John Marchetti - Chief Strategy Officer Tom Mitchell - Chief Executive Officer and Chairman, Board of Directors TS Ng - Chief Financial Officer.

Subu Subrahmanyan - The Juda Group Patrick Newton - Stifel Alex Henderson - Needham Dave King - B. Riley.

Good day, ladies and gentlemen and welcome to the Fabrinet’s Third Quarter 2014 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the call over to John Marchetti, Fabrinet’s Chief Strategy Officer. Please so ahead sir..

Thank you, operator, and good afternoon, everyone. Thank you for joining us on today’s conference call to discuss Fabrinet’s financial and operating results for the third quarter of fiscal year 2014 which ended March 28, 2014.

With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of Fabrinet and TS Ng, our Chief Financial Officer. This call is being webcast and a replay will be available on the Investors section of our website located at investor.fabrinet.com.

Please refer to our website for important information including our earnings press release and our non-GAAP to GAAP reconciliation. I would like to remind you that today’s discussion will contain forward-looking statements about the future financial performance of the company.

Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management’s current expectations.

These statements reflect our opinions only as of the date of this presentation and we undertake no obligation to revise them in light of new information or future events, except as required by law.

For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular the section captioned Risk Factors in our Form 10-Q filed on February 4, 2014. We will begin the call with brief remarks by Tom, myself and TS followed by time for questions.

I would now like to turn the call over to Fabrinet’s CEO and Chairman, Tom Mitchell..

Thank you, John, and good afternoon everyone. I am pleased with the results delivered in the third quarter and I am encouraged by the early signs of improving demand that we are beginning to see across our business. We continue to work closely with our customers to meet their current and future production needs.

This closed collaboration combined with our commitment to providing world-class engineering and manufacturing services with a focus on total customer satisfaction gives me confidence that growth in our business could accelerate as we move through the calendar year.

As always, I want to thank our employees for their dedication and hard work and all of our customers for their continued trust and support of Fabrinet. I will now turn the call back to John for a discussion of the markets we serve..

Thanks, Tom. Third quarter results were very much in line with our expectations and we continue to expect that the March quarter will mark the revenue trough for the calendar year. As anticipated, revenue in both our optical and non-optical businesses were down sequentially, but increased on a year-over-year basis.

This year-over-year increase gives us confidence that despite the weaker seasonality that we typically see in our March quarter, underlying demand fundamentals continue to improve.

In telecom, we continue to see faster growth in the more advanced components and modules, especially around 100-gig coherent technologies, while in datacom demand for 10-gig and 40-gig solutions continues to be healthy. We expect these trends to continue and we remain confident that the underlying fundamentals of our optical business are strong.

And we expect to benefit through our customers as spending on optical equipment accelerates through the calendar year. The laser market showed some additional signs of stability in the March quarter with a modest increase on a sequential basis.

We expect that over the near-term, our laser business may continue to experience some lumpiness as demand still seems somewhat variable by application and end markets. But over the long-term, we believe that the laser market represents a significant opportunity for growth as it is still in the very early stages of outsourcing.

Demand in our automotive segment remains solid with both the quarter-over-quarter and year-over-year increase in revenue attributable to those customers. We believe the longer term trend in this business is encouraging for us and we are excited about the opportunities for growth in the coming quarters.

While results in our non-optical businesses have been mixed over the last several quarters, we remain confident that our laser, auto and other businesses will continue to be an important contributor to our top line growth for the next several years.

And as Tom has mentioned on several occasions, we will continue to explore ways to accelerate our growth in these and potentially other new markets. As we look out into the remainder of calendar 2014, we are encouraged by the overall growth prospects for our business.

We continue to work closely with our customers to ensure that we are aligning our resources to meet their current and future production needs and believe that our business will accelerate along with our customers as demand trends continue to improve.

With that, I would now like to turn the call over to TS, our CFO, who will review of our financial results..

Thank you, John. Good afternoon everyone. I would like to start with a brief update on the insurance recovery status, then move to the reviews of the results for the third quarter, and end with our outlook for fiscal Q4. In the March quarter, we received our final insurance payment of $38.2 million.

With the receipt of this payment, I am happy to report that we are done with the insurance recovery process. In total, we have exceeded payment against our claims in an amount of approximately $74.7 million and we estimate that the overall cost of the floods less the insurance proceeds and other government grants was approximately $24.7 million.

Now, to review the results for the third quarter of fiscal 2014, please note that all numbers are GAAP unless stated otherwise. Our total revenue for the quarter was $167.7 million, a decrease of 6% sequentially and an increase of 8% compared to the third quarter of fiscal 2013.

On an end market basis, revenue from optical communications was $119.8 million or 71% of total revenue for the quarter, while lasers, sensors and other revenue was $47.9 million, the remaining 29%. Our share-based compensation expenses for the quarter were $1.5 million, of which roughly $1.2 million was included in the SG&A.

Our taxes in the quarter were net expenses of approximately $727,000, mostly booked by our Chinese subsidiaries. Excluding flat incomes and one-time items, our effective tax rate for the quarter was 5.8% within our expected range of 5% to 6%.

On a GAAP basis, including share-based compensation expenses, executive separation costs and income related to our insurance recovery, our net income was $47.7 million or $1.33 per diluted share compared to GAAP net income of $21.1 million, or $0.61 per diluted share in the third quarters of fiscal 2013.

On a non-GAAP basis, net income totaled $12.3 million for the quarter or $0.34 per share. Non-GAAP net income was down from $16 million last quarter as a result of lower revenue, but grew 6.6% compared to non-GAAP net income of $11.5 million in the same period last year.

Moving on to the balance sheet and cash flow statement, we ended the quarter with a cash balance of $234 million. Cash increased by approximately $54 million sequentially primarily as a result of our receipt of the final insurance payments. I would now like to discuss guidance for the next quarter.

We expect revenues of between $169 million and $170 million. GAAP net income per share is expected to be in the range of $0.39 to $0.31 with non-GAAP net income per share of $0.33 to $0.35 based on approximately 36 million fully diluted shares outstanding. That concludes our prepared remarks.

At this point, I would like to turn the call over for questions.

Operator?.

(Operator Instructions) The first question comes from Subu Subrahmanyan from The Juda Group..

Hi, I have two questions. First on the demand environment, you had mentioned some positive commentaries on just in terms of the trends you are seeing. If you could elaborate on that, what gives you some of the confidence given the results of at least one of your larger customers is somewhat more mixed.

I was wondering what you can see in terms of visibility on that? And then if you could update us on the situation that maybe two states where your relationship is and if you can clarify the 10% customers for the quarter? That will be helpful. Thank you..

Sure, Sibu. In terms of your first question on the demand environment, no, I think obviously the guidance captures some of the uncertainty that’s out there, but I think we still feel pretty comfortable that the underlying fundamentals continue to get little bit stronger.

On the telecom side and like I said both our telecom and our datacom business were down sequentially in the quarter. That came in pretty much as expected. And I think as we are continuing to look a little bit further out, the conversations that we are having with customers about their demand levels and things like that continue to be constructive.

The guidance that we are giving here, I think up sequentially is in line with what we are hearing from customers that are out there. So, I think in terms of the overall demand environment specifically on the optical side, I think it was very much in line with what we are hearing from customers.

On the non-optical businesses, it is a little bit more mixed. This quarter was down sequentially, but both our laser and auto businesses were up just a little bit on a sequential basis even. So, those businesses I think continue to see pretty healthy fundamentals.

Our other category, if you will, which is some sensor and some medical and some sort of one-off programs that we have got going on right now, that was really the reason for that segment to be down sequentially. So, we feel that again the auto business has been one of our higher visibility businesses. That continues to perform pretty well for us.

And on the laser side, we are encouraged that that’s starting to get a little bit more stable and hopefully we can continue to see some growth there as we go through the remainder of the year. In terms of your question about 26, there really is no big change relative to what we talked about last quarter. We have the contract in place.

I think the operational side of the relationship if you will in terms of how orders are coming in and things like that has settled down quite a bit now that we have gotten a little bit further into the relationship with the contracts signed. So, no big changes there, we still feel very comfortable about what we are doing with them.

And I think that that’s the way we continue to view that. I will let TS comment on the 10% customers in the quarter, but there is really, really not too much change there..

Yes. Subu, just like what we disclosed in the 10-K the usual two customers, which is JDSU and Oclaro..

Got it. Thank you very much..

The next question comes from Patrick Newton from Stifel..

Yes, thanks for taking my questions, good afternoon Tom, TS and John. I guess my first question is I guess echoing what Subu just said is given the earnings commentary at one of your largest customers I thought that the revenue result and guide are relatively solid.

But the biggest issue I think that investors are having of the quarter was the gross margin result and then the implied guidance and I think the last time we saw gross margin reach this mid 10% level it snapped back rather aggressively.

So I guess my questions are, can you walk us through what impacted gross margin so aggressively in the quarter on a sequential basis, what is embedded in guidance you seem to be targeting a relatively flat gross margin sequentially.

Is pricing playing any type of role in that line item and can you discuss the potential for snap back as we move through the year?.

Okay, Patrick, this is TS. Good questions. Yes, the gross margin for March quarter would have been closely 11%. It is not because for one customer in the non-optical segment where it ceased operations toward the end of the quarter. So we are shipping to them a bunch of stuff, toward the end of the quarter, they stopped operations and the behind payment.

So according to the accounting standards, I took a provision for that. The customer is going to start to figure out their strategy moving forward. So, if we get our money back, those will resolve in the future. But just to put that aside, you’re looking at close to 11% and mainly because of the volume, lower volume we lost.

It does not mean compared to sequentially – compared to the December quarter that account for the delta..

Okay.

So I’m just backing into you guys having about a – that reserve is somewhere around may be $1.1 million, is that accurate? And it looks like all else equal if that’s accurate you would have posted about a $0.37 quarter, is that fair, TS?.

Yes, close to that after, yes, your number is very close..

Okay. So then sort of that answers the sequential question. I mean you are still just to get to the midpoint of guidance from the midpoint of revenue that $0.34 of gross margin – I am sorry 34% earnings implies that gross margin is somewhere in the 10.

So is there still a reserve impact that fit in the June quarter as well?.

Yes, okay. So, if you get down to the non-GAAP EPS we lost $0.11 sequentially, $0.45 down to $0.34 and we guide $0.34 based on….

I am sorry, TS to interrupt, I am not talking about the March quarter I am talking about the June quarter guidance?.

Okay, alright. Okay. So, June quarter we are looking at $0.34 and we have a imply as I say imply 11% for March quarter and as well as June quarter, because of revenues pretty much about the same, if you look at the midpoint maybe up a little bit. So, if you trigger that down is about $0.34 at the midpoint.

So, remember March quarter I have some unusual items here. I have tax $0.06 impact in the March quarter. I also have foreign exchange $0.04 unfavorable impact. So, if you account for that adjust for the margin, it’s pretty much in line with $0.34..

Maybe as a different way as we march through the back half of the calendar year, is there anything that fundamentally should preclude you guys from posting kind of greater than 11% margins, which is what you had been doing the last couple of quarters?.

I cannot think of anything. If you look at our long-term goal of $190 million to $195 million, it’s still pretty intact, maybe a little bit on the upper range, but I went by, I look at it – I can discuss that with you in detail when you call back, but essentially I believe our long-term goal is still intact..

Okay..

You can call and come back..

Okay, thank you.

And then John just on the early signs of improvement, if we kind of take your commentary on the optical side, would it appear that we are in an environment that the second half of the calendar year we could see somewhat stronger than typical seasonality in optics?.

I mean, I think that, that is a possibility, Patrick. I mean where we are sitting today I am not going to pretend I have visibility out into September or beyond.

But I do think that we have got a situation, where as long as the fundamentals both in North America and we have seen some early signs of some spending in China as well, as long as those things sort of continue and deployment stay sort of on schedule, then I would anticipate that there is a pretty good likelihood that we’ll see that..

Great. Thank you. Good luck..

(Operator Instructions) The next question comes from Alex Henderson from Needham..

Thanks. So, I have got a couple of questions here. And I just wanted to go back to the gross margin question that was just being asked.

Is it reasonable to think that the gross margin in the June quarter ought to be around 11% consistent with the number that you would have had in the March quarter, excluding the one-time item?.

Alex, that’s accurate, yes..

Okay. And then the second question you made the comment that your datacom was down year-over-year, but could you talk about what it did on a, excuse me, quarter-to-quarter.

Can you talk about what your datacom did on a year-over-year basis?.

So, the datacom business for us on a year-over-year basis was down a little bit as well. So, it was down both on a sequential and a year-over-year basis..

Okay. I am a little confused by that, because I am under the impression that both of your larger datacom customers are up year-over-year, for instance, JDSU was up 35% in their datacom business and I am pretty sure that Oclaro is and I am pretty sure that Finisar is.

So, can you explain to me why your datacom is trajectoring, I’m showing a trajectory that’s inconsistent with the rest of the market, is there something going on there?.

No, I don’t think there is anything in particular going on there, Alex, to be fair. It’s a one quarter sort of variability there. I am not going to – and it’s not a very big number. So, I am not going to get overly excited about it.

I don’t think it’s a share issue may then a little bit of mix in terms of those customers portfolio and what we are shipping and some things like that, but I don’t – again we are not overly concerned about it given what it’s doing here.

If it’s a trend that goes on for a couple of quarters then it’s something that we would probably get a little bit more concerned about. But right now, we are having it be one quarter, not something we are terribly concerned about..

Okay. If I could go back to the comment that you made about non-optical programs were expected to be somewhat weaker than the optical side of the business, you then turned around and called out improving conditions in industrial lasers and auto.

So, I am a little confused about how I reconcile those two statements?.

No – and maybe there was some confusion there. I didn’t say that it was supposed to be different than it turned in. We said that we had expected both our optical businesses and our non-optical businesses to be down in this March quarter and they were.

Within that non-optical segment we actually saw a very modest sequential improvement in both the laser business and the auto business. So really the different came like I said in, in some of our other segment.

You know not a big change overall in the total revenue numbers here, but again the laser business and the auto business was up very modestly on a sequential basis..

And the question around the, the company that ceased operations in the quarter, can you talk to us about what segment of business that was in?.

That was purely in the other category, Alex. So, it’s in the non-optical communication portions of the business. It was a start-up type company that we had been working for about I guess a little bit over two years now.

They finally came to a point where they were unable to continue funding operations and we’re sort of in the process of cleaning that up a little bit right now. You know we’ve had a few of these over the years as we continue to bring in sort of the start up community along with some more established customers from a business development perspective.

In the past, we have been able to collect all the moneys that are owed to us.

Our expectation right now is that we will do the same with this customer over time that will wind up reversing itself and be a little bit of a benefit at some point in the future in terms of the margin, again not a huge number but it certainly had an impact on the gross margin this quarter..

Well, did it have an impact on the revenues as well, it sounds like that explains some of the variants in the other revenue line not just in the cost of goods sold, I assume if there is a reserve hit of $1.1 million there is probably more than that on the revenue line?.

A little bit, I think that’s accurate, it's absolutely in that other category of our non-optical business..

Yes, that’s correct..

So, we are talking about a couple of million dollars swing in the numbers on the top line, is at all we are talking about?.

No, no, less than $1 million, we are less than $1 million, yes..

So, it’s less than $1 million in revenues a $1.1 million charge?.

The $1.1 million charge came in the two sections. Some in revenue, majority in revenue, some in the cost of goods sold..

Okay, I will free the floor. Thanks..

The next question comes from the Sherri Scribner from Deutsche Bank..

Hi, Tom and TS. This is (indiscernible) here calling on the behalf of Sherri Scribner.

My first question I was hoping you could shed some color on how the sensor business is doing?.

I mean, the sensor business at least on a quarter-over-quarter basis still remains pretty flat. I mean, there is very small portion of the overall revenue. There is some sensor work that’s done within the auto segment.

So, if you characterize that as part of it as well even though we tend to pull that out as auto, then the group performed a little bit better but as a whole it’s a pretty small piece of the overall pie. It was down sequentially this quarter but again off a pretty small base it didn’t have a big material impact on the results in the quarter..

Okay, thanks.

And I don’t want to beat a dead horse here but on the telecom sector I know we did speak about this in the Q&As before, but a few of the EMS companies and connectors companies have seen strength on the telecom slide so I was just wondering that it is that brought about that weakness this quarter apart from seasonality?.

To be fair, I don’t think there was much more than seasonality to it for us this quarter, I mean the March quarter results was pretty much inline with exactly what we were sort of expecting as we planed out this quarter, there wasn’t a whole lot of variability in the telecom business relative our expectation at the beginning of our fiscal 3Q..

What would you say are your expectations for telecom CapEx going into the year?.

Telecom CapEx?.

Yes..

I think on an overall basis, the telecom CapEx that we saw certainly out of the North American carriers was very much inline with expectations in terms of the overall percentage increases being relatively moderate.

I think that as we go through the year our expectation is that some of the spending within those CapEx figures will start to shift a little bit more towards our customer’s lines of business and I think that what we’ve seen so far out of the China spending has been encouraging, and I think that that’s still going to be a little bit of a wild card at lest in terms of how it trickles all the way down to us as we go through this calendar year but I think at least what the customers that we’ve had discussions with to have exposure to that China spending they feel pretty good about it..

Okay, great. Thank you..

The next question comes from Dave King from B. Riley..

Thank you. Good afternoon.

First, a couple of numbers, can I get the depreciation and CapEx?.

For the quarter?.

Yes..

Depreciation is about $2.7 million..

Okay..

So, you can look at it from a cash flow base on a nine-month basis, so CapEx is about $3.1 million for the quarter..

Okay.

And then you talked about 10% customers, but can you talk about II-VI and Finisar, were they near 10% customers or not even close or any color on that?.

I mean, I think from a – I mean they were both below 10% in the quarter. In the past, Finisar has been a 10% customer and they tend to bounce around a little bit. They’re typically are better for us as telecom picks up. I would say that I wouldn’t necessarily say that they were close to a 10% customer.

They’re still a very important customer for us and one that we have high hopes as we continue to work our way through the rest of the calendar year and I would say that the same about II-VI I mean no big changes there from our expectation about what we anticipated them delivering to us in the quarter..

And can you remind us regarding the supply of your menu sign that’s for how long?.

It’s more than an annual contract that’s a multi year contract..

A multi-year, okay. Got it.

And then regarding your guidance I guess I’m still a little confused I got into the call a little bit late, so I missed some of the post margin discussion but I thought you’d, are you guiding 11% for the quarter or for fiscal fourth quarter or not?.

Yes, this is TS. Normally, we don’t guide the gross margin we got a top line and a non-GAAP EPS. So we are guiding to $0.33 to $0.35 based on the midpoint to $171 million..

Right, but if you do the math it sounds like gross margin will be kind of flat at 10.5% not the 11% that I guess that’s what I am little bit confused?.

Well, if you move some of the extraordinary item I think exactly that, you can’t come to the conclusion that implied by 11% that what he said..

Okay.

And then what about regarding optical versus non-optical, are you assuming kind of similar growth for both segments or optical could be stronger than non-optical?.

As we are looking into the June quarter I would say right now we, I think we’ll probably see a little bit better growth in the optical segment, but not significantly so..

Got it.

And just lastly, not a number question, what was the mix between telecom versus datacom within optical is it about 70:30 or?.

Yes..

Yes, roughly, okay, great. Thank you..

Roughly about 70:30, yes..

Right. Got it. Thank you..

Next question comes from Alex Henderson from Needham..

Let me go back to the question on Finisar for second just to be clear, they do almost all of their datacom in-house correct so you are only really doing the telecom portion for them is that, that’s accurate?.

That is accurate Alex..

Okay, thank you..

Yes..

And I’m showing no further question..

Great. Well, thank you everybody for joining us today. We look forward to talking with you over the next month or so and we have an update for you on fiscal 4Q and end of the fiscal year on our August call. Thank you..

We really appreciate your support. This is Tom..

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day..