Garo Toomajanian - IR David Mitchell - Chairman and CEO Toh-Seng Ng - CFO.

Alex Anderson - Needham & Company Patrick Newton - Stifel, Nicolaus & Company Troy Jensen - Piper Jaffray Paul Coster - JPMorgan.

Good ladies and gentlemen welcome to Fabrinet’s First Quarter Fiscal Year 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions on how to participate will be given at that time. As a reminder today’s conference is being recorded.

I would now like to turn the call over to your host Garo Toomajanian, Investor Relations. .

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 2016, which ended September 25, 2015.

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 Investor Relations 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’d 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 August 19, 2015. We will begin the call with brief remarks by Tom, myself, and TS, followed by time for questions.

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

Thank you, Garo, and good afternoon, everyone. We are off to a good start in fiscal 2016 with first quarter revenue and non-GAAP earnings that were above average expectations and a healthy performance across the board. In the first quarter new products increase to represent 24% of total revenue, compared to 11% a year ago.

While majority of the new product revenue came from existing customers. We also saw revenue from our Fabrinet West facility, which one in the production during the quarter. Another meaningful during the quarter was the purchase of 50 acres of land outside of Bangkok for the development of a second manufacturing campus in Thailand.

We recently program on the first of what will ultimately be several buildings. In total our new campus will ultimately enable us to increase our manufacturing capacity by 150%, compared to our current capacity today. From my perspective we delivered a strong performance in the first quarter and are off to a solid start in fiscal 2016.

We are excited about our strategy to expand new product introductions and are increasing our capacity to meet anticipated demand. We expect the investments we are making will continue to grab profitable growth, as our business scales in years ahead.

Let me now turn the call over to TS, for a discussion of the markets we serve and our financial results..

Thanks, Tom and good afternoon, everyone. I’d like to provide you with more details on our performance by end market and our financial results. Total first quarter revenue was $216.4 million and was above the high-end of our guidance range.

Revenue grew 14% from a year ago or 16% when you exclude the impact of $3.3 million in consignment revenue in the first quarter of fiscal 2015. As we indicated last quarter, all of the consigned shipments revenue difference from our fiscal 2014 was recognized in fiscal 2015. So there will be no impact to fiscal 2016 result.

Our optical communications business represented 72% of our total revenue consistent with our recent performance. Optical revenues of $154.8 million increased 14% from a year ago and 5% from the fourth quarter.

Within optical, revenue split was 54% to telecom market and 46% to datacom market representing a 9 percentage point increase for datacom from years ago. As datacom revenue grew 14% from a year ago while telecom revenue was stable.

Growth in our optical communications business was driven by advanced optical components and modules, including 100 gig solutions and new programs. We expect this time to continue in the second quarter. Turning to our non-optical communications business.

Revenue from lasers, sensors and other markets represented 28% of total revenue and increased 14% from a year ago and 5% sequentially. During the first quarter strong growth in revenue from sensors drew most of this increase though the lasers and automotive markets also contributed to growth.

We expect sensors to continue to drive growth in our non-optical revenue in the second quarter. Revenue from new business represented 24% of total revenue in the first quarter, up from approximate 11% of revenue in the same quarter last year.

Our focus on new business supported our overall growth in the quarter and we expect this time to continue as we look ahead. As Tom mentioned our MPS facility in Santa Clara went into production in the first quarter and we expect volumes there to ramp through the year.

Our strategy to broaden and strengthen our overall pipeline with new business is succeeding and our current footprint in Thailand is expected to be nearly 89% occupied back by the end of calendar year 2015.

To that end, in September, we executed a land purchase agreement for $13 million to acquire approximately 50 acres for a second manufacturing campus in Thailand. In October, the first piling went to ground and we expect to have construction of our first building of this new campus completed within a year.

Estimated cost of construction of the new building is expected to be approximately $30 million to $35 million. Building A which will be the first of three new buildings will add approximately 500,000 square feet of manufacturing space.

In total, we anticipate that our second campus in Thailand will add approximately 150% to our total manufacturing capacity once it is fully built. We are excited that our new campus will be able to support our next phase of growth as we continue to scale our business. Now turning to the details of our P&L.

Unless otherwise stated, all numbers presented here are on a GAAP basis. GAAP gross margin in the first quarter was 12%, an increase of 10 basis points from the fourth quarter, primarily due to higher debt anticipated revenue.

Excluding share based compensation expenses, non-GAAP gross margin was 12.3% in the first quarter, an increase of 20 basis points from the fourth quarter. For the second quarter, we expect gross margins to be flat to slightly up compared to fiscal Q1.

Our total share based compensation expenses for the quarter was $2.7 million of which roughly $2.1 million was included in SG&A. As we had indicated, startup cost related to our new Fabrinet West facility in Santa Clara are reflected primarily in operating expenses.

Including this impact, GAAP operating margin increased to 6.5% excluding slight expenses in the first quarter, compared to 6.2% a year ago. Non-GAAP operating margin was 7.8% about the same as a year ago due to cost associated with ramping up with production at our Fabrinet West facility offset by efficiency due to higher sales volume.

Please note that during the first quarter, our K6 facility in Fuzhou, China was impacted by flooding in conjunction with Typhoon Soudelor that disrupted part of China. Our GAAP EBITDA for the first quarter included $864,000 in losses to inventory, supply and equipment. However our facility was back up quickly after only minor disruptions.

Other income and expenses in the first quarter included a $10.1 million forward exchange contract loss associated with the mark-to-market adjustment at quarter end. During the quarter, the Thai Baht continue to depreciate against the US dollar, and at quarter end created this underlying loss against the various forward contracts we brought earlier.

We expected that this underlying loss will be reversed when the contracted Baht is delivered. Taxes in the quarter were at net expense of $1.3 million and our normalized effective tax rate was 6.7%, which was within our expected range of 6% to 7%. We continue to anticipate that our effective tax rate will be in the range of 6% to 7% for fiscal 2016.

On a GAAP basis, which include share based compensation expenses and the underlying loss on mark-to-market foreign exchange adjustment, net income for the first quarter was $1.6 million or $0.04 per diluted share compared to GAAP net income of $30 million or $0.36 per diluted share in the fourth quarter.

On a non-GAAP basis, net income totaled $16.2 million for the quarter or $0.45 per diluted share above the high end of our guidance. Moving on to the balance sheet and cash flow statement. We ended the quarter with the cash and investment balance of $248 million.

This is a decrease of approximately $8 million from the end of the fourth quarter as CapEx including cost associated with our land purchase more than offset the operating cash flow generator in the quarter.

In fiscal 2016, we now expect CapEx to be in the range of $60 million to $70 million, which consists of approximately $30 million in maintenance CapEx and approximately $35 million for our new manufacturing facility in Thailand including land purchase. I would now like to discuss guidance for the second quarter.

We expect revenue to be between $218 million and $222 million representing growth of between 21% and 23% when you exclude consignment revenue of $8.4 million in the year ago quarter.

We anticipate GAAP net income per share to be in the range of $0.41 to $0.43 and non-GAAP net income per share of $0.45 to $0.47 based on approximately $36.6 million fully diluted shares outstanding.

In summary, we are pleased with our performance in the first quarter and remain optimistic that our strategy will continue to drive profitable growth going forward. Operator we’d now like to open the call for questions..

Thank you, sir. [Operator Instructions]. Thank you, our first question comes from the line of Alex Anderson of Needham & Company.

Your question please?.

Thanks very much. Just wanted clarify couple of points because I wasn’t 100% sure what you said on it.

When you talk about the datacom piece, could you just hit the comments you made on what the rate of growth was on the various pieces of it?.

Hey, hi Alex this is TS. On the datacom, we talk about on the sequential is 25% growth from quarter-to-quarter. And then compared to a year ago we looking at pretty strong growth about close to 40%-45% growth. .

Okay. And the datacom growth, I assume you have no short range OpEx i.e., victual [ph] based products in your production line.

Is that correct?.

Yes, that’s correct. .

So all in the indium phosphide based..

Not necessary, we don’t have the short range, but we have long range in both of our technology..

Okay. And looking at the new customers that you’re bringing on Fabrinet West, can you talk about how you expect to ramp.

I assume that given your extremely tight floor space, you’re still at two shifts what would happen if we saw enough demand to push it to three shifts on some of that?.

Alex this is Tom how are you doing?.

Hello, Tom I’m fine thank you. .

That growth is a planned growth. And as normally planning -- as we planning our new factories, and the customer base is probably 50-50 at the present time current customers and new customers. And as we progress on through the year and in particularly this fiscal year which is in June, we really believe that those numbers of customers will increase..

I see.

And how do I anticipate the move from the production in Fabrinet West to the production facilities in Thailand if you’re running at 95% of use of the floor space by mid-year '16?.

So Alex this is TS, let me add a little bit color for what Tom just said, I think 4,900 of Fabrinet West is going to take a while to fill up the space and then also create a process new to Thailand. As we mentioned I think previously we said that will probably take upto maybe is a fiscal 2017 event.

So at this moment we are not guiding anything transferred to Thailand. Hopefully by the time we are ready to transfer to a low cost manufacturing in Thailand our new building will be ready..

Okay. So the utilization rate will continue to grow up excluding any movement from Fabrinet West to those facilities. So that once the building is up you’ll have a natural move opportunity to take those people to Thailand..

Yeah Alex this is Tom again. That facility was primarily put in place to be NPI facility, new products introduction facility and at the present time that’s what it’s performing and as the new products that our customers bring in are award us with as we go through their product life right now they’re just at the infancy of their product life..

Okay. I get it. Okay thank you, I’ll leave the floor..

Thank you..

Thank you. Our next question comes from the line of Patrick Newton of Stifel. Your line is open..

Yeah Tom, TS thank you for taking my question.

I guess just honing in on Fabrinet West even further, can you help us understand what the revenue contribution was in the September quarter, what is baked into your December quarter guide? And then is it still reasonable to think you could equip a $10 million quarterly run rate of revenue coming out of that facility exiting fiscal year '16?.

Patrick, this is Tom. Thanks for calling in. No, the rate... the quarter we just completed our first quarter the revenue contribution of Fabrinet West was insignificant I guess the total of all the revenue and we expected that that revenue as we go through the next two quarter will not be that significant to our total revenue.

And it was planned that way..

So the $10 million quarterly run rate you alluded to it’s probably further out into fiscal year '17 timeframe?.

Yeah. I think, Patrick last quarter we did say that that probably is a FY 2017 event..

Okay.

And then I guess I believe you had two lines running last quarter, can you inform us how many lines are currently up at Fabrinet West? And then do you a loose expectation of how we should I guess actually in the how many lines should be running and is that baked into your CapEx guidance?.

Yeah, Patrick we do have two lines very efficiently running. But I suppose that… I would have to say that the performance of those lines is far greater than most of insertion lines that you see today. Our insertion rate is at least 4 times higher than the average insertion rate of the other lines that are an NTI facility.

So as we go forward we are looking forward to begin to add to… of those two lines and anticipation of the total of 10 lines if that facility will accommodate..

Great.

And then TS I am sorry if I miss this, how many 10% customers did you have in the quarter and was there any change to the current 10% customers relative to the once you previously listed in you 10-K?.

I think see early in the year we normally don’t report that until the end of the year the 10-K.

But I will say that the last year in August when we filed the 10-K that two 10% customer we name and then obviously we have some more new customer, they tend not to be a 10% customer, but until the end of the year we will never judge whether they will be on 10 or not so..

I guess maybe asked differently, are you seeing a shift in the concentration at your top customers from who has consistently been listed as 10% customers to perhaps some newer entrance cracking your significant customer base?.

Okay the true is answer is we see some shift whether they will be 10% or not, we don’t know until the end of the year..

Okay.

And then on 100 gig side you alluded to that being part of the strength in optical communications, could you help us understand the breakdown of 40 gig and above or 100 gig and above within your broader optical communications business or even more specifically if you could give us that detail in the mix of datacom and Telecom?.

Okay. So Patrick normally we don’t break it down, but I can only tell you that the 100 gig is far better than 10 and 40 gig combined in both telecom and a datacom as of last quarter. So last quarter both telecom and datacom and the 100 gig essentially more than half of the total.

Is that helpful?.

So just to make sure I heard that right, 100g is more than half of your datacom and more than half of your telecom revenue in the most recent quarter?.

Okay, I say 100 gig is more than 10 gig and 40 gig combined. Okay, so if you look at transceiver obviously 100 gig account for than half of the transceiver both in telecom and datacom..

Understood. Thanks for the clarification. Good luck, great job in the quarter. .

Thank you, Patrick. .

Thank you. Our next question comes from the line of Troy Jensen of Piper Jaffray. Your line is open. .

Congrats on a nice quarter gentlemen. .

Thank you, Troy..

Hey, maybe quickly for Tom here. So Tom you’ve been pretty upbeat recently on the new program initiatives at Fabrinet.

Just be curious if you could quantify at all how big is the pipeline now versus where it was maybe a quarter or a year ago?.

As I understand the question Troy it’s really relative to our pipeline of NPI projects?.

Exactly, yes. .

We’ve seen since the last time when I was chatting with you guys sometime in the last quarter. Now that we’ve seen about a 10% increase. And then it continues to grow. I think it’s been a big help that our customer base knows that we have 4900 that can also support in the NPI. .

Okay, understood. And then maybe two quick questions for TS here.

So SG&A was 3% about a year ago, I know it's gone up because of Fabrinet West, but do you think it’s topped out here, can we start to see leverage in the SG&A, OpEx line?.

Yeah, Troy if you look at non-GAAP we guide about $9.5 million, $9.7 million per quarter, which include about $2 million to $2.5 million Fabrinet West startup cost. And then plus $0.5 million for the new sales team. So that has been consistent in the last two-three quarter.

And obviously when you ran Fabrinet West a part of this will cost to the cost of goods sale. So I would say from now on consecutively $9.5 million -- we probably seen $9.5 million in the next two quarter or so until we get some meaningful revenue from Fabrinet West..

Okay. And the one from Patrick’s question sounds like that’s probably not until the March quarter in the '17..

Yes. .

Okay. And then last question TS and I’ll see the floor.

Can you just let us know what are you assuming is your other income to get to the $0.45 to $0.47 that EPS guidance?.

Okay, for the non-GAAP okay which is essentially does not include foreign exchange okay? Because foreign exchange we booked a loss last quarter and of course when contracted Thai baht is delivered some of this mark-to-market loss will be reserved.

So if you look at the -- if you look at GAAP and non-GAAP EPS it’s pretty narrow only about $0.04-$0.05 different typically it’s about $0.10. So we assume some gain reverse back in the second quarter..

I guess I am asking specifically on the December quarter, what do you think the other income lines, can it be three months from now when you are reported it?.

There is no major item there other that the income -- interest income. Yeah there is really nothing much there..

Okay, alright thanks guys. Keep up the good work..

Thank you. .

Thank you. Our next question comes from the line of Paul Coster of JP Morgan. .

Yeah, thanks for the taking the questions. Couple of quick ones. You talked to 24% of I think of the revenues coming from new business this quarter. I just want to make sure I understand is that new business or completely new customers? I’m just keen to understand that difference..

Hi Paul this is TS, the 24% Tom was talking to is talking about the business we don’t have a year ago. So this could be the existing customer or new customer majority is new customer. In a year ago we don’t have this customer or this business, so now we are tracking. So we call it new business..

Okay.

And maybe another way of asking the same kind of question is, how is this new business coming in, is it coming in sort of federals, is there some kind of reference account affect here that is going this business?.

I think in Tom Mitchell’s methodology with NPI, this is the NPI we are working on and now we cannot as the volume shipment. And in fact we stop taking programs..

Okay. You’ve talked I think 12% plus gross margins on this $200 million run-rate. And then you got the Thai factory coming back in fab layering in sometime next year.

Can you talk to us just about what impact if any this would have on gross and operating margins as it layers in will it pulling down temporarily?.

So Paul we pretty much on a currency side with dollar cost average. So even though the Thai baht currently swing I mean recently swing quite a bit. But we have a hedging program essentially the next six to nine months become already locked in. So if there is sudden depreciate we don’t, if get sudden appreciate we don’t suffer losses.

So that’s how we manage and we hedge all our exposure. So in a long run obviously the currency weaken we get benefit, but that comes smooth out to other year..

I was referring to the depreciation from the new fab in Thailand once it starts layering in with that but margins..

The depreciation in the Thai facility is not very big, because you can see from our financial statement last quarter we performing as depreciation. Now most of the equipment are supplied to that customer, so we don’t -- because they don’t because depreciate so much equipment.

On the new building that’s another year down the road, so at this moment I have not really model that depreciation on that.

Is that your question?.

Okay. Yeah so was the question. Alright thank you, TS. .

Thank you. .

Thank you. Our next question comes from the line of Tim [indiscernible] of Northland. Your line is open. Mr. [indiscernible], your line is open, please make sure your line is unmuted. We’ll go to the next question, which comes from the line of Alex Anderson of Needham & Company. Your question please. .

Thanks. I wanted to ask a question about integration of various components into what mystically called monolithic chips into the ACO and DCO pluggable that are developing? And how you see that impacting a business? Historically you guys have been a company that put together a lot of piece parts into modules and there was value added in that skill.

I assume as we go to integrated monolithic circuits that there is a less of that going on, but on the other side of the point it would venture that that there is a lot of additional packaging and testing that has to happen on those products.

So how should we think about the transition in the industry to more monolithic type designs and your roles as we go forward in those type of products?.

Alex this is Tom. That subject is one that we talked about as a team or really got shared about as a team I don’t know five or six years. And we went into a program called advanced packaging and it’s just a kind of a just a word, but it really does encompass all those technologies that you’re bringing up.

And as you can see the industry today is really leaving but not leaving, but directing itself toward advanced packaging. And we happen to be a leader in advanced packaging..

So does the content and value add that you provide in advanced packaging, is it larger or is it smaller or is it the same effective, deliverable value to the customer and therefore to your revenues?.

Alex this is TS, I’ll try my best answer that. Based on what I see here, I think it’s a natural progression of our process, even though you going into the photonic integrated circuit, right? I mean you see the wire bonding, you still have the laser alignment, fiber handling, Tom talked about advanced packaging.

So I think the process is more robust, more high precision type and we love to save money for our customer in terms of [indiscernible] deduction with a single chip and you actually save a lot of money on the material side.

And on the labor content I am not too sure it will reduce, but again Tom talk about the investment we put together few years ago and it’s nicely paying out. If we don’t have the investment in advanced packaging we may not be integrated to support our customer..

Is it fair to say that because of your foresight in advanced packaging that you are now in a position where you are gaining business from your -- want to be competitors in the optical contract manufacturing market and winning new ACO DCO type projects that could materially advance your relative growth rate because of that where other people are unable to do this because they were not positioning for it several years ago..

And that’s the way we feel about it.

I mean that’s exactly what we set our goals to do and that’s what we are accomplishing and to accomplish that we had to about six years ago we began to really start looking at tomorrow that tomorrow’s equipment the manufacturing equipment capacities that will support the future products that what was going to be required as we went forward and we put a lot of capital into it and we put a lot of technology into it and has given us the capability to do it and we are recognized for it today..

Have you won any major new conversions from your competitors such as the [indiscernible] in that space?.

No, I don't think so. I think it’s not winning against them because we don’t really measure our business that way.

Our business is more of a relationship business and our quarterly relationship is that we have the advanced packaging or advanced manufacturing equipment to support any new products and time to market products that come through their product line..

Okay, I’ll proceed forward, thanks..

Thank you. At this time I’d like to turn the call back over to management for any closing remarks. Mr.

Mitchell?.

We are excited about our business. With our strategy to drive new programs from existing customers as well as adding new customers to our mix, we are well positioned to continue our record of delivering profitable growth..

Thank you, Mr. Mitchell and thank you ladies and gentlemen for your participation. This does concludes Fabrinet’s first quarter 2016 financial results conference call. You may disconnect your line at this time. Have a wonderful day..