Fabrinet Stock

Hi, everybody. Good afternoon. I'm Mike Genovese, the cloud and communications infrastructure analyst at Rosenblatt Securities, and this is The Age of AI tech conference. I'm super happy today to be joined by the team from Fabrinet. We've got everybody. We have Seamus Grady, the Chairman and CEO; Csaba Sverha, the Chief Financial Officer; and Garo -- Garo, the IR guy. Hi, nice to see it.

Welcome, everybody. Nice to see everybody, especially after reporting earnings last night. I'm sure you've been busy speaking to the sell side -- sorry, to speak to the buy side. Glad to have you here when we have fresh information to talk about.

I mean -- so let's start -- let's just start with the telecom business. We'll go through the different segments. And I know you've changed your segment reporting going forward, but we'll talk about it on the segments you've been reporting up until now. With the communications infrastructure 40% year-over-year. That's the new category. But telecom up much more, datacenter interconnect, up 144% year -- 140%, sorry, year-over-year, $1 billion run rate in DCI. You had Cisco as a 10% customer, Nokia is -- or 20% customer, Nokia is 11% customer. We think that Sienna might be getting close. So we don't know. But there's a lot of really strong stuff going on in telecom.

So specifically on DCI scale across 800ZR, OLS, multi-rail, how -- are we just getting started on this? Like where is this business going to continue to grow and you get to much bigger numbers than we're seeing now? Like what should investors know about this telecom/DCI segment that's been so strong, but kind of what inning are we in? And how sustainable does this look?

Yes. Thanks, Mike. It looks very strong and quite sustainable from what we see. DCI or -- DCI, in particular, 400ZR, 800ZR, it really solves a power problem for the industry in a very elegant way. So for a lot of these huge data centers, the limiting factor is often the amount of power that can be physically gotten into the data center from the substation that you max out your power. And the best way around that is to spread the data centers around and connect them using DCI like 400ZR or 800ZR, ZR+. So it's an industry trend that we've seen coming for some time. For us, ZR business started off as a couple of million really, not that long ago. And now as you said, at the end of the year, we were at $1 billion run rate, which is just phenomenal.

Originally, DCI, when there was softness going on in telecom, DCI was offsetting that. for us. But now DCI on its own is just phenomenal growth. And the nice thing about that from our point of view is it's across several customers. It's not just one customer, several customers, all of whom are the kind of the leaders in that space. And we're making obviously pluggable modules for to customers, but we also make a lot of the component content that goes into those modules. So the business is quite sticky and the work we do for the customers is very important to our customers and to their customers.

So DCI, we see having a lot of legs. The demand is very strong and looks to be very strong for some considerable time to come. Certainly, the next several years as far ahead as we can see, the demand looks to be just increasing dramatically over the next several years.

When do you expect to see multi-rail really start in your production? I imagine it's not so much behind us, but that would be ahead of us.

Yes. I mean it really -- it's a function of what our customers decide to do, and we're always kind of careful of not announcing products on behalf of our customers. So we will defer to our customers to see what they have to say publicly. But we are working on that with a number of our customers, and that will be an important growth driver as well in the coming years. But not really for us to say at this point. It's too early.

Great. And I just want to remind the audience here if they want to ask questions, if you type a question into the upper right-hand widget on your Zoom screen, which we don't have, Seamus, I see you looking up already. We actually don't have that, probably the audience has it. But the questions will come directly to me, and I will certainly ask the questions that the audience type in. So we'll get to datacom, but let's also touch on auto and industrial. I mean you had a very strong quarter for auto. Did something specific happen there? Or is that also -- is that strength that we might repeat?

Yes. There's a couple of things going on there in auto for us. One is we've had some new program wins and some nice growth in the EV charging part of our auto business. So that's going very well for us. And then we are starting to see some growth in LIDAR. LIDAR has been somewhat flat, I would say, for some time. Our strategy in LIDAR was really to try and win all the customers. In the early days of LIDAR, it wasn't quite clear to us who the winners would be. So we set out to try and win really all of the players. And now we're a few years into LIDAR now, and it's kind of shaking up. There's a few really good companies there who look to have some good volumes and good demand. So we are starting to see LIDAR ramp as well. So really EV charging and LIDAR will be the 2 areas that we're seeing growth in automotive.

When you say new programs, as you said, with EV, does that imply additional customers? Or does it mean new programs with an existing customer?

New programs with an existing customer.

Got it. Okay. But then also, we spoke last night after the call, and we talked about a lot of different things. And then as we were running out of time, we said, look, we haven't even talked about industrial. We haven't talked about lasers, industrial, and we're really starting to see some good things there. So now we have more time to flesh that out. What were you referring to?

Yes. So we have a couple of really good wins, I would say, in the industrial laser space, companies that we've done business with in the past, but haven't really grown. So we're starting to see some nice growth there with a couple of customers in the industrial laser segment or category. We've always felt that, that industry is a really good fit for us. It's been slow to grow for us because that industry has been quite slow to outsource. But we're seeing that change now. We're seeing more of those companies are leaning more towards outsourcing and are looking to outsource strategically, not just for overflow manufacturing, but strategically. So we're starting to see that happen now. And again, ordinarily, that would be relatively big news. It's gotten a little bit overshadowed because of all the bigger news we have going on. But we're very optimistic about that. I mean, really all of the product categories that we play in are all going very well for us and growing.

Yes. All right. Well, let's talk about datacom in the old segment first, and then I'll talk -- then I'll talk about data center, the new segment. But if we talk about last quarter in datacom, when I look at the numbers, I mean, datacom overall was -- I mean, you beat a lot in telecom and DCI, a lot in auto and industrial. Datacom overall was a little bit just a little bit softer than we expected. But it seems like there's a few customers now in the datacom mix as opposed to before, it was all just one customer. So kind of to the extent possible, tell us what's going on with the kind of customer mix and customer diversification within datacom?

So we've always said since we started, let's say, the big ramp a few years ago with initially NVIDIA, we've always said that we wanted to diversify in that space to a couple of other areas, namely merchant transceiver manufacturers and also hyperscale direct. We also talked at the time about if there are other, let's say, competitors of NVIDIA who need optical interconnect products and transceivers, we'd be happy to make them for them. We haven't made a huge amount of progress on that front because NVIDIA is still very clearly the leader.

But the 2 areas I talked about hyperscale direct and merchant transceiver manufacturers, we are making progress there. We are actually shipping to both right now. And it's early days, but we are starting to get going. And the demand, again, a little bit like the DCI conversation, the demand picture that we see looks very strong, very robust. So we...

I think from my perspective, the diversification is the story and that we don't focus so much on one customer, but people do want to know kind of what happened with that -- the original data center customer. It does seem like it was down quite a bit sequentially in the quarter and kind of what happened and then what's going to happen with that customer from here?

And that's really one of the problems with the way we have been categorizing the revenue historically is it shouldn't be possible to determine the actual revenue with one individual customer in a quarter. And that should not be possible. And yet it is. So that's one of the reasons to make the change is that we have to protect our business with that customer, and we have to protect that customer's business as well. So we're very happy with that relationship.

The -- if you go back to the early days of our relationship with NVIDIA, there really wasn't any particular capacity out there 400 -- 400-gig and 800-gig transceivers in the volumes that were required to support the growth in their business. NVIDIA, as you know, acquired Mellanox, designed their own transceivers. And in the early days, Fabrinet was the only manufacturer of their 400-gig and then 800-gig transceivers. Naturally, they have diversified over the years and have multiple sources now for 800-gig transceivers, let's say, including their own design that we make, but also other designs that they source from other suppliers. That has always been the plan, I suppose, and we're not at all surprised at that.

Our focus has been on obviously doing everything we need to do for NVIDIA and doing what they need us to do for them, but also diversifying, as I said, into these other areas, merchant and hyperscale direct. So NVIDIA is a very important customer for us and will continue to be a very important customer for us. The outsized growth that we got with NVIDIA in the early days, that just was never going to continue at that pace because that blistering pace of growth we had, we always knew we would have to replace some of that growth with growth in other areas. And that's what we're off to do right now.

I mean just for modeling purposes, I mean, should we think about NVIDIA at the quarterly revenue level that they were at kind of being at a similar for the next 4 quarters?

I can't help you with the model, Mike. We think the -- they're still a very important customer for us, but our focus is on servicing their needs and as I say, bringing on these other growth vectors as well. And that's really all I have to say. The revenue with NVIDIA or any other customer we'll disclose once a year when we disclose the 10% customers. That's all we can do really.

Okay. Well talk about just the datacom opportunity in terms of being a contract manufacturer and not an ODM and not a designer of products because it sounds like that customer basically said like we don't want to only design our own transceivers. That's not our business. But if they come to you and they say design a transceiver for us, you say, well, that's not what we do. But -- so maybe talk about that a little bit more. But I guess more importantly, you do now have a large hyperscale transceiver customer who brought you a design, which they probably had partners in working with. They probably didn't all do it themselves, but they're bringing you the design. You then have merchant guys who just need help with capacity to make what they've designed and they have demand for. So the growth opportunities in datacom as a CM as opposed to an ODM, could you just flesh that out a little more?

Yes. Certainly, if we had been prepared to become an ODM, there would be products we could be building and shipping right now, but that's not something we're going to do. We've decided for kind of strategic reasons that that's not something we're going to do. It's very important to -- we have a very varied and vast customer base, some of whom would be quite happy for us to be an ODM. But a lot of the customers who got us to where we are, we want to continue to grow with. And they would be deeply upset if we were to become a product company, companies like Sienna, Cisco, Nokia and the like. If we were to become a product company, that will be problematic for our relationship with them.

So we decided rather than get into that space, we just won't ever be a product company. So it does present a little bit of a challenge. For example, when we want to do business with a hyperscaler, we can't own the IP. So it's the same with -- if it's NVIDIA or anybody else, we just won't own the IP. We're happy to do whatever they need us to do. We're happy to produce any product that they want us to produce, but we won't own the IP. That's really the only -- we're a pure-play contract manufacturer. We're not going down the path of ODM.

And so just to make sure I understand the -- one other question. So it sounds like in the quarter you just reported, you had at least 3 datacom customers, right? There was -- there was a merchant and there's a hyperscaler and then there's the original customer. But are you -- did you -- are you saying that there's going to be another merchant coming in, in the September quarter or the December quarter? I've had some questions on whether -- what the timing is?

We're working on another one that we hope to start producing towards, I think what did we say, Csaba, on the call? Was it towards the end of the year or in the...

Towards the end of the year. The merchant will start in December.

But that's a second merchant vendor then?

Yes, correct.

And back to your question about the -- we believe there's ample growth opportunities for us as a contract manufacturer. We -- there could be more or less. I think short term, there could be more growth opportunities if we decide to become an ODM, but we think long term, we would damage ourselves actually and damage our growth with the traditional customer base if we become an ODM. And that's why we choose to stay away from it. And the proof of that is we have been picking up business and winning business with some of our customers, not just because -- but in some cases, because some of our competitors have chosen to go the route of being ODMs and some of our customers don't like that. So that's the path we've chosen. We believe there's more than enough growth for us to work on as a pure-play contract manufacturer.

Great. And so the new data center category going forward, just to make it sure I understand, that's going to include DCI in that category as well as the hyperscale transceivers, the merchant transceivers and the high-performance computing. Am I getting that correct? That's everything that's in the new category.

Exactly. Right.

And is there any chance of additional high-performance computing customers? I mean, as you work with the one, does that attract other customers over time?

We think so. I think there's other high performance, let's say, hyperscale type customers. There's also some quantum compute customers that we feel will be -- that we're working with that could be very good. And that would go into that category as well. So there's both the hyperscale and then there's quantum compute customers that we're working on, especially as -- in order to move the workloads around, those type of products need optics. It's not just electronics. They will also need optics in the future. So that's why it's such a good fit for us.

Okay. My next set of questions, and some of them come from the audience that I'm adding in here because we're getting good questions from the audience. But it's more talking about -- I'm going to ask you about sort of technologies and product categories. And the question is really the timing of when it could impact you positively with revenues and the kind of scale of what that could be to whatever extent you could answer. So sort of what does X mean for you? There's going to be 3 or 4 of these. So the first one is OCS. Is this an important product category for you? When could we expect revenues? And if Coherent is saying it's a $4 billion and Lumentum is saying it's a $10 billion TAM by 2030, it's somewhere in the middle and how much roughly flows to you guys?

Well, so for OCS, yes, it's a really good fit for us. It's an important product category. We think it will be a significant revenue contributor in the future. It's quite small today. We have shipped some, but it's quite small. And we're happy to do whatever the customer wants us to do. So if the customer would like us to do subassemblies and then they do the finished product or do subassemblies, they do the finished product up to a certain volume and then we start to produce the finished product at a point in time. Whatever the customer wants us to do really, we will do.

For Coherent, I think Coherent have a lot of their own in-house capacity, both at the system level, but also at the wafer level. So they do a lot of the in-house silicon themselves. And I believe they will continue to manufacture in-house. But yes, there's a number of companies we're working with, one of whom we're actually shipping product. The others are early days. They're more start-up type companies, but it does seem like it has a lot of potential. And we're looking forward to really beginning to ramp that over the next, I would say, 12 to 18 months, something like that.

And that would also go into the data center category, correct?

Yes. Right.

Okay. So -- and then also -- and this -- well, this one I wasn't going to ask, but it's from the audience, which is how large is low earth orbit -- LEO and how fast is that growing so satellites?

So we haven't actually quantified it. It's in our communications infrastructure category, but it's a very important and fairly rapidly growing segment for us. We've been producing products in that space for several years. We have a couple of major customers there. So it's significant. It's a significant and important category for us, and it's one that's growing fairly rapidly as well. And again, it's right in our kind of wheelhouse of capability. And of course, the nice thing about the low earth orbit products is they're in low earth orbit, so they eventually get pulled into the earth's atmosphere and disintegrate and have to be manufactured again. So it's a really good fit for us, and we have a couple of really good customers there that we're growing nicely with.

I'm just going to read the next question that directly comes from the audience. And I think these are not exactly the way that I would ask them, but I'm just going to ask it and get your answer. What does NPO mean for you? Are you just assembling the ELSFP? What are the different revenue streams for NPO? And can this increase the gross margins? Now I don't think about you having kind of mixed gross margin, right? I feel like you have a fixed gross margin, but I should let you...

No, I mean NPO would be much better gross margin than the traditional business because it's much higher value-add content. If you take the COGS, the typical COGS on the product we make, hence the product, but let's assume it's -- if the COGS is 100%, let's assume that 70%, 80% material, 20% value-add. For NPO, it's much higher value-add content and much lower material content because the material, in many cases, is a wafer, which would be consigned by the customer, and then we take the wafer, we singulate it, we do the packaging and the testing at the die level and at the device level. So it's a much higher value-add content, probably lower ASP but higher margin. So it's a very good business for us. It's difficult for us to talk with any kind of credibility of what we'd actually be doing because we'd be disclosing what's going on with individual customers. But NPO, we believe should be a very good revenue driver for us in years to come.

And like I say, it's a good margin enhancer. Our relationship with Raytek, we think, will be an important development in that regard. Raytek, very good -- they're a very good company. They will be setting up an operation on one of our campuses in Thailand in the coming months. So that's a critical and important part of our ability to provide these essentially kind of precision packaging services to our customers in regard to NPO and also CPO.

And ELSFP, of course, is -- it's a product category that's -- it's more kind of like -- it's like -- somewhat like a traditional transceiver. They're not that complicated. ELSFPs are not that difficult. But there's a lot more opportunity for us in NPO than just ELSFPs.

Such as?

The packaging of the devices that I talked about.

Yes. And then, I mean, is there anything -- could we have just substituted NPO and CPO there? And -- or is there anything to add on CPO?

Yes, somewhat. They're quite similar. I think NPO is probably a little bit more straightforward than CPO. But they're both -- we're pretty excited about both opportunities and our ability to kind of win and grow with the customers there.

Great. And now I mean the -- I mean, look, the stock is down today. I mean there might be other reasons in the market, interest rates and things like that, but it's -- I mean, I simply think that we're just getting over this fixation with NVIDIA, right? So the good news is that we won't have it anymore after this, right? We'll move past this. But I mean, the growth here is incredible. And I think in response to a question, you said it's not beyond the bounds of possibility that FY '27 could grow faster than FY '26. And I guess, what would you have to -- we're really early in '27. So what would we have to see to know whether it could be even faster? And is there a capacity issue with growing even faster than last year? Would we run up against capacity issues?

And then I guess I'm asking too many questions at once, but now going to an audience question, exiting fiscal '27 with Building 10 and the capacity expansion, what's the potential revenue run rate exiting the fiscal year?

So maybe I'll separate capacity from the revenue run rate because we don't forecast the revenue run rate a year from now. We only forecast one quarter at a time. And our forecast for Q1 is whatever we said in our guidance. The answer I gave was actually in response to a question from Tim during the call around is it beyond the bounds of possibility that -- or something along those lines that our growth in FY '27 could be even higher than our growth in FY '26. Our growth in FY '26 year-on-year was, I think, 36%? Csaba, is that right? 36%?

Right.

And it is not beyond the bounds of possibility that we could grow at a faster pace in FY '27. That's not a forecast. That's not guidance. But certainly, from a demand point of view, the growth looks to be very strong. in order for the growth to happen, a few ingredients have to be in place. One is the demand has to be there. That's for sure, the demand is there. Secondly, we have to have the capacity, and we have the capacity and we will have the capacity, and I'll walk through in a moment the capacity additions that we're making. And then we have to execute. The products have to work, and we have to be able to get components and all that stuff as well.

But usually, the biggest challenge is demand. If we have the demand -- our history has been, if we have the demand, we execute, and we can deliver on that. So the demand looks to be there. We just have to make sure we can get the components and we can execute.

And the really important message, I think you're exactly right, we want to get away from this obsession with NVIDIA and the growth is staggering and the diversification is also excellent. And the financial performance of the company is excellent. Everything is excellent. And yet the industry seems obsessed with NVIDIA. We're not a proxy for NVIDIA. We never have been. We never claim to be. In fact, we always say we're not a proxy for NVIDIA. But I think the more we say we're not a proxy for NVIDIA, the more people think we are. And we're not. We are a contract manufacturer who serves multiple customers, one of whom is NVIDIA, they're a very important customer for us, but we have several other customers as well.

In terms of capacity, right now, our run rate at the end of Q4 was $5.3 billion, if you take our Q4 revenue times 4, $5.3 billion. Our capacity right now is for about $5.8 billion, which is our run rate at the end of Q4 plus the additional capacity we added in Pinehurst by converting offices into manufacturing space. So our capacity right now is about $5.8 billion. Building 10, when that's fully available, that will give us capacity for about another, at the high end, call it, about $3.5 billion of capacity.

Nava, the new factory in Nava Nakorn, adds capacity for about $250 million. And then our Santa Clara operation that we just acquired will add capacity for about another $250 million. So if you add all those together, $5.8 billion plus $3.5 billion plus $250 million and another $250 million, that gets you to $9.8 billion of capacity in calendar Q1, let's say, in the March quarter -- early in the March quarter, actually. So that's an 85% increase versus where we ended the year in terms of capacity. So we certainly have the capacity to continue to grow and scale.

And then beyond that, Building 11, which -- we haven't announced Building 11 yet, but Building 11, were we to pull the trigger on Building 11 will take probably 18 months to build, and that will add capacity for another $2.1 billion of revenue approximately. And the same for Building 12. So if we were to move ahead with those capacity adds, they would take about 1.5 years, about 18 months each. So over the next kind of 3 years, on top of the $9.8 billion of capacity that we'll have at the end of this year, we would be able to add another $4.2 billion, which would take us to $14 billion -- approximately $14 billion of capacity over the next few years of capacity, not a revenue forecast. But that's the first step for us to make sure we have the capacity ahead of the demand. And it's not a case of there's no field of dreams. It's not like if you build it, they will come. They are already here. The customers are here. They want the capacity. They want us to ramp with them. we have the demand in front of us. So we just have to make sure we keep the capacity coming on ahead of the demand and make sure we ramp it appropriately. We're also looking for more -- even with all of that, we're still looking for more land in Bangkok, in Thailand and looking to expand beyond our current footprint.

So I mean, you said the customers are here, the demand is here. But how much of that is actually orders versus forecast? Is there any kind of prepayment? Is there any kind of -- I guess the real question is, as the CEO and as you sit here, I mean, you've already -- you're already executing on Building 10. And it's very unusual, right, for you to talk about 11 and 12. In old days, that would never happen, right? I mean that shows we're in a new environment that you're even discussing 11 and 12 right now. But then to actually make the decision, yes, we're going to do this because we know the customer demand and it's not going to just instantly go away for some reason. I mean, how do you -- what are you watching and making these decisions?

Well, it's actually a really straightforward kind of calculus for us because it's -- the downside risk is tiny and the upside opportunity is immense. If you take the economics of Building 10, for example, and you can then extrapolate that for Building 11 and Building 12. Building 10, and Csab, please stop me if I get these numbers wrong, Building 10, it's about a 2 million square foot factory. It is revenue capacity for, I think we said about $3.5 billion of revenue. So the upside opportunity is the profit -- the operating profit that we're able to generate when we ramp up in Building 10. So it's immense. The downside risk, even if Building 10 were to sit idle, which it won't because we're actually already starting to install equipment. We're starting to get going on level on floor one of Building 10 already, and we'll start to occupy floor 3 in October. But anyway, even if Building 10 were to have sat idle, the gross margin headwind is about 15 basis points. So the downside risk is negligible.

And the upside opportunity, just to put it in context, just over 5 months' worth of operating profit at full run rate we pay for the whole factory. So from an investment point of view, it's a really excellent use of the company's cash, leave aside the fact that we have to have this capacity for our customers. So the downside risk is tiny and the upside opportunity is immense. The downside risk, if we don't put this capacity in place, customers will have to go somewhere else and we lose out of the opportunity. So it's a very straightforward decision for us.

Yes, ordinarily, we don't talk about buildings until we're ready to pull the trigger, but I think these are very different times. The demand is so huge. We do feel it's important to make clear that we will keep the capacity coming on ahead of the demand. I think at some point, there was a concern that were we building Building 10 too late. Initially, was it too soon? And then the question was, was it too late? And I think we'll find it was probably just at the right time, maybe just ahead of the demand curve. We do the same with Building 11 and Building 12.

Yes. I mean, generally, like what's the -- what's the CapEx for this? I mean, either -- I mean, the buildings are different sizes. So CapEx per building, I don't know if that makes sense. But it just seems like the dollar return per CapEx dollar spent is -- I mean, the investment here is obviously way lower than if you were building indium phosphide lasers, right, and to build those kind of fabs. I mean you're building manufacturing space, right? That's what this is. So how do we think about the CapEx?

We build the building, and that's the -- for Building 10, it's about $132 million, $133 million. But then the fit out of the factories within the factory, that takes place in concert with the customer. And typically, if it's generic equipment or standard equipment, we pay for it. If it's product-specific or unique equipment, we ask the customer to pay for it. But it's generally a fairly capital-light business that we have. Maybe, Csaba, if you want to talk about the CapEx for Building 10 and then what Building 11 or 12 would look like as well?

So again, our CapEx, again, going to cover the entire spend of CapEx for the last year was about $250 million. So we anticipate that to continue in the next fiscal year. Obviously, we are putting the capacity in place ahead of the demand. So we anticipate that the elevated CapEx levels to continue in the 2027. As you know that we have just acquired the Santa Clara facility for $75 million, $76 million. We are also finishing up Building 10. And obviously, as the fit-outs and all those equipments are going in, we anticipate that the CapEx spend in the next fiscal year to continue to be in this $250 million range.

Obviously, we also have to be mindful about the ROIC that we generate. By adding this CapEx and financing the growth through our own cash, we have been still able to generate a very reasonable ROIC. I think it's in cost to 40% mark. So we continue to believe that investing in our own growth is the best use of cash as long as it generates the high returns of capital. So we continue to expect and we are comfortable financing it from our own free cash flow actually.

Okay. Super helpful. Csaba, let me ask you just about the first quarter EPS guide, right? Strong revenue guide, good EPS guide, but you talked about the EPS doesn't grow as much sequentially as the revenue does. And you said usual first quarter expense seasonality. Could you flesh that out more what that means?

Yes. So typically, in our first quarter, we increased our staff salaries and those merit increases are captured in our first quarter results. That has been the case for the past several years. So those seasonality -- [ external ] seasonality will be adding probably about 20, 30 basis point headwinds in the quarter. So that's the biggest change from a sequential basis. We did have some onetime other income in the prior quarter. So sequentially, those will not be included in our guidance. But fundamentally, that's the biggest element there, which is a temporary headwind. We anticipate that to make up with efficiencies throughout the year. So this temporary 20, 30 basis points are baked in our first quarter guidance.

And the investments in the buildings don't really have anything to do with it?

The investments in buildings, obviously, as we are shipping revenue from there, it doesn't provide any headwinds in our numbers. If the building were to sit idle, that would probably result a small headwinds in gross margin. But since we will be shipping products right away, it's not going to give any headwinds from investments.

And just in terms of sort of free cash flow, I mean, you have a lot of cash on the balance sheet, but with CapEx is elevated like this, there's not a lot of excess cash being generated. Are you comfortable with the balance sheet? I mean, is there any need to raise money?

We are very comfortable with the balance sheet. We still have ample of cash, and we also still have a lot of our cash is invested. Nevertheless, we took a small $75 million loan -- term loan just recently in August, we signed up with Thai Bank obviously to finance our growth in Thailand. So we are mindful about expanding our credit lines as well to make sure that we have ample of credit to support the growth and the business. But again, we are very comfortable with the balance sheet. And as you look at the last year free cash flow generation, it was somewhat $4 million. So again, it goes back to our strategy of reinvesting in the growth and financing it from our own capital. So we remain very comfortable with the balance sheet.

Okay. Great. What about just thoughts on buybacks here?

We have a structured buyback program in place. It has 2 legs. We have a 10b5 plan, whereby we fund the plan with the surplus cash that we generate from operating cash flow. Obviously, throughout the last year, that number hasn't been significant. And also, we also have an opportunistic buyback program. So we have, I think, $169 million left in our authorization. So we are committed to return the surplus cash through buybacks and opportunistically as we see fit.

Yes. The discussion earlier that NPO CPO could actually be a gross margin tailwind is very interesting and not even something I considered because I just thought your gross margins and operating margins would always be in a super tight range because that's the price that you charge, right? And there's very little OpEx and it's kind of like we charge a markup and this is it. So over -- I mean, without giving guidance, so it's hard to do, but I mean, could we get higher margins in the future than we have now? And if so, like would it be a meaningful impact? Or would we still be close to where we are now?

I think if you look at kind of what drives the margin, if you -- as the material percentage goes up in a particular product for any given product, the gross margin percentage typically comes down, even if the gross profit dollars goes up. So if you have a $10,000 product versus a $1,000 product and they have the same amount of value add in them or transformation, then the $10,000 material content product will have obviously more profit dollars, but a lower profit percentage, if that makes sense.

And the point about NPO and CPO is they're more in the packaging than in the traditional contract manufacturing realm. So that business just by its very nature because it is a lot less material content, a lot more value-add activity, the margin tends to be a lot higher, the margin percentage. But then the ASP is lower. So you kind of trade one for the other. I think that more can really help the margin. But it's like everything else, you have to have a mix of that work. You can't have all -- you don't haul steak in your diet, but you don't haul fiber either if you're following. It's a bit like that. You're going to have a mix of business, a mix of higher volume, maybe lower margin business, but then this business would be much higher margin, but lower ASP. But we think very sticky business because these things are difficult to make.

Okay. Great. And I'm going to ask one more question from the audience that's here. And then just a final question to you from me. But the audience question, which again, I'm just going to read, how can we think about the 3 other customers in datacom, so not NVIDIA. Are these 1.6T? How do you think about share? And how much visibility do you have to the ramps?

So the non-NVIDIA customers in datacom, let's say, hyperscale direct and then merchant, they are mostly initially 800-gig short-reach transceivers and then moving to 1.6T in the future. But the initial -- our initial foray will be with 800 gig.

Do you spend any time thinking about share? I mean you're not going to have like a majority share at any of these customers. I don't imagine, unless there are small merchants, but I should let you talk, not me talk.

We don't overly analyze share. I mean, obviously, we want to have a decent share for us to be able to provide good service for the customer and for us to be an important supplier for them, we want to have a decent share. But we don't always -- it's not always easy for us to calculate the share. We tend to end up guesstimating the share and they don't always tell us what share we have. But certainly, we focus more on can we -- can we grow the business with the customer to a significant level, whereby we're able to provide them good service. If you're only doing $5 million or $10 million a year, it's very hard to provide good service for the customer if your revenue is down at that level. Whereas when you're up in the multi-hundred million level, it's much easier to have the right resources, the right team and infrastructure in place.

So we're more focused on growing each of these opportunities to become a significant revenue opportunity and significant piece of business for us rather than obsessing about share.

Yes. Great. And then my final question, I mean, you just reported last night. Obviously, not the best stock reaction today, but this is just one day. So my question to you is just what message do you want to leave investors with as we start on this fiscal '27 journey?

Well, I think we have a track record of excellent execution over many, many years. We've gone from several years of double-digit compound CAGR. And then in FY '25, we had, I think, 19% growth, FY '26, 36% growth. While executing, we believe, better than anyone in our industry -- in the contract manufacturing industry. We have a track record of excellent execution and a really deep customer relationships that are actually expanding. We're growing both the number of customer relationships and deepening the relationships with those customers. So we have really excellent growth in front of us and a really excellent customer base and really good diversification. That's the message really. We're -- we believe we're a very good company. We run the company very well. We're very focused on doing an excellent job for our customers and hopefully providing excellent returns for our shareholders, and we plan to continue to do that.

Well, great. I really enjoyed speaking with you today, gentlemen. Keep up the great work. I look forward to following it more. And again, thanks for being here. We all appreciate it.

Thank you, Mike. We appreciate it. Thank you. And thanks for everyone -- thanks to everyone for participating. Thank you. Bye-bye.

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the Fourth Quarter of Fiscal Year 2026. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the call over to your host, Garo Toomajanian, Vice President of 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 of fiscal year 2026, which ended June 26, 2026. With me on the call today are Seamus Grady, Chairman and Chief Executive Officer; and Csaba Sverha, 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.

During this call, we will present both GAAP and non-GAAP financial measures. Please refer to the Investors section of our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation as well as additional details of our revenue breakdown. In addition, 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 5, 2026. We will begin the call with remarks from Seamus and Csaba, followed by time for questions.

I would now like to turn the call over to Fabrinet's Chairman and CEO, Seamus Grady. Seamus?

Thank you, Garo. Good afternoon, everyone, and thank you for joining our call today. We are delighted to report an outstanding fourth quarter that ended a remarkable year of accelerating year-over-year revenue growth, and we are enthusiastic that our momentum will extend in the first quarter and through fiscal year 2027. Quarter-to-quarter revenue of $1.316 billion increased 45% year-over-year and exceeded the top end of our guidance range. This revenue upside flowed through to the bottom line, with non-GAAP EPS of $4.10, which was also above our guidance range. We were pleased to see success from multiple sustainable growth drivers simultaneously supporting our business as we closed out fiscal 2026, and we are excited to anticipate an even stronger fiscal 2027. For all of fiscal 2026, revenue was an impressive $4.6 billion increasing 36% from fiscal 2025. And with strong execution, net income grew even faster than revenue, producing non-GAAP EPS of $14.09 for the year.

What's most noticeable to us is that this performance did not come from any one product category or customer, but from increasing demand trends across numerous customers in multiple markets, particularly evident at customers addressing the data center market as well as those serving the communications infrastructure market. Demand from these markets continues to increase, which makes us optimistic about the long-term durability of these trends.

Before we get into the details of our results, I'd like to highlight a change in the way we will be reporting our revenue breakdown going forward. As complex optical and electronic products become more and more prevalent inside, across and between data centers, it is evident that hyperscalers and other data center service providers are the ultimate customers of many of the products we manufacture, including some of those that have been characterized as telecom products in the past. At the same time, communications infrastructure continues to be an important part of our business, driven by general purpose, longer rich products with broader applications that are not specific to data centers.

Therefore, in order for our revenue breakdown to better reflect the end markets we ultimately serve. Going forward, we will focus on three revenue categories. Number one, data centers; number two, communications infrastructure; and number three, automotive, industrial and other revenue. In addition to being better aligned with the markets we ultimately serve, this also simplifies our reporting. We will continue to provide color on trends within all of these categories to extend our transparent revenue reporting practices and to help investors better understand the underlying drivers of our business.

I would now like to talk about capacity. As you know, we have been rapidly increasing our manufacturing footprint in order to stay ahead of rising demand, and we are excited to report a number of milestones. At Building 10 in our Chonburi Campus, we remain on track to complete Building 10 by early 2027. And which will add a total of 2 million square feet to our footprint. We have already qualified 250,000 square feet on the first floor of this facility, and we expect a similar amount on the third floor to be qualified this quarter. At our Pinehurst Campus, we have completed the conversion of 120,000 square feet of office space into manufacturing space. We have also completed the acquisition of our new site in Nevanacorn earlier in the fourth quarter, and we are happy to report that this building has just been commissioned, adding another 200,000 square feet of space.

In addition to these capacity increases in Thailand, we have also been focused on expanding our footprint at Fabrinet West. Our Santa Clara operations are primarily focused on helping customers, many of which are in the same neighborhood, bring new products to market. Since Fabrinet West is an on-ramp to Bangkok, success here is measured by how efficiently we transfer our production of products to Thailand for higher volume, low-cost manufacturing at scale. To support increasing demand for these new product introduction and related services, we recently completed the acquisition of a campus at great America Place in Santa Clara, less than a mile away from our existing facility on Patrick Henry Drive. This campus consists of two office buildings and a large manufacturing space of approximately 130,000 square feet, that will more than double our Silicon Valley footprint and help support our long-term growth.

Looking back at fiscal 2026. It was a remarkable year with accelerating revenue growth and record profits. More importantly, we have set the stage for another incredible year in fiscal 2027 as our strategy plays out. In addition to increasing demand across our existing business, we will see our growth bolstered by recent program wins as we continue to pursue further opportunities across our key markets.

In summary, this is an incredible time at Fabrinet as we benefit from our focus on complex high-growth markets, and we are proud to be winning more than our fair share of the opportunities. With accelerating year-over-year revenue growth, we are enthusiastic about the strong demand trends we are seeing and confident in our ability to extend our strong track record into the new year.

Now I'd like to turn the call over to Csaba for more details on our fourth quarter results and our outlook for the first quarter of fiscal 2027. Csaba?

Thank you, Seamus, and good afternoon, everyone. We delivered an excellent fourth quarter with year-over-year revenue growth accelerating to 45% and continued strong earnings growth. Revenue reached a record $1.316 billion, above the high end of our guidance range. We also continued to generate operating leverage, resulting in record non-GAAP EPS of $4.10, which also exceeded our expectations. As Seamus described, we have updated our revenue mix reporting to better reflect the end markets we serve and that our customers' products are ultimately deployed. The investor deck posted on our website provides a 12-quarter history under the new reporting structure, along with the reconciliation of our Q4 results to the prior categories. This change is purely presentational and has no impact on total revenue in any period.

Now turning to the details, beginning with data center revenue. This category includes optical and interconnect products deployed within data centers including data center networking with an expanded view of DCI, high-performance computing and other AI infrastructure applications. Data center revenue was $669 million in the fourth quarter, representing growth of 68% from a year ago and 13% from Q3. This is now our largest category, representing 51% of total revenue. DCI products were the largest contributor to data center growth in the fourth quarter with an annualized revenue run rate exceeding $1 billion. High Performance Computing, or HPC, also made a substantial contribution to data center revenue, a solid growth in the quarter. Looking ahead, we expect the momentum we saw in the fourth quarter to continue into fiscal 2027, supported further by the new transceiver wins we discussed last quarter.

Moving to communications infrastructure. This category includes optical and networking products used in telecommunications and enterprise networks, excluding products specific to data center applications. Revenue was $413 million, an increase of 40% from a year ago and 1% from Q3, representing 31% of total revenue. Growth was broad-based across customers and end markets, including telecom systems, satellite communications and telecom components. We remain optimistic about the long-term growth outlook for this market and expect continuous trend in fiscal 2027.

Turning now to automotive, industrial and other category. Revenue was $234 million, up 8% from a year ago and 9% from Q3, representing 18% of total revenue. The improving sequential growth was primarily driven by EV charging infrastructure products with a smaller contribution from growth at certain later customers. Overall, we are extremely excited about the growth trajectory and the broad-based trend in demand across the customers and end markets we serve. As I discussed the details of our P&L, all expense and profitability metrics will be presented on a non-GAAP basis unless otherwise noted.

Gross margin in the fourth quarter was 12.2%, a 10 basis point improvement from Q3 and a 30 basis point decline from a year ago. We continue to demonstrate strong operating leverage with operating expenses representing just 1.2% of revenue. This produced an operating margin of 10.9%, our highest level in three years. I'll remind you that our growth model does not require significant incremental operating expense, and we, therefore, expect continued operating leverage as revenue growth. Interest income was $7 million, and we saw a foreign exchange revaluation gain of $1 million in Q4. Income tax was $3 million in the quarter. GAAP net income was $139 million or $3.83 per diluted share. Non-GAAP net income was $149 million or $4.10 per diluted share.

In calculating our Q4 non-GAAP earnings, we excluded two items that we believe provide useful information to investors in assessing our results and comparability across periods. First, we recorded an approximately $56.7 million noncash gain from remeasuring our investment in rate. This was an accounting gain on an existing investment and did not generate cash for the business. We intend to apply the same treatment consistently to the future gains or losses from remeasurement of this investment.

Second, we recorded $57.4 million provision related to Thailand's top-up tax regime under the OSE, the Global Minimum Tax framework. The provision reflects the first year application of the new framework is based on the rules in effect at our fiscal year end. No cash was paid in fiscal 2026 in connection with this [indiscernible]. Thailand's regulatory environment for this tax remains in transition as implementing regulations guidance and related investment support measures continue to develop. As a result, future tax expense and any related benefits will vary over time, and we intend to apply a consistent approach while the transition continues.

For the full fiscal year, revenue was a record $4.6 billion, up 36% from fiscal 2025. Non-GAAP EPS was $14.09, an increase of 39% from a year ago. In 2026, we continue to diversify our customer base with four customers representing 10% or more of total revenue. These were Cisco at 20%; NVIDIA at 16% and Nokia at 11% and Amazon at 11% of total revenue.

Turning to our balance sheet. We ended the fourth quarter with cash and short-term investments of $876 million, down $70 million from the end of Q3. Operating cash flow for the quarter was $55 million. CapEx increased to $92 million with ongoing construction of Building on in Chonburi and the purchase of our new campus in Nava Nakorn for $11 million. Free cash flow was an outflow of $37 million in the quarter. For the full year, operating cash flow was $257 million, free cash flow was $4 million. This reflects our disciplined capital allocation strategy and our continued investment in capacity to support long-term growth. We believe reinvesting in the business remains one of the most attractive uses of our cash, supporting continued growth by generating strong ROIC.

In the fourth quarter, we did not repurchase a meaningful number of shares. However, our share repurchase program remains active with approximately $169 million available at the end of the quarter under our current authorization. Turning to our fiscal Q1 2027 guidance. As we look to the first quarter, we entered a new fiscal year with strong momentum across the business. In the data center market, we anticipate strong broad-based growth across transceivers, DCI and high-performance computing products. We expect growth from both established programs and new urbans, providing multiple growth engines for the company.

In communications infrastructure, we also expect healthy growth, supported by continued strong demand across a broad range of systems, components and other programs. We are also optimistic that we will see growth in automotive, industrial and other revenue. In total, we expect first quarter revenue to be between $1.375 billion and $1.425 billion, representing year-over-year growth of 43% at the mid-quarter. While our usual first quarter expense seasonality will create a temporary margin headwind, we expect to continue generating operating leverage as revenue growth. As such, we anticipate EPS to be between $4.10 and $4.25. While we only guide 1 quarter at the time, we think it's important to convey that we are more confident than ever in our longer-term outlook as customers provide us with visibility that goes into fiscal 2027 and beyond. While this longer-term customer forecasts are not order commitments, they reinforce our confidence in the durability of the very strong demand trends we are seeing.

In summary, our outstanding fourth quarter results kept a remarkable year for the company, with revenue increasing 36% and EPS growing 39%. We enter fiscal 2027 with strong momentum driven by growing demand across existing programs, meaningful contributions from new program ramps and additional capacity coming online to support continued growth.

Operator, we are now ready to open the call for questions.

[Operator Instructions] It comes from Christopher Rolland with Susquehanna.

This is Yasha on for Christopher Rolland. So I wanted to ask on datacom. It was down slightly sequentially in the quarter. So can you help us understand the dynamics there? How much of that was component supply versus any program transition or demand timing. And as we look into September and beyond, how should we think about the shape of datacom recovery? Do the constraints ease and any way to frame like sequential or year-over-year growth?

This is Csaba. Let me take that question first. So we are transitioning to our new revenue categories as we mentioned in our prepared remarks. So if you were to look at or to reconcile our Q4, our datacom was somewhat flat. Obviously, this is a combination of everything that you have mentioned. When we are looking at this category in our data center business in the future quarter, we do anticipate this to be up sequentially in our Q1 guidance. So the demand environment remains pretty robust and accelerating. So we are very optimistic about this subcategory that we are now going to report inside our data center revenue category.

And my second question is on HPC. I think previously, you had talked about a $150 million quarterly run rate for September. So is that still the expectation for the next quarter? Or maybe has the timing there kind of shifted. I think in your prepared remarks, you highlighted new transceiver wins with this customer. So any additional color there? Is this for 800 gig, 1.6T or any other color on like applications?

Yes, this is Seamus. Our HPC business continues to perform, I would say, ahead of expectations. We demonstrated good sequential growth in the quarter as a number of programs with the major hyperscaler continues to ramp. We're in the process of ramping the customer's next-generation silicon platform, and we're installing additional capacity to support both the technology transition as well as additional products and capacity that we're adding additional products that will be manufacturing. We remain on track with the customer, and we expect that business to continue to grow. You mentioned the, let's say, the transceiver business as well with that particular customer. So we're excited to be expanding our data center transceiver business with a number of new customers and programs. We expect these programs to see -- we expect these programs to start ramping as soon as this quarter with the hyperscaler direct program among the first Solange, the one you mentioned. We do expect one of the merchant programs to begin in the December quarter and the others to get off the ground in early calendar 2027. This is all pretty consistent with our prior expectations for a meaningful ramp over the course of the fiscal year, supporting our very strong growth trends.

It comes from George Notter with Wolf Research.

I wanted to ask about some of the capacity additions in the business. obviously, we're getting ready to wrap up Building 10 in the next few months. I'm just curious on your thoughts around building an I think, Seamus, if you go back in time, I think you admitted at one point that maybe you started building 10 a little bit too late. I guess I'm just wondering how you think about the triggers now for Building 11 and then longer-term capacity additions?

No. I think we started Building 10 as it turns out at exactly the right time, either by excellent planning or good luck or combination of both. Yes, we continue to expand our capacity ahead of the demand and investing in capacity for us is a very important use of the cash. And we're really rapidly expanding our manufacturing footprint to support the strong customer growth that we're seeing and to make sure we have sufficient capacity for the new programs. Just to kind of frame it a little bit, we ended fiscal 2025. If you take Q4 revenue of $1.32 billion, look by that by 4, you get about 5.3%. So we're we're at a run rate of $5.3 billion, so a little bit ahead of what we had originally thought was the capacity. So $5.3 billion run rate as we exit Q4. And we have, if you like, land capacity and plans in place to bring that capacity up to between $12.5 billion and $14 billion over the coming years. And let me just explain how we get from $5.3 million to potentially $14 billion. Again, we finished FY '26 at a run rate of 5.3%. With the space we converted in Pinehurst recently that would take us up to about between 5.5% and 5.8%. We converted some office space into manufacturing. So that takes up to 5.5% to 5.8%. Building 10 will add $3 billion to $3.5 billion of capacity. So that would take us to between 8.5% and 9.3%. I know that's a pretty broad range, but it really does depend on the mix and the products that we're making for our customers. So like I said, Building 10 will add about $3 billion to $3.5 billion, taking us up to between 8.5% and 9.3%. We've already started to produce in some of just started to produce in some of Building 10. But the vast bulk of that capacity had in front of us. The Nevanacorn factory that we recently purchased, that will start contributing from Q1 onwards and at full capacity. That building has capacity for about another $200 million to $250 million. Santa Clara, the new campus, again, it's very much mix dependent. But if you just take the kind of the average revenue per square foot and applied, that Santa Clara campus would add about $200 million to $250 million of additional capacity. And then we have room to build two more factories in Chonburi, each of about 1.2 million square feet with revenue capacity of about $1.8 billion to $2.1 billion. So if you add up all of that and you take the run rate exiting Q4 and then you add the low and the high of each of those additions, you get between $12.5 billion and $14 billion. And we continue to look for more land to expand. So we've been very fortunate we've been able to keep expanding ahead of the demand, and we plan to continue to do that. We're going to be expanding -- continuing to expand aggressively over the next few years.

Got it. Super. And then I think last quarter, when you discussed this, I think you kind of circulated or centered on an $11.5 billion revenue run rate, if I have that correct, these numbers are obviously higher. Is it just -- the difference is, obviously, a piece of this, I think, is Nava, but Santa Clara would be another piece. Are there other components in this also or no?

Yes, I think it's a combination of we're adding more space, more square footage, of course, between Nava and the other capacity issues we talked on sent car, of course, but also our revenue per square foot is increasing. We are actually increasing our revenue per square foot. We're doing more with less. We find -- we seem to always find ways to make sure we never never turned away revenue. We don't disappoint the customers. So we always find ways to get the product out. So our revenue per square foot has been increasing as well as our our square footage has been increasing. So both have been increasing.

It comes from Joseph Cardoso with JPMorgan.

Maybe just one on the discussion in recent weeks around CTO and MTO. And maybe more specifically about the NPL opportunity it seems like it's materializing a bit sooner than what maybe the industry or at least maybe investors have been thinking about. And I'm just curious, just given the combination of the recent relationship that you have with [indiscernible], how are you thinking about Fabrinet's ability to address these type of opportunities? I mean, I guess, CPO and MTO, but I'm just curious if NPOs looking like it's something that maybe is happening earlier for you guys and maybe to a greater magnitude than what was a quarter or two ago? And then I have a quick follow-up.

Sure. Thanks, Joe. Yes. So NPL technology sits somewhere between pluggable modules and CPO. As you know, we've built tens of millions of pluggable modules over the years. So we've clearly demonstrated that expertise. We're working on CPO today with a handful of customers, and we're already building devices, albeit not yet at full scale volumes. And since NPO, as you said, NPO combines elements of both, we feel we're very well positioned to be the leader in manufacturing and packaging and new package optics devices. As NPO scales to 6.4, 12.8 terabit and beyond, the manufacturing complexity and yield becomes increasingly important, it becomes critical. And for decades, our core strength has been transforming advanced photonics components into reliable high-volume systems. So that's really what we do. That's our sweet spot. It's probably too early to talk about, let's say, revenues and margins from those opportunities and customers as they depend on program specifics. But rest assured, we are very much involved in all of the technologies you mentioned, and NPO, I think, probably represents a more near-term opportunity and CPO for what we've seen with our customers. Our partnership with Raytec we think will be very important for us and will really be instrumental in allowing us to unlock the potential of the demand we're seeing rate will be adding capacity in Thailand in our campus. So we really feel it's important for us to have all of the packaging capabilities that are required to produce these products in the future. under our roof, either in our own production lines or in partnership with Ray tech. So we're pretty excited about those opportunities, too.

Very interesting. And then maybe just as my follow-up. You listed Nokia as a 10% customer, which maybe for me was a bit of a surprise. I thought maybe Ciena would be on that list. But maybe just speaking to Nokia. How much of this is a function of the Infinera business that you've had as a large customer at least historical versus maybe additional business that you have subsequently won as a function of the combination of those two companies together. Just curious if you're actually seeing the business you now winning bigger or more opportunities from the combined entity or if it's not just a function of what you have done historically with Infinera and kind of a rising tide situation?

It's a little bit of both -- I mean I don't want into too much detail on any 1 specific customer, but I think I can safely say our first objective, and it's something we don't necessarily control was to make sure that we do everything possible that when Nokia acquired Infinera at the Infinera business stays robust and sometimes in these situations when the big company acquires a smaller company, there can be product rationalizations and things like that and through no fault of your own, you can end up losing business. That didn't happen in this case. The Infinera products, I think, are instrumental and seem to have very strong demand. So the Infinera business has been rising. And then, of course, the Nokia business is going very strong as well and our our relationship with Nokia is very good. We historically have done a little bit of business with Nokia, but they were not a big customer for us historically. So really that that reputation that we had and that we continue to have with the intreneura folks has really set us in good state and we feel we're well positioned and starting, as you say, to make some breakthroughs and winning business with Nokia. So we're pretty excited about that relationship. Yes, they rose to be more than a 10% customer. And we're really just -- we feel getting started with Nokia. We feel there's a huge amount of potential there to continue to grow that relationship.

Our next question comes from Tim Long with Barclays.

Yes, two, if I could, going to hit some of this again. Seamus, I know you don't want to talk too much about customers, but obviously NVIDIA's a reported one with 10% and a pretty good decline in the year. Understanding there was a lot of component issues that have plagued that business. Just curious of kind of current update on competitive landscape there particularly as the newer programs that you guys tend to lead are a little bit more mature now. So just curious how -- appreciate it's going to -- that business should overall go up a little up next quarter, but curious about the -- how you view the competitive landscape, particularly as some of the nodes have matured. And then I have a follow-up after that.

Yes. I mean, we're obviously not going to get into too much specifics on any one customer, but I will say that we're very pleased with our data center performance in Q4. And we're optimistic that we'll see sequential growth in the first quarter, both with long-standing customers, like the 1 you mentioned, and newer customers contributing to that growth. With respect to any specific parts or components don't want to speak on behalf of our customers, our suppliers in these kind of three-way relationships, especially for some of these high-profile components. But our supply chain team has been doing an excellent job managing these relationships, and we have continued to get our share of the components we need. Demand yes, demand for certain components is higher than the available supply, and we're working very hard to mitigate that to make sure we get what we need. And as always, we have taken any potential gaps in supply into account in our guidance. and expectations for growth in all three major revenue categories, including the data center business.

Okay. Great. And then maybe back to the HPC, you mentioned some kind of newer opportunities there as well. I was wondering if you could just give us a little bit more color on types of products or any color you can give us or scale of what that could do to the business? It seems like it got off to a pretty good start and the ramp has been pretty good through four quarters. Just curious what other programs could be added to that to keep that business growing?

Yes. I mean the products we're talking about are really follow-on products from previous generation products. And we've also won some additional products. That relationship is going very well. It's well ahead of our expectations and on track to continue to grow for some time to come. That's -- HPC is now included in our data center category. We won't be breaking out HPC as a separate category in the future, but it is part of our data center category, along with the datacom products and also DCI and HPC because those products are really what drives the data center revenue for us. But back to your question on HPC with AWS, the business is going very well. We're very happy with the relationship. We believe the customer are too, which we just continue to focus on doing a great job for them. And that's the best way for us to win new business is to do an excellent job with the business that we have. So that's our focus.

Our next question is from Steven Fox with Fox Advisors.

Seamus, I was wondering if you could talk a little bit about the system integration business doing full system with some of the telecom networking OEMs and how that's going? I believe you talked about one major program and maybe there were others in the works. But any update there would be appreciated. And then I have a follow-up.

Yes. I mean we have a number of products that we make for our customers where we do the complete network system. The sweet spot for us, Stephen, is where we do a lot of the component content maybe first and then work our way up through -- start off with components, then do the, let's say, PCBAs and then subsystems and subassemblies all the way up to complete network systems. So it's for us and for our customers, it's very important that we have sufficient component content that we're making in order for it to be attractive for the customer and also sticky from our point of view that we're doing a lot for the customer more than just assembling systems. So that's really been our focus. That's how we've had some success with that with a number of our customers. Probably the first foray into that business for us was with the the Infinera now Nokia business when Infinera acquired Corium several years ago. We've also brought on significant Cisco complete network systems business, and we're working on 1 or 2 others. They take time. They take a long time to come to fruition, and we usually start with the components and work our way up from there. So we're working very diligently on that, and we hope to have 1 or 2 to add in the coming quarters.

That's helpful. And then just on your comments about being able to improve revenue per square foot. It sounds like there's some interesting details, but I don't know maybe you want to share or don't. But beyond mix, like can you give us an idea of how you're sort of getting more out the door than maybe we would have expected 90 days ago?

Well, I mean, if you look at the nature of the products and the business that's growing for us. DCI, of course, has been really good for us. And DCI products are generally physically small in form factor and revenue dense. So as we've shipped more -- as we've been shipping more complex products to our customers, that revenue per square foot metric. And that's not to be on an end all. It's a function of better mix but also improved efficiencies and better utilization of space. So there's a number of factors that go into it. It's not only one factor, but in a broad sense, it's a combination of more complex products and therefore, more revenue dense products and also a better space utilization and efficiency improvements. We're pretty relentless about finding savings and finding better ways to utilize space and save on space because space is at a premium. So it's a combination of both, Steven.

Our next question comes from the line of Ryan Koontz with Needham & Company.

I want to ask about the telecom and DCI business, which continues to repair really, really strong numbers. Do you think you're seeing yet impact from scale up across projects, number one. And number two, when do you think that you'll see some impact from the new multi-rail amplified densification? Is that a new market opportunity for you?

Thanks, Ryan. Yes, we believe we are seeing both a scale out and scale across in our business. Again, bear in mind our customers don't necessarily share with us their plans for where all of the products we make for them are going to end up. But we believe, yes, we are participating in both scale up, scale out and scale across but specific to DCI scale out and scale across. For the -- you asked about the multi-rail product. Multi-rail architectures, they package and manage fiber pairs as a highly integrated optical system, creating really more photonics integration and manufacturing complexity per deployment. So they're quite complex and difficult. These platforms they're highly manufacturing intensive. There's a lot of value add and complexity that goes into producing these products. You have dense fiber routing and management high-volume fusion splicing and connectorization and a whole array of precision optical manufacturing technologies and assembly processes that we're really very good at we're actively engaged with customers on programs that leverage our strengths in these areas, especially in photonics integration and packaging. And we see multi-rail programs is a really good fit for us to write in our sweet spot. They're complex. They're difficult to make. They require many process steps, which are -- which these process steps are really our secret sauce, if you like. So we're heavily engaged on a number of ultra programs with our customers. Again, not really our place to announce them, but rest assured we are heavily engaged with another customers on these programs. And we're very excited about this.

And then maybe just a question on your recasting of the segment here. when you say telecom is going to stay in communication infrastructure, that's everything that's really rack-based, should we think of it that way? So it's line systems and rec-based transponders as opposed to DCI, which I assume is all pluggable set the split that we're going to see here.

Yes. Ryan, this is Csaba. So let me clarify what is going into the communication infrastructure. So I think the best way to think about it is where our products or our customers' products are being deployed. So that's the #1 distinction. Whatever we see a product that goes and ends up in data center or a hyperscale infrastructure. We would categorize them under data center and then the rest of the business that traditionally has been telecom -- most of them would be network systems, but also some of the longer-term long-reach products will be also falling into this category. So it's not one fits all, but the #1 tumble is that whatever the product is getting deployed if it's a data center or hyperscale that goes into data center, everything else goes into the communication infrastructure that is supporting that.

Our next question comes from Karl Ackerman with BNP Paribas.

Seamus, on datacom, have you seen higher interest from hyperscale customers seeking to diversify away from Chinese renter suppliers? And as you address that question, do you have the laser supply commitments needed to support the upcoming transceiver ramp in the next few months. And I have a follow-up, please.

Yes. I mean the component supply, as I said in the earlier comments, it's factored into our guidance. So we're not going to go into specifics beyond that. The proposed ban and new transceivers from China, I guess, it's not yet a done deal. It remains to be seen what will happen. We don't manufacture for any Chinese providers, and we're, of course, more focused on Western providers. So in theory, that could be a positive as long as materials and components are available. It could be a positive -- should be a positive for us, but I think it's early days. Like I said, it's not a done deal. There's a lot to be unpacked before that actually comes to fruition. A lot of the transceivers that go into these data centers are coming from China. So if you just put a block on -- ban on transceivers coming from China, the whole industry guides to a halt. Besides whether it's good or bad for Fabrinet, so I think it's by no means a done deal, and we'll see what happens.

Within comms infrastructure, how are you thinking about the opportunity to address LEO satellites today? Could you discuss your visibility there relative to your earlier view of this year?

Yes. We include that in our telecom infrastructure category. We have a number of customers we're engaged with there, primarily the two, I would say, major players in that space and there's 1 or 2 others who are looking to get into that space that we also do business with. But for us, it's a really good pace because the technology is right in our sweet spot. We have the customers today. So as that business ramps, we feel we're very well positioned to. We're making these products. We've been making them for a number of years for one customer in particular, and now a couple of other customers. So -- and they're -- again, they're right in our sweet spot. They're very straightforward, if you like, for us to make these products that really fit well with our capabilities. So we feel good about our position there. We have the two big players. And as I said, this 1 or 2 smaller ones who were we're also working with. So we think it is a lot of potential for us.

Our next question comes from the line of Mike Genovese with Rosenblatt Securities.

[indiscernible] stepping in for Mike. I was wondering if you can touch on the progress and mainly the timing for 1.6T driving revenue from your largest datacom customer?

Yes, that's not something we're going to update the market on in this call. This is a Fabrinet call. You'll have to talk to NVIDIA about the NVIDIA product launches. So that's not something we would be disclosing to that level of detail.

Got it. Got it. Understood. And then just a follow-up. Just with the inventory jump, I'm assuming it's relative to supply constraints in the upcoming ramp. Is there anything else there, or is it maybe regarding that?

Well, I think the inventory jump has to do obviously with the revenue growth. So if you look at it from other perspective, we are positioning material to continue to support our customers. The material constraints are something that we have been used to in the past several years. So those would not be a meaningful increase in our inventory. So the inventory increase has to do with our growth and then the positioning for future ramps with the customers.

Our last question, it comes from the line of Tim Savageaux with Northland Capital Markets.

Congrats on the results. And also, congrats on growing mid-30s with NVIDIA down 20% plus for the year. I think that's the rest of the business is up nearly 60% on that basis. So that's quite impressive. Just a couple of quick questions. First, on -- as you look for Q1 2017 guidance, I imagine data center is the primary driver, but within the three drivers that you mentioned, DCI, transceivers, high-performance compute and noting that you had a really huge quarter with Cisco and DCI, and that was evident in their results. Can you kind of give us a sense of among those categories? I imagine it's transceivers that's going to drive the majority of the growth, but I'd love to get your -- any color on that.

Well, really, first of all, thanks, Tim, I think you hit the nail on the head. We finished, if you like, a 10-year spell from up to 2024, 17% compound annual growth. And then we had 19% compound annual growth in FY '25 and then 36% in FY '26 with 45% year-on-year growth in Q4. So we're pretty happy with the growth trajectory that we're on also if you look at our performance over the last while, we have 12 consecutive quarters of record revenues and 6 consecutive quarters of accelerating year-over-year growth. So it's been -- we've been on a very nice trajectory for the last while. Within the data center business, and we think it makes sense to categorize these particular products into data center because DCI, the transceivers, of course, are inside the data centers. And then high-performance compute is also essentially data center product and DCI between the data centers. The growth in all three, we think, is robust. HPC continues to grow. We won't be breaking them out individually going forward. But HPC continues to be very strong for us. We're doing very well. And we have a number of other customers that we're focused on that are not in the revenue yet, but we're working on the transceiver business, a combination of our new customer but also success we're getting with hyperscale direct and also merchant business. That is just beginning to get going as well. And we feel very good about that. And of course, DCI has been a real success story for us. I think Csaba said in his prepared remarks, our run rate on DCI is about $1 billion. Over to you, Csaba.

Yes. So actually, our DCI business reached close to $1 billion run rate. And if you look at our Q4 numbers, our DCI business was equivalent to our historical datacom business. So that's a meaningful growth and continues to grow.

And if you look at each of those categories, I suppose, especially DCI and the transceiver, the demand is just insatiable. It's extremely robust, and we're -- the demand is coming to us and coming at us from several directions. DCI, of course, we have really all the main players the transceiver business, historically, we've had our main customer, but now we have these other growth vectors to layer on top of that, both merchant and hyperscale direct. And the high-performance computers continues to go from strength to strength. We feel very good, Tim, about our overall position in the data center business. And what's interesting is the customers are giving us visibility well out into the end of 2027 and beyond. That doesn't mean they're giving us firm orders, but they're giving you visibility and there looks to be no end in sight to the demand from the customers. We feel very good about that.

Well, that is a perfect segue to my next question, which is, you've mentioned accelerating growth several times, including in response to that quick question. Although I would note at the middle of the range, might break your streak, but I imagine you're not heading for the middle of the range, still in the 40s in terms of year-over-year growth. But given that lengthy list of demand drivers and the capacity additions, is it within the bounds of reasonableness to think about annual growth in fiscal '27 accelerating from what you saw in '26, especially maybe given the lack of that headwind from your largest customer?

Yes. I think that's a good point and a good question. I think, of course, the standard answer, Tim, we guide 1 quarter at a time. However, based on the picture we have right now, it is not beyond the bond's possibility. And that's not something we would ever say. I suppose we always we guide 1 quarter a time. That's -- we're going to continue to do that. But based on the demand we're seeing, certainly, the demand is there that we could see another year of accelerating growth. It's just a staggering demand picture we're seeing from our customers. And the thing that's particularly satisfying for us is the trust that the customers are placing and it's obviously the revenue is great, don't get me wrong. But it's really the trust the customers are facing is there they're trusting us with their most important products, they're leading-edge products, and we're on a ramp with several of these customers that is just amazing. So I think it's not the underground possibility, Tim, to to answer your question.

Great. And let me close by adding maybe one other growth driver that I don't know that's been discussed that yet, and that's optical cross-connect OCS. And we heard last week big ramp there from the industry leader, but also I think, plans to move from strictly internal to working with contract manufacturers. I wonder if you might be able to give us an update on what you think the timing might be there for you or the opportunity? And does that lie in fiscal '27 as well?

Yes. I mean OCS it remains a great opportunity for us. It's right in our wheelhouse. It's -- the manufacturing technology is very similar to products that we're already making for our customers. So we already feel like we have a bit of a head start. So no real change in our optimism on OCS to the -- there are incremental opportunities for us and that, for us, OCS is quite small today. We are shipping some product, but it's quite small. So I think the big ramp that maybe -- has been talked about, we're pretty confident we will participate in that. So we feel very good about OCS, and I think it could be a bigger, much bigger and more meaningful category for us in the future.

The specifics of our customers ramp, we leave that to them to talk about, I think we're well positioned.

This will conclude our Q&A session for today. I will pass it back to Seamus Grady for closing.

Thank you. Thank you for joining our call today, and we delivered an outstanding performance in Q4 with continued top line acceleration that ended a tremendous year for the company. We are entering fiscal 2027 better positioned than at any other point in our history to continue delivering strong growth in response to the increased demand that we are experiencing across our business. With our deep domain expertise and increasing capacity, we expect to extend our manufacturing leadership as a trusted partner for our customers, both complex products. We look forward to sharing more excellent results with you in the future and to seeing those of you who will be attending the Rosen Black Conference tomorrow and the Wolfe Conference in September. Thanks again, and goodbye.

And thank you all for participating, and you may now disconnect.

Good morning. Thank you, everyone, for coming. I'm Samik Chatterjee. I cover the hardware and networking companies at JPMorgan, and I have the pleasure of hosting the next fireside chat here with Fabrinet. Seamus Grady, CEO; Csaba Sverha, CFO.

Good morning, everyone.

Thank you both for coming to the conference.

Thank you, Samik.

So let's kick it off. Seamus, for you. I think just overall, given the amount of interest we're seeing from investors, maybe I'll ask you to outline a bit more about Fabrinet's role in the supply chain, and I know it's a more 101 question to start with, but let's do that and then we'll move into the more deeper questions here. How would you outline to investors Fabrinet's role in the supply chain? And why the role expands as you look at the future in terms of what Fabrinet's role is in the supply chain? How does that expand? How -- why does it expand as well?

Thanks, Samik. I think our role of Fabrinet, we're a contract manufacturer. We make other people's products. We don't have any products of our own, and we're -- I would call us a pure-play contract manufacturer. Again, we don't have our own products. We help our customers in a number of ways. First of all, the background of the company was -- the company was established originally in 2000 and then went public in 2010. And was established as a contract manufacturer specializing in the then fledgling optical communications industry. So 26 years ago, the company was founded by a gentleman called Tom Mitchell.

Really, we specialized in optical communications contract manufacturing from the very start and built up expertise that came originally from the disk drive industry, actually, a lot of the expertise came from the disk drive industry. We're headquartered in Thailand, and that's where most of our manufacturing footprint is. And we've really built up a lot of expertise in putting these products together right down at the -- from the wafer level all the way up through finished systems. We do a lot of packaging work at the wafer level. We make components and subassemblies and subsystems, and we also make finished products for most of our customers. Our customers range from companies like NVIDIA, Cisco, Coherent, Nokia, Ciena, several of the leading companies in the world.

Our role really is to provide leading-edge manufacturing capabilities for our customers to be a trusted partner for them and to do it in a way that allows them to realize some hopefully significant savings if we do our job well. So we're -- I would call it a very high capability, high-technology manufacturer, but we keep our costs under very tight control because at the end of the day, if we can't produce the product at a better cost than the customer can produce it themselves or than our competitors can, then there isn't much reason to go with us.

So our role has evolved over the years. We've gone from being more of a specialist component contract manufacturer to -- we still are that, but we also do a lot of complete system assembly as well. So full suite of products and services. A lot of the work we do is at the packaging level. Approximately 70% of our manufacturing space is clean room space, which is quite unusual for a contract manufacturer. We're also expanding quite significantly over the last 10 or so years. Up to 2025, we grew our compound annual growth rate was 16%. In FY '25, we grew 19%. And then we're in FY '26, we're in Q4 of FY '26, at the midpoint of our Q4 guidance, that would put us at a growth rate of 34% for this year. So our growth rate is actually expanding, it's increasing actually over the last couple of years.

Okay. So we'll get to the growth rates in a bit. From our perspective, Fabrinet was very focused on the optical contract manufacturing market. Now you've broadened that out to participate in the broader HPC market as well. When you reflect on that shift, what drove you to take the company beyond optics, which is where you are well known for you're specialized in? And how do we think about -- are there more adjacent markets that you see opportunities in beyond even HPC for Fabrinet to go into?

Yes. We're really looking to -- we're a specialist, and we want to always remain a specialist. We think the contract manufacturing industry has been, I would say, somewhat obsessed with diversification for a long time. And if you get too diversified, you end up in 10 different industry segments and you end up being an expert at none of them. So we're very much focused on being a real expert in the contract manufacturing space.

High-performance compute makes sense for us for a number of reasons. One is a practical one. We signed a warrant with Amazon, with AWS a couple of years ago. And the first foray into that business for us was they asked us to produce a range of their high-performance compute PCBAs. So it's a good fit for us. They are very complex PCBAs, very difficult to produce, and we've done a good job for them.

Secondly, we believe high-performance compute is a good fit generally because over time, photonics and optics will become more pervasive in high-performance compute. A lot of the high-performance compute bottlenecks are no longer the compute power themselves, it's more the ability to move the huge workloads around, which is where you need optics and photonics.

So it's a good fit for us. We've also started to -- it's early days, but we've started to produce transceiver for AWS as well. So there's a good fit there between high-performance compute and our photonics and optics capabilities that we think will serve us well in the future. And we think there's other high-performance compute customers who could use our services as well. So we'll be working on that.

Got it. Got it. So maybe going back to the growth rates. In the past, you've referenced long-term growth rate for Fabrinet 2x the optical industry and 3x the contract manufacturing industry. So now your growth rates are accelerating, as you just pointed out. Is that accelerating because the underlying market is accelerating? Or are these more a function of your outperformance not staying at that 2x, 3x anymore because of these moves to the adjacent markets that you are now referencing?

Yes, I think it's both. I think the services we provide, our customers appreciate what we can do. We're a little bit different to most contract manufacturers in the sense that we try to do as much as possible down the stack and at the wafer and packaging level. We don't make the wafer, but everything after the wafer is in scope for us, including packaging and making the components that go into the product and then assembling the next level up in the system all the way up to complete systems. I think we've always had very good kind of depth in the services we provide, but we also -- the breadth has increased over the years. So I think that has been a factor. But then, of course, the industries we serve have just been expanding very rapidly over the last few years. .

The best way to -- the best strategy to increase your revenue is execution, and we have a very good reputation with our customers for being a very reliable partner for them and doing a very good job for them. So I think it's a combination of our -- the breadth of what we're doing for our customers is expanding. The execution with our customers is very good. We do a good job for our customers and they appreciate us. And of course, we're very fortunate to have really the cream of the crop in terms of the customers we have their business is exploding right now. We're right there with them to help them. So it's a combination of all of those factors.

Okay. Okay. Recently, you announced that you're acquiring additional land in Thailand at, I think, Navanakorn is pronounced -- and you're continuing to expand the Chonburi real estate as well. Can you now discuss the strategic rationale to acquire in Nava and beyond the cost -- the low-cost location that you have in Thailand, what otherwise makes Thailand the best suited to -- for you to continue to expand in that geography?

Yes. We have two main campuses in Thailand. The original campus is in Pinehurst, which is closer to Bangkok. We have a significant footprint there, but we're essentially landlocked in Pinehurst. We've converted over all of the nonmanufacturing space that we could. We've converted over to manufacturing space, and we're in the process of converting about 150,000 square feet right now in Pinehurst into manufacturing space. And then that's it. We're kind of maxed out in terms of manufacturing capacity on that campus.

The campus in question that you mentioned or the location in question, it's in Navanakorn, also known as Nava. It's about 15 minutes from our Pinehurst campus. So it's a very good campus. It has a factory on the campus and room to build another one that if we were to build out everything on that piece of land, it will give us additional capacity for about another $500 million of revenue.

Right now, our revenue -- let's say, our revenue capacity before that campus is about 5.5 -- approximately $5.5 billion. So that would take us to about $6 billion. We're also building at our second campus in Chonburi, we have a building in construction right now, Building 10, which when it's finished, will be about 2 million square feet with additional capacity for about another $3 billion, that would take our capacity to $9 billion. And then we have enough land again in Chonburi to build another 2 factories, each of which would add about $1.5 billion of revenue capacity.

So right now, we have land capacity, let's say, for about $12 billion of revenue. We are growing fairly quickly. We -- the Building 10 that I talked about, it will be fully completed by the end of the year, but we'll actually be occupying two floors of that building, one in July and another in October to make sure we can accommodate our customers' needs. So lots of room to grow.

Thailand as a location, it's a really excellent location, we have found to do business. You have availability of really excellent people who we're able to train and retain. It's -- the cost is predictable in Thailand. It's a friendly place to do business, a good location to do business. The government there are business-friendly. So we found it really to be an excellent place to do business, and we plan to continue to grow and expand there for many years to come.

Got it. So you mentioned you'll have capacity up to $12 billion. You've also referenced the $8.5 billion on the earnings call that you'll have revenue capacity for. Help us think about time lines? Like what does it typically take from the time that you start putting sort of brick-and-mortar in place to filling up that capacity when you're outlining $8.5 billion and then $12 billion of capacity, what should investors think about, okay, this is probably a good way to think about how you filled up capacity that you've rolled out in the past?

Yes. I mean if you go back to the first factory we built on the Chonburi campus, which was all the way back in 2017, I remember at the time, it was 550,000 square feet. And I remember thinking it's going to take us a long time to fill that factory, and we filled it very quickly. Then we built the next factory, which was 'dis called Building 9. That was 1 million square feet. And again, we filled that within relatively short period of time, 2 or 3 years to get that filled. And then Building 10, again, 2 million square feet, $3 billion of capacity. It will take us a couple of years to get that filled up.

But we guide one quarter at a time. We don't guide -- we don't give long-term guidance. It's very difficult to give long-term guidance in our business. But I think the fact that we're building, Building 10, we're taking over, if you like, 2/5 -- two of the five floors ahead of the completion of the full building kind of gives an indication that we're quite optimistic about our ability to fill up that footprint.

Plus, we have the plans already ready to go for Building 11 and Building 12. So we think we have a good runway for the next several years, but we are looking for more land as well in the Chonburi area to continue to expand. Because once we finish, like I say, Building 10, 11 and 12, then we don't have any more land on that campus. So I think at the time when we started there in 2017, we thought Building 12 would last us for a very, very long time, but here we are coming up on 10 years later, and we need more land. So we'll be looking to continue to expand.

Okay. Okay. And maybe let's talk to the flip side of this. As you ramp capacity, how do we think about gross margin headwinds? You've been seeing some already from a ramp cost perspective. But clearly, you're laying out here a multiyear road map of continuing to add capacity. How does it play out on your gross margin line?

Yes. Our -- we have some gross margin headwinds as you ramp new products. We have many new products ramping at the moment. We have a number of new products with Ciena and Cisco. We also have the high-performance compute business ramping for AWS. We have a number of new transceiver programs that all of which are ramping. They're all good news. They are all products that are ramping that once they're ramped, we benefit from that. But they do create a little bit of gross margin headwind as they're ramping. Notwithstanding that and maybe also notwithstanding any FX variations.

Our gross margin has been in the, I would say, 12.5% to 13% range, our -- maybe more importantly, our OpEx is tiny. As a contract manufacturer, you have to keep your OpEx under very tight control. Our OpEx right now is about 1.4% -- on a percent revenue basis. And really, as we grow the company, we don't need to add a lot of additional OpEx. So there's probably a little bit more leverage on operating margin than gross margin. But we do plan to continue to nudge the gross margin up over time. We're -- again, we're a service company, we're a contract manufacturer. So we're not a product company. We can't just increase prices just because there's a lot of demand out there. And there is a lot of demand out there. I've certainly never seen anything like it. But we'll be careful. We can't just increase prices just because we can. We won't do that. We value the relationships with the customers very much. And if anything, we'll be using this growth to make sure we stay very competitive for our customers and where we can, we'll actually bring prices down as we're able to bring the cost down. We'll be using it to actually grow the business. So a little bit of margin expansion, but it will be gradual and over time rather than any big step-up in margin.

Csaba, just checking, do you have anything on the gross margin?

No, I think one thing that is important to mention as we are building out this capacity, our fixed cost structure remains very, very small. So our fixed cost is about 5% of our revenue. So if anything, where the growth would pause, we have very intact gross margin structure and profile. So in that sense, there is not a lot of leverage when the top line growth at the gross margin level. But on the other hand, we are protected from the downside as well. So I think we are in a fortunate position in terms of that.

One of the questions I get often is, clearly, Fabrinet is known as the leader in optical contract manufacturing today. And you've talked often when we've discussed about clean room being a key differentiator. But what does it take for new competitors to come in into the space and sort of play a catch up to you in terms of what capabilities you offer? And are you seeing any competitive threats emerge, particularly as demand becomes more significant, are customers looking for additional suppliers? And are you seeing sort of new suppliers being helped on that front by the customers themselves?

I think what we're seeing with the customers is the customers are asking us to do more. So more at the packaging level and at the component level and at the subassembly level and, of course, at the complete system level. What would it take for a competitor to get into the business and successfully compete with us? It's easy. You just need about 20 years and a lot of experience along the way. We've been doing this for a very long time. And because it's all we do -- we've become quite good at this. But there's really nothing to stop. I think what makes it difficult maybe for a competitor to compete with us is the sheer number of process steps that we do for the customer. We don't just assemble -- if you take transceivers or if you take the DCI business as a good example. We don't just assemble pluggable transceivers. We make, in many cases, a lot of the components that go into those products. In some cases, we make up to 60%, 70% of the bill of material in-house. So that allows us to be very competitive for the customer, but also it creates a lot of stickiness with the customer.

The customers trust us. They know we'll never compete with them. We never have our own products. They know we won't let them down and they know we keep our costs under very tight control. So it's kind of a winning formula. Some of the things we have seen some of our competitors do is to maybe get into the product business and become more ODM like than contract manufacturers. That's their choice. That's something that some contract manufacturers have started to do. That's their choice. But certainly, we've tended to benefit from that because when a contract manufacturer becomes a product company, typically, a customer somewhere gets upset.

So we've tended to benefit from that. So really, there's always competition. I mean everybody wants our business, everybody is after our business. We're accustomed to that. But we're confident we can continue to stay ahead of the competition and really make sure we continue to kind of invest in the technologies of the future and the customers of the future.

Got it. So given that we are on that topic about investing for the future, how is the investment in Raytek extending your capabilities in packaging? Just help us understand the opportunity you're seeing there? And maybe any other areas that you feel like you should focus your investments in as you prepare for next generation technologies?

Yes. So we have not been very acquisitive. If you look over the history of the company, we have not grown -- we've grown the company. Like I said, we've grown compound annual growth rate of 16% last year, 19% this year to be about 34%. So we've grown very nicely without any acquisitions to speak of. There was a small acquisition in, I think, 2016, it predates me, but it was very small. There was no -- so there's been no acquisitions in the last 9 years. It's all been organic growth. We're not against acquisitions, but we typically try to focus on growing the company organically, we think is a good approach. It works very well for us. And then we will do acquisitions or investments if there's a particular capability or technology that we don't have that we feel we need to have. And that's really the category that this Raytek investment falls into. It gives us access to for co-packaged optics and also for silicon photonics. It gives us access to some wafer level packaging processes that we don't have ourselves. We don't have them in-house. We don't have that capability in-house. We use -- we've been using Raytek as a supplier. They're a very good company, a very capable company, and we really like how they operate. So it seemed to make sense for us when the opportunity came up to invest in them, it made sense for us.

We invested, I think, $32 million for about 14% of the company. And it gives us access, like I said, to a number of wafer-level packaging processes, including copper pillar bumping and a few other processes that we want to have access to. With that investment, we also -- we haven't announced it previously, but Raytek will be establishing a manufacturing footprint on our campus in Thailand in the coming quarters. So we're pretty excited about that. We have access to that technology and capability, and it will be on our campus. Raytek then, of course, get access to our customer base. So it's kind of a symbiotic winning relationship that we're pretty excited about.

As for other technologies, again, as we go through all of the new products that we're working on, if something comes up that we -- usually, we develop the capability in-house. But if we find something that we don't either want to develop in-house or we feel we're not able to develop it in-house, we would be open to making further investments. But we're not too keen on investing, let's say, in acquiring just to grow the top line. We don't feel the need to do that. We think we can continue to grow at a nice pace just by organic growth and continuing to expand the relationships with our customers.

Okay. And I'll ask you the next question. But just before that, a heads up to the audience, if you have a question, you can raise your hand and we'll get a mic over to you. So while we're waiting for that, you announced the transceiver -- new transceiver programs, including you said AWS. Can you help us understand the customer, what drove the customer's decision to outsource the program or engage Fabrinet on the manufacturing side?

Yes. I think we have a number of wins that we've announced. There's -- in most cases, what drives the customer to come to us is our ability, again, to make -- to do a lot of the subcomponents that go into these products and then to produce -- we've produced, I would say, north of 50 million transceivers over the years, well north of 50 million transceivers. So we have a lot of expertise, a lot of capability. We're very good at producing transceivers in volume at scale with very high yields and very predictable costs. So we're very good at this. In the case of these recent wins, they really fall into kind of 2 categories. One is for a hyperscaler. You mentioned AWS where we'll be producing a product, a couple of products for them. They're not our designs. Again, we don't have our own designs. So we're a contract manufacturer, we'll be producing for AWS. And then secondly, some merchant transceiver business.

One is an existing customer -- sorry, they're both existing customers. One is a transceiver customer of ours. The other is more of a traditional telecom customer who's now getting into the datacom world. So we're excited about both of those. We haven't sized the opportunities, but they're both significant. And certainly, the combination of the two could be as big as our existing business with our main customer, NVIDIA. But in fact, either one of them could be as big as that. So they're very significant, but it's early days. We'll ramp those over the next 12 to 18 months, but they're both significant wins for us. We're very excited about them.

Okay. Great. Let me just pause here and see if there are any questions in the audience. Any questions?

When you look at your customer base, you mentioned NVIDIA being a core. You look at the stack of different technologies, whether at the data center or the individual manufacturer or the component guys, Lumentum, Coherent or their subs going down to [indiscernible], where do you see your space? You mentioned NVIDIA's core, but do you move all the way up and down as contract through the entire spectrum? If you could give us a little bit more color on that?

Yes, we do. I mean, historically, we've been -- originally, we were a component manufacturer, but we've been moving both down the stack and up. So down, I think everything -- we're not going to get into the wafer. We're not going to be competing with TSMC or anything like that. But everything after the wafer has been produced really is in scope for us. We're able to do a huge amount of packaging. And interestingly, we don't do packaging as a stand-alone service. We do it as part of a broader service for our customers, where we're taking the wafer, singulating the dies and packaging the component as long as we're then using that component. We don't have actually any third-party revenue for packaging.

It's -- we do it for our customers, where we're then using the component in the next level up, if you like, in the assembly. So really everything right down to the wafer level packaging, all the way up through components and subsystems, pluggable devices all the way up through complete network systems and everything in between. It's all in scope for us. But we like to develop the capabilities in a really kind of a deep way. We -- getting into any of these businesses, we don't want to get into those businesses unless we can be really excellent at it and provide a great service for the customer. So we've managed to expand it over the last several years. We're certainly doing a lot more now than we were 7, 8 years ago, and that really has contributed to our growth over the years. What it also does is it allows us to be very competitive for the customers. We're able to provide breadth of services that really no other contract manufacturer can. Our margin is significantly higher than other contract manufacturers. And one of the reasons for that is we're able to offer a very compelling business case for the customer. By having us do more, we can save them more, in many cases, by eliminating 3 or 4 other margin stacks that may go on, we can help the customer be much more cost competitive.

So it improves the stickiness of the business. It increases the revenue and the margin opportunity, and it also saves the customer a lot of money. So it's a very compelling proposition.

Maybe I understand you can't give short -- not a lot of visibility short term, but you also do long-range planning, right, capital outlays for your construction business. There's a huge gap between no visibility short term and some long term visibility. Can you maybe just give us a little more detail on what goes into your LRP for capital allocation that you don't have short term and just sort of the push/pull? And then can you sort of transform your business given what's going on more to LTAs or anything else to have a little bit more -- you mentioned stickiness. So that's a component of visibility. So maybe just close that gap for us a little bit.

Yes, sure. So we -- as you say, we guide 1 quarter at a time, but of course, we have to plan much longer than that. I think one of the interesting phenomena that we see going on. Historically, any contract manufacturer will tell you one of the struggles they always have is to get long-term forecast from customers. Customers generally don't like to give very long-term forecasts. And usually, they'll -- where they can, they'll limit it to whatever is in the contract.

Maybe a little bit longer for the purpose of planning long lead time components. But these are not normal times. And what we're seeing right now is most of our large customers are happy to give us 2 years or maybe even up to 3 years of visibility. That doesn't mean that they're making a purchase commitment, but they're at least telling us, okay, for the products we're making, here's the road map that they see in terms of the products that we're making, the new products coming down the track and also the volume, and therefore, the likely manufacturing capacity that they need from us. So the customers are willingly sharing, like I said, 2 or 3 years of visibility, which allows us to make these large capital allocation decisions. In our case, we have to build out capacity to support the customer.

Armed with that knowledge, then it's a relatively straightforward capital allocation decision for us. And what I mean by that is if you take Building 10 as an example, it's 2 million square feet, it takes about 18 months to construct, the CapEx is about $132 million, $133 million, depending on the FX. At full run rate, the building will generate about 40% ROIC. So it's a really good use of the company's capital. At full run rate, about 5 months' worth of operating profit pays for the entire building. So it's a really excellent use of the company's cash. But on the downside, if something were to happen that the world economy were to collapse and AI were to disappear, the gross margin headwind for Building 10, even if I were to sit idle, is about 15 basis points.

So a tiny downside risk versus a very significant upside opportunity. And we work very hard to make sure we kind of set ourselves up for that kind of success where we capitalize on the upside but largely insulate ourselves from the downside. And it's that customer visibility that we're seeing that's giving us the confidence to continue to grow and invest in this, again, in a way that we capitalize on the upside, but we are risk-averse. We don't like to take big risks with the company's capital. So we'll be making sure we protect ourselves on the downside.

So maybe moving on, let's talk about supply constraints a bit. We can see that there's industry-wide supply constraints within the optical industry. Maybe talk about where are you seeing the bigger impact relative to your portfolio? And should we view these, given the demand curve that we're seeing, should we think about supply constraints not being structural for the industry? Or do you think it's more transient?

I think it's -- ultimately, I think it's more transient, but how more transient remains to be seen. I think it's really a function of the -- some of the component supply pipelines take a very long time to build out. If you take a foundry for a laser, it takes a long time to get that up and running and to get the yield to the right level and to get the output to the right level. And really, what we're seeing is the demand has accelerated at a much faster pace than the capacity has been able to keep up. So there are some pinch points, I would say, particularly around laser supply, specifically EMLs. But I don't believe it will be a long-term problem. I think it will get resolved. So that will be probably the biggest one that we're seeing. There's always other more short-term supply constraints that pop up, especially when you're dealing with significant volume increases like we're seeing. But that one in particular, I think, like I say, I think it's a transient one, but it will take a little bit of time for the industry to catch up.

Okay. Okay. Fair. It's almost been a year since you entered into the AWS partnership and had the issuance of warrants. Are you seeing any other hyperscalers or any other customers looking for similar agreements in terms of trying to get visibility into capacity on their own by engaging with you on that front?

So we're -- I mean, we're talking to several other companies, I would say. I don't think the hyperscalers necessarily look at each other to determine the strategy. They each kind of do their own thing. Our relationship with, I would say, all of the hyperscalers is very good. We know them quite well. Interestingly, predominantly because of our strength in our DCI business. Most of our DCI, data center interconnect customers they're shipping those products, 400ZR, 800ZR products to the hyperscalers. So the hyperscalers are in our factories all the time auditing the production lines that we're using for our customers. So they know us very well. They know what we can do and they have a good -- I think a good impression and a good feeling for the capabilities that we have. So that has been a real kind of a catalyst for us to allow us to really start a more meaningful dialogue with some of the hyperscalers. But any of these relationships take a long time to develop in our business. It's not unusual for -- when you engage with a willing customer until you're actually shipping something, it can be 18 months to 2 years. There's a long kind of gestation period from engagement until you're shipping revenue.

So yes, we are talking to a few of them, and we'd be hopeful we can work with more hyperscalers directly. Again, where it's appropriate because, in many cases, it's not appropriate. Like I said, we'll never produce our own products. We'll never have products that we'll be competing with our customers. But where the hyperscalers need someone to produce products for them with a direct contract manufacturer relationship, we think we can do the job for them.

A lot of the discussion with investors on the optical front is on OCS products at this point. How are you thinking about the opportunity? What are the breadth of engagements do you have with customers on that product? And how should we think about once those engagements turn into wins, how soon can we see revenues relative to OCS products?

I think for us, OCS, we're not really going to opine on whether OCS is a winning product or not winning. For us, it's a product we're very capable of manufacturing. A lot of the technology that underpins OCS, we're very comfortable with, we're very familiar with. So our role really will be to help our customers to ramp up that capability. It does look to be very promising. That's for sure, and there looks to be some -- a lot of demand there and a lot of volume there. So we'd be very excited to work with a couple of our customers to get some of the products off the ground and ramp them for them. But yes, we think there's a few product areas, OCS is one, [indiscernible] SFP is another. There's a few, I would call them, new-ish product areas where we're really focused on winning. And OCS is certainly one of those, we're excited about it.

Last one quickly for Csaba. Just given the capacity expansion plans that you have, how should we think about free cash flow for the medium term? Do we see a change in the free cash flow conversion rates on account of the capital plans that you have?

So in the past, we have been a very strong free cash flow generator company. As you can see, our balance sheet, we have close to $1 billion cash on the balance sheet. In the last 2 quarters, we have seen some pressure given the capital expansion and working capital build-out. So in the near term, we do anticipate that to continue. But the good thing is that we are able to still generate 40% ROIC on these investments. So we look at it as a fundamental strategy of our capital allocation, investing in our growth and using our own cash to build out this capacity. So in the short term, I think it will be somewhat compressed. But nevertheless, we are still not compromising on the growth and the ROIC that we are returning on these investments.

Okay. Great. I'll wrap it up there. Thank you. Thank you, both for coming to the conference. Thank you to the audience as well.

Thank you.

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the Third Quarter of Fiscal Year 2026. [Operator Instructions] As a reminder, today's call is been recorded.

I would now like to turn the call over to Garo Toomajanian, Vice President of Investor Relations. 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 third quarter of fiscal year 2026, which ended March 27, 2026. With me on the call today are Seamus Grady, Chairman and Chief Executive Officer; and Csaba Sverha, 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.

During this call, we will present both GAAP and non-GAAP financial measures. Please refer to the Investors section of our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation as well as additional details of our revenue breakdown.

In addition, today's discussion will contain forward-looking statements about the future financial performance of the company. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. These statements reflect our opinions only as of the date of this presentation, and we undertake no obligation to revise them in light of new information or future events, except as required by law. For a description of the risk factors that may affect our results, please refer to our recent SEC filings, in particular, the section captioned Risk Factors in our Form 10-Q filed on February 3, 2026.

We will begin the call with remarks from Seamus and Csaba, followed by time for questions. I would now like to turn the call over to Fabrinet's Chairman and CEO, Seamus Grady. Seamus?

Thank you, Garo. Good afternoon, everyone, and thanks for joining our call today. We delivered an outstanding financial performance in the third quarter along with several notable achievements that we believe can extend our strong growth trends into the fourth quarter and fiscal year 2027. Revenue was above our guidance range at a record $1.214 billion with year-over-year growth accelerating to an impressive 39%. Record non-GAAP EPS of $3.72 also exceeded our guidance range, reflecting continued excellent execution.

Looking at our quarter by product area, optical communications revenue growth increased to 35% from a year ago. This was driven by a 55% year-over-year growth in telecom revenue, which was fueled by strong growth in a wide range of products. Within telecom, data center interconnect revenue grew a robust 90% from a year ago and 38% from Q2. And we believe strong longer-term DCI growth trends remain firmly intact. This remarkable telecom performance more than offset softer-than-expected datacom revenue, which grew 4% year-over-year but declined 6% from Q2.

Underlying datacom demand remains exceptionally strong. In fact, demand during the quarter far exceeded what we were able to ship, meaning our reported revenue does not fully reflect the true momentum of the business. Right now, demand is outpacing the broader supply of certain components and we are actively working to narrow that gap. While we expect the supply/demand imbalance to persist into the fourth quarter, we remain optimistic that supply conditions will improve over time. The strong demand we are seeing today positions us well as that improvement unfolds.

As we have outlined, our datacom strategy is to continue supporting the strong demand trends we are seeing with our largest customer while actively expanding into new high-growth channels such as direct engagement with hyperscalers and partnerships with merchant vendors. With that in mind, we are happy to report that we have made meaningful tangible progress on both fronts.

First, we're excited to share that we have successfully completed qualification and have already begun shipping 2 datacom -- programs directly to a hyperscale customer with initial ramp starting in the fourth quarter. We expect volumes to ramp steadily throughout fiscal 2027 with these programs becoming a meaningful contributor to our datacom revenue over time. Second, building on the groundwork laid over the last several quarters. We are on track to qualify and ramp multiple merchant transceiver programs, including several for data center scale-out applications with existing and new customers. We expect production to begin in the second half of the calendar year aligning with the early part of fiscal 2027, with additional ramps progressing into the second half of the fiscal year. We expect this combination of hyperscale and merchant program wins to further diversify our datacom revenue and provide multiple new growth factors in the new year and beyond.

In non-optical communications, revenue jumped 52% year-over-year and 8% sequentially from Q2. This growth was driven primarily by high performance compute revenue, which continues to ramp as we support our customers' transition to their latest product generation. At the same time, we are seeing encouraging traction beyond the current ramp with new program wins and expanded scope across additional products that we will be manufacturing to support their accelerated computing infrastructure. We're also increasing capacity to align with the customers' ambitious growth plans, reflecting a deepening and increasingly strategic relationship.

Automotive revenue moderated in the third quarter as anticipated, with revenue decreasing modestly from Q2. This decline was more than offset by continued growth in industrial laser revenue, which was up 9% from a year ago and 7% from Q2. An important area of strategic focus for us over the past several years has been co-packaged optics or CPO. In this space, we are deepening our engagement with customers across the CPO ecosystem, including optical components, external laser source pluggables as well as other integrated precision optical packaging solutions, building on our long-standing silicon photonics expertise. GPO relies heavily on advanced semiconductor packaging technologies. And we have been actively investing to expand our capabilities in this area with a focus on scalable, high-quality manufacturing processes and broader system-level integration.

This includes leveraging and extending our in-house silicon photonics expertise but also partnering with key technology providers to enhance our ability to deliver more integrated end-to-end manufacturing solutions. With that backdrop, we have made a minority investment in Raytek Semiconductor, a one based provider of advanced wafer-level packaging technologies as an ecosystem partner. We already serve a number of common customers and expect this collaboration to further strengthen our capabilities and extend our offering. This investment supports our continued evolution from silicon photonics into more advanced packaging and integration solutions, reinforcing our role as a key manufacturing partner within the CPO ecosystem.

Looking at our business as a whole, we are very excited by both the number and size of customer engagements for our advanced manufacturing services. The breadth and depth of these projects provides us with significant opportunities to demonstrate our differentiation and expertise that we've established as a key enabler for the success of our customers' most advanced products.

As you know, we have been expanding our capacity to support our accelerating growth trends. We continue to make progress in the construction of Building 10, which will add 2 million square feet to our current 3.7 million square feet of space, with plans to be fully completed around the beginning of the new calendar year, we are on track to have a portion of Building 10 ready by next month, consistent with what we described last quarter.

In addition to that, with our accelerated construction time line, we now expect to commission an additional floor in this 5-story structure by the end of September, with the rest of the building still scheduled to be completed by January. Beyond Building 10, we have sufficient land available at our campus in Chonburi for two additional buildings of more than 1 million square feet each. While this means we expect to have ample capacity available for the next several years, we continue to think ahead.

In that context, we have recently acquired a building and land in the Nava Nakorn industrial estate in Thailand, not far from our Pinehurst campus. We have already begun renovations to make the existing 200,000 square foot building world-class clean room factory with sufficient space on the -- site for additional expansion at a later time.

In summary, our success in the third quarter extends well beyond our strong financial performance. We are particularly encouraged by the multiple new growth vectors we are adding across our datacom business, while our diversified telecom portfolio continues to show solid momentum, and our non-optical communications segment expands further. This combination of execution and strategic progress reinforces our confidence in sustaining our growth trajectory, extending our leadership position in the fourth quarter and carrying that momentum into fiscal year 2027.

Now I'd like to turn the call over to Csaba more details on our third quarter results and our outlook for the fourth quarter. Csaba?

Thank you, Seamus, and good afternoon, everyone. We delivered another record-breaking performance in the third quarter of fiscal year 2026. Revenue of $1.214 billion exceeded our guidance range with revenue growth accelerating to a remarkable 39% from a year ago and 7% from the prior quarter. Strong execution and FX revaluation tailwinds led to non-GAAP EPS of $3.72 that also exceeded our guidance range.

Turning to revenue by market in the third quarter. Optical communications revenue was $889 million, with revenue growth accelerating to 35% from a year ago and 7% from Q2. Within optical communications, telecom revenue was a record $628 million, climbing 55% from a year ago and 13% from Q2. Within telecom, revenue from data center interconnect modules or DCI, jumped to $197 million, growing 90% from a year ago and 38% from the second quarter. Datacom revenue of $260 million increased 4% from a year ago but moderated 6% from Q2 due to broadening component and material supply constraints in the quarter.

Turning to non-optical communications. Revenue reached $326 million, growing 52% year-over-year and 8% sequentially from Q2. This strong performance was once again driven primarily by continued momentum in our HPC program, which delivered $107 million in revenue, up 25% from Q2. Automotive revenue declined slightly as anticipated to $115 million, while industrial laser revenue increased to $44 million.

As I discussed the details of our P&L, all expense and profitability metrics will be presented on a non-GAAP basis unless otherwise noted. Gross margin in the third quarter was 12.1%, a 10 basis point improvement from a year ago and a 30 basis point decline from Q2 as anticipated, primarily due to foreign exchange headwinds. We continue to demonstrate operating leverage with operating expenses declining to 1.4% of revenue. This resulted in an operating margin of 10.7%, a 50 basis point improvement from a year ago and 20 basis point decline from Q2.

Interest income was $7 million and -- foreign exchange revaluation gain of $7 million in the quarter. Our effective GAAP tax rate for the quarter was 6.7%. We expect our tax rate to moderate in Q4, resulting in a mid-single-digit effective GAAP tax rate for the year. Net income was a record $135 million or $3.72 per diluted share.

Turning to our balance sheet. We ended the third quarter with cash and short-term investments of $946 million, down $16 million from the end of Q2. Operating cash flow for the quarter was $53 million. Capital expenditure spending of $64 million reflects continued accelerated construction of Building 10 as well as capacity expansions to support the rapid growth across the business. As a result, free cash flow was an outflow of $11 million in the quarter.

Before getting into our guidance, I want to provide some additional color on our recent capital allocation decisions. As Seamus mentioned, we have made a minority investment in rate semiconductor to support our efforts in advancing manufacturing solutions for CPO. In April, we completed a private placement of approximately $32 million for 20 million shares of Raytek, representing approximately a 14% position. This investment deepens our partnership and supports our joint efforts to our bringing CPO technology to market at scale.

Early in the fourth quarter, we expect to complete the purchase of an 8-acre campus Nava Nakorn industrial estate Thailand, located approximately 15 minutes from our Pinehurst campus. The Nava Nakorn facility currently consists of a 200,000 square foot building with additional space on the site for future expansion. We have already initiated minor renovations to support world-class crane manufacturing capabilities, and we expect to begin utilizing the space early next quarter. The total purchase price of $11 million will be reflected in our fourth quarter financials.

With our very strong balance sheet, we are well positioned to deploy capital efficiently, support our growth initiatives and continue to generate superior returns while remaining committed to returning surplus cash to shareholders through our share repurchase program.

In the third quarter, we did not repurchase a meaningful number of shares. However, our share repurchase program remains active, and we ended the quarter with approximately $169 million available under our current authorization.

Now turning to the details of our guidance. We expect revenue in all major product categories to increase in the fourth quarter despite a broader supply constrained environment. With datacom growth expected to be more measured as we continue to navigate component availability that is not keeping pace with strong demand. At the same time, we are excited by the number of new customer programs coming online which we expect will contribute more meaningfully to our performance in fiscal year 2027 than in the fourth quarter.

With that backdrop, we expect total revenue to be in the range of $1.25 billion to $1.29 billion, representing year-over-year growth of approximately 40% at the midpoint. We expect gross margin dynamics to be similar to Q3 with continued operating leverage as top line growth continues. As a result, we expect non-GAAP EPS to be in the range of $3.72 to to $3.87.

In summary, our third quarter results were exceptional, with record revenue and earnings that exceeded our guidance as good continued to accelerate. We also made strong progress against our longer-term strategic priorities, establishing additional vectors of sustainable growth that we expect to begin contributing as early as the fourth quarter, positioning us to extend our strong track record into fiscal 2027 and beyond.

Operator, we are now ready to open the call for questions.

[Operator Instructions] And our first question comes from George Notter from Wolfe Research.

I just wanted to double-click on the datacom business. I know that last quarter, you talked about having some new supply of 200-gig per lane EMLs coming online that would help support growers on the datacom business. It sounds like that didn't happen. I'm just wondering kind of what's going on in terms of EML supply. Is that the gating item you're referencing? Or are there other components that are problematic now? Anything more you can tell us would be great.

Yes. There's -- this is Seamus. Yes, there's a number of, I guess, commodities, you could say that are causing us constraints. First of all, we're very excited at the breadth and depth of the opportunities we see in front of us, not just with our main customer, but across a number of new products, new markets for us. Since we started to see the revenue accelerate from this -- demand, our strategy has been to support the existing demand and also pursue while pursuing additional hyperscale direct and also merchant relationships. So we're -- we're excited with the progress we're making there and what we're managing right now. It's not demand risk, it's supply constraints.

With respect to datacom supply, we saw a broadening of supply shortages for components and materials for datacom products. And as a result, shipments and revenue were well below demand levels. We could have shipped a lot more if we had those components. Without these supply constraints, datacom revenue would have been a new record by a weak margin while we expect the constraints to get resolved over time, we do have to deal with them right now in the near term, we anticipate that supply volatility will continue. And it's in a number of areas. It's not only one component. It's a number of areas, mainly lasers, memory, which I think is no secret that there's a global shortage of memory and also certain ASICs. So it's across a number of commodities.

Great. And then I just wanted to ask one also on CPO. I just want to be clear on where you guys see your opportunity in CPO. I guess I assume that LSPs that go into CPO switches are kind of a real natural for you guys. Are you also going to manufacture other elements of CPO switches? I mean, historically, you guys have not really been involved in manufacturing the switches themselves. But obviously, this is a unique architecture. There's a giant amount of sort of fiber attached that goes into your fiber tech units into that CPO package. I just want to be clear on what you guys see yourselves kind of doing in terms of that manufacturing exercise.

Yes. So for us, CP for us is really an evolution from silicon photonics and precision photonics patching capabilities that we've had for many years. And it continues to be an area of investment for us to align our capabilities with our customers' road maps. For many years, CPO has been just on the horizon, but it's a lot more real now than it's ever been. We're in an excellent position to benefit. We feel we're well ahead of our competitors in making this technology a reality. And we're already seeing some CPO revenue, so the amounts are relatively small at this point.

We're working on a number of CPO programs with 3 different customers specific timing on each of them. We don't really want to speak on their behalf, but we're working on 3 separate programs. And as with our custom programs, we expect to see the impact in line with or slightly ahead of our customers production schedules. So the growth in CPO is in front of us. And as you rightly point out, there are several opportunities for us in CPO, and we feel we can participate at a maybe a higher level of the food chain than we have historically. So we're excited about CPO.

Our next question will come from Karl Ackerman from BNP Paribas.

I have two, if I may. Seamus, do you believe you will be at the full run rate of the current HPC program in June. I think the previous expectation was March and June time frame. And I guess, how much visibility do you have with that follow-on program? I have a follow-up, please.

Yes. So our current HPC program is ramping according to our customers' expectations. It's not ramping in a perfect straight line. These things never do. But we've been working closely with the customer to transition production to their latest generation product, and that transition is making good progress. We've also been awarded some follow-on business rational programs, separate from the main, if you like, the main programs. We've awarded some additional programs with that customer. So we're really helping to support their accelerated computing infrastructure in a broader way than have been in the past.

We're installing additional capacity right now to support both the technology tension and also the additional products that we'll be manufacturing, because of this technology transition, we now believe that $150 million mark will be pushed out by maybe 1 quarter. But as a result, we expect our high-performance compute revenue to continue growing even after we reached the first $150 million quarterly revenue milestone.

So short term, this quarter, let's say, we don't think we get to the $150 million, but we think it's probably a quarter away, but longer term because we're now making more than just, if you like, one family of products, we think the opportunity is more than that. So like I said, when the timing has shifted slightly the overall trajectory is stronger, actually, and we expect continued growth beyond that $150 million level. And we remain very optimistic about the long-term outlook for our high-performance compute business overall.

Very helpful. And then maybe for Csaba. Building 10, that was 2 million square feet. We're adding a fifth floor. So is it 2 million square feet still the case? Or is it presumably 2.5 or so. And then with respect to the two additional buildings of 1 million square feet, given the high ROIC and also lower for cost of building this new manufacturing fab, how quickly can you accelerate these manufacturing facility investments, so you're not capacity get restrained for these very large opportunities?

So Karl, maybe I'll just comment first on the capacity. Right now, our current capacity, we have capacity for about $4.8 billion in our current footprint. As we mentioned on the last call, we're converting about 200,000 -- sorry, about 120,000 square feet at our Pinehurst campus into manufacturing space that will add an additional $200 million in capacity. So that would take our capacity up to $5 million before Building 10. Building 10 would add about $3 billion of capacity. And then the new factory that we just purchased in Nava Nakorn down the road from us. Initially, that will have capacity for about $250 million in the current factory that's on that land, but then there's room to build another factory. So overall, that purchase will give us capacity for about another $0.5 billion. So $4.8 million in our current footprint, plus the Pinehurst -- it didn't plus the Nava factory plus Building 10, that would take us to a capacity of about $8.5 billion, if you add all that up.

And then building -- and the timing on Building 10, we talked about the first floor of that will be coming on stream in June, and we plan to have another floor ready, which will be mostly a clean room space by September, October. And then the building will be finished by the end of the year, we'll probably have the opening ceremony in January towards the end of January. Building 11, which we haven't broken ground on that yet, but Building 11 would give us capacity for about another $1.5 billion of revenue and Building 12 the same. So if we were to build out everything we have on the current land and space that we have that would give us capacity for $11.5 billion there or thereabouts, probably a little bit more because while our growth is accelerating, our revenue per square foot is also going in the right direction. It's increasing as time goes on.

So $11.5 billion fairly conservatively, probably a little bit more. The timing of that, it's too early really to talk about that card at this stage. We're focused on meeting our customers' needs, making sure we have capacity in place. So we have ample capacity for the next few years, but we are seriously considering what the timing might be for Building 11 and Building 12. We're also looking for additional land in and around both the Pinehurst campus and also Chonburi. So high quality problems.

Our next question comes from Samik Chatterjee from JPMorgan.

Seamus, maybe if I can start with the new datacom customer opportunities that you outlined with both the hyperscaler and some of the merchant opportunities. Can you help us sort of size that in terms of what these customers are communicating to you in terms of what their demand will look like at full run rate? Just trying to compare it to your primary customer with whom you're doing about sort of $250 million a quarter or so. How do these new opportunities sort of size up relative to that? And is the supply chain different where we should not expect some of the supply constraints you have with your primary customer to impact ramp with the new customers that you have. And I have a follow-up after that.

Yes. I think the supply chain is broadly similar across most of these primarily scale-out applications. It's very similar supply chain taking both of those in turn that you just mentioned, so the hyperscale relationship. Yes, we're excited about the new datacom opportunities where we announced today. There are two separate products. And we've already began shipping, albeit in small qualification type quantities, but we've begun shipping those, and we expect that growth is already in front of us. And we believe it will be significant. It's a significant piece of business for us. The demand that we're seeing from the customer is very significant, and we are very focused on making sure we have the right capacity and capability and everything else in place to support the customer.

In terms of merchant programs, again, for several quarters, we've been working towards expanding our datacom business to encompass again, to direct hyperscale as we talked about, but also deep dealing and broadening the merchant relationships, and we have made sizable progress there. We have a couple of programs there as well that we're working on. So both very significant, both the hyperscale direct and the merchant, both very significant and have the potential to be very meaningful revenue contributors for us. But like as I say, both of those. All of those opportunities are essentially a very similar supply chain kind of ecosystem. I hope that makes sense.

Yes. Okay. Seamus, maybe I'll just ask you a clarification question on that and have a question for Csaba. Are you expecting that these programs stand-alone are like 10% of your revenue? Is it that sizable relative to the opportunity? And then, Saba, just the gross margin outlook here, like it sounds like you'll be at this sort of low 12% for the next quarter as well? How should we think about the recovery on the gross margin profile, particularly as ramp costs continue to sort of feed through the P&L?

Yes. On the contribution from these customers, we never predict which customer may or may not become a 10% customer. We always talk about that. at the end of the year when we have to disclose which customers are 10% customers. So we only talk about that looking back. We never talk about it looking forward. But there are significant opportunities. That's all I'd say about that.

And then on the gross margin, I'll let Csaba provide a little bit more color on the gross margin.

Sameek, so basically, what we are seeing on gross margin is a combination of external and internal factors. On the external side, we have been communicating exchange rates, which have been a headwind for a while and that dynamic continues into this quarter. So the margins from exchange rate perspective will be similar in our Q4 as it was in Q3. Obviously, we have some visibility with our hedging program in place. So Q3 panned out as much as in terms of headwinds as we had anticipated. So Q4, we anticipate to be at that same level.

Obviously, at the same time, we are ramping a large number of new programs across multiple growth factors, which is sometimes creates short-term inefficiencies. So obviously, this is a function of strong demand and the pace we are scaling the business. So as this program mature, we do expect those efficiencies to improve and get back to our higher margin ranges. Obviously, the good news is that we are very disciplined on the operating expenses. As you saw last quarter, we continued to generate operating leverage and OpEx is trending down. Overall as a percentage of the revenue. Last quarter, we were at 1.4%.

So there are some near-term pressures on gross margin, some of it we cannot control from an exchange perspective, but the overall model continues to deliver a very, very strong and solid and improving profitability as we scale. So we feel very good about the underlying model and our ability to drive long-term profitability growth. And obviously, our ultimate focus is to remain driving strong return on capital and delivering consistent value to shareholders as we scale these programs.

Our next question comes from Christopher Rolland from Susquehanna.

This is [ Dylan Olivier ] on for Chris Rolland. So for my first question, I wanted to ask, you spent some time talking about in your role here. So you mentioned that you're working with 3 customers or 2 programs and that you've begun getting revenue now. So are all these programs getting revenue today? And then any color you could provide on if these are all scale out or if any of these engagements are related to scale up.

We are shipping to all 3 customers. They're both scale up [indiscernible]. Both will scale up and scale out. And we're really putting the capacity in place and making sure we have the right technology in place. You'll see with our investment in rate tech. It's really to help us make sure we have the right capability. So we are excited about CPO, but it's largely -- revenue is largely in front of us at this point.

Great. And then for my second question, I wanted to ask maybe about another opportunity that you didn't discuss on this call, but is kind of seeing it's a nice little explosion right now. Are you -- any sort of color that you can provide on our engagements are going, when do you think this can materialize and if you can get a dominant chair of the externally contracted OCS market.

Yes. So OCS remains. We think it's a great opportunity for us as we look ahead. The technology is very similar to products that we already make for our customers. So it gives us a real head start versus our competition. There's no change in our optimism about OCS. But to be clear, the new merchant opportunities that we talked about earlier that they are not -- we'll see us related, they're separate. But yes, we see opportunities are incremental to that. And again, similar to CPO are largely in front of us. But we're focused on 1 or 2, too early to talk about in -- until we have something to have something to talk about, but we're pretty excited about OCS as a segment.

Our next question will come from Ryan Koontz from Needham & Co.

I just want to ask a little more generically regarding your transceiver wins. Can you just expand for us kind of where you would be in your milestone process before you'd announce to us that you have a win? Is it you have a contract, you have qualification, you have sampling. I'm not asking specifics about the same customer, but generically, at what point do you typically disclose and might we consider these different programs in the process between ramping material revenue and maybe an MOU that's not contractually bound.

Yes. It's a good question. Actually, generally, we don't really talk about wins until we have actually won the program. So that would mean we have been awarded the business. We have a contract in place. We have purchase orders. We've been qualified and approved. So we're really at that milestone phase where we're being ready to ramp at this point. Ryan, that's really our -- we don't really signal specifics and new programs and until we have them won. That's generally how we've tended to do things historically because not all not all products that you think you've won early on turn into real products. or in demand. So in this case, I'm happy to report here, we have a number of programs that we won, like I say, contracts in place, product being shipped, contract signed with customers. So there -- we've actually won those.

That's helpful, Seamus. And then give us a follow-up just on your strength in telecom. Obviously, DCI and it's a big star there. How would you characterize your customer mix within telecom is changing? Can you share anything about kind of the product mix there? 400, 800ZR, I mean I know you guys pretty much touch everything going on there, but are you seeing some industry shifts that are working in your favor within the telecom mix?

Yes, I think there are. We're really -- our position supplying the DCI market is very strong. We have really all of the major players there as customers of ours. And as we talked about in the prepared remarks, our growth in DCI has been pretty staggering. And our datacom -- I'm sorry, our telecom portfolio continues to go from strength to strength. We don't just provide components, we provide the DCI, the 400ZR modules as well as our telecom systems. So we really -- I suppose we've really evolved our business from being a niche optical component supplier, which we were several years ago into a diversified strategic ecosystem partner for the leading OEMs. For both optical components, but also systems across all dimensions of AI-driven growth in both datacom and telecom.

And like I say, the best example of that is probably our strength in in DCI, data center interconnect. So the demand looks to be very strong. We continue to win business in that space and continue to execute very well for our customers. And there's a number of new programs that we're working on as well. as well as ramping the existing programs as new products in the works as well that we're not shipping in volume yet, but we're gearing up to ship. So we feel very good about our momentum in DCI with the leading customers there.

Helpful. And do you consider multi-rail an opportunity for you in your wheelhouse there to go with the telecom sector?

I think it's -- anything in the telecom space where we can have a good high level of content is a good fit for us. So yes, certainly, those type of products will be a good fit for us.

Our next question comes from Steven Fox from Fox Advisors, LLC.

Seamus, I guess I was curious on the supply constraints. It sounds like they got worse during the quarter. And at the same time, it sounds like even if we think about just end market demand, end markets are getting stronger. So can you paint a picture for how constraints don't get worse going forward and how do you manage through this and start catching up with demand? Is there any line of sight to improvements? And then I had a follow-up.

Yes. I think we're not unduly concerned long term, but we do feel obliged to point it out in the short term because we guide 1 quarter at a time. It did impact our ability to ship last quarter, we could have shipped a lot more if we had those components and the same this quarter. But overall, it's really a function of the growth that we see in the industries that we serve and in our business overall. That growth -- we're very proud of our our track record of excellent execution built on dedication to customer service. That's really the secret sauce here. That track record is what has allowed us to deliver the sales growth we've seen over the last.

If you look over a 10-year period, even up to FY 2025, we compounded the revenue growth of 16%, the compounded earnings is 22%. And then in FY 2025, we grew 19% versus FY '24. And if you look at FY '26, since we're now in Q4, if you take the midpoint of our Q4 guidance, that will put us up 34% versus FY '25. So FY '25 grew 19% versus FY '24, FY '26, at the midpoint of our Q4 guidance would be up 34% versus FY '25. So growth is accelerating. And with that acceleration of growth, it does expose certain supply constraints. The component supply ecosystem is doing everything they can to catch up with the demand. But there is a lag right now between the demand we're seeing and the supply base catching up with that demand.

And really our focus is on execution and ensuring we capitalize on this really strong demand environment that we're seeing having more than enough capacity in place to support each of our customers while we work on these challenges in the supply chain. So it's nothing unusual. We think it's really a function of just this explosive growth we're seeing.

That's fair. And then just one other question on the flip side of that, you're accelerating your own capacity additions. I guess if we started today as another starting point, like your ability to accelerate further like what else would you have to see? Would it be more in programs or loosening up of the supply chain that you -- the supplies you need? And how long would that take?

I think -- for us, it sounds like we're adding a lot of capacity. They're quite straightforward, if you like, capital allocation decisions for us because of the huge upside potential, we guess, we build a 2 million square foot factory that will give us capacity for an addition of $3 billion of revenue. The CapEx is just -- depends on the exchange rate on the day you look at it, when it's $130 million, $132 million, something like that.

The upside opportunity for us at full run rate in that factory. 6 months' worth of operating profit would pay for the entire 2 million square feet of manufacturing space. On the downside, if there is a downturn, and we end up with no new business going into that factory, which we don't anticipate, but just if we did, if that were to happen, the gross margin headwind would be about 50 basis points, something like that. So a negligible headwind and a significant upside opportunity. So that makes these decisions for us relatively straightforward. The capacity is very is fungible, whether it's the 2 million square feet in Chonburi, or the -- a couple of hundred thousand square feet that we just acquired in the [indiscernible] or the 150,000 square feet that we're converting in Pinehurst. The capacity is very fungible. And the customers are very comfortable working -- most of the customers are very comfortable having us build their products in either location.

So -- and like I said earlier, we have room to add two additional factories in Chonburi, and we can have another 200,000 square foot factory on the land which was purchased in the [indiscernible] . So we have ample land and capacity to seize up for the next several years and then we continue to look for more land. So certainly, as we're seeing the strong demand segments seen from our customers making those capital investments is a relatively straightforward decision for us because it's -- we're not we're not taking any big risks. We're just really making sure we have capacity in place to support the needs of our customers, and that's really our focus.

Our next question comes from Michael Genovese from Rosenblatt Securities.

Seamus, in talking about the direct hyperscale datacom business, I think you mentioned that there's two products. Can I ask, does that imply an 800G and a 1.6 or are they to 2 800G products? Can you comment on that?

They're both 800 gig, but they are different applications. They scale across -- sorry, they're both scale apps not scale across.

Perfect. Okay. And then on the -- I mean just very good DCI growth this quarter, and I think you were asked, but is a little bit more kind of vaguer question. I just want to ask a little bit more pointedly, if 800ZR in particular, drove an outsized portion of the growth this quarter or if it was more broadly spread. And then I also noticed that you had some telecom growth above and beyond -- so if you could just call out those products that were not DCI that also grew in telecom, that would be helpful.

Yes. So on the mix between, let's say, 800ZR and 400ZR, it's probably more appropriate for our customers to talk about that. But really 800ZR is ramping, I would say it's getting going, and we do have very big hopes for that. It looks to be a very strong product. But again, the growth like a lot of these programs that we've won despite the fact that we've demonstrated really excellent growth, we think this past while. A lot of those new programs are really in front of us that are just beginning to ramp. And I would put 800ZR in that category.

And your second question?

Just the telecom growth there was above and beyond, DCI didn't drive at 100% of the telecom growth. There was more telecom growth in DCI. So if you could just call out some of the strong products outside of DCI and telecom, that would be helpful.

Yes, we continue to win -- we continue to win business with our customers, both DCI but also outside of DCI, both in -- at the component level and also at the system level with a number of our customers. We continue to win business, mostly share gain maybe from some of our competitors. So that continues at a pace with our customers. We're very fortunate. We have the -- we believe, some of the really best companies in the industry, and the demand for their products is very strong. And because of the -- we believe, a very good job we do, taking care of them and executing the reward us by giving us more business. So it's a kind of a self rewarding loop. The better we do, the better job we do executing for the customers, the more business they seem to give us.

So it's a combination, like I said, of both the growth in growth in DCI. It's also ramps of programs we've been awarded previously, and thirdly, new business that our customers continue to award us.

[Operator Instructions] And our next question will come from Tim Savageaux from Northland Capital Markets.

Seamus, I'm going to take you back to OFC. And I think you commented that you wished you guided farther out sometimes. And I'm going to try and to forge you that opportunity here with the following contracts.

I appreciate that.

I know my pleasure. In the context to some comments you've made earlier in the call about maintaining momentum into '27, you mentioned '27 and sustaining this growth trajectory. Now as I look at these datacom wins, maybe by themselves, but -- and I have a follow-up question on that. But I mean it seems to me quite plausible that you could sustain and accelerate this 34% growth rate that you're putting up in fiscal '26. Any comments on that?

Well, I think again, as you point out, yes, FY '25 grew 19%. FY '26 will grow at 34% versus FY '25 at the midpoint of our guidance. And the thing that we're particularly as proud of is we've managed to do that if you look at, again, FY '26 at the midpoint of the guidance, if you take this quarter, for example, compared to the same quarter a year ago, we grew the revenue from $872 million to $1.214 billion, so 39% year-over-year growth in Q3. Our operating expenses grew by 6.2%. We went from $16 million to $16.99 million. So we grew the OpEx by a mere 6.2%. So therefore, on revenue growth of 39%, our operating income grew 46% and our net income grew 48%.

So growth without profit is not much fun for anyone. So we're very focused on making sure as we grow that we are we're very cautious with the use of the company's resources and the company's assets, but that we also execute in a way that allows us to get that operating leverage that we've been delivering for quite some time. The growth is accelerating. There's no doubt about that. And certainly, the demand segments we see from our customers. There's always things going on in the world that we don't control. So we don't worry too much about those things, because we can't do anything about them other than respond to them.

But certainly, if you look at the key fundamentals that drive our business and that allow us to make these capital allocation decisions and if you like, investments and expansion decisions, it looks to be very promising. And for some time to come, it looks to be very promising. Again, we'll continue to guide one quarter at a time, Tim.

But at the same time, that doesn't stop us from being optimistic about the future. And certainly probably more optimistic than we've been in quite some time. It's a very, very strong demand pipeline that we're seeing across the board, both telecom and datacom. And also our industrial laser business, we're seeing some growth there, and we're making some traction there with some new business wins. So it's really across our business.

Okay. And along those lines, would you expect your two datacom direct wins to be in full ramp, I guess, by the end of fiscal '27 or maybe even earlier than that.

I think probably earlier -- sorry, Tim, I didn't mean to -- I think earlier than the end of fiscal '27 probably middle -- kind of middle of fiscal '27.

Great. And then last one for me is on the merchant wins, and maybe I'll -- because who knows these could be related I want to combine that with a question about outsourcing opportunities from some of your historical, let's say, onetime 10% customers. But how do you -- I guess, how should we look at those merchant opportunities? I mean, look, on these direct things, it seem to be any reason that any one of those two guys could be as big as your current big datacom customer at least. But from a merchant standpoint, how should we be thinking about that in terms of those opportunities and how they ramp? And indeed, does that kind of cross over to the boundary of outsourcing?

Yes. I think, yes, certainly both of the opportunities, both the hyperscale direct, which will probably ramp throughout FY '27. With the new program, it's hard to say exactly how quickly it will run, but it'll probably ramp throughout FY '27. On the merchant opportunities, again, some of these opportunities are very significant. The demand is very strong. And for us, we don't really mind who we're making, for example, transceivers. We don't mind who we're making transceivers for as long as we're making somebody else's design because we're really adamant about that, Tim.

We're a service company. We will never have our own product. We never compete with our customers. It's very, very important for us, and it's very important for our customers. So we have to make sure we thread that needle carefully and never end up in a situation where we have a product design. So we don't have that. We're facilitating our customers with somebody else's design and we just happen to manufacture it. But certainly, the demand is very strong. Even if you were to take a relatively modest percentage of the -- of any hyperscalers demand. And if we were to be able to supply a relatively modest percentage with a product that we can ship direct and it's still very significant. So we're very focused on it. Those represent a big opportunity. You're exactly right.

And any one of these will be significant opportunity worth noteworthy and worth talking about. And the exciting part is we have several of these. We have, like I say, two separate programs linked to a hyperscaler. And we have merchants business, and we have our main customer as well. So -- and we haven't really talked that much on this call about our telecom business, which again goes from strength to strength. So lots of growth factors.

Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Seamus Grady for any closing remarks.

Thank you for joining our call today. We are excited to have delivered another impressive quarter that exceeded our guidance. Moreover, we're very enthusiastic about the several key new business opportunities that will further support our strong growth starting in the fourth quarter and that also positions us to extend our remarkable performance record into fiscal year 2027. We look forward to speaking with you in the future and to seeing those of you who will be attending the upcoming Needham and JPMorgan conferences. Thanks again, and goodbye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the Second Quarter of Fiscal Year 2026. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the call over to your host, Garo Toomajanian, VP of Investor Relations. Please go ahead.

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 second quarter of fiscal year 2026, which ended December 26, 2025. With me on the call today are Seamus Grady, Chairman and Chief Executive Officer; and Csaba Sverha, 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. During this call, we will present both GAAP and non-GAAP financial measures. Please refer to the Investors section of our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation as well as additional details of our revenue breakdown.

In addition, 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 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 November 4, 2025.

We will begin the call with remarks from Seamus and Csaba, followed by time for questions.

I would now like to turn the call over to Fabrinet's Chairman and CEO, Seamus Grady. Seamus?

Thank you, Garo. Good afternoon, everyone, and thanks for joining our call today. We had an excellent second quarter. Revenue and earnings significantly exceeded our guidance ranges with multiple large key strategic programs across our business, all contributing to our strong performance.

Second quarter revenue was $1.13 billion, a new record for the company, which represented growth of 36% from a year ago, and is the fastest year-over-year growth we've achieved since our IPO over 15 years ago. Our remarkable top line performance also represents 16% growth from the prior quarter. Non-GAAP EPS also set a new record at $3.36 per share, exceeding our guidance range despite stronger FX headwinds in the quarter.

Looking at our performance in greater detail. Optical communications revenue grew 29% from a year ago and 11% from the prior quarter. Telecom revenue reached a new record, increasing 59% from last year and 17% from Q1. Within telecom, DCI revenue grew 42% from a year ago and 3% from Q1 as strong longer-term growth trends remain firmly intact. Datacom revenue grew 2% sequentially, while the year-over-year decline narrowed to 7% as demand continues to strengthen.

In nonoptical communications, we delivered a very strong performance, with revenue surging 61% from a year ago and up 30% from last quarter as high-performance computing revenue soared to $86 million in the quarter. We expect this strong sequential growth to continue in the near term, particularly as our second and third fully automated production lines get qualified.

Automotive revenue grew 12% from a year ago, but was down slightly from Q1 as anticipated. While Industrial Laser revenue demonstrated respectable growth of 10% and from a year ago and 4% from last quarter. We are confident that the same growth drivers that contributed to our success in Q2 will extend into Q3. This includes growth in all major areas of our business, with the positive exception, [ automotives ]. We are experiencing sustained telecom demand, including strong DCI module growth, ongoing datacom momentum and continued growth in HPC as our business ramps. In addition, we continue to aggressively pursue new opportunities across all areas of our business. As our business scales, we remain focused on execution as well as strategic capacity expansion. Construction of Building 10, which will be a 2 million square foot facility is still on track for completion at the end of calendar 2026. We are making progress on completing about 250,000 square feet of that by the middle of the calendar year. At the same time, we are creating additional manufacturing space at our [ Pinners ] campus, by converting office space into manufacturing space and relocating those offices into a new building on that campus. With this capacity expansion, we are well prepared to continue supporting our anticipated growth in 2026 and beyond.

In summary, we delivered an impressive second quarter performance with numerous significant customer programs contributing to our outstanding results. We are well positioned to extend our track record of profitable growth and to meet the increasing level of demand we are experiencing in the third quarter and beyond.

I'll now turn the call over to Csaba for more financial details on our second quarter results and our outlook for the third quarter. Csaba?

Thank you, Seamus, and good afternoon, everyone. We are extremely pleased with our performance in the second quarter of fiscal year 2026. Revenue exceeded our guidance range, reaching a record $1.13 billion, up 36% from a year ago and 16% from Q1. Strong execution produced non-GAAP EPS that also exceeded our guidance range at $3.36, which includes the negative impact of a $3 million or $0.09 per share FX revaluation loss. .

Turning to revenue performance by market in the second quarter. Optical communications revenue was $833 million, up a strong 29% from a year ago and 11% from Q1. Within optical communications, telecom revenue grew to a record $554 million, surging 59% from a year ago and 17% from Q1. Within Telecom revenue from Data Center Interconnect or DCI modules was $142 million. DCI module revenue delivered another strong year-over-year performance, increasing 42% and grew 3% from the first quarter.

Datacom revenue was $278 million, while revenue declined 7% year-over-year, it increased 2% sequentially and trends appear favorable for continued sequential growth.

Turning to non-optical communications. Revenue in this category was $300 million, up a sharp 61% from a year ago and 30% from Q1. This exceptional growth was primarily driven by high-performance computing products, which contributed $86 million to revenue in the quarter compared with $15 million in Q1, the first quarter in which we broke out this category. We are confident that our first HPC program will continue to grow rapidly and is on track to be fully ramped over the next 2 quarters. [indiscernible] revenue of $117 million was up 12% from a year ago, but was slightly down sequentially as anticipated. Industrial laser revenue grew 10% year-over-year and increased 4% sequentially, contributing $41 million to the non-optical communications category. As I discussed the details of our P&L, all expense and profitability metrics will be presented on a non-GAAP basis, unless otherwise noted.

Gross margin in the second quarter was [ 12.4% ], and a 10 basis point improvement from Q1 and consistent with a year ago despite foreign exchange headwinds. At the same time, a modest increase in operating expenses, combined with strong top line growth continued to drive operating leverage. Operating margin reached 10.9% in second quarter, up 30 basis points from both Q1 and a year ago. Interest income was $9 million, and was partially offset by a $3 million foreign exchange revaluation loss. The effective GAAP tax rate for the quarter was 5.9%. As a result, net income was $122 million, or $3.36 per diluted share.

Turning to our balance sheet. We ended the second quarter with cash and short-term investments of $961 million, down $7 million from the end of Q1. Operating cash flow for the quarter was $46 million. Capital expenditures of $52 million continued to run above maintenance CapEx levels, reflecting construction of Building 10 and capacity enhancements at our [indiscernible] campus. As a result, free cash flow was an outflow of $5 million for the quarter.

Turning to our share repurchase program. During the second quarter, we repurchased just over 12,000 shares at an average price of $387 per share for a total cash outlay of $5 million. At the end of the second quarter, $169 million remained available under the program.

Turning to our Q3 guidance. We are confident that the very strong growth trends we have been seeing across our business will continue in the third quarter. We expect revenue to grow sequentially in telecom, datacom and HPC, while anticipating another modest sequential decline in automotive revenue. We expect total revenue to be in the range of $1.15 billion and $1.2 billion. representing approximately 35% year-over-year growth at the midpoint. While we anticipate that FX headwinds will persist in Q3, we expect to offset of that pressure through continued strong operating leverage. As a result, we expect non-GAAP EPS to be in the range of $3.45 to $3.60, representing approximately 40% year-over-year growth at the midpoint.

In summary, we delivered an excellent second quarter with strong momentum across multiple areas of our business, we are well positioned to extend our track record of success into the third quarter.

Operator, we are now ready to open the call for questions.

[Operator Instructions] our first question, it comes from Samik Chatterjee with JPMorgan.

Maybe, Seamus, starting with you. You had a pretty strong ramp with the HPC customer, but maybe if you can sort of share your thoughts in terms of where you are with the ramp with that customer. Particularly, I think you talked about a second and third production line, I mean what does the fully ramped volume look like relative to the $80 million plus sort of level you did this quarter? Are you sort of halfway relative to the full ramp? Or are you sort of only 1/3 in because you are adding 2 more production lines. If you can just share your thoughts in terms of what the full ramp looks like? And when do you expect that full ramp? And I have a follow-up.

Samik, thank you. Yes, we're in about halfway, I would say, to be a little bit more than halfway. We expect the revenue from our current HPC program to be north of about $150 million when it's fully ramped. We're currently running on 2 fully automated production lines. We had 1 line. We got a second production line qualified, and we're in the process of qualifying additional lines. Once we're able to achieve that and get the lines around, we'll be well be on our way to that run rate, again, which we expect to achieve over the next couple of quarters. After that, we believe there's a couple of growth at for us in HPC, given our one-stop shop kind of value proposition and competitive cost structure, we're pursuing other HPC customers, of course, as our relationship with AWS is not exclusive. The time lines for these is -- can be fairly long. Meanwhile, if we can exceed our main -- our initial customer, if we can exceed their expectations for cost [indiscernible] and deliveries, we may be able to earn a larger piece of our current program because we're currently a second source in that program. So no matter how you look at it, we're very excited to see our high-performance computing business, rapidly becoming a meaningful revenue and growth driver.

Got it. Okay. And then maybe I wanted to ask you on [indiscernible] opportunities as well. I mean, one of your big customers is now closer to commercializing CPO in more large volume. So any more clarity that you have on that front as to what your role in co-packaged optics is going to be and what maybe the content opportunity on that front is going to be. And there's a lot of excitement in the optical space around OCS products as well, optical circuit switches, do you see that as an incremental opportunity, any customer engagement on that front as well?

Yes. So we -- for us, co-packaged optics, it's really an evolution from silicon photonics and the precision photonics packaging capabilities we've developed over many years. We have and will continue to invest heavily and working closely with our customers to align our capabilities with their road maps for many -- for many years, co-packaged optics has been just on the horizon. But for now -- right now, it's much more real than it's ever been, and we are in an excellent position to benefit from that. We believe we're far ahead of most of our competitors in the space in making this technology a reality. And we're already seeing some CPO revenue, although the amounts are relatively small right now. We're working on co-packaged optics programs with 3 different customers. It's not just 1 customer, so like it's actually 3 different customers. the specific timings on when the revenue would become more material, depends on our customers' road maps and schedules, but we're very excited about CPO. Again, we don't really want to speak on our customers' behalf, but rest assured, we're quite excited that we have several products that we're working on our projects with our customers. As with other customers, we'd expect to see the impact in line with or slightly ahead of our customers' production schedule.

On optical circuit switching. We are engaged on a number of fronts. And again, it's a product -- it's a completely new product category. We're quite excited about it. And I'm looking forward, nothing to announce. But really will depend on our customers' ramp schedules, but we are working on a couple of projects on -- in that space. And we are quite excited about OCS as a technology. We think it has a significant role to play in the future.

Our next question is from Karl Ackerman with BNP Paribas.

Two questions for me, please. First off, do you remain supply constrained on datacom transceivers because I would have thought that you might be maybe improving datacom mix as lager capacity comes online. I guess as you address that question, could you speak to the growth opportunities you see within that segment across hyperscale and across merchant transceivers OEMs. Any of that would be helpful. And then I've a follow-up, please.

Thanks, Karl. So yes, we have been, as you say, supply constrained in our datacom, particularly on the leading-edge products, the 200 gig per lane both 800 gig and 1.6. Demand continues to strip supply, and we continue to ship significant volumes to our main customer, but of course, we could ship more if we had more components. We did get approval for a second source for the EML for the laser, which has been the main cause of the supply constraints. So we were able to get a second source. Our customer was able to approve a second source for the laser during the quarter. And that should benefit us this quarter and in future quarters. So we are making good progress there. We've always felt that, that supply constraint will resolve itself and we're starting to see that resolute come through now. The mix between 800 gig and 1.6 at that 200 gig per lane, it's really not that relevant to us. We don't mind which the customer orders. We're happy to ship what they need from. So again, good progress, and we're making good progress there.

As regards to other potential growth drivers in the datacom space. Again, we have several projects that we're working on, both with hyperscale direct and with other potential product companies who need our services. So several projects that we're working on. Again, nothing to announce yet, but several that we're working on, again, both hyperscale direct and other, let's say, merchant transceiver manufacturers.

Got it. Very helpful. Perhaps if I can talk about telecom [indiscernible], of the $80 million sequential increase, was that evenly split between SATCOM and the core telecom or optical module system business? Just trying to get a relative mix of the Satcom business there. And then as you address that, do you believe that your Satcom business opportunity can be similar to your high-performance computing opportunity over time?

Yes. I mean, as you call it the satellite communications business has been growing steadily for us. It's been a meaningful contributor for a while. We haven't really broken it out separately. A lot of the growth in the quarter was more focused on the DCI, I think. DCI has been very strong for us. We have a number of customers there and really mostly 400ZR and 800ZR modules, that business has been growing very nicely for us. So again, we're very optimistic, I would say, about telecom generally, both from a satellite communications point of view and the DCI point of view. And also [indiscernible] also complete network systems. Our network system business continues to grow as well. So really solid growth, I think, on all fronts in our telecom business.

Our next question comes from the line of Christopher Rolland with Susquehanna.

I guess the first 1 is around CPO switches as opposed to scale up. Are you hearing about increased desire for CPO switches? Is this perhaps upsiding your capacity plans? And just generally, your outlook for CPO switches versus the typical transceiver set up, how do you think this might move over time?

Yes. I mean, we're involved in the CPO, let's say, supply chain. We're in the ecosystem there. We haven't actually talked about exactly what we are doing, but certainly CPO switches and a number of the products that our customers are working on are very exciting for us. We haven't really -- like I said, we haven't really talked about the switch -- the CPO switch opportunities in detail. But yes, certainly something we're excited about. But I really wouldn't want to go much deeper than that at this point, Christopher.

Understood. Perhaps as a follow-up, DCI seemed a little bit disappointing versus at least our model. And then non-DCI under telecom had some upside. You could perhaps address the -- at least the DCI portion? What's going on there? Is that also laser and supply based? Or is there -- that a pure demand dynamic?

No, it's -- the demand remains very strong. We continue to see great momentum in our DCI module business. We grew 59% year-over-year. And we have all of the market-leading customers in the space. And we do believe the long-term demand is durable and as we work with the customers on the next-generation 800ZR products, which are yet to ramp. Like any leading technology products, there's always going to be constraints here and there. So with new products and leading technology products, it's not always straightforward. All the components have to line up, the designs have to work, everything has to go perfectly, but the demand remains very strong.

Telecom revenue growth was particularly strong as we started to ramp Sienna's new system program, as well as other new program wins that we're particularly excited about. [indiscernible] But in the early -- specifically I we broke out our DCI revenue. We talked -- we want to be clear that in reporting our DCI revenue is for coherent telecom modules that we have high confidence are being used in datacom interconnect -- sorry, data center interconnect applications. And these include both 400 and 800ZR modules and their variants as well as some embedded coherent line [indiscernible] modules as well. So our DCI revenue does it does not include telecom systems that's our pure DCI coherent business. So -- but overall, I think we're we remain very optimistic about DCI. There will always be puts and takes. It won't always grow in a straight line, especially again because, as I said, when you're you're dealing with leading-edge products, there's always going to be challenges here and there, but nothing we're concerned about. The demand remains very robust.

Our next question comes from the line of George Notter with Wolfe Research.

I just wanted to kind of lean in on new customer opportunities on the telecom side of the business. Like I think you're kind of suggesting that you're working with other customers. Are these like OEM customers that are in the marketplace and shifting existing business from other manufacturers to Fabrinet? Or are these new product categories? I guess I'm just trying to understand what you guys are looking at in terms of new opportunity. And I noticed from Nokia's earnings call, they talked about expanding their optical manufacturing capacity. I'm just wondering if you guys are involved in that?

Yes. I think we're very excited about, obviously, not just the strength in the business but also the new opportunities. It's a really good pipeline we have that we're looking at that's in front of us. And we're always pursuing new opportunities, both with potential new customers as well as existing customers. The kinds of opportunities that we've talked about and continue to pursue things like the datacom opportunities we've talked about, including producing transceivers directly for hyperscalers and also building transceivers for merchant vendors. On the datacom opportunities, yes, I would include additional system wins and further penetrating existing customers and also new customers or maybe new to Fabrinet customers. So we've had some success. We think we have a winning formula where we're able to deliver. We believe superior technology, excellent delivery, quality, responsiveness at a lower cost because we don't [ merge and stack ] and we also don't have our own products, which is very important to our customers. We're a pure contract manufacturer, we don't have any of our own products. And that's actually a positive for many of our customers. They don't want us to have our own products. So overall, we have several new opportunities there that we're that we're pursuing, George, including existing customers and some new customers that we're trying to win. They take time though, [indiscernible] at lease take time. And we also have additional high-performance compute customers that we're pursuing and an additional CPO. So several growth drivers that we're working on right now.

Great. And then you mentioned potential transceiver designs for hyperscalers and other merchant vendors. I guess, at 1 point, I kind of thought that was maybe a number of quarters away, but I'm just curious like programs like that, assuming you guys have success, is that a quarter away, multiple quarters away, multiple years away? Like what do you think the time line would look like?

I would say, we're quarters away. I don't think it's years away. I think it's quarters away. We've been working on it for well over a year, probably 18 months at this stage. And we're -- so I would say, quarters away rather than years away, George, from that turning into meaningful revenue. .

Our next question, it comes from the line of Steven Fox with Fox Advisors.

I guess I had 2 questions. First of all, on the hyperscale business, the ramp is obviously substantial. You mentioned that maybe improving from a second source position was possible. From the outside again, it looks like it's ramping very well, like you don't see any sort of holes in margins or anything like that. Can you just give a little bit more color on your chances of doing that? And also I thought there was potentially a second program with that customer that was going to ramp. Can you just comment on that as well? And then I have a follow-up.

Yes. So I'll take the second question first. So the second program, there's multiple programs. I mean there's no program excluded from what we're working on. We're working on current products and also new products. So we are ramping multiple products. our chances of growing the business further, like I said in my previous answer, we have 2 lines, 2 production lines, fully qualified and additional lines being qualified where little bit more than halfway into the ramp to capacity on those production lines, which we have ample capacity, and we can build more products. Our chances of growing the business more than that level. we're reasonably confident but we have to execute. It's really a case of earning the business by doing an excellent job for the customer, excellent delivery, quality responsiveness, et cetera at very competitive costs. So we're -- we enjoy the competition. We -- the existing suppliers is a very good supplier with a long relationship with the customer. But we're confident that we can continue to grow that business because the business is very strong, and we're performing very well. So both things we think are in our favor.

Great. That's helpful. And then just as a follow-up, just on the dollar but currency issue. So $0.09 drag in the quarter you just reported. Any help on how the EPS track looks this quarter versus maybe 90 days ago?

Steve, this is Csaba. Yes, indeed, the exchange rate environment has been favorable for the last several quarters. So we called out about $3 million drag in the last quarter and below the line and also on the gross margins, we have been seeing unfavorable headwinds. So based on our hedging program, that we have in place, we continue to expect about the same impact going into the third quarter from exchange rate perspective. Obviously, we are not forecasting anything on the revaluation and below the line, but we do anticipate about 20, 30 basis point headwind in the gross margin. And Nevertheless, obviously, we have been able to deliver a slight improvement in gross margin in our last quarter as well as the drive continuous operating leverage. So we are hopeful that we will be able to offset most of the exchange rate headwinds in operating leverage by keeping our OpEx in check and as we grow the top line, we should see continued operating leverage on operating income. But we don't put any guidance for exchange rate other than the color that based on the hedging program we have in place, we do anticipate similar headwinds in the gross margin as in the prior quarter.

Our next question comes from the line of Mike Genovese with Rosenblat Securities.

Congrats on the record results. Maybe my first question is more of a comment. But I think if you counted that Ciena business where that stuff was going in I you find the vast majority of your telecom growth was driven by DCI, and then you had a huge sequential DCI quarter. But that's just like kind of a segmenting thing. Any thoughts on that?

Yes, I think that's pretty accurate. DCI has been very, very strong for us. The growth is not just DCI, but it's predominantly DC, it's been very good, and it continues to grow and the demand looks to be very, very durable, and it's not just [indiscernible] across multiple customers.

Can you give any details on the data center side or datacom side, I mean, between the 800 and 1.6 mix, whether in terms of like what the mix is or what the trends are? Is 1 growing faster than the other? Anything you could tell us about that?

Not particularly. I mean it's predominantly 200 gig per lane almost all 200 gig per lane 1.6 terabits and 800 gig. The exact mix between the 2, we don't really -- I won't say we don't care, but we don't put a huge amount of thought into it because it really is a decision that our customer makes and our customers make. The exact puts and takes as to why the customers would want 800 gig, 200 gig per lane versus 600 -- sorry, versus 1.6, 200 gig per lane. It's not really something we're involved in. But we're producing everything we can with the components we have and the demand remains very robust. But the mix -- again, the mix between 1.6 and 800 gig, we don't put too much emphasis on because it's not that important to us they're both produced on the same production line, very similar products.

I guess just a final question. In datacom, I mean when you -- I understand you're projecting sequential growth for this quarter. You usually don't guide more than another, but would you continue more than 1 quarter of sequential growth and kind of how many in datacom, do you have visibility to?

Well, we have pretty good visibility, I would say, our visibility right now, it's certainly the furthest that I've in my experience, I think we have more visibility now than we've ever had. I can say, we guide 1 quarter at a time, but we're very optimistic. We're adding capacity as Csaba mentioned in his remarks, we've -- we're converting significant office space and warehousing space into manufacturing space at our [ Pinehurst ] campus. We're accelerating the build-out of our 2 million square foot Building 10 in our Chonburi campus, we have 250,000 square feet completed by the middle of the year by June. And then the balance of that 2 million square feet would really by probably early 2026, January or February 2026. So on just other ways to expand the capacity that we're looking at, we'll probably talk about it in our next earnings call, but there's a number of activities we have underway that should help us to add additional capacity. So we're pretty excited, Mike, about the demand we have in front of us. It's a very exciting time. I'd say when you look at what's going on with our customers and what they need from Fabrinet, it's a good place to be right now. We're pretty excited about it.

Thank you. SP1 Our next question comes from Ryan Koontz with Needham.

Appreciate the updated milestones on Building 10. But you can share just a little more color about where you are in that process? What kind of shape, facilities in, in terms of the construction and where you are really in the procurement of all the materials you need as well as customers to outfit the building and what that process looks like over the balance of '26?

So we're well underway. I was there a few weeks ago. We're well underway that the building is a phenomenal building. And it will be a real showcase when, it is 2 million square feet, it's a lot of -- it's a lot of factory. It's a big factory. But we're well underway. We've had no delays or anything like that with the availability of material [indiscernible]. It's going very, very well. And we'll have about, like I said, about 250,000 square feet finished and ready to move into by the end of June. So that's well ahead of the completion schedule for the full factory. Then the balance of the factory will complete as we go throughout the year. And I think we'll probably take possession of the balance of the factory in like January, February of 2027. So it's going very well. The customer demand to consume the factory. Again, we don't ask our customers to make a hard commitment. We have to have capacity in place ahead of demand. That's why we're moving so fast with this. We see strong demand and strengthening demand from our customers. So we'll put the factory up then the customers, we're optimistic, I would say, Ryan, about our ability to [indiscernible] the factory. When we built Building 8, it was 550,000 square feet, and we filled it pretty quickly. Building 9 was 1 million square feet, and that's almost full. So we're pretty optimistic about Building 10. We also have room for Building 11 and Building 12 on the same campus. So lots of runway in terms of capacity in front of us.

Our next question comes from Tim Savageaux with Northland Capital Markets.

Congrats on the results from me as well. A couple of questions. First, just I guess continuing on the capacity front, so as you look to add that 250,000 square feet, I guess, at this point where we're standing right now, and I don't know if this is a reference to transceivers being quarters away? Or do you have an idea about where that capacity is going, I guess, since it's coming online pretty soon. Any color on what drove that pull in? And if there's any particular projects that are driving that? And as a quick aside to that, still on capacity, I wonder if you might be able to size the kind of Pinehurst repurposing in the context of the 250,000 that you're adding? I assume it's smaller, but anything you can give us there? It's -- you look like you're adding, what, $300 million in annual revenue capacity plus Pinehurst. So just wondering if we have any more visibility on where that's going?

Yes. So I'll let Csaba cover the Pinehurst capacity addition in a moment. Chonburi, we're, as you say, pulling in 250,000 square feet, that's 6, 8 months ahead of the original schedule. There's several customers, Tim, we wouldn't want to quantify them all here, but it's really several drivers. Again, our telecom business is very strong. And it's not just TCI, it's TCI, but it's not just TCI, there's also some additional new business and new customer wins that we're working on in the telecom space. They come -- its growth with our main customer, but also we're confident in our ability to win other new datacom customers, both merchants and also hyperscale direct.

Our business overall, Tim, is just strong demand profile we have from our customers is very strong. And for us, it's a relatively easy decision to add this capacity because the way we add this capacity, our balance sheet is very strong. As you know, we have a very strong balance sheet. We're able to build these buildings and add this capacity with 0 debt. So the downside risk for us is very small. As we build Building 10 will be, I don't know about $130 million of CapEx. Csaba, Correct me if I'm wrong on that, about $130 million of CapEx. It will add 2 billion -- sorry, 2 million square feet and capacity for additional depends on the mix. But we said, 2.5 in the past is probably a little bit north of that at the moment, given the mix that we're looking at. So the upside opportunity is huge. It's the -- if you like, the operating profit that we can generate from that business. The downside risk is very small. The downside risk for us of building a factory that doesn't get consumed as quickly as we'd like, it's probably 15 basis points, something like that on a full year basis. So 15 basis points gross margin headwind. So the downside risk is tiny because of the strong balance sheet we have, the way we're able to build these in a very efficient way with no debt. downside risk is very small. The upside opportunity is huge. So it's a relatively easy decision for us to add this capacity. Coupled with that, our ROIC is about 40%. So really the best return for us is to add capacity, fill that capacity with new business that's able to generate outsized margins for our industry and also outsized returns. So it's a relatively straightforward decision for us, Tim.

Great. If I could follow up and you mentioned strength across the business demand-wise, it sounds like that hasn't really changed as you've gone through the quarter and into the new year here. But given where you're guiding and the sharpness of that HPC ramp, while -- so you expect telecom to grow it seems like only slightly on a sequential basis and relative to very strong results you just put up here in the quarter. And I guess am I -- first, am I reading that right? And second, do you attribute that to anything in particular seasonality of customers or anything else, if indeed, I'm kind of working through the segments properly.

I'm sorry, Tim, I didn't understand the question. Are you interpreting that correctly? I missed the question.

Just your segment guidance. Basically, I'm saying with HPC let up another big chunk in the quarter, while you're talking about telecom and datacom growth, it seems like much slower sequential growth than you saw in December in terms of what you're forecasting in your March figures, is that accurate? And why would that be? I guess would be the question.

I think I'll let Csaba give a little bit of color, but I think our HPC growth, it's not in a straight line because we are dealing with some new products that don't always grow at the growth is a little bit lumpy, I would say. So HPC won't necessarily grow in a straight line. It looks like a nice straight line. But really, we only have 2 data points, 2 quarters of revenue. And as everyone knows, 2 data points is not a trend. So we have to wait until we have a little bit more HPC experience under our belt. And then I'll let Csaba talk about telecom and datacom and also the question you had about the capacity additions in Pinehurst.

TI'm, so let me give you some pointers on the guidance. So as we mentioned, all the we anticipate to grow with the exception of automotive. So HPC, we had a nice bump of about $70 million sequentially last quarter. So that's not going to grow in that space. but we do anticipate double-digit growth in that area. Within telecom, we anticipate that DCI is going to grow faster than we have seen in the past quarters. So that strength continues into our third quarter, and we also anticipate datacom to growth. So that's the color that we can provide at this stage. And automotive will probably be down in a similar way as it has been in the prior quarter. With regards to Pinehurst campus, to answer your prior question, so we are able to create about 120,000 square feet of space or convert offices and warehouse spaces to manufacturing space. A couple of years back, we were able to acquire an adjacent piece of land, which is in a zone that we are able to build office buildings on those -- on that land, but we are not able to put a factory. So we were able to convert some of the office and manufacturing space in the existing campus. So that adds up to about 120,000 square feet, which if you do the math again, it's highly dependent on mix that should give us over a $150 million revenue upside opportunity. Again, this is subject to mix. So overall, and again, in terms of customer requirements for additional space, obviously, Pinehurst is prime from that perspective because one of our legacy customers are there, and they would like to have more space in Pinehurst. Hence, we are doing the best we can to accommodate all those requirements.

Great. And just very quick, is the Pinehurst addition, is that on the same time line as the Building 10 pull in midyear? Or is that kind of happening now or anything [indiscernible]. That's.

Yes, it is happening now. Seamus doesn't have an office anymore in the campus. So we used to joke, it comes back time to [indiscernible] Pinehurst [indiscernible] no longer have an office. So it's happening for [indiscernible].

Thank you. And this will end our Q&A session, and I will pass it back to Seamus for closing comments.

Thank you for joining our call today. We are very pleased with our agile second quarter performance and with continued momentum across our business. We're optimistic that we can deliver a very strong third quarter as we expand on our strong market position. We look forward to speaking with you in the future and to seeing those of you who will be attending Susquehanna Conference later this month and the OC Conference in Los Angeles next month. Thanks again, and goodbye.

And with that, we conclude our conference. Thank you all for participating. You may now disconnect.

Hello, everybody. Thank you for joining. Tim Long here, Barclays IT hardware com equipment analyst. Very happy to have Fabrinet with us today. Seamus Grady, CEO, with us. So thank you very much for joining. Obviously, really hot space, and you guys are in the heart of a lot of the key technology growth areas now.So I got a bunch of questions here. I want to start with kind of the maybe the 4 top ones that we get a lot of questions on, and I'm sure you do as well. So maybe we'll start with telecom and DCI. It's been nice, you guys started breaking that out recently, so we could see it a little bit better. Just talk a little bit about from a Fabrinet side, what products and solutions are really seeing that growth on one side and then talk a little bit about kind of the breadth of customer base and who's driving that strong growth.

Yes, we decided to break out DCI because think for the feedback from investors was DCI has always been in our telecom number. But of course, it's what's going on in the datacom world that's driving the growth in DCI. So we decided to break it out. So so that you can clearly say, okay, yes, it's in telecom, but here's the number you can see it separate. And it's been growing very nicely for us. We have 5 -- most of our DCI data center interconnect, most of it is 400 and [indiscernible] plus and more recently some 800 CR. It's been growing very nicely for us, as you can see from the numbers. And we really have customers that we deal with there. This is 1 that we don't have that we're working on, but we have 5 customers there. Most of the volume comes from probably 2 of those 5. But it's been -- they are is a really good solution for these distributed networks where you just can't get enough physical and electrical power into a data center. So by having the data centers further apart, you can connect them together with products and really get the full effect of the processing of that you have in data center.

So it's kind of a scale across.

Our telecom business overall, let's say, excluding -- so DCI has been growing very, very strongly for us. And I think the demand seems to be very robust and continues to be. For our telecom business outside of DCI, that has also been growing for us, driven more by share gain somewhat by growth in the business, but also share gain, where we've been winning business with a few.

Right. Okay. And then you mentioned 5 customers. I mean 1 is reported as a 10% customer. The other one is kind of in ramp mode, I believe. So is it -- is this the type of thing where looking at all the CapEx announcements and power being committed that you feel there's a very sustainable DCI opportunity in the next multiple years, particularly as those 2 customers continue to do pretty well. And if you get the sixth one, that will probably add to it also.

We hope so, certainly. The demand looks to be very robust. I mean, we only guide 1 quarter at a time, but the visibility we do have we have visibility, obviously, beyond that. But the visibility, it gives us -- we're very encouraged by the demand for DCI and it just seems to be increased.

Okay. And it seems like the telecom side is strong, the traditional telecom, but that's not going to have the same growth dynamic over time. It's a little bit more stable growth rather than Yes. kind of explanation [indiscernible]

[indiscernible]

Great. Okay. Great. Maybe second topic here, HPC. So also started breaking this out, which is also helpful. I think it was $15 million or something last year, early stages where you're -- you've got 1 line running and a ramp throughout the year. So -- maybe if you could start by talking a little bit about -- obviously, it's cabinets a company does really well in optical and transceivers and pluggables. This is a little -- obviously, a little bit different. So maybe talk about the technology angle, the learning curve, the ramp first and then we'll get into a little bit more on it.

Yes. So we -- our customers is AWS. -- it's in the high-performance compute category. Again, we decided to break it out as a separate category because it's a new category for us. It doesn't fit in any of the other categories. It's data. It's data center, but it's not datacom. So it didn't fit in datacom and it's it would be too big to be in the other category. And we also think it's a good potential market for us to win other business with other customers. We're producing a range of products for our customer mostly very, very densely populated, very complex PCBAs. And the approach we've taken is we've put a very cost-competitive solution in place, we believe, for our customer. So far, as you said, we did $15 million last quarter, which was really just qualification type volumes. So we just really got off the ground last quarter. And we have -- we're very optimistic about that business. We think it has a lot of potential. We have to earn our way into the business and do a good job and execute very well for the customer. But we really think with a very high level of performance and execution, coupled with what we believe to be a very cost-competitive solution. We're optimistic we can grow that business nicely over the next line.

Okay. Great. And you guys are clearly differentiated on the transceiver optical business, do you think HPC will be something where once you're fully up and running, you'll be able to demonstrate the same level of differentiation compared to the competitive landscape?

We think so. And we certainly think there's a lot of opportunity there for us. Again, we're a pure contract manufacturer. We don't have any of our own products. So that's maybe in 1 sense, an area of the business where we don't participate. Some of our contract manufacturing competitors do have ODM type offerings and the like, we don't -- we're a pure contracture. So the target customers for us are ones who have those type of products, but where they own the design themselves. We don't want to be a product company.

Right. Yes. And there's obviously news every day about a very large custom ASIC platform. When you say there's other opportunities, I'm assuming something like that is a next phase for you in the HPC business? And what would it take to break into another large program like that? I think in our business, what it takes to break in is you have to do an excellent job for the customer at a very competitive cost. It's -- our business is not a complicated business, not an easy business, but it's not a complicated business. It's all about performance. delivery, responsiveness quality and doing a lot of that as competitive costs. So -- and we also have a lot of expertise in putting together really excite manufacturing process. Our first foray into this. We have a completely automated production line, 1 line qualified 2 lines in qualification. And again, so far, we're very happy and the customer seems very happy with the job we're doing in terms of delivery, quality cost, et cetera. Okay. Great. Great. Maybe we'll move over to capacity a little bit. You got the Building 10 coming on next year. You've talked about pulling forward a little -- a portion of that capacity. So maybe walk us through how you're thinking about capacity more broadly and what the space is earmarked for? And obviously, demand is good. The fact that you're trying to move some forward. So any thoughts around that would be helpful. Yes. So we're building -- the construction is underway, building 10, which will -- when it's maybe let set first, our capacity right now in our current footprint, we have capacity for our current run rate, I would say, is we're at about a $4.5 billion run rate. we still have room to grow with our current footprint, but call it a $4.7 billion, $4.8 billion capacity that we currently have. The new building, building 10, when it's finished, will be 2 million square feet with capacity for an additional $2.5 billion of revenue. We announced our decision to pull in about 250,000 square feet of that to June. So we'll be -- as soon as that's ready, we'll be occupying that very quickly while we finish out the rest of the factory. That should see through in terms of capacity for the next while, then we have room on that campus to 2 more factories each of which would be 1 million square feet. So $2.5 billion capacity with Building 10. And then if we were to build out the other 2 buildings, building 11 and 12, that would give us capacity for another roughly $2.5 million.

Okay. And how flexible is the space from a product solution standpoint?

It's completely flexible. The way we build these buildings, the capacity is very fungible we build the building, we fit it out in terms of facilitization and whatnot. But in the specific fit out for each individual customer, depends on what the customer needs from us. But at any point in time, if a customer decided that they wanted to move out of a building into a bigger building, we can repurpose that space very quickly. So we're very flexible and can repurpose and reassign that space.

Yes. So the CapEx that you're going to need to spend is pretty success based. You have visibility into needing that capacity at this point?

And also the decision for us to to expand the capacity, it's a very easy decision for us to make. So to build that 2 million square foot facility, the CapEx is about $130 million. which we can fund from our own resources. We have about $1 billion of cash. We have no debt. So we're able to fund that out of our own cash with no debt. And God forbid, but even if we woke up one day and it turns out the the whole industry collapsed. And we never filled up Building 10. The gross margin headwind if the building were to sit on is 15 basis points the gross -- so the downside risk is tiny. The upside opportunity is that incremental $2.5 big of business. approximately when you do the math based on our operating margin, about 6 months' worth of operating profit, a full run rate would pay for the [indiscernible]

It seems like we might be getting into areas where if you have capacity, you're going to win.

[indiscernible] all of these opportunities are time based. If you don't have -- like if you go back a couple of years ago when when we engage with NVIDIA and we had a huge ramp with NVIDIA. If we weren't able to ramp, we wouldn't have been successful. So you have to have capacity.

[indiscernible]

Yes. And then if there's more success and the 2 other million square foot buildings, is it kind of 6 to 12 months to get 1 of them up and running?

It's probably more like 12 months and we're also repurposing other space in both campuses. We have 2 campuses in Thailand. We're repurposing other space to create more manufacturing space. We're also looking for additional and additional factories as well.

Great. Great. You mentioned NVIDIA, so maybe we'll talk datacom a little bit. Maybe start with the demand profile. It's still there's obviously cycles in there, but maybe just high level on demand for the datacom business? Yes. So overall, demand seems very robust. And if anything, it's very robust and increasing I think with the rollout of all of these AI data centers, it just seems that the demand for transceivers in particular, is insatiable.

So we have -- our main customer, our kind of marquee customers is NVIDIA, but we have other customers that we're working on as well. But demand is [indiscernible]

And as far as the , you guys aren't talking 400 to 800, 1.6 much anymore. But where are we in kind of the node progression for the large customer on on the datacom side.

Well, we're producing with, let's say, 200 gig per lane EMLs, we're producing 1.6 terabit and 800 gig transceivers. We don't produce much 100 gig per day this we're producing a significant volume. We could produce more of or components, we're constrained at a couple of components. But if we had more components, we a lot more, but demand is very robust.

Right, right. And that demand doesn't go anywhere if there's a shortage of a specific component because the industry is sort the industry -- the industry [indiscernible]

[indiscernible]

And then you mentioned other customers other than the large one. Where are you in the process? How do you think about scale for the other potential customers?

So we're working with a number of other customers. nothing really to announce at this point, but we're working with a number of other customers, some of whom would be maybe some of the traditional companies who are planning to get into the space or -- we're also working on hyperscale and our ability to supply direct to hyperscale with their design, again, not our design with their own design. So several kind of growth factors that we're working on.

Okay. Back to the HPC business with AWS, obviously, there are warrants associated with that customer. How do you think about. You talked about the success of that program to help you do better in that program at AWS and maybe do better at other HPC players. How do you view your success at AWS? -- for other products at transceivers or other? How do you view that?

Yes. So the nice thing about our agreement with AWS, there are no particular products that are excluded from that arrangement. So yes, we'd certainly be using this business as a kind of a proof point with our customer to show them the really excellent job we can do for them with a view then to expand into other areas of the business [indiscernible] including optical interconnect and various other aspects of the business. But really, it's a step one for us and it's a fairly sizable step one. But we think it will open the door for us to other lines with AWS.

Okay. Now when you think about like diversification, maybe from optical strength that you lead with, you had this high-profile HPC program. Is that going to occupy the next few years ramping HPC? Or do you see an opportunity for a different product set like a switch or a power system or something else?

I think we can do both. We can do all of the above. We have a lot of new program ramps in front of us. We have the HPC ramp. We have the big growth with NVIDIA is really in front of us on 1.6 and 800 gig. We're ramping new products with Ciena our business with Cisco is growing. So we have a lot of growth going on at the moment, but we're happy to continue to grow if AWS or any of the other hyperscalers want us to do more than just HPC. We're very happy to do that.

Okay. And this back to this HPC business, should we think about it as a comparable margin structure to -- is there any reason to believe that could ultimately be better? It's probably -- it's pretty complicated product generally just like transceivers as well?

Yes. I mean, all of these products, we have to produce them about industry-standard margins, if you like, or hopefully, industry-leading margins. But at the same time, when we get into a new lender business, we're always quite careful to do everything we can to make sure we don't do anything to do with the margin. So it should be comparable in terms of margins.

Right, right. Okay. maybe back to the DCI part, when you talk about having the -- like what does it take to get the other player like you're trying to get the sixth customer -- is it like engineering, codevelopmentor is there something else that has to happen for you to [indiscernible]

They use a different supplier today. They use another country manufacturer. So we would have to displace the other [indiscernible] manufacturer. Most of these other companies are they do a very good job. -- is easy. It's not easy to displace our competitors. They do a very good job. Right, right.

Okay. And then I know you're not the CFO, but when we're thinking about the mix of all this stuff going on, is the model generally maybe the gross margin doesn't move around much. But if you get incremental revenue growth, there's a little bit better leverage on that. Is that kind of the way we're thinking about the margin structures.

Yes I think that I think we're somewhat range bound on the gross margin. We're in the kind of 12.5% to 13% range, which is -- which for counter manufacturing is kind of leading. Our OpEx is very low. It runs at about 1.6% of revenue, maybe 1.7%, is very low. It was 2. And as we've been growing the company, we've been able to add these big pieces of new business with effectively 0 incremental OpEx. So the leverage is really on the OpEx and the operating margin. So we should see -- I think the gross margin will stay in that range and then the operating margin, we should see improve over time.

Okay. Maybe let's touch a little bit outside the AI world for a little while. The auto business. Obviously, everyone's been having struggles with the auto end market. How do you view your participation there -- is there an end in sight? Or what do you see for turnaround in that business?

So our auto business is not that exposed to -- so 1 part of it is, but it's not that exposed to, let's say, the consumer-facing we have 1 customer, which is what we call a traditional automotive. That's quite steady. So that business has been very steady for us. It hasn't really grown that much. It hasn't shrunk that much. It's very stable. And then the 2 other parts of the motor for us, 1 is EV charging, which is more on the kind of infrastructure side of automotive. So that business has been growing nicely for us over the last [indiscernible] and then the third part of automotive for us is the whole area if we call it LiDAR and sensors generally. We did capture really all of the lighter customers. and as time has gone by and as a number of companies in that space is strong as they either acquired each other or whatever, we really have most of the players there. So I think that part of the business could could grow nicely as and when LiDAR as a technology starts to take off.

Okay. And then I'm sorry, I'm hopping around a little bit here. But back to the HPC business because I think there's a lot of attention because it's a huge opportunity. I think you talked about the 1 line. Just walk us through the time line of the ramp how you go from like the trial line to full production? And is this going to remain PCB only? Or will there be other elements of their HPC program that you could participate. And I think the main incumbent does the PCB, but they also do the card as well. So -- is there other -- maybe talk about the ramp and then talk a little bit about not just like transceivers, but related to the HPC.

So we do that as well. We do the domain [indiscernible] Yes. I think there's opportunities to do more than just the PCBA. For now, last quarter was just about getting qualified. So we got qualified. We had that $15 million of revenue last quarter. So we're qualified now we're up and running. We have -- so we have 1 line qualified 2 other lines that are in qualification at the moment. And I think we'll ramp to that kind of first plateau of revenue probably by the June quarter, maybe a little bit earlier, but probably by the June quarter. And then really, it's thought about how well we perform. If we do a good job, we perform well. We execute very well and we're easy to do business with and they make significant savings, then I think there's an opportunity to take more share there and grow that business. So it's really down to how we perform.

Okay. And I'm assuming currently, it's -- you don't have a full view on market share, but it's starting out with whatever percentage of the business and then if you perform then that has the opportunity to move higher?

Yes, yes. But again, there's no guarantees right we have to hear every piece of business and what goes up can also come down.

Yes. And there's been a lot of discussion about that program with going to the third version from the second to 2.5 to 3. Is Fabrinet, with the ramp phase, are you able to participate in evolutions of the program. So you don't have to be requalified [indiscernible]

Well, I mean, yes, the new product would have to be requalified for us. were bottomed at the supplier. The last time around there was really 2 things. We had to be qualified and we had to qualify the product. So that first part is should be more straightforward exercise.

And.

I believe the competitor in that one is more of an ODM model. So from a pricing standpoint, could be beneficial. You said if you -- if there's cost savings [indiscernible]

Yes. As far as I know, they do have some ODM business. But certainly, the products that we're making are contra manufacturing [indiscernible] customer owns CIP. So from that point of view, it's kind of interesting for us to see that kind of overlap between ODM and country manufacturing that yes, interior it's ODM, but it's not at its country manufacturing. Because ODMs is not for us. We don't have any of our own products.

Maybe a higher level one. When you think about the CEO, you got the capacity stuff we talked about. You got some pretty massive opportunities, right? This HPC deal could be $15 million now and that 8 a year, right? How do you plan not just capacity but infrastructure in the company, investment, how do you manage with uncertainty and just how big some of these revenue ramps can be?

Yes, we take a really long-term view. So we have a couple of processes that we use internally that work really well for us. We have a rolling 8-quarter revenue forecast, that's Friday Acura because we're very plugged in to the customers. And when we build our revenue plans, they're bottom-up revenue plans. We don't build a top-down -- so believe it or not, we don't say we have to get to be a $10 billion revenue company. That's not our goal. Our goal is to grow -- we always like to grow at 2x the rate of growth in the industries we serve, 3x the rate of growth of the country manufacturing industry. That's what we like. That's how we like to grow. -- over the last 10 years up to the fiscal year ended in June of this year. In the prior 10 years, our compound annual growth rate was 16%. We compounded the earnings 21% in that same time period. So we have -- we take a good track record of growth and success. As we look ahead, like I say, we have an 8-quarter really close in rolling a quarter revenue forecast. We have a 3-year, and we have a 5-year. So we use that 5 year. You can't be reviewing and sitting down looking at strategy every month. It's something we sit down periodically usually kind of once a year more frequently if something big comes along, and we set out our plans for the years ahead because these things take -- if you bite building, it takes [indiscernible] to get it off the ground. But we're in the fortunate position that are, if you like, our footprint, our geographic footprint is quite compact. We're financially very strong. So our balance sheet is very, I would say, pristine and strong. We're able to fund our own growth. We really just sit down and look out 5 years all the time and make plans accordingly. So -- and we're in a very fortunate position that the customers are very happy to share their demand and their plans with us. and we're able to take that and use it to build our own plans. And the customers know when they share their plans with us, we're not going to hold them to it. It's not like we're going to turn around in 5 years and tell them you told me you'd leave the 2029 [indiscernible]

No, but it's really good to get that information for the customers and the customers are really good at sharing their plans. What also helps is we're always working with the customers, not just on the current product, but on the next-generation product. and the 1 after that and in some cases, 2 or 3 generations out. So when you have that kind of visibility, it just allows us to see what's coming down the tracks and hopefully see on corners.

Okay. Feel free to send me that quarter rolling [indiscernible] Okay. I think that -- you've got a minute -- a few minutes left, but I think that does it for me. Thank you so much for the time. Really appreciate it. I know it's a very busy time.

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the First Quarter of Fiscal Year 2026. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the call over to your host, Garo Toomajanian, VP of 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 2026, which ended September 26, 2025. With me on the call today are Seamus Grady, Chairman and Chief Executive Officer; and Csaba Sverha, 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.

During this call, we will present both GAAP and non-GAAP financial measures. Please refer to the Investors section of our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation as well as additional details of our revenue breakdown. In addition, 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 August 19, 2025. We will begin the call with remarks from Seamus and Csaba followed by time for questions.

I would now like to turn the call over to Fabrinet's Chairman and CEO, Seamus Grady. Seamus?

Thank you, Garo. Good afternoon, everyone, and thanks for joining our call today. We had an exceptional start to fiscal 2026 with record revenue and earnings that exceeded our guidance ranges and demonstrated our continued business momentum. First quarter revenue was $978 million, an impressive increase of 22% from a year ago and an increase of 8% from Q4. Non-GAAP earnings were also outstanding at $2.92 per share, with our revenue upside flowing directly to the bottom line. In addition to these terrific first quarter results, we're very optimistic that this strong momentum will extend into the second quarter with numerous revenue drivers contributing to our growth.

Now let's look at the quarter in more detail. Starting with optical communications, telecom revenue hit a new record, increasing 59% from a year ago and 15% from Q4, driven primarily by data center interconnect products. Within telecom, DCI revenue nearly doubled from a year ago to 14% of company revenue. Datacom revenue declined sequentially as predicted, but by a smaller amount than we anticipated. This was a result of a smaller sequential decline than expected at our biggest datacom customer as well as larger contributions from other datacom customers where we are gaining traction. While we believe certain component constraints will persist into the second quarter, we remain optimistic about overall demand trends in datacom. Within nonoptical communications, we are excited to introduce a new revenue category for high-performance computing products. In Q1, we qualified and started to ramp our first [ KPC ] program, which contributed $15 million to revenue. We believe this program will scale considerably over the coming quarters and become a significant driver to our overall growth.

Automotive revenue was down slightly from Q4 as anticipated and industrial laser revenue was flat. With numerous growth drivers supporting our confidence, construction of Building 10, which will total 2 million square feet, remains on track for completion by the end of calendar 2026. We have accelerated the construction of a portion of Building 10, which we expect to be completed in mid-2026, in order to help ensure that we will have ample capacity to support our rapid growth. As we look to the second quarter, we are very optimistic that we can deliver another outstanding quarter with continued growth in telecom, driven by DCI expansion, strong datacom demand and the rapid scaling of our HPC program.

In summary, we are off to an excellent start in fiscal year 2026, with record first quarter results that exceeded our guidance ranges. With multiple growth drivers across our business, producing increased business momentum, we are well positioned to deliver an outstanding second quarter.

Now I'd like to turn the call over to Csaba Sverha for more financial details on our first quarter results and our outlook for the second quarter. Csaba?

Thank you, Seamus, and good afternoon, everyone. Fiscal year 2026 is off to an excellent start with revenue and EPS that were above our guidance ranges. Revenue in the first quarter was a new record $978 million, representing impressive growth of 22% from a year ago and 8% from Q4. Non-GAAP EPS was also a record $2.92, including the impact of a $2 million or $0.06 per share FX revaluation loss. .

Looking at revenue performance by market for the first quarter, Optical Communications revenue was $747 million, up 19% from a year ago and 8% from Q4. Within optical communications, telecom revenue grew to a record $412 million, surging 59% from a year ago and 15% from Q4. This impressive growth was driven primarily by continued strong demand trends for data center interconnect products. In the first quarter, DCI revenue was $138 million, representing remarkable growth of 92% from a year ago and 29% from Q4. Datacom revenue declined by a smaller amount than expected, totaling $273 million, down 17% from a year ago and 1% from Q4. While we continue to experience longer lead times for one critical component in particular, overall demand trends within datacom remains strong. Non-optical communications revenue was $231 million, up 30% from a year ago and 5% from Q4. This increase was driven primarily by high performance computing revenue of $10 million. We expect this new revenue category to drive even greater growth in Q2. Automotive revenue of $122 million was up 19% from a year ago, but down 5% from Q4. Industrial laser revenue of $40 million was up 12% from a year ago and flat sequentially. As I discussed the details of our P&L, all expense and profitability metrics will be presented on a non-GAAP basis unless otherwise noted.

First quarter gross margin of 12.3% was down 30 basis points from Q4, but was in line with expectations as we absorb FX headwinds in addition to the seasonal impact of annual [indiscernible] increases. This small sequential decrease in gross margin was partially offset by our continued operating leverage.

Operating expenses were $16 million or 1.7% of revenue, resulting in an operating margin of 10.6%, a 10 basis point decline from the fourth quarter.

Interest income was $9 million in Q1 and was partially offset by a $2 million foreign exchange revaluation loss. Effective GAAP tax rate was 5.4%, consistent with expectations. Non-GAAP net income was $105 million or $2.92 per diluted share.

Turning to our balance sheet. We ended the first quarter with cash and short-term investments of $969 million, up $35 million from the end of Q4.

Operating cash flow in the quarter was $103 million, Capital expenditures of $45 million remained above maintenance CapEx levels as construction of building time progresses, including the acceleration of a portion of the facility.

In the first quarter, our share repurchase program was not as active as in recent quarters. We repurchased 970 shares at an average price of $276 per share for a total cash outlay of $268,000. As of the end of the first quarter, $174 million remained available for repurchases.

Now turning to our Q2 guidance. We expect our strong business momentum to extend in the second quarter with multiple growth drivers across our business. We expect revenue to be up sequentially in all of major markets we serve, except automotive, we expect to be flat to slightly down. Most notably, we anticipate particularly strong growth in HPC as that program continues to ramp quickly. As a result, we anticipate second quarter revenue to be in the range of $1.05 billion to $1.1 billion, representing remarkable growth of 29% from a year ago at the midpoint. From a profitability standpoint, we expect to maintain operating leverage with revenue growth outpacing operating expenses this quarter. However, some of the gains may be partially offset by foreign exchange headwinds. Therefore, we anticipate earnings per diluted share to be between $3.15 and $3.30.

In summary, we are extremely excited about our robust start to fiscal year. We are optimistic that we can continue to build on this momentum in the second quarter as we benefit from multiple growth drivers across our business.

Operator, we are now ready to open the call for questions.

[Operator Instructions] Our first question will come from the line of Karl Ackerman with BNP Paribas.

Congrats on the quarter, gentlemen. For my first question, what is embedded in your December quarter outlook for datacom? And as you address that, what are your assumptions on having access to necessary 200 gig per lane [ e-mail laser ] capacity to support that growth?

Thank you, Karl. So we're not really going to comment on individual components or individual customers at this stage. I think what we would say is we're in the -- we're in the very early stages really of a generational transition to photonics that we've seen going on for some time. Fabrinet is really ideally positioned to continue to capitalize on this transition. We manage a lot of complexity for our customers. And as we've seen growth just always happen in a straight line, but for any company, I think the best predictor of future performance is past performance. And if you look at our any time horizon, you care to look at our 10-year history, the revenue, we had compounded annual revenue growth of 16%, we compounded the earnings 21% over that same 10-year horizon. Last year, revenue grew 19%. Last quarter, our revenue grew 22% and as Csaba said, at the midpoint of our guidance for this quarter, we're projecting to grow 29%. So really, Karl, our objective is to make sure we have enough, if you like, earns in the fire and enough customer opportunities in front of us that we can continue to deliver that kind of outsized growth. We're quite excited about the this period that we find ourselves in the middle of. We think we're readily positioned, and we're just going to -- we're going to continue to keep pushing ahead, winning those opportunities and executing on them. so we continue to grow in the future the way we have done so in the past.

Yes. Seamus, if I may ask 1 more. You you refer to your HPC program as your first HPC program in your prepared remarks. When you note this business will scale considerably, does that take into account any other customer engagements or discussions for other HPC programs with new or existing customers?

Yes. I think HPC for us, we decided to break it out as a separate category for a couple of reasons, really. One is a practical one. It doesn't fit neatly into any of the other categories that we have. So it's not telecom. It's not datacom, it's data center, but it's not communication. So we decided to call it, not to break it out into its own category. And of course, the other reason we decided to was we're quite optimistic about this segment or category as an year for us to really expand and continue to grow. It's early days, but our initial foray into this category is going very well. It takes a little bit of time to get off the ground. These -- again, these are complex products. There's a qualification process that has to be gone through. We're working with our customer making sure we have a very efficient, highly automated process in place. And that's going very well. The customer is very happy. The business is growing nicely, and we really just got this was kicked off last quarter. We got the qualification builds on and really just started to ship products towards the tail end of the quarter. And we'll continue to see that category grow for us nicely over the next while. There are certainly other opportunities that we're pursuing there in that area, but it's early days yet. But yes, we would be optimistic that at some point in the future, we would have more than 1 customer in that category, we would have multiple growth vectors like we have in all of the markets we serve. So yes, we think it's -- it's the first customer, but we hope not the only one. There's others we're working on.

Our next question will come from the line of Samik Chatterjee with JPMorgan.

And [indiscernible], if I can maybe start with a question on asking you to compare the ramps of the HPC customers vis-a-vis the new telecom customer that you will want to ramp on in this quarter, our impression going into this quarter was that the HPC customer would ramp faster than the new telecom customer. But just looking at the results, it seems to have been like a lot more skewed towards the new telecom customer, but anything to share on that front, how those 2 ramps are going rate to your own expectations and how much of a contribution are you getting getting from the new telecom customer that's ramping thinking more of that ramp? And I have a follow-up.

Yes. I think they're ramping differently. I would say they're very different products. If you look at the high-performance compute product, it's an existing product that's already up and running with very high demand. And we're 1 of a number of suppliers producing the product. So we're just getting going with that. The telecom, the new telecom program that you mentioned, but that's a new product. So now they both end up growing at a certain trajectory, but the other one is a new product. So the product has to grow in the market. And then obviously, we'll grow as that product grows that product grows in the market. The HPC product, I think it gets off to a fairly slow -- reasonably slowed out because it's quite a complex product, and there's a lot to be bedded down in terms of automation, et cetera. But we're pretty confident that we should see some very strong growth in that in the short to medium term. So they're both strong growth drivers for us. None of these products grow in a straight line, and part of what we provide for our customers is the ability to manage a slow, steady growth, if it's a new product, maybe slightly more steep when we're maybe transferring from another supplier or as we've seen in the past, when you have completely outsized growth, we can also cope with that. So we take the good with the bad. None of these programs, like I said, none of them grow in a straight line. So we're just focused on making sure we execute in a very strong way for our customers, excellent delivery, excellent quality and at a very competitive cost. So that's our focus.

And If I may follow-up, you're guiding roughly to $100 million sort of give or take increase in revenue quarter-over-quarter, roughly ballpark. I want to sort of look at the -- your commentary, it seems like the vast majority comes from the HPC ramp. Is it possible to just rank order for us in terms of how should we think about the big drivers into that $100 million increase quarter-over-quarter?

Yes, I would say it's possible, but not advisable for us to do that. Obviously, we have a plan at the start of the quarter. We have a plan right now, we're at, call it, coming up on the midpoint of the quarter. So we have a fair idea of how we take the quarter will shake out. We have some -- we still have some very strong growth drivers. We have the HPC program that we talked about. We have the new telecom product that we're ramping. We have DCI generally, which is very strong for us. Datacom was also quite strong, stronger than we had thought going into the quarter. We did a little bit better than we thought we would do. And then there's a lot of other growth factors that were growth drivers that we're working very hard to secure and to win. So lots of opportunities, and it's really a case of -- there's certainly no shortage of demand right now. We're not in any way, demand constrained. It's a case of executing and making sure we capture everything that's out there and deliver on it for our customers. So Yes. I think HPC will be a significant growth driver, but the others will as well. The DCI, the new programs in telecom and then other projects that we're working on in datacom as well. That will be the 3 main [indiscernible]. .

Our next question comes from the line of Mike Genovese with Rosenblatt Securities, Inc.

When you look at the telecom growth sequentially, about 15%, $60 million. Was it -- how many customers were really a significant driver of that sequential growth?

Well, there's a number of customers might behind that. I mean if you look at what's in our telecom, it's traditional telecom and also DCI, if you had to kind of break it into 2 broad areas. Both of which are growing nicely for us. So there's a good mix of customers. It didn't come from any 1 customer or any 1 product. It's a mix of DCI, traditional telecom and also some of the new wins that we've been working on. So it's fairly broad-based and nicely spread between customers.

Great. And then on datacom, you mentioned other customers besides the main transceiver one. Could you talk both about the kind of datacom customers and products that are contributing to revenue now and as well as any upcoming projects that you hope to win if there's anything likely -- where -- what kind of customers and products should we be looking at?

So there's really a few that we've talked about in the past, I guess, our biggest driver of datacom revenue is our big customer there in the datacom space. We continue to do very, very well with them. They're launching new products, and we're supplying those for them. But we're also working on several other opportunities in that space. So One is hyperscale direct where we would be supplying to hyperscalers with the product directly. That's not our design. It will be the hyperscalers designed. So we're working on that. The other 1 would be some of the merchants transceiver manufacturers that we're also working on, where in some cases, you have to convince the customer to outsource and also to outsource the Fabrinet. So it's a double sell. But we're working on all of those. Nothing to announce yet at this stage. These things take time. I mean, typically, in our business, Mike, it can take from when you engage with a customer who has a real opportunity until you're shipping something, it's generally an 18-month kind of gestation period. So it does take time. It might look like these are quick wins and that everything is always up and to the right, but I can tell you there's an awful lot of work that goes on behind the scenes to win these opportunities. So several I would say, several irons in the fire on all of those fronts that I mentioned, but nothing specific to report at this stage. And we generally won't report until on particular customers until we get to the end of the fiscal year, and we talk about our 10% customers. Outside of that, we generally tend to steer clear of giving too much specifics on the individual customer opportunities we're pursuing.

All right. But just quickly on the revenue that you have now outside of the biggest customer, is that mostly the merchant type of stuff? Or is it something else?

It's mostly merchants outside of the biggest customer, yes, we'll be mostly merchant let's say, non NVIDIA transceiver business and other datacom products that we're making.

Our next question comes from the line of George Notter with Wolfe Research.

I was just curious on the share repurchase. I noticed you didn't buy many shares back for this quarter. I'm curious if there was something to that, is it just capital going into the manufacturing expansion or some other thing that's driving your decisions there?

And then separately, I would just love to drill down into the manufacturing Building 10 expansion a little bit more deeply. From memory, I think the expansion was several hundred thousand square feet. Can you just remind us kind of what the update there is? Is it as you envisioned 3 months ago? Or has there been any change to that?

I'll take the share purchase questions, George. So our buyback last quarter was driven by our 10b5 plan, which is, as you know, automated and depending on price tiers that we set up initially, and that plan is going in place for 1 year, so we haven't changed on that. .

With regards to overall capital allocation, that strategy. As you have pointed out, our main focus still remains in investing in our future growth. That obviously includes working capital as well as in time capacity additions. So we did have an outsized capital spend in last quarter, but that has nothing to do with the share repurchase activities. So again, repurchase was done by the 10b5 plan and we remain committed to return the surplus cash we generate to shareholders through 10b5 and open market. We were not active in the open market. Nevertheless, we still have a 10b5 in place which we continue to.

And then just as a follow-on there. I'm sorry, did I hear you say you intend to change that going forward? Is that right?

I think we're having trouble hearing you.

Guys, can you hear me? Hello?

We can hear you. Can you hear me? I think we're having trouble hearing you.

Yes. I can hear you.

Could you repeat your answer [indiscernible].

I'm sorry, my line must be out. So sorry about it. So our share repurchase was driven by a 10b5 plan last quarter. We didn't participate in the open market last quarter. So we -- the repurchases were triggered through the 10b5 plan. Our capital allocation remains around -- our priority remains to invest in our future growth, so including working capital and CapEx investment. So our CapEx throughout the quarter was higher than our maintenance CapEx level driven by our Building 10 which we are pulling in a portion of that building, which will be a 2 million square feet facility and should add in approximately about $2.4 billion revenue, give or take, for the future. And we are -- as communicated earlier, we are holding a portion of that building in into our [indiscernible] to have that space available.

Got it. So I assume that, that incremental space that you're expecting is the same as you were looking to do 3 months ago. I guess that's my question.

That's correct.

Our next question is going to come from the line of Ryan with Needham & Company.

I wanted to ask about DCI in particular. And obviously, that's getting boosted here, a shift from cloud to AI infrastructure, higher higher attach rates for ZR. And my question for you is, from your discussions with customers, there's this concept of the distributed cluster to the power requirements? And do you think that the distributed cluster due to power grids is already affecting your demand for ZR? Or do you think that's still?

I'm not sure, Ryan. I think for us, we honestly don't spend too much time trying to figure out the reasons for the demand. When the demand is so strong. We generally focus most of our energy and just trying to fulfill it. But I think you may have a point as that need rolls out and continues to grow. I think it should drive the need for more DCI, more 400 ZR and 200 ZR. So -- but the exact reasons behind the strong growth, we don't spend too much time thinking about. We were too busy just trying to make sure we have everything in place and lined up to meet the demand.

Yes, fair. Great. Great execution. And on the non-DCI telecom, I know you might have touched on it briefly earlier, but as you think about that growth, it was up several $10 million sequentially. Is that mostly share? Or do you have any new wins in the mix there for the non-DCI telecom?

It's a little bit of both. So we've been continuing to chip away at our competitors and continuing to win business. It's primarily, I think ramping, ramping existing programs that we've won that are kind of becoming existing programs at this point, but it's mostly newer programs that are ramping, newer programs that we've won in recent times that we're ramping.

[Operator Instructions] Our next question comes from the line of Tim Savageaux with Northland Capital Markets.

And congrats on the results. And I think it was a couple of quarters ago, Seamus, where you made a reference to -- you talked about the 19% growth in fiscal '25. And made a reference to the potential for accelerating growth in '26 and didn't have you quite there, but pretty close. You're guiding to 25% growth in the first half of the year, that certainly would represent acceleration. Is that, in your mind, it looks like a reasonable baseline for the year, but I wonder if you have any thoughts on maintaining or even accelerating that growth rate.

Yes. I think as you rightly pointed out, yes, we had -- last year, we grew 19%, last quarter, 22% this quarter at the midpoint. As Travis mentioned, we're projected to grow we're just going to focus on executing the demand is strong. I wouldn't want to put a number on what growth would be for the full year because we don't guide for a full year. We only guide 1 quarter at a time. But yes, certainly, we're quite optimistic about what's in front of us. We're -- it's an unusual time. Demand is very strong, and it looks to be robust looks to be sustainable, and it's across multiple product categories and customers. So our focus is on execution and hopefully delivering another quarter and hopefully, another year of outsized growth. It's an exciting time. We're very positive about the trends we're seeing because as fast as we can build the products, the customers need them. The demand is very strong across all the segments that we -- all the sectors that we service. So we hope it continues on a long time.

Great. And I want to take another crack at this kind of the composition of the sequential guide. I think you did in your prepared comments, you mentioned DCI, datacom and HPC. I don't know if there was any rhyme or reason to that ordering, but should that be in -- could that be interpreted as kind of the relative demand drivers maybe on an absolute dollar basis? Or is that the [indiscernible].

Yes. Datacom DCI, HPC is just alphabetical. I'm joking. There's no particular order to that. I wouldn't read too much into that. It's just -- it's probably more likely that sequentially, as we take through the numbers, we kind of tend to focus on telecom first because that's where the if you like, the origin of the company, then datacom has become a much bigger part of our revenue and then HPC is more recent. So it's probably more to do with is the sequence in which each of the categories has grown, frankly. But all 3 of those look to be very strong. DCI is just -- it's been a fantastic set of products for us and customers. Of course, datacom is great for everybody in the HPC. So I wouldn't read too much into the ordering of those 10.

Fair enough. And last 1 for me. I know you commented on it, but I guess you mentioned some of the component shortages are still there. Can you say whether that's improving at all or looks to be? And is that part of your maybe fairly strong guidance for datacom in December?

Yes. I mean I think these issues always have a way of resolving themselves or getting resolved. If there are times when you look out to the future and if you're kind of host in terms of component supply. But you have to make certain assumptions and certain actions. And generally, our customers and our own team working with the supply base generally do a very, very good job of making sure we get what we need in the end, even if in the beginning, it doesn't look like we're going to get what we need. So I think it is improving. The certain component categories that are just in extremely tight supply. But fortunately, we have some pretty blue chip type customers who tend to get their their share and sometimes their unfair share of the available components. So it's not something we're overly concerned about, and we do think it will right itself as the component supply, component suppliers ramp up additional capacity. It does take time to add capacity, especially for these complex components. But -- so I think it will improve, Tim, but there's probably another quarter or 2 of tight supply. But in the end, I think we guess what we need.

Thank you. And I would now like to turn the conference back over to Seamus Grady for closing remarks.

Thank you for joining our call today. We are excited by our first quarter performance with record results that exceeded our guidance ranges. We're also optimistic that we can deliver an even stronger second quarter with multiple growth drivers as our -- with multiple growth drivers as we continue to expand our market leadership. We look forward to speaking with you in the future and to see those of you who will be attending the JPMorgan Tech Conference in [ Asia ] and the Needham Conference in November as well as the Barclays and Northland conferences in December. Goodbye.

This concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.