Garo Toomajanian - Investor Relations David T. Mitchell - Chairman & CEO Toh-Seng Ng - Executive Vice President & CFO.

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

Good day, ladies and gentlemen. Welcome to Fabrinet’s Fourth Quarter and Fiscal Year 2017 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 on how to participate will be given 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, 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 fourth quarter and fiscal year 2017 which ended June 30, 2017.

With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of Fabrinet; and TS Ng, Fabrinet’s 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 which includes our GAAP to non-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 May 09, 2017. We will begin the call with remarks from Tom and TS followed by time for questions.

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

Tom?.

Thank you, Garo, and good afternoon, everyone. Our fourth quarter results again exceeded our guidance ranges. Revenue increased 34% from a year ago and represented the 12th quarter in a row of year-over-year revenue growth. This strong performance contributed to our record revenue for the year of $1.4 billion dollars.

Fiscal 2017 was also important strategically. We significantly expanded our manufacturing capacity and increased our new product introduction capability outside optical communication market. We are well-positioned to diversify our customer base and we are optimistic that our recent successes will extend into fiscal year 2018.

Now I'll turn the call over to TS for details on the quarter and the full-year..

Thank you, Tom and good afternoon, everyone. I will provide you with more details on our performance by end market and our financial results as well as our guidance for Q1 of fiscal year 2018. Total revenue in the fourth quarter of fiscal year 2017 was $370.5 million, an increase of 34% from a year ago and above the high end of our guidance range.

Non-GAAP net earnings were $0.86 per share also above our guidance range despite the impact of a net foreign exchange loss of $0.03 resulting from continued strengthening of the Thai baht.

Our business momentum in the quarter was driven primarily by new business that we started tracking in Q1 of fiscal year 2014 and was complimented by growth in revenue from existing programs.

Revenue from new business of $113 million increased 50% from a year ago and represented $31% of total revenue, while revenue from new business decreased from Q3 growth in revenue from existing customer programs more than make up for this difference.

Looking at the fourth quarter in more detail, Optical communications revenue was $290.9 million an increase of 37% from a year ago and represented 79% of total revenue. Non-optical revenue was $79.5 million an increase of 23% from a year ago and represented 21% of revenue.

Within optical communications, Datacom grew faster than telecom as in the third quarter. Datacom was 39% of optical revenue at $114 million up 48% from a year ago. Telecom was 51% of optical revenue at $177 million up 31% from fiscal year 2016.

Growth in our optical communication business continues to be driven by 100 gig solutions and other advanced components and modules including QSFP28 transceivers and silicon photonic modules. In Q4, 100 gig solutions contributed $159 million to revenue or 55% of optical revenue and 43% of total revenue.

Within 100 gig QSFP28 transceivers grew more than 50% from the third quarter and make up more than 10% of total revenue in the fourth quarter.

We also saw continued sampling of 400 gig solution which generated $18 million in revenue more than doubling in one quarter and make up 6% of optical and 5% of total revenue and silicon photonic revenues of $78 million increased 48% to make up 27% of optical communications revenue.

Looking at non-optical communications revenue from lasers grew 6% from a year ago and represented 9% of total revenue. Sensors revenue continued to be stable and grew 8% from a year ago.

While automotive revenue was 10% less than a year ago, other revenue was up more than 200% to over $21 million with a strong performance on Fabrinet West where we saw more than 100% growth and at exception [ph] UK providing meaningful contribution to this growth.

On a full-year basis total revenue was $1.42 billion an increase of 45% representing record revenue and our best fiscal year growth in six years. For the full year, optical communications make up 78% of revenue and grew 52% from a year ago while non-optical communications make up the other 22% of revenue and increased 25%.

Looking at customer concentration we have one customer that represented more than 10% of revenue in fiscal year 2017. As in fiscal year 2016 we had an end customer for whose account receivable which assumed by other CMs. On a combined basis this end customer were represented 11% of revenue. Now turning to the details of our P&L.

Reconciliations on GAAP to non-GAAP measures is included in our press release. Non-GAAP gross margin in the fourth quarter was 12.4% a decrease of 30 basis points from a year ago down 10 basis points from last quarter due to strengthening of the Thai baht.

For the first quarter we expect non-GAAP gross margin to decrease slightly from Q4 primarily due to the impact of annual merit increments. Non-GAAP operating income in the fourth quarter was $34.8 million and operating margin was 9.4%. Non-GAAP operating income excludes share based compensation expenses of $4.6 million.

Non-GAAP operating margin improved 30 basis points from a year ago primarily due to leverage to operating expenses we are growing in revenue.

Taxes in the quarter was a net expense of $1.1 million and our normalized effective tax rate was 2.3% which is below our expected range of 6% to 7% due to higher than expected tax benefit in Thailand after finalizing our year-end tax procedures.

For fiscal year 2017 our normalized effective tax rate was 5.5% and was below our expected range of 6% to 7%. We anticipate that our effective tax rate will return to the 6% to 7% range for fiscal year 2018.

Non-GAAP net income was $32.8 million in the fourth quarter or $0.86 per diluted share compared to $22.4 million or $0.60 per diluted share in Q4 of fiscal year 2016.

On a GAAP basis which includes share based compensation expenses and amortization of debt issuance cost net income for the fourth quarter was $27.4 million or $0.72 per diluted share compared to $19.7 million or $0.53 per diluted share in the fourth quarter of fiscal year 2016.

As I mentioned earlier, we experienced a $1 million or $0.03 negative impact from a stronger Thai baht on a GAAP and non-GAAP bottom line results for the fourth quarter. The impact was offset by the higher than expected tax benefit in Q4.

For all of FY 2017 non-GAAP gross margin was 12.5% and non-GAAP operating margin was 9.6% which extended from fiscal year 2016 primarily due to leverage on fixed overheads as revenue grew. Non-GAAP net income for the year increased by 64% to $127.4 million or $3.37 per diluted share a record level for the company.

Moving on to the balance sheet and cash flow statement, we ended the year with cash and investments balance of approximately $288.6 million.

This represents a decrease of' approximately $4 million from the end of the third quarter as CapEx of 11 million and loan repayments of $3.4 million more than offset positive operating cash flows of $10.5 million.

For all of FY2017 CapEx was $68.3 million compared to $40.6 million in FY2016 primarily due to constructions of our new 500,000 square feet building at our Chonburi campus. In fiscal year 2018 we expect CapEx to return to the levels of FY16 or approximately $40 million.

Before discussing our guidance for the first quarter, I wanted to note that in conjunction with our earning release today we also announced share repurchase programs. Fabrinet's Board has authorized the repurchase of up to $30 million of our ordinary share over the next two years depending on market conditions and other factors.

This authorization reflects the long term confidence the company has in our business, but should not be viewed as a major change in our long term capital allocation strategy.

We continue to seek compelling acquisition opportunity that can further bolster our new product introduction efforts in order to ultimately drive increasingly diversified volume manufacturing business to our facility in Thailand. I will now like to discuss guidance for the first quarter.

We expect our strong records of year-over-year growth to continue in the first quarter driven by growth existing program and new programs in both the optical communications and non-optical markets.

However as certain end market utilize existing inventory, we expect to see a near term pause in sequential growth with a decline from optical communications revenue that more than offset an anticipated sequential increase in non-optical communications revenue.

This expected growth in non-optical revenue highlight the value of our long term strategy for increased diversification in the end market results. We expect revenue in the first quarter to be between $356 million and $360 million representing growth of 7% to 8% from a year ago.

Recall that the first quarters of fiscal year 2017 was a 14-week quarter, normalizing for impact of this extra week a year ago our first quarter guidance represent growth of 16% to 17%.

We anticipate non-GAAP net income per share in the first quarter to be in the range of $0.78 to $0.80 and GAAP net income per share of $0.60 to $0.62 based on approximately $38.2 million fully diluted share outstanding. In summary, we are pleased with our strong fourth quarter results and record revenue and non-GAAP net income for all of FY2017.

We are excited about our prospects in fiscal year 2018 due to investment in our expanded manufacturing capacity and additional capability in the non-optical communication market. We believe our strategy to drive growth from diverse arrays of customer will support our success in fiscal year 2018 and beyond.

Operator, we will now like to open the call for questions..

[Operator Instructions] Our first question comes from line of Patrick Newton with Stifel. Your line is open..

Yes, good afternoon Tom and TS. Thank you for taking my questions.

I guess first a clarification I want to make sure I heard correctly that silicon photonics revenue in the quarter was $78 million and if that is accurate could you help us understand some of the puts and takes that drove that 50% down take sequentially and help us understand what’s embedded in the guidance for silicon photonics?.

Patrick, this is TS. Yes, the $78 mi is correct for the fourth quarter and obviously during the quarter we see some customer had reduced their silicon photonic production notably the top two silicon photonic customers have reduced their volume.

And obviously is offset by some other small customer and then we see a reduction sequentially from $92 million to $78 million. Moving forward, we believe that the Q1, some of the volume will come back may not be at Q3 level but it will come back meaningfully..

Okay.

And then as we think about silicon photonics as we move through FY 18 bar lapping some very difficult comps, can you maybe speak to how investors should think about the growth potential in 2018 as this healthy double-digit growth potential or should we see growth slow?.

Well we normally guide the business forecast on one quarter basis, there is a single digit, double digit growth in FY 2018..

Okay, great.

And then your largest customer I think saw some slowing in North America, they had softer laser quarter and their ROADMs were definitely pressured, I guess it’s fair to say that a large impact of that is seen in your guidance, but any sense if those product lines are going to rebound in the December quarter, which that customer seems to indicate?.

Again it is hard to tell, we got 13 weeks forecast on most of the customer and obviously December quarter is beyond the 13 weeks, so it’s really hard for us to predict, but for September, we have good visibility and that’s reflected in our guidance..

Great and just last one, TS can you provide us with what the revenue contribution was from CFP products in China specifically in the quarter?.

CFP products from China, well I don’t have the breakdown in front of me and normally we don’t get into that kind of detail.

You heard from my customer that is actually the mix consensus, some everybody believes that China is eating into the inventory seems that you have the consensus on that, now whether the underlying demand is picking up or not is a mixed consensus there. So already we are still low in the food chain, it’s hard for me to comment on that..

But is it fair to say China is sub 10% of your [indiscernible]?.

Will be lower that’s the reason why we guided down one of the reasons..

Thanks for taking my questions. Good luck..

Thank you..

Thank you. And our next question comes from the line of Alex Henderson with Needham & Company. Your line is now open..

Thanks. I'd like to start off with a question on the exchange rate impact.

My presumption is that as we look at the September quarter that there is an impact built into that, is that accurate the weakness in the Baht that's continued post the end of the quarter is baked into your numbers?.

No, we in the September forecast, we assume it will stay at the June levels and anything else I really have no crystal ball to see whether the Baht is going left or right. So and typically that’s the methodology we use. Whatever the previous quarter end we use it for the next quarter..

So you’re not assuming the current rate, you’re assuming the rate as of the end of June in your assumptions?.

Unless, I have hedge contract on the book, then I use the hedge rate. Okay so we have hedge contract, so we count the blended within hedge and the spot rate at the end of the last quarter.

Is that helpful?.

Yes so the other question was on the gross margins, you ticked down a little bit in the June quarter, you’ve given guidance I think of 10 basis points decline again in the September quarter, is that the trough and then we should assume that will gradually rebound to the FY ‘17 average of 12.5%, is that the right way to think about it?.

Yes, if you look at the pattern because we give worldwide merit increase increments to our employees, typically kick in in July, the first day of the fiscal year and the merit increment typically takes a while four to six months to recover that.

So and typically the first quarters of the year, fiscal year you see the gross margin impacted by the merit increase..

Similarly if I were to look at the sales and marketing lines, I assume this is exchange rate pressure point, but that had a pretty good increase sequentially from March to June quarter and so look out appears over 3% here.

Is that going to trend back down to the 2.9 or less over the course of the year or is the exchange rate the predominant factor?.

Yes, I am not sure exchange rate will impact sales and marketing lines, most of our sales guys are paid in foreign currency not Thai Baht. But yes, recently we beat all the sales and marketing for the M&A effort in Europe and so I would expect overall I would say within $11 million non-operating expense.

Individual line you have put and takes, but I think overall it will be more than $11 million for non-GAAP operating expense is reported..

Okay great and just one question on the basic business model for a second if I could, have you changed in any instances has changed your approach to taking on responsibility for manufacturing production year that would be associated with the specific customers line or are you still requiring that the customer buy and own the equipment that’s in their own production line excluding the common equipment that’s used for everybody?.

In general that’s our model, customer we pay for common equipment, we pay for all the facilities and customer if there is specific equipment specific to the customer business they usually fund that, in general that’s correct..

Have you changed that in any instances any recent contracts where you've diverged from that strategy?.

On a case by case basis I cannot comment on that a lot, sometimes depends on the relationship between us and the customer, but I would say in general, our model is to have the customer fund their specific, customized equipment..

All right.

So under what circumstances would you choose to allow a customer to have you buy the equipment, would that change the margin characteristics of that business?.

I think some of this business relationship with the customer, I don’t think I will go there, also some of the agreements we have the customer we could ask on disclosing those, so I would just leave it at that..

Alright. I will cede the floor. Thank you..

Thank you..

Thank you. And our next question comes from the line of Troy Jensen with Piper Jaffray. Your line is now open..

Hey, hi congrats on the great year gentlemen.

I got a quick question specifically on Datacom, just because you know your outlook for that segment in 2018 and specifically the Web 2.0 opportunity?.

Yes, so if you look at Datacom, we did 114 the same as last quarter all right, so Datacom and obviously year-over-year it grew faster than the Telecom. We expect the Datacom continue to do well and I think for FY 2018, most of the challenge we have is in telecom. For example the FQ1 the reason we've guided down mostly or actually all from the telecom.

So I do hope that Datacom because of the Web 2.0 guide continue to play demand and that segment of the business look pretty optimistic..

That’s very perfect TS.

If you could just go back to kind of the guidance, I think down 10% sequentially, but you didn’t say in your prepared remarks that you expect that lasers and sensors to grow roughly how much you’re expecting that segment to grow or conversely how much you’re expecting that to further decline?.

Okay. We say for the FQ1 guidance non-optical is still growing, okay we did about $80 million, $80 million FQ4 and I expect growth of couple of million dollars from there and most of the downside is on optical communications.

So if you look at 370 to 358, $12 million downside obviously telecom go down more than $12 million because non-optical went up by couple of million..

Okay.

Understood and just my last question would be, you talked about a second customer being about 11% revenues, is that for the year or for the quarter?.

That’s for the year, Troy..

Okay, alright. Perfect, thank you..

Thank you..

Thank you. And our next question comes from the line of Paul Coster with JPMorgan. Your line is now open..

Yes, thanks for taking the questions.

Earlier on in the discussion you talked of silicon photonics recovering and when you said you expect 10% growth in fiscal year ’18 or greater than 10%, were you talking about silicon photonics specifically or were you talking about the whole company?.

Silicon photonics, I would ask the question whether you’d be as double digit growth, I will say, I do hope we get back to the double digit growth, okay, that's what I said..

And would you have the same expectation for the whole company or even greater?.

Hard to say, in the last year, year-over-year we grew 45% and obviously I don't expect we do the same growth. I mean last year was pretty exceptional and again we only guide one quarter at a time you know it is hard for us to guide the whole year because my customer doesn't have the visibility, of course we don't even have the visibility.

But giving all the things out there hopefully Chinese will return and Web 2.0 guide continued to do well. We’re optimistic on the fiscal year 2018 as mentioned by Tom in his prepared remarks..

You also talked of 400 gig and its obviously meaningful contributions.

Can you describe for us what the impact it has on the 100 gig and 40 gig markets as that starts to roll out?.

Again Paul, I think my customer will be in a better position to explain that. We are just the manufacturer. So we do whatever our customer want us to do, so some of these questions will be best answered by my customer..

Yes, I understand. Okay, last question also along the same lines and that is you talked of telecom being a little bit challenging at the moment.

What do you think needs to happen for telecom to become more robust end market, is it the 5G rollout?.

Obviously 5G and I think in the near term everybody is speculating when Chinese is coming back. Most of the Chinese talk about telecom as you probably know. So if that Chinese sector return eat up all the inventory that will be pretty optimistic for the whole industry..

Okay. Thank you..

Thank you. And our next question comes from the line of Tim Savageaux with Northland Capital. Your line is now open..

Hi, good afternoon. Couple of questions just wanted to kind of dig into some product detail. First on the silicon photonics side going back to that decline, you simultaneously I think reported a fairly decent increase in overall 100 gig revenue sequentially and I do assume all of that silicon photonics revenue was 100 gig.

So, can you talk about kind of what made up the difference there, actually more than made up the difference in terms of strengths in other areas of 100 gig telecom and what your kind of outlook would be going forward as you look at those two elements of 100 gig silicon photonics and non-silicon photonics..

Okay, so we see very strong growth in QSFP28 and not all the QSFP28 are silicon photonic. We also see some nice growth in CFP2 helping some customers to rent the CFP2 form factor. So those can offset whatever silicon photonic business.

Is that helpful?.

It is and within silicon photonics itself I think there's an element that's probably kind of a longer distance sort of Metro long-haul piece if you will and that element that's sort of inside the data center.

Within those two buckets and I guess as we look at the overall Datacom number going forward assuming you're going to see, and correct me if I'm wrong here continued growth in the QSFP28 side which would appear to be the case as well as silicon photonics transceivers inside data center what sort of dynamics would you continue to expect in Datacom? It sounds like you’re talking at least flat and most of the declines in telecom but it seems like most of what's in Datacom should be continuing to grow?.

That’s a good observation.

If you look at QSFP28 some of my customers are ramping CWDM4 less than 2 kilometre and I presume those are all mostly in the Datacom sides and [indiscernible] mostly in the long-haul that is trending down a little bit, so that’s why I can tell you a lot all depend on our customer, each customer have a different landscaping portfolio, so hard for me to comment on that..

Okay. And then maybe final question to the extent we’re looking at a flat to slightly up profile on the Datacom side about optical communications in Q1, what would be sort of the offsetting factor on the telecom side and that would seem to be given some of your customer commentary focused on the ROADMs side and maybe not related to China.

So I guess your commentary is that if China comes back obviously that maybe takes care of a lot of problems, but as you're looking to the telecom weakness in Q1 can we assume that’s primarily ROADM driven?.

Again, I only view ROADM for one customer; I really don’t want to comment on that. Maybe you can ask Lumentum so, they can give you a better picture..

Okay, thanks I'll pass it up..

Thank you..

Thank you. I’m showing no further questions at this time. So I’d like to return the call to Mr. Tom Mitchell for any closing remarks..

So well, once again we appreciate your attendance on the call and look forward to our next call. Good afternoon..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..