors?
A:The company expects these programs to generate meaningful revenue within a few quarters, as they have been working on them for over 18 months.
Q:What is the status of the hyperscale business ramp and potential for becoming a primary source?
A:The hyperscale business is ramping well, with multiple programs underway. The company is confident in its ability to grow the business further by delivering excellent quality, delivery, and cost performance. They are currently a second source but aim to earn a larger share of the business.
Q:What is the impact of currency exchange rates on the company's financials?
A:Currency exchange rates caused a $0.09 EPS drag in the last quarter, with a similar impact expected in the current quarter. The company is mitigating this through operating leverage and cost control.
Q:What is the status of the Building 10 expansion and other capacity additions?
A:The Building 10 expansion is well underway, with 250,000 square feet expected to be completed by June 2024 and the full 2 million square feet by early 2026. The Pinehurst campus is also being expanded by converting 120,000 square feet of office and warehouse space into manufacturing space, adding over $150 million in revenue capacity.
Q:What is the company's visibility into future demand and capacity utilization?
A:The company has strong visibility into future demand, driven by telecom, datacom, and HPC growth. They are confident in their ability to fill new capacity, including Building 10 and Pinehurst expansions.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details about the mix of CPO switches versus traditional transceivers, the exact timeline for OCS projects, and the specific customer programs driving the Building 10 expansion. Additionally, they did not disclose the exact mix between 800 gig and 1.6 terabit datacom products or the detailed breakdown of Satcom versus core telecom growth.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
Automotive laser
CEO Garo
Chairman
DCI module
DCI term
Fabrinet
IPO year
Investor Relations
Investors section
Pinehurst campus
Relations addition
Telecom record
addition opportunity
afternoon today
area exception
area scale
breakdown result
building campus
calendar manufacturing
calendar progress
campus capacity
campus office
capacity expansion
communication
computing term
customer program
datacom momentum
decline demand
demand Csaba
detail
foot
presentation
section website
space
statement
telecom
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Frequently Asked Questions
Where does this earnings call transcript come from?
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They are generated by a specialized financial-language model trained exclusively on 15+ years of earnings transcripts. The model extracts financial figures, guidance, and tone with 97%+ accuracy and is regularly validated against human analysts. The full raw transcript always remains available for verification.
