John Marchetti - EVP, Chief Strategy Officer Tom Mitchell - Chairman, CEO Toh-Seng Ng - EVP, Chief Financial Officer.

Sherri Scribner - Deutsche Bank Patrick Newton - Stifel Alex Henderson - Needham & Company Troy Jensen - Piper.

Good day, ladies and gentlemen and welcome to Fabrinet's First Quarter 2015 Earnings 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) And as a reminder, this conference call maybe recorded.

I would now like to hand the conference over to Mr. John Marchetti, Fabrinet's Chief Strategy Officer. Sir, you may begin..

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 first quarter of fiscal year 2015 which ended September 26, 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 Web site located at investor.fabrinet.com.

Please refer to our Web site 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-K filed on October 16, 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. Fiscal 2015 is off to a solid start. And I'm pleased with the improving visibility and traction that we are gaining with current and new customers.

While the overall demand environment remains challenging, I'm confident that our growing pipeline of business will enable us to deliver another year of profitable growth. I will now turn the call back to John for a discussion of the markets we serve..

Thanks Tom. Our first quarter results were inline with our expectations was sequential in year-over-year growth in both our optical and non-optical businesses despite what remains a challenging demand environment. This uncertain demand environment is having a negative impact on our December quarter order book.

Excluding the impact of the expected consignment revenue that we were unable to recognize in fiscal 4Q of last year, we are expecting our December quarter revenue to decline sequentially in both our optical and non-optical segments. Our optical communications business performed well in the quarter increasing 23% sequentially and 9% year-over-year.

On a normalized basis excluding the impact of the consignment revenue on our operations, the optical communications business increased 8% quarter-over-quarter and 7% year-over-year. Our split between telecom and datacom in the quarter was approximately 70:30 with both segments up on a sequential and year-over-year basis.

Similar to prior quarters' growth in our optical communications business was driven by advanced optical components and modules including a 100-gig of the improvements in our datacom business were driven by 10 and 40-gig solutions.

As we look into the December quarter, we are expecting both our telecom and datacom businesses to decline on a sequential basis. Our non-optical business turned in another solid quarter with revenue up 15% year-over-year and 8% sequentially driven by improvements in our laser and automotive segments.

Similar to our optical business, we are expecting the non-optical portion on our fiscal 2Q revenue to decline modestly on a quarter-over-quarter basis. We continue to win new programs from existing customers in both our auto and laser businesses and remain encouraged by the long-term outlook for this segment.

In terms of our new business efforts, revenue from new accounts represented approximately 10% of revenue in the first quarter up from approximately 3% of revenue in the same quarter last year. Year-over-year growth in this category was driven by contributions from both new optical and non-optical programs.

As Tom mentioned in his opening remarks, we are encouraged by the increased visibility that we are beginning to see in terms of the sustainability and predictability of this revenue contribution. Our new business efforts are a vital part of our overall growth strategy and while we still anticipate that these opportunities will be somewhat lumpy.

We feel confident that the long-term outlook for this book of business is positive. Despite a demand environment that remains severely uncertain, we remain confident that fiscal 2015 will be another profitable year of growth for the company.

Our pipeline of new business is growing, our relationships with our existing customers are strong and our focus on providing world-class engineering and manufacturing services position us well for long-term success. With that, I would now like to turn the call over to TS for a review of our financial results..

Thanks John. Good afternoon everyone. As in the past, all numbers within the year are GAAP unless stated otherwise.

In line with what we announced 2.5 weeks ago, our total revenue for the first quarter was $189.3 million an increase of 10% compared to total revenues of $171.6 million in the first quarter of last fiscal year and up 18% compared to last quarter.

Please note that revenue in the quarter include $3.3 million in consignment revenue excluded from fiscal 2014. On an end market basis, revenue from optical communications was $135.3 million or 71% of total revenues for the quarter while revenue from non-optical business was $54.1 million, the remaining 29%.

GAAP gross margin for the first quarter was 10.8% a decrease of 30 basis points sequentially. Excluding share-based compensation expenses non-GAAP gross margin was 11% in fiscal first quarter down 30 basis point quarter-over-quarter and in line with our expectations given employee merit increases pay at the start of our first fiscal year.

Our total share-based compensation expenses for the quarter were $1.9 million of which roughly $1.5 million was included in SG&A. Our taxes in the quarter as net expenses of approximately $971,000 and our effective tax rate for the quarter was 8.1% above our expected range of 5% to 6%.

On a normalized basis, our effective tax rate would have been 7% if we exclude a one-time expenses relate to investigation cost booked in this quarter. We anticipate that our effective tax rate will be in the range of 6% to 7% moving forward until building 6 is substantially occupied.

On a non-GAAP basis, net income totaled $14.5 million for the quarter or $0.41 per diluted share. Non-GAAP net income was up from $12.1 million last quarter as a result of the higher revenue and grew 2.4% compared to non-GAAP net incomes of $14.2 million in the same period last year.

On a GAAP basis, including share-based compensation expenses and expenses related to the accounting investigation, our net income was $11 million or $0.31 per diluted share compared to a net income of $19.2 million GAAP wise or $0.55 per diluted share in the first quarter of fiscal 2014.

Please note that our GAAP net income in the first fiscal quarter of 2014 was positively impacted by $6.6 million or $0.19 per diluted share due to flood insurance proceeds. Moving on to the balance sheet and cash flow statement. We ended quarter with a cash balance of $244 million.

Total cash increased by approximately $11 million sequentially primarily from our operations. I would now like to discuss guidance for next quarter. We expect revenues between $181 million and $185 million which include approximately $13.2 million of consigned revenue excluded from fiscal 2014.

GAAP net income per share is expected to be in the range of $0.22 to $0.24 and non-GAAP net income per share of $0.37 to $0.39 based on approximately $36 million fully diluted share outstanding. That concludes our prepared remarks. At this point, I would like to turn the call over for questions.

Operator?.

Thank you. (Operator Instructions) Our first question comes from Sherri Scribner from Deutsche Bank. Your line is open. Please go ahead..

Hi.

I think I just wanted to quickly clarify the consignment revenue, did you say for the December quarter, you expect it to be $13.2 million?.

Yes, Sherri. This is TS. Yes..

Okay. So if….

That should pretty much clean up the whole issue when we first reported it back in Q4 results call and we talked about it $16.5 million, we did about $3.3 million in this first quarter, we should have the bulk of the remainder if not all of it out in fiscal Q2..

Because I'm trying to think about – trying to understand sort of the organic revenue when you exclude the consignment revenue and trying to understand what type of declines you are seeing from an end market perspective?.

Sure.

If you wipe that out and you look at the way if you remove it all and you normalize it, we would have reported say in the 4Q number about $176 million, the 1Q number excluding any of the consignment revenue would have been about $186 million and the guidance here without that $13 million give or take is essentially a $168 million to $172 million..

And so in terms of the declines you are expecting for the different end markets, are you expecting optical to be down more than the laser and printer business, I know you said both to be down but just trying to understand the magnitude and I think you said its both telecom and datacom, just trying to understand what you are seeing from your customers? Thanks..

Right. So for us, the mix on the telecom, datacom side I would say that we are expecting the datacom business to be a little bit softer for us than on the telco side. We are expecting both to be down sequentially, but datacom probably more so than telco for us.

And more, we are expecting some declines on the non-optical business from a magnitude perspective. It really is coming more from the optical side of the house..

Okay. Thank you..

Thank you. Our next question comes from Patrick Newton from Stifel. Your line is open. Please go ahead..

Yes. Thanks for taking my question. Hello, Tom, TS and John. I guess dub tailing of Sherri's question, if we take out the effect of your consignment revenue recognition on caulking and down 9% sequential guide and down 5% year-over-year guide.

And if we take seasonality, if we take what we heard from your 10% plus or near 10% customers to-date, I think it's somewhat surprising what you are guiding into at the midpoint.

And I guess, maybe a two part question is, should we think about something fundamentally in the optical market that's challenging or is this more of a customer specific type of issues supposed to a broader market challenge?.

Patrick, I think it's a little bit of both issues. I mean for us when we look at the way the last few quarters have gone September, we were a little bit stronger than the industry. And we talked on our last call that we thought that was more a timing issue than really a share gain issue or anything along those lines.

So for us, I think we are playing a little bit of catch up here. We typically do see order cuts come in during the December quarter as customers start to sort of clean up if you will a little bit ahead of what is typically a weaker March. And for us those cuts have come in maybe a little bit earlier than what is normal for us.

So we are being, I think a little bit conservative here to be careful about that and make sure that we don't get ourselves into any kind of a trouble here. But, I think beyond just sort of the mechanics of the way the industry tends to roll and we tend to contribute within that.

I think it is – like you said our datacom business has always been lumpier than the industry because of some of the exposure that we have there. We don't have it as broadly as we do on the telecom side. And I think for us in particular that's weighing a little bit here on the December quarter results.

TS, I don't know if you have got anything else that you would like to add there..

No. I think you’re on the money..

And then I guess maybe to ask more pointed along the same line because you said it's a little bit from customer and a little bit from industry, it is on the customer side you have greater than 10% customer that's winding down some product lines.

You have 26 so there has always been a fewer that they can move some production in-house, you have another customer that's sub-10% but they are selling some of their assets portion of what you make to a vertically integrated player.

Are those – are any of those types of large customer specific moves impacting your guidance?.

I guess what I would say to that Patrick is, I think it is more industry related than it is related to sales of assets or programs moving away or being shutdown or things like that. I mean when I look at the roll-up that we have, it's not that programs are being cut-off.

It's not that programs that have been sold or something like that or suddenly being cut and we are seeing volumes go elsewhere or anything along those lines.

So I don't think its program specific in the sense that some of these customers are either going through asset sales or have gone through asset sales or cutting big end of life programs that we are really seeing a big impact from that..

Great. Thank you for taking my questions. Good luck..

Thank you. Our next question comes from Alex Henderson from Needham & Company. Your line is open. Please go ahead..

Thanks. Let me just follow-up on that last one. It's my understanding that if anybody where to move a narrow line with IT allied line from you to somewhere else that they would have to get requalified.

Doesn't that essentially prohibit any moves of a product line like that?.

I certainly think it makes it challenging Alex. I mean it doesn't preclude it, but it makes it very challenging for a customer to pick that up move – quite frankly all that equipment away after reestablish production. And then to your point requalify that production. So to do so would be a multi-quarter process.

So it does certainly help and make it a pretty sticky..

All right. So that's certainly not a meaningful factor here. So the other question I had on product lines, it is clear that there are some product lines that some of your customers have around some of the legacy product lines are being discontinued at the customer in order to pair losing – products are losing money.

Is that a part and parcel of what's going on here in either datacom or the telecom product, is it a function of some older lines being shutdown to stem losses?.

I think Alex; I mean certainly there are programs that are being discontinued. I just – I'm not trying to lay all the blame for the decline at the feet of those programs. They certainly contribute. They have contributed in prior quarters. And they are likely to still contribute here for a couple of quarters going forward.

So while that is certainly a piece of it, I don't think it is the major source of the quarter-over-quarter decline..

The other area that is quite challenging is direct detect and that's my understanding your manufacturing a fair amount of direct detect product that is sourced through you for projects that have yet to move to coherent in the 40-gig arena.

And that area is also declining is that part of the industry back profits that's impacting things? I'm trying to separate out some of the – this item that could be….

Certainly the stronger growth area of the business. I don't want to give out too many specifics out because I need to be very careful about our customers' product lines and programs. But, I think that obviously coherent is certainly where the industry is seeing the – not just the growth but certainly the focus shift..

So I mean the comments around coherent in a marketplace converse to the situation with direct deduct is still been strong general demand conditions at most of the vendors certainly that was made – the comment was made in the JDSU call not so along ago. I assume while some of the other people are seeing similar.

So I guess what I'm trying to get at is, is it a function that some of the old legacy direct detect offsetting what is still a growth business in 100-gig and 40-gig coherent or is coherent – the trajectory of coherent moderated as well I mean can you give us any sense of that sort of general backdrop?.

Sure thing Alex. I don't think we've seen a big change in the slope of the curve if you will on the coherent side. I think that we've seen probably the non-coherent or some of the legacy type businesses become a little bit lumpier for us in terms of the quarter-to-quarter patterns.

But, I do think that coherent trajectory if you will – the growth trajectory of that technology still is pretty healthy..

Another question, slightly different angle to it. I know you guys sheltered the OEMs, but I assume you get some read through and where it's going.

Any sense of what’s going on in the China market?.

No.

I mean the only thing I guess I would comment there Alex is, for the customers that we have exposure to China through – the discussions that we've had from them, they seem pretty content with how that market is unfolding for them throughout the year, we haven't heard from our customers that, that market has, really deviated much from their expectations as they've been going through the year.

So it doesn't feel like it has heated up recently if that's fair to say. And it certainly hasn't underperformed their expectations as they've gone through the year. So at least in the discussions we've had, I think that China market has performed very much in line with expectations..

One last question, I'll exit the floor, you made reference to your building expansion, but the question of where are we in the capacity adds and where are we on utilization rates and so forth and does a down quarter here negatively impact utilization rates, should we be nervous that could hurt your numbers on the margin side?.

Sure. So, from a space allocation perspective, buildings 3, 4 and 5 are essentially full and building 6 is a little bit more than half in terms of space that's being spoken for. So if you combine that on a campus-wide basis, we're probably from a space perspective somewhere between 70%and 75%.

I would say equipment utilization for the factory is still probably running somewhere in the low to mid 60s, so probably a little bit below that, most customers are still only on a couple of shifts a day. We certainly have some exceptions to that, but most customers are still running two shifts a day.

So we still have a fair bit of capacity available both for new customers to come in and take wide space as well as for ramping production quite frankly with existing lines that are already established..

Very helpful. Thank you very much..

Thank you. Our next question comes from Troy Jensen from Piper. Your line is open. Please go ahead..

Yes. John, maybe just a couple of questions for you. So can you guys quantify how big Emcore as a customer. I know they're sub-10%, but any color on that would be helpful..

Definitely, you are right less than 10%..

Okay. I understand..

No. Actually we haven't broken it out since they fell below that line. They're probably a mid single digits kind of customer..

Okay. Right there.

And how about within datacom how big is 10 and 40 G, as percentage of that business and are you expecting both 10 and 40 to decline sequentially?.

To the second part of your question Troy, I don't know if we've broken it down by speed that way to try to figure out if the decline is coming more from 10 and 40. When I look at it like that, 10 and 40 overall is more than probably 50% of the datacom business.

I'd have to go back and double-check this, I don't know if you know off the top of your head. We can certainly get that number for you Troy. But I don't think from a forecast perspective, we don't forecast it by 10 or 40 as we're looking at the sequential numbers..

Okay, understood. Thanks guys..

Thank you. We have a follow-up from Sherri Scribner from Deutsche Bank. Your line is open. Please go ahead..

Hi, thanks guys. I just wanted to think about the March quarter and understand, I think you said TS that the consignment revenue ends this quarter or maybe John you said that.

And so without the consignment revenue varied about $168 million or $172 million this quarter typically you are down in the March quarter, but the street is expecting you to do about $179 million right now.

Would you assume you will be down in the March quarter, I know you don't typically give guidance, but just trying to get sort of a understanding of where we are?.

Sherri, I mean it's a little bit challenging for us right now to look out to March and say we will or we won't be down sequentially like you said the industry is typically a little bit weaker there. Like said we've seen order cuts at least for us a little bit earlier in this quarter. So I think we will have to wait and see how it balances out.

We are seeing a little bit of a more of a datacom impact here in December. We said that's a little bit lumpy so that could kind of go either way on us in March. Telecom is typically down but I think there is a couple of mitigating factors.

And then as Tom talked about on his opening remarks, we are starting to see a little bit of greater contribution from the new customers and I think they may help to offset that a little bit. So it's still a little bit of a mixed bag as we are looking out into that March quarter.

But, I don't think the consensus numbers that are out there right now are unreasonable in anyway..

But to be fair, the number that we should be looking at is the comparison for the second quarter does the third quarter would be the $168 million to $172 million without that consignment revenue because this consignment revenue will be gone, is that fair?.

Correct. We do not anticipate at this point that there is going to be any consignment revenue in that March quarter..

Okay. Thank you..

Thank you. You have a question from Alex Henderson from Needham & Company. Your line is open. Please go ahead..

Yes. I just wanted to go back to the opening comment about you are expecting a good year up – an up year a growth year. I assume you meant both the revenues and on the EPS. I'm just trying to figure out, if you were to exclude the impact of the consignment stuff from the first half of the year here.

Is that still expected to be a growth here and additionally are you still expecting – are you saying you are expecting up EPS for the year based on the guidance after the first two quarters here because it's not obvious that's the case..

I will take a shot at that top line stuff and I will let TS talk a little bit on the EPS side.

But, I think from the way we were looking at the full year, even if you stripped out that $16.5 million and say put it back into 4Q of last year, we'd still be looking at – our expectations certainly that will be looking at a growth year on the top line fiscal 2015 versus fiscal 2014. TS, I will let you know handle the EPS question in terms of the…..

Okay. Thanks John. Alex, if you look at last year on average we did about close to $170 million to $175 million per quarter. So this year for example, the first quarter without the consignment we did $186 million rightly so and I believe that definitely it's a good year for us on the top line standpoint.

And we also anticipate that the EPS will be growing from the last year..

So on a non-GAAP basis?.

Correct. As last year too we had some of the flood stuff that was still in there contributing to the EPS growth..

Yes..

Just want to make sure we are talking about the same thing. Great. Thank you..

Understood..

Thank you. I'm showing no further questions at this time gentlemen..

Great. Well, thank you everybody for joining us today and we look forward to speaking to everybody soon..

Ladies and gentlemen, thanks for participating in today's conference. This concludes our program. You may all disconnect. And have a wonderful day..