Garo Toomajanian – Investor Relations Tom Mitchell – Founder and Executive Chairman Seamus Grady – Chief Executive Officer T. S. Ng – Executive Vice President and Chief Financial Officer.

Patrick Newton – Stifel Alex Henderson – Needham & Company Paul Coster – JPMorgan Tim Savageaux – Northland Capital.

Good day, ladies and gentlemen, and welcome to Fabrinet’s Financial Results Conference Call for the First Quarter of Fiscal 2018. 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 hand the conference over to your host, Garo Toomajanian, Investor Relations.

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 first quarter of fiscal 2018 which ended September 29, 2017. With me on the call today are Tom Mitchell, Founder and Executive Chairman; Seamus Grady, Chief Executive Officer ; and T. S.

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 and investor presentation, 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 August 23, 2017. We will begin the call with remarks from Tom, Seamus and T. S. followed by time for questions.

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

Tom?.

Thank you, Garo, and good afternoon, everyone. I am pleased our first quarter revenue of $357 million was within our guidance ranges, and increased 8% from a year ago.

Despite near-term challenges in certain end markets, we believe that new business and further customer diversification will enable us to deliver continued profitable growth over the long-term. I'd like to now introduce Seamus Grady, our newly named CEO and invite him to make some introductory comments..

Thank you, Tom. And good afternoon everyone. I’m very happy to be joining the Fabrinet leadership team at this exciting time in the company's growth. While we are experiencing near-term challenges in certain end markets, as Tom mentioned, Fabrinet is well positioned for long-term profitable growth.

We continue to attract and grow new business while increasingly diversifying our customer base across a broader range of end markets.

We are doing this in a deliberate and strategic manner by leveraging our strengths in high-mix, low-volume production that takes advantage of the advanced manufacturing capabilities we have developed to serve the optical communications space as well as adjacent markets.

For example, our new product introduction facilities, Fabrinet West and Fabrinet UK are already attracting new customers for volume manufacturing in Thailand across a variety of end markets.

I'm looking forward to furthering this strategy to diversify Fabrinet's customer base by strengthening our leadership position as the manufacturer of choice for the optical communications markets.

In the short six-week period since I have been on board, I visited our teams and operations around the world, and I have met with several of our customers, and what I saw makes me very optimistic. We have a strong and expanding customer base and we have excellent people and first class manufacturing capabilities.

I am very positive about the long-term opportunities at Fabrinet, and I'm looking forward to getting to know our investors and analysts. Now let me turn the call over to T. S. to discuss the details of our first quarter performance and our outlook. T. S..

Thank you, Seamus. I'm looking forward to working together to build long-term shareholder value. I will provide you with more details on our performance by end market and our financial results in Q1 of fiscal year 2018, as well as our guidance for Q2.

Total revenue in the quarter was $357.3 million, an increase of 8% from a year ago and within our guidance range. Recall that the first quarters of fiscal year 2017 was a 14-week quarter. Adjusting for the extra week in 2017, our growth would have been 16%.

Non-GAAP net income was $0.75 per share, compared to $0.80 per share in the same quarter a year ago. However, in the first quarter of fiscal year 2018, we experienced a $1.9 million or $0.05 per share foreign exchange loss headwind.

Adjusting for this foreign exchange loss headwind, non-GAAP net income per share would have been at the upper end of our guidance range. While these results are within our expectations, after adjusting for foreign exchange, we are not pleased with our overall performance.

As I will describe in a moment, based largely on declining order for telecom products, we anticipate a sequential revenue decline in the second quarter. In order to help protect our historical strong margin, we have already taken action to reduce costs, including a reduction in force.

We do not take this decision lightly but believe they are in the best interest of all of our stakeholders. While this near-term outlook is discouraging, numerous factors make us optimistic about our long-term ability to drive profitable growth.

For example, looking at the first quarter in more detail, we saw a sequential and year-over-year increase in new business, which represented 33% of our total revenue at $119 million, an increase of 15% from a year ago. Looking at the first quarter in more detail.

Optical communications revenue was $275.6 million, an increase of 7% from a year ago and represented 77% of total revenue. Non-optical revenue was $81.7 million, an increase of 9% from a year ago and represented 23% of total revenue. Within optical communications, datacom again grew faster than telecom.

Datacom was 39% of optical revenue at $107.8 million, up 21% from a year ago. Telecom was 61% of optical revenue at $167.8 million, and was roughly flat compared to the first quarter of fiscal year 2017.

We believe the continuous strength in datacom reflects secular growth drivers in that market, which offset some of the volatility we see in the telecom market.

100-gig solutions continued to dominate the optical market at 57% of optical revenue, and 44% of total revenue driven by demand for advanced components and modules, including QSFP28 transceiver and silicon photonic modules. In fact, QSFP28 revenue was $48 million in the first quarter, up 12% sequentially, and more than fivefold from a year ago.

400-gig solution represented 6% of optical revenue as in the fourth quarter. In the first quarter, we also started sampling 1.2 Terabit solutions. Silicon photonic revenue increased 24% from a year ago and was consistent with the fourth quarter, representing 22% of total revenue in the quarter, compared to 21% of revenue in prior quarter.

Note that we achieved this performance despite a meaningful, sequential decline in silicon photonic revenue from one customer who is going through a product transition. Looking at non-optical communications. Revenue from lasers was $37 million, or 10% of revenue, compared to $38 million a year ago.

Sensor revenue was down slightly from Q4, but stable from a year ago at approximately $4 million, while automotive revenue was up 1% from a year ago at $21 million. Other revenue was $19 million, up 67% due to strong performance from both Fabrinet West and further contribution from Fabrinet UK.

Now turning to the details of our P&L, a reconciliation of GAAP to non-GAAP measures is included in our earnings press release and investor presentation, which you can find on our website.

Non-GAAP gross margin in the first quarter was 11.8%, which is below our target range of 12% to 12.5%, primarily due to seasonal trends with annual merit increases in the first quarter but also from strengthening of the Thai baht and Chonburi startup costs previously reported in operating expenses.

The cost-cutting measures I discussed earlier are squarely aimed at returning our gross margin to within our target range. We have already started a reduction in force of approximately 200 indirect staff members in order to bring our costs in line with revenue.

Non-GAAP operating income in the first quarter was $31.9 million, and operating margin was 8.9% compared to 9.4% in both the year ago quarter and in Q4, with the decrease primarily due to lower gross margin.

Taxes in the quarter were a net expense of $1.7 million and our normalized effective tax rate was 6.3%, which was in line with our expected range of 6% to 7%. We continue to anticipate the effective tax rate of 6% to 7% for fiscal year 2018.

Non-GAAP net income was $28.6 million in the first quarter or $0.75 per diluted share, compared to $29.7 million or $0.80 per diluted share in Q1 of fiscal year 2017.

On a GAAP basis, which include share-based compensation expenses and amortization of debt issuance costs, net income for the first quarter was $21 million or $0.55 per diluted share, compared to $22.8 million or $0.61 per diluted share in the first quarters of fiscal year 2017.

As I mentioned earlier, we experienced a $1.9 million of $0.05 per share negative impact from a stronger Thai baht on our GAAP and non-GAAP bottom line results for the first quarter. Moving on to the balance sheet and cash flow statement. At the end of the first quarter, cash and investment were $266.7 million.

This represents a decrease of approximately $22 million from the end of the fourth quarter, reflecting typical cash flow seasonality, including an operating cash outflow of $3.1 million, CapEx expenses of $11.2 million, and loan repayments of $4.4 million. In fiscal year 2018 we continue to expect CapEx to be approximately $40 million.

Note that we did not repurchase any shares during the quarter and $30 million remain in our repurchase authorization. I will now like to discuss guidance for the second quarter. As Tom and Seamus mentioned, we have seen near-term demand temper in certain customer end markets.

As a result, committed order levels suggest that our revenue will decrease from the first quarter.

While this near term dip in demand, mainly from telecom related products is disappointing, we expect datacom products to deliver more stable results, at the same time we have made tremendous inroads into the non-optical communications market to support our diversification objective and expect to see continued sequential growth from this product with particular strength expected from the industry laser and automotive market.

We expect revenue in the second quarter to be between $328 million and $332 million. We anticipate non-GAAP net income per share in the first quarter to be in the range of $0.69 to $0.71, and GAAP net income per share of $0.43 to $0.45. based on approximately 38.2 million fully diluted shares outstanding.

In summary, we are disappointed in the impact that the near-term cost in some end markets are having on our financial results. We made the appropriate adjustments to our cost structure and believe that our strategy to win new business and diversify the end markets we serve will enable us to deliver profitable growth as we look forward.

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

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

Thank you, good afternoon Tom, Seamus, and T. S. I guess my first one is I'm trying to bifurcate on the data center you seem to be talking about it being roughly flat. We've heard several of your customers speak to you, some QSFP28 trends that are relatively challenged.

So can help us understand for your business, what's happening with QSFP28 relative to silicon photonics sequentially?.

He Patrick, how are you? This is T. S. Yes, we have a couple of customers – we produced datacom for a couple of customers. So the one customer or two customers you heard about datacom's weakness may not necessarily reflect on our entire portfolio. So we are still looking at datacom year-on-year, we'll continue to deliver stable result..

Okay, and then no difference on – no noticeable difference on QSFP28 versus silicon photonics within that outlook?.

Yes. It's the same story goes. The QSFP28, we have almost half a dozen customers. And some of them are – hit the curve. They are doing very well in the CWDM. Some of them having some challenge transition from LR4 to CWDM. But in aggregate, we see – overall in QSFP28 is doing okay of us. And silicon photonic is the same thing.

We mentioned about one customer have a product transition. And the other customer in the earnings call, they talked about downward guiding – guidance. So all this are reflected in our guidance..

And pertaining to the silicon photonic customers, use of that is going through the product transition is this something that’s transitioning to another product line that Fabrinet makes and it could prove somewhat temporary or is this a customer that may be moving more to a emergent margin market solution, meaning, that this could prove to be a multi-quarter headwind?.

My understanding is that they are doing it with us, okay? So that's my understanding..

Okay. And just last one for me is on the – you previously, I guess, discussed a customer who wanted to sell direct to hyper scale.

And I was wondering if you could provide us with an update on progress with that solution and when we could expect a meaningful revenue contribution, may be $10 million or more in quarterly revenue?.

Yes in general we don't comment on specific customer programs. But I can tell you that we are actually progressing, on plan, on the initiative..

Great. Thank you for taking my questions. Seamus welcome to the team..

Thank you..

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

Thanks.

I was hoping you could talk a little bit about the industrial laser segment what you're seeing in terms of trends there? That should be, I would think, a bright spot – place that's picking up? Is that reasonable?.

That is reasonable, Alex..

And what about on the automotive side, there was a fair amount of discussion about some new projects in the automotive segment.

Have you seen those come to fruition?.

Yes, the automotive are legacy customer, we continue to do well, pretty stable. As we discussed before we are in the new product for some of the customers, and those parts are doing well. That's why in the prepared speech, we talked about non-optical communication, the segment is – we actually guided up in that segment..

I see.

So some of those are car sensing technologies?.

Yes, that’s correct Alex..

Alright. Then, going back to the data center side of the business for a second. You've got a number of new customers ramping over there you got some older customers that are maybe import transitions.

Can you talk a little bit about the mix between new customers and existing customers in over the next couple two, three quarters? Do you see that mix shifting to some of the new customers, or do you see a continuation of the same rough share between new and old?.

Alex, most of the legacy customer, you heard their earnings calls, they are actually guided down on the datacom. They are a little bit pessimistic on datacom, as you can hear from their earnings call. But again, we – most of our offsets is from a new customer, as you rightly pointed out – but in terms of mix, we don't normally give out the mix.

But I can say that most of the offset is on that new customers..

But I was trying to get at is that – is the – are the newer customers that are in that space accelerating enough that after we get through the initial comparable offset, that we actually see growth coming back from the new – driven by these new customers?.

We'd like to think that way. But in the short-term, what the guide is what we guide. Datacom will be down..

Alright, okay. I’ll see it before thanks..

Thanks you..

Your next question is from Paul Coster of JPMorgan. Your line is open..

Yes, thanks. I’m wondering if you can give us some sense of the duration of this downturn. I mean your shedding headcount, that's a – implies usually a fairly long-term view of resourcing requirements.

So talk to us a little bit about how to interpret the reduction in headcount?.

Yes Paul not necessarily. We're actually taking out only the indirect labor. We never touch the direct labor, even in our previous reduction in force. So those are the guys who have – we need them to generate product. So when a business turns, we definitely have the workforce to capture a business.

So these are the indirect labor, things like technicians, and some of the low-level engineer. We found, with the latest business condition, we are a little excess, and that's why we take out those redundancy..

Okay, got it. And I mean is this a one-quarter downturn or six months.

Can you give us some sense of when you think it will recover?.

You probably know that we get 13-week forecast on the customer, so that is the visibility we have. Beyond that, our guess is as good as anybody else's guess..

Okay.

The telcom side of the business was there anything to be said about the different regions or was it uniform slow down?.

I would say region is more new customer versus legacy customer. So as you know, we did quite well in our new businesses and we continue to run that new businesses segment..

I’m sorry. May be I missed understood that. In telecom, it was new customers or, I'm just trying to focus in on the telecom sector, specifically..

That’s right. Yes, we had some new customers came online. We classify a new customer or new business – is a business we never had -- you remember -- in 2014 we start tracking from there. So those are the business we acquired, and then we continue to ramp their production. So those are the area where we concentrate on.

Most of the legacy customer, except one customer I mentioned in the earnings call that – they are looking at up on the telecom. I think majority of them are guided down, so that is reflected in our guidance..

Okay got it.

And then my last question is on the 400 Gig and the 1.2 terabyte transition, is it possible that this is starting to slow – the adoption of 100 Gig?.

Again, getting to the customer application territory, I really don't want to make comment on that..

Okay. Thanks very much..

Thank you, Paul..

Thank you, Paul..

Thank you. Our next question is from Tim Savageaux of Northland Capital. Your line is open..

one, datacom revenue; two, Silicon photonic revenue. Are you guiding those to be – I think you made a comment about datacom being flat year-over-year, does that mean down sequential – and same comment about silicon photonics.

Do you expect that – what sort of sequential performance do you expect out of silicon photonics do you expect out of silicon photonics? Thanks..

Okay, so obviously the quarter is not over. The way we look at – the way we look at it, datacom is stable. Stable to slightly down elevated little bit. Silicon photonic hopefully we can be flat on that because half a dozen of customers. Some up and some down. With the new customers will contribute to the growth.

So at this moment, we really do want to gain to segment guiding, but datacom is stable and flat, and silicon photonic, I hope that will be flat also..

Okay. And just a follow-up briefly and I think you did and it's not sort of surprising to hear when you talk about the potential for sequential growth on the non-communications side.

So obviously, that implies a pretty significant decline in telecom and I guess you're looking at the environment that's probably more concerned about the data com, which seems relatively okay.

Any additional color you might be able to provide in terms of drivers on the telecom side? And one thing I wanted to throw into that, I forgot is if you can't in any way characterize the magnitude of the decline in one of your legacy silicon photonics customers you mentioned?.

So on the telecom, obviously, we see that data in front of us. Obviously, our hope that China will come back. That will really contribute to the telecom. And also, one of my customers is saying that they are pretty optimistic about the ROADM ramp. If that happens, that will benefit Fabrinet. So those are the two major drivers we are keeping an eye on.

Okay? And on the silicon photonic, really nothing much I can say because they are five or six customers, which had different levels of ramp. And some ramps are faster than the other so as I earlier mentioned earlier, I like to see at least flat in the technology segment..

Okay, thanks. I’ll pass it on..

Thank you..

Thank you. At this time I see no other questions in queue. I’ll turn it to Mr. Mitchell for closing remarks..

I want to thank you for joining us. And I look forward to our next call..

Ladies and gentlemen thank you for your participation in today's conference. This concludes your program, you may now disconnect. Everyone have a great day..