Fabrinet Q4 2025 Earnings Call Transcript

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Provided by Quartr
August 18, 2025

Key Takeaways

  • Positive Sentiment: Fabrinet delivered Q4 revenue of $910 million (+20% YoY) and record non-GAAP EPS of $2.65, both above guidance.
  • Positive Sentiment: For fiscal 2025, full-year revenue hit a record $3.4 billion (+19% YoY) with non-GAAP EPS of $10.17, and the company began a key AWS partnership expected to drive fiscal 2026 growth.
  • Neutral Sentiment: Construction on Building 10 began to add 2 million sq ft of capacity, and management is evaluating an accelerated completion that may temporarily raise CapEx.
  • Positive Sentiment: Data center interconnect (DCI) revenue was introduced as a new reporting category at $107 million in Q4, up 45% YoY and now representing 12% of total revenue.
  • Negative Sentiment: Surging demand for next-gen 1.6 Tbps transceivers led to temporary component supply challenges, prompting an expected sequential dip in Datacom revenue in Q1.
AI Generated. May Contain Errors.
Earnings Conference Call
Fabrinet Q4 2025
00:00 / 00:00

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Operator

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the 2025. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions on how to participate will be provided at that time. As a reminder, today's call is being recorded.

Operator

I would now like to turn the call over to your host, Carole Tumajanian, VP of Investor Relations.

Garo Toomajanian
Garo Toomajanian
VP - IR & Corporate Development at Fabrinet

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 2025, which ended 06/27/2025. With me on the call today are Seamus Grady, Chief Executive Officer and Chavez Ferra, 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.

Garo Toomajanian
Garo Toomajanian
VP - IR & Corporate Development at Fabrinet

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 05/06/2025.

Garo Toomajanian
Garo Toomajanian
VP - IR & Corporate Development at Fabrinet

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

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Thank you, Carol. Good afternoon, and thanks to those joining our call today. We had an excellent fourth quarter ending an outstanding year with tremendous momentum. Fourth quarter revenue was $910,000,000 which was above our guidance range and up more than 20% from a year ago and 4% from Q3. With margins that were a little better than expected, we also achieved record non GAAP earnings of $2.65 per share.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

For the full year fiscal twenty twenty five, revenue reached a record $3,400,000,000 representing a robust 19% increase over the prior year. Non GAAP EPS also hit an all time high at $10.17 Looking back, fiscal year twenty twenty five was an exceptional year of execution and growth for Fabrinet. We navigated a significant product transition at a major datacom customer, while our telecom business and overall revenue reached record highs. We established a significant partnership with Amazon Web Services, which we anticipate will be a meaningful revenue driver in fiscal year twenty twenty six. Construction began on Building 10, which will add 2,000,000 square feet of capacity to our overall footprint.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

We also marked the fifteenth anniversary of our IPO by ringing the opening bell at the New York Stock Exchange. Additionally, we returned $126,000,000 to shareholders through our buyback program with continued repurchases expected in fiscal twenty twenty six. We begin fiscal twenty twenty six with strong broad based momentum. Robust customer demand across our business leaves us better positioned than ever to capitalize on the many significant opportunities ahead of us. In fact, with multiple growth drivers providing clear visibility toward reaching $1,000,000,000 in quarterly revenue, we are now evaluating options to accelerate the completion of a portion of Building 10 to meet increasing customer demand.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Looking more closely at our fourth quarter results, optical communications revenue delivered strong growth. Telecom revenue increased 46% from a year ago and 1% from Q3, with system programs and demand for data center interconnect products driving the bulk of our growth. In fact, DCI revenue represented one quarter of our total telecom revenue and grew 45% from a year ago. We expect our telecom momentum to continue into Q1, especially as we begin to ramp volume production of a next generation system program for a major customer. As anticipated, Datacom revenue was down from a year ago but increased double digits sequentially as we enter a meaningful growth phase for 1.6 t products.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

With demand still increasing, we are very optimistic about Datacom growth trends for fiscal twenty twenty six. In the near term, this surge in demand has created some temporary component supply challenges, which we are working closely with a major customer to overcome. Within non optical communications, automotive performed better than expected for the quarter with only a slight sequential decline, while industrial laser revenue remained stable. Looking ahead, multiple simultaneous growth drivers give us strong optimism for fiscal twenty twenty six. These include the launch of a new telecom system, continued growth in DCI, increasing demand for 1.6 t transceivers, and the ramp of our prominent high performance compute program.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

We remain confident in our ability to maintain excellent execution while continuing to grow both revenue and earnings. In summary, we are pleased with our outstanding performance in Q4 and throughout fiscal twenty twenty five. More importantly, we enter fiscal twenty twenty six in a very strong position, reinforcing our optimism for the future as we further solidify our leadership position in the marketplace. We look forward to carrying this momentum into a strong Q1. I'll now turn the call over to Csaba for more financial details on our fourth quarter results and our outlook for the 2026. Csaba?

Csaba Sverha
CFO at Fabrinet

Thank you, Seamus, and good afternoon, everyone. We had a very strong fourth quarter achieving new quarterly records for both revenue and non GAAP net income. Revenue in the fourth quarter was $910,000,000 above our guidance range and an increase of 21% from a year ago and 4% from Q3. Non GAAP EPS was $2.65 a new quarterly record. This result includes the impact of a $4,000,000 or $0.10 per share FX evaluation loss.

Csaba Sverha
CFO at Fabrinet

Looking at revenue performance by category, in the fourth quarter, Optical Communications revenue was $689,000,000 up 15% from a year ago and 5% from Q3. Within Optical Communications, telecom revenue reached a robust $412,000,000 up 46% from a year ago and 1% from Q3. This performance reflects growing demand driven primarily by continued strength in data center interconnect products. For the first time, we are reporting DCI revenue, which reached $107,000,000 in the fourth quarter, representing 12% of overall revenue. To provide investors better insight into this important growth area, we have included historical DCI revenue data in the investor presentation available on our website.

Csaba Sverha
CFO at Fabrinet

Datacom revenue of $277,000,000 was down 12% from a year ago, but swung to a strong growth of 10% sequentially, driven by very strong demand for new higher data rate products. In optical communications, revenue from 800 gig and faster products was $313,000,000 up 21% year over year and 32% sequentially, driven primarily by the ramp of new 1.6 Datacom products. Importantly, we have now begun volume shipments of 1.6 transceivers, a major milestone, and expect demand trends to continue ramping in fiscal twenty twenty six. In contrast, revenue from products below 800 gig was $233,000,000 up 4% from a year ago, but down 18% from Q3, reflecting the industry's transition to next generation products. Revenue from optical communications products that are non speed rated was $143,000,000 up 4% from Q3.

Csaba Sverha
CFO at Fabrinet

We expect strong revenue momentum from 800 gig and faster products to continue, while revenue from lower speed products is expected to decline gradually as the industry transitions towards higher data rates. As a result, beginning next quarter, we will no longer report revenue by data rate. Similarly, starting in Q1, we will discontinue the breakout of silicon photonics revenue as the vast majority of it is now captured under DCI. Non optical communications revenue was $221,000,000 representing a healthy 41% increase year over year and 3% sequential gain. Automotive revenue came in better than expected at $128,000,000 experiencing a modest quarterly decline following several quarters of rapid growth.

Csaba Sverha
CFO at Fabrinet

Industrial laser revenue was stable at $40,000,000 Other revenue was $53,000,000 up 38% year over year and 20% from Q3, with the sequential increase primarily reflecting the absence of a non cash contra revenue item recorded in Q3. As I discuss the details of our P and L, expense and profitability metrics will be on a non GAAP basis, unless otherwise noted. Gross margin in the fourth quarter was better than anticipated at 12.5%, with operational efficiencies offsetting a smaller than expected impact from large project ramps. Operating expenses remained below 2% of revenue, resulting in record operating income of $97,000,000 or an operating margin of 10.7%, a 50 basis point improvement from Q3. Interest income was $8,000,000 in Q4.

Csaba Sverha
CFO at Fabrinet

As I mentioned, we also incurred a foreign exchange evaluation loss of $4,000,000 Effective GAAP tax rate was 6.5%. Non GAAP net income was $96,000,000 or $2.65 per diluted share. For the full fiscal year, revenue was a record 3,400,000,000 up 19% from fiscal twenty twenty four. Non GAAP EPS was $10.17 for the year, which includes the impact of an $0.11 headwind from non cash contra revenue and a $0.26 impact from FX revaluation losses. Looking at customer concentration, in fiscal twenty twenty five, we had two customers who represented more than 10% of our total revenue, with NVIDIA at 28% and Cisco at 18% of revenue.

Csaba Sverha
CFO at Fabrinet

Our top 10 customers made up 86% of total revenue for the year, consistent with last year. Turning to our balance sheet highlights. We ended the year with cash and short term investments of $934,000,000 down $16,000,000 from the end of Q3. Operating cash flow in the quarter was $55,000,000 Capital expenditures rose to $50,000,000 primarily driven by building temp construction costs and investments to support new program ramps, resulting in fourth quarter free cash flow of $5,000,000 As Seamus mentioned, we are actively evaluating options to accelerate the construction of Building 10 in response to growing customer demand. If we move forward, quarterly capital expenditures could temporarily increase from current levels.

Csaba Sverha
CFO at Fabrinet

With our very strong balance sheet, we believe we have ample cash to support our top capital allocation priorities, which are first, investing in our future growth and second, returning value to shareholders through our buyback programs. In the fourth quarter, we remained active in our share repurchase program. We repurchased 108,000 shares at an average price of $2.00 $6 per share for a total cash outlay of $22,000,000,000 For fiscal year twenty twenty five, we repurchased 126,000,000 worth of Fabrinet shares, which is the most we have ever spent on repurchases in a single fiscal year. We entered fiscal twenty twenty six with $174,000,000 available for repurchases. Now, turning to our guidance for the 2026.

Csaba Sverha
CFO at Fabrinet

We remain very well positioned to extend our track record of excellent growth and execution. In telecom, we expect our very strong revenue growth trends to extend into the first fiscal quarter, driven particularly by ramping system program. In datacom, we are excited to see growing demand, especially for next generation products. However, the surging demand has resulted in near term supply constraints for some critical components. And as a result, we expect to see a sequential dip in Datacom revenue in Q1.

Csaba Sverha
CFO at Fabrinet

We are working with our customers and suppliers to resolve these supply issues, which we expect to be temporary. In non optical communications, we anticipate strong growth driven primarily by a new high performance computing program. Since this new revenue stream does not align with our current disclosure categories, beginning in Q1, we will be introducing a new revenue category called HPC. In automotive, we expect the near term softness experienced in Q4 to continue into Q1, but we remain optimistic about a return to more normalized growth trends. Industrial laser revenue should be relatively flat.

Csaba Sverha
CFO at Fabrinet

Taking all of this together, we anticipate healthy year over year and sequential growth in the first quarter, with total revenue in the range of $910,000,000 to $950,000,000 From profitability perspective, please keep in mind that our annual merit increases take effect in Q1, creating seasonal margin pressure of about 10 to 20 basis points that we typically recover through efficiency gains over the course of the year. In addition, Q1 margins will be impacted by temporary inefficiencies from new product ramps, which are expected to subside as these programs advance through their early production stages. With that in mind, we remain optimistic that we can achieve gross margins within our mid-twelve percent target range, while continuing to generate operating leverage that supports steady improvement in operating margins over time. We expect earnings per diluted share to be between $2.75 and $2.9 In summary, this is an exciting time at Fabrinet. We delivered a very strong fourth quarter and an outstanding fiscal year.

Csaba Sverha
CFO at Fabrinet

With multiple new programs fueling our long term growth trajectory and our strong competitive position, we are highly optimistic about Q1 and the new fiscal year ahead. Operator, we are now ready to open the call for questions.

Operator

To remove yourself from the queue, you may press star, 11 again. Please limit yourself to one question and one follow-up to allow everyone the opportunity to participate. Please standby while we compile the Q and A roster. Our first question comes from the line of Karl Ackerman of BNP Paribas. Please go ahead, Carl.

Karl Ackerman
MD - Equity Research, Semiconductors & IT Hardware at BNP Paribas

Yes, thank you, gentlemen. Congrats on the quarter. I have a clarification question and a follow-up, if I may. The clarification question is the dip in datacom revenue that you expect in September, does that exclude or include contributions from the new HPC segment?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Hi, Karl. Thanks for the question. So the new HPC program is not in our Datacom number in q one. It will be in a new a new category that we'll report in the quarter, called HPC or high performance compute. So HPC will will not be in will not be in Datacom.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

It will be in its own category. In q four, it was in other as it just got off the ground, but in q one, it will be in its own category.

Karl Ackerman
MD - Equity Research, Semiconductors & IT Hardware at BNP Paribas

Got it. Thank you for that. So, Seamus, you suggested in the past are interested and certainly have the opportunity to perhaps have an EMS partner manufacturer transceivers. Know you've been shifting manufacturing capacity away from 800 gig toward 1.6T. So should we assume that any future hyperscaler transceiver opportunities would be on 1.6 terabit port speeds?

Karl Ackerman
MD - Equity Research, Semiconductors & IT Hardware at BNP Paribas

Or do you still see a very long runway of growth on eight hertz gig? Thank you.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

No, I think it depends on really whether we're talking about our main customer or the market generally. For our main customer, it will be predominantly 1.6 gs. But for the datacom customers, generally, it will be both 801.6 gs. We don't see much going on below 800 gig. For the Datacom opportunities, if you like, in total that we're pursuing, we usually work with our customers on the current plus the next two generations of products.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

And so in addition to our leading Datacom customer, we have other long standing Datacom customers that we're working with who are designing their own products for 800 gig, 1.6, and also CPO products. We're also pursuing engagements with a number of merchant transceiver suppliers, as well as, as you mentioned, hyperscale direct. So we have four, if you like, four distinct growth factors in the Datacom space. Our largest Datacom customer, other Datacom customers who are designing their own products, merchant transceiver manufacturers and hyperscalers direct. And we're actively pursuing all four of those growth factors.

Karl Ackerman
MD - Equity Research, Semiconductors & IT Hardware at BNP Paribas

Very good. Thank you.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

You're welcome.

Operator

Our next question comes from the line of Tim Savageaux of Northland Capital Markets.

Tim Savageaux
MD & Senior Research Analyst at Northland Capital Markets

Hi, good afternoon, and congrats on the results. Thank you, Tim. It's a higher level question, perhaps. I think maybe it was the close of last quarter's call. James, you talked about, I guess, the potential for accelerating growth in fiscal twenty twenty six off of obviously, what was a pretty strong 25%, growing 19%.

Tim Savageaux
MD & Senior Research Analyst at Northland Capital Markets

I guess the question is, any more precision on that now that we're three months later? Do you still feel like that's the case? Does perhaps the component issues change that? Just love to get your view on that previous statement.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Yeah, I think we enter fiscal year 'twenty six very optimistic about the year ahead. As you say, we an excellent FY 'twenty five. We grew 19%. We grew 19% in the year where our largest customer, our business with our largest customer was down on a dollar for dollar basis. So we feel, I would say, very optimistic, Tim, about the year ahead.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

We guide one quarter at a time, so we're not gonna full year guidance, but I think our cause for optimism remains. The Datacom business is coming back and the demand is outstripping supply right now. That's a temporary issue, but we have very strong demand 1.6 terabit products right now. We have a number of other datacom products in the works, I just mentioned. The strong telecom trends continue driven primarily by DCI.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

And we a number of new customer wins, of course, that we've talked about previously, but overall I think we enter the year with a very positive outlook for the year ahead.

Tim Savageaux
MD & Senior Research Analyst at Northland Capital Markets

Got it. And and I guess that's evident to some degree in your comments about maybe accelerating the Building 10 capacity expansion. I'm trying to figure out what you're exactly trying to communicate here. Are you Have you pulled the trigger on something? Are you very close to or how, as you said, evaluating options, how might we see that move forward and over what time frame?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Yeah, so the decision to pull Building 10 in to get a portion of the building completed maybe one or two quarters ahead of the original schedule, we're really communicating that because it will impact our CapEx. Obviously, we'll have to spend a little bit more to pull in completion of a portion of the building. And it's a combination of a few things. It's a combination of the business opportunities that we just talked about that we're addressing right now in telecom, datacom and high performance compute, as well as some other potential new opportunities. We really want to be able to occupy some of the space in Building 10 before the total building is completed.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Meanwhile, we have flexibility. We can accommodate all the demand that we're seeing, but we do want to be able to occupy a few 100,000 square feet of Building 10, probably three to six months ahead of originally contemplated.

Tim Savageaux
MD & Senior Research Analyst at Northland Capital Markets

Great, and last one for me. I Wonder if you can talk about whether your new telecom systems win contributed in a material way in Q4.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

It contributed. I mean, we're really just getting going. Know, we've always said it will ramp in FY twenty six. So we're just really getting started with that. And it will ramp as we go throughout the year.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

So it did contribute, but you know it's really as we go through the year that we'll start to see that program ramp. But it's going very well. We're very happy with the relationship. I think the customer is happy and we're very happy with how it's going and how the ramp schedule is going. But the big I would say that the bulk of that ramp is still in front of us.

Tim Savageaux
MD & Senior Research Analyst at Northland Capital Markets

Great. Thanks very much.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Thank you, Tim.

Operator

Thank you. Our next question comes from the line of Samik Chatterjee of JPMorgan. Please go ahead, Samik.

Samik Chatterjee
Samik Chatterjee
MD & Equity Research Analyst at J.P. Morgan

Hey, guys. Thanks for the questions. This is Joe Cardoso on for Samik. Maybe for my first one, in a similar vein to the prior question on kind of the growth prospects for the company kind of heading into next year, just given these multiple customer ramps across various and different products, some of them being kind of newer to the portfolio, Anything we should keep in mind relative to kind of the gross margin and OpEx trends going forward? Anything one off or or different from kind of what we're used to in terms of the historical profile for Fabrinet?

Samik Chatterjee
Samik Chatterjee
MD & Equity Research Analyst at J.P. Morgan

Just trying to be mindful that there's a lot of irons, in the fire here, so if there's anything that we should be kind of considering. And then I have a follow-up.

Csaba Sverha
CFO at Fabrinet

Hi, Joe. This is Chavez. Let me take that question. With regards to profitability, obviously, our aim is to maintain our gross margin target range in the So obviously, as you would anticipate, some of these large new programs would put some temporary pressure on the gross margins.

Csaba Sverha
CFO at Fabrinet

However, we do anticipate that these headwinds to be temporary and subside over time. We did call out a small headwind in our Q1 guide, because that's a seasonal quarter for us with merit increases as well as this program ramps are coming through. However, we don't anticipate any structural changes in our portfolio or margin profile. So our aim is to maintain our existing gross margin range.

Samik Chatterjee
Samik Chatterjee
MD & Equity Research Analyst at J.P. Morgan

And then just on the OpEx side? And then I have a follow-up.

Csaba Sverha
CFO at Fabrinet

OpEx, we are we have been very careful about spending on operating expenses, and we have been very cautious about adding cost, and we will maintain that discipline. As you see our track record, we have been able to deliver operating leverage year over year, so we continue that path. We don't anticipate to add any significant OpEx other than the usual merit increases throughout the year. So that should continue to drive operating leverage as the top line grows.

Samik Chatterjee
Samik Chatterjee
MD & Equity Research Analyst at J.P. Morgan

Very clear. And then maybe just as my follow-up, 800 gig trends, you mentioned 1.6 being kind of the primary driver of growth sequentially, but curious how much of a gating factor was the supply constraints that you highlighted? And as you think about the ramp going forward, any color on how you're thinking about the magnitude of the impact from these bottlenecks and when we potentially could see them easing? And then maybe just quickly, like any color on whether that's what components those are lasers DSPs anything else that you guys are seeing that's kind of the concentration of the supply constraints?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Yeah, so it's a know really it's a handful of components that causing us to have some component constraints. As we saw this past quarter and into this quarter and beyond, we think now it's surge in demand for 1.6 T transceivers and in particular, 100 gig per lane EML based products. We are seeing some supply constraints, mainly for specific components. It's a small number of components. It's not broad based.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

It's unique to really one component for one or two components for one product for our customer or for one customer. And because of these constraints, we're anticipating that the Datacom revenue will be down. We've called that out in our prepared remarks, but we think it's short lived. We're pretty confident we're pursuing multiple paths with our customer and with the supply base to help remedy the constraints in order to meet the strong demand and we believe the supply issues will be temporary. But they will take a little bit of time to fully resolve maybe one or two quarters.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

But we do think it's a short lived problem but it's one we have to deal with right now. The good news is the demand is very strong and you know the current demand is strong and well above the supply availability. But like I say, it's not unusual when you get a new product like this, a kind of a leading edge product with leading edge technology and a big spike coupled with a big spike in demand. That's not unusual to have these temporary supply constraints, but we'll work through that.

Csaba Sverha
CFO at Fabrinet

Thank you, gentlemen. Thank you, Joe.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Thanks, Joe.

Operator

Thank you. Our next question comes from the line of Steven Fox of Fox Advisors. Please go ahead, Steven.

Steven Fox
Founder & CEO at Fox Advisors, LLC

Hi, good afternoon. I think I'm still a little confused on the gross margins. Can we back up and just talk about the fiscal fourth quarter margins for a second? You did better than you thought you would on efficiencies, but I would assume you had some of the product ramps going on. I guess you avoided the component shortages in the quarter and weren't expanding on Building 10 yet faster than previously thought.

Steven Fox
Founder & CEO at Fox Advisors, LLC

Like, if you could just break that down, what like, why didn't you see some of these headwinds and how else you got efficiencies in Q4 besides better sales? Thanks. And then I had a follow-up.

Csaba Sverha
CFO at Fabrinet

So let me clarify. So first of all, Steve, Building 10 expenses are not in the numbers. So Building ten is a future event, so we don't see any gross margin headwinds from Building ten context. So that's number one.

Csaba Sverha
CFO at Fabrinet

Secondly, obviously, as these programs are ramping, obviously, we do have certain inefficiencies that are baked in our outlook. However, the existing program existing business continues to execute very well and we have made a very strong execution. So that's on the flip side, that resulted in better than expected gross margin in our Q4. Again, we do anticipate that this product ramps will put some pressure on the near term gross margins. So going into Q1, we expect a mild headwinds.

Csaba Sverha
CFO at Fabrinet

But Q4 was strong and it's not particularly because of Building 10. It's just a very strong execution on the legacy business and obviously starting off with the new programs.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

If I can just add maybe to Travis comments here, Stephen, you know, the ramp cost that we had assumed going into the quarter, we came in a little bit better than we had planned. But we a few quarters I think now of fairly strong ramps going on simultaneously. So we are going to have to carry these ramp costs when we start a new program, some of these big programs, takes a little bit of time to get ramped up to full efficiency. So, we do carry some startup costs or NPI costs when we start these programmes. And then in Q4, we just did a little bit better on efficiencies.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Our operations team did an excellent job outstanding Sorry, an excellent job to execute to make sure that we came in a little bit better than anticipated in Q4.

Steven Fox
Founder & CEO at Fox Advisors, LLC

And just one other minor detail on all that, and that's very helpful, is that you didn't experience any component constraints to speak of in Q4. Is that correct?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Not any huge constraints. I mean, we have, again, as we called out there, a couple of constraints going Q1. There some in Q4, but the big hit release in Q1. We were able to get what we needed in Q4, but we are constrained in Q1, yes.

Csaba Sverha
CFO at Fabrinet

Great. Typically, Steven, typically, don't have margin impacts from component shortages, so we are always able to juggle the capacity to make sure that component constraints don't create near term. The good thing about component constraints, we have a fairly good visibility on supply, so we are able to adjust capacity. So there is no concern of headwinds from component constraints when it comes to gross margins.

Steven Fox
Founder & CEO at Fox Advisors, LLC

Great. Thanks for explaining all that.

Steven Fox
Founder & CEO at Fox Advisors, LLC

And then just as a follow-up, can you a little bit more on the data center interconnect business? I thought you also had talked about some new customers for the new fiscal year. I know you don't you only got a quarter at a time, but can you give us a sense for the momentum? You were up 45% year over year in the quarter. Any way to think about how the momentum directionally continues for the rest for the new fiscal year? Any other clues you can provide there? Thanks.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Yeah, maybe I'll let Chavez put a bit more detail around the button. In general, Stephen, our DCI business has been very strong. We've captured a number of customers there. They're all ramping and we're able to keep up with the demand. And the demand seems to be it's strong, it's robust and it looks to be durable.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

And it is increasing over time. So I think as these big data center clusters get rolled out, these big AI workloads get shared around between data centers, the need for DCI is increasing, if anything. So, we see DCI demand being continued to be very strong for some time to come.

Csaba Sverha
CFO at Fabrinet

And some clarification there, Steve, as well. So, DCI is a distinct category, as you called out. We wanted to give that additional color to the investors. So, it's part of our telecom business, but we wanted to call out as it's a significant growth driver as we look ahead. So there is one more thing that's going on in DCI.

Csaba Sverha
CFO at Fabrinet

Obviously, bulk of that growth came in the fiscal year from 400 ZRMs. We started to see transition to 800 ZR as well, but it's not at the expense of 400 at this stage. So, is that growth driver going on there. And to clarify your question about the new programs, we did not talk about particular DCI programs as new category going forward. So DCI, we have already captured the customers who we have been shipping, and we anticipate the growth to come from those customers.

Csaba Sverha
CFO at Fabrinet

So the new system wins will be in the telecom space, not the DCI, and the HPC is going to be a distinct its own segment and another DCI category.

Steven Fox
Founder & CEO at Fox Advisors, LLC

Great. That's all super helpful. Thank you very much.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Thank you.

Operator

Our next question comes from the line of George Notter of Wolfe Research. Your question please, George.

George Notter
Managing Director at Wolfe Research LLC

Hi, guys. Thanks very much. Can you just remind us the triggers on vesting of the Amazon warrants and recognition of contra revenue? I know that it was $4,000,000 last quarter, I think none here in the June. Can I assume that you did not generate revenue with Amazon this quarter? Is that the right read through?

Csaba Sverha
CFO at Fabrinet

Hi, George. So basically, the first vesting was prior to signing the contract. So upon signing the contract, we invested 10% in Q3. So that was one condition of the vesting. The rest of the shares will vest over revenue and over time.

Csaba Sverha
CFO at Fabrinet

So the fact that you haven't seen anything in Q4 has to do with the fact that there is a threshold that to be met in terms of revenue shipments. So it doesn't mean that we haven't shipped anything. So but future vesting will be subject to revenue and volume shipments throughout the year.

George Notter
Managing Director at Wolfe Research LLC

Got it. And then any I guess, we're all curious about how big that Amazon PCB business can be over time. I mean, obviously, you're breaking it out into its own category. I get that certainly. But is this hundreds of millions of opportunity?

George Notter
Managing Director at Wolfe Research LLC

Is this in billions? How do you think about the scale of what you can do here?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Yeah, so as look at the opportunity, it's certainly a significant opportunity for us. It could be significant. We believe it could be significant this fiscal year. We're not sizing the overall revenue with the customer there or the high performance compute deal we have with them, but the business will start to ramp in Q1. We did ship a little bit in Q4, but it will start to ramp in Q1 and that is contributing to our strong anticipated sequential growth.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

But keep in mind that our shipping I'm sorry. Yeah, I'm sorry. Calendar Q1 is just the beginning for us though with AWS and we think there could be more to come. We have one opportunity, there's a high performance compute opportunity, but we're working hard to see if we can gain some momentum in other categories there. Longer term, performance compute, we think represents a significant new TAM expansion opportunity for us and that's why we've decided to classify it as its own category.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

So we were again we'll be disclosing in our Q1 we'll be disclosing HPC as its own category. We'll also be disclosing what Trevor mentioned or we start to disclose DCI as its own category.

George Notter
Managing Director at Wolfe Research LLC

Got it. Then just I'm sorry, just to be clear, the ramp is in your fiscal Q1 or in calendar '26?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Fiscal Q1. We've already started. We've already started. We've shipped some revenue in Q4 and really that's just the getting off the ground and that's what we have the, if you like, we've called out the startup cost because as you can imagine, when you start up, you don't start at cruising speeds. We start up, we get the lines debugged, we get the efficiencies up, we make sure the yields are good, the customer comes and qualifies the production line and then we start ramping.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

So that work has been largely completed now and we're just beginning to ramp properly then this quarter. So fiscal Q1. Thank you. Thank you. Thank you, George.

Operator

Thank you. Our next question comes from the line of Ryan Koontz of Needham and Company. Please go ahead, Ryan.

Ryan Koontz
MD - Research Analyst at Needham & Company

Thanks. I'm going ask also about Datacom, maybe a different angle here if we could. Certainly understand the ramp going on for your large customer at 1.6T. That's self evident. You've talked about, I think, 800 remaining strong.

Ryan Koontz
MD - Research Analyst at Needham & Company

And obviously, there are other customers involved in the mix there. But Seamus, how would you characterize your visibility for 800 demand right now as you look at this next fiscal year? I think there's been some investor concern that that might dry up with your large customer shifting over. Thanks.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Our visibility is quite good. I mean, main focus is on the next generation products, the 1.6 T, but we have visibility on 800 gig as well. Our visibility is quite good and like I say in both areas it's supply constrained as opposed to demand constrained right now.

Ryan Koontz
MD - Research Analyst at Needham & Company

Got it. Helpful. And then, you guys had some pretty decent auto numbers, auto segment. Any any, view of how you think that, unravels in '26?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

I think, you know, steady. We we think steady. I don't think it's going to have the same kind of growth trajectory as, let's say, high performance compute or or datacom or or even telecom. It's probably telecom. It's probably more steady growth as we gain market share.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Again, bear in mind, our automotive business is more on the infrastructure side, the EV charging side of the business. So we're not as exposed to consumer sentiment as maybe other you know, companies who are producing for automotive, companies. So we think automotive will be steady, but, maybe not grow quite as fast as datacom or telecom or the others.

Ryan Koontz
MD - Research Analyst at Needham & Company

That's great. And one last one, if I could sneak it in. It was around tariffs. Any dialogue with tariffs that you'd be willing to share in terms of how your discussions are going with customers?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Yeah. It's an interesting one. For us, we haven't seen any meaningful impact to date from the tariffs. First, bear in mind, our shipping terms with our customers dictate that the receiver or the customer is responsible for the tariffs. So we don't bear the cost of the tariffs.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

And the products we make, both in the optical communication space and the non optical communication space, those categories are not necessarily shipped directly to The US as they may be shipped to Asia or Europe or elsewhere to another contract manufacturer for higher level assembly. So in many cases, the products we make, they don't ship directly into The US. So thus far, we have not seen any significant impact from tariffs, thankfully.

Ryan Koontz
MD - Research Analyst at Needham & Company

Super helpful. Thanks for that.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Thank you.

Operator

Thank you. Our next question comes from the line of Mike Genovese of Rosenblatt Securities. Please go ahead, Mike.

Mike Genovese
Senior Research Analyst at Rosenblatt Securities

Thank you. Seamus, I'm wondering, do you have any of your 800 gs customers moving to 200 gs per lane lasers? Or is 800 gs still a 100 gs per lane market?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

The focus for us is is on 200 gig per lane, 800 gig products. That's where that's the the bulk of the growth that we're doing is on on 200 gig per lane, 800 gig products.

Mike Genovese
Senior Research Analyst at Rosenblatt Securities

So so when you talk about supply constraints then, is it is it in both for the for the current quarter? Is it in both 800 g and 1.6? Or is it more in 1.6 than an 800?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

It's affecting both. It's both 600 sorry, 800 gig and 1.6. Yes.

Mike Genovese
Senior Research Analyst at Rosenblatt Securities

So then when we talk about being, like, sequentially down in the quarter, then that sounds like it could happen at more than one customer. That would be something that would happen at multiple customers because potentially 200 gs per lane EMLs are in short supply. Is that a right read?

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Yes and no. I think there's a of opportunities we're working on with customers, but they're not producing meaningful revenue in the current quarter, even though we're working on several opportunities. The big impact is with our main customer on the 200 gig per lane, again, impacts both 800 gig and 1.6. But there are, again, there are other customers we're working with on both 800 gig and 1.6 actually, but they're not meaningful in terms of revenue in the current quarter. Okay.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Perfect. I'll pass it on. Thank you. Thank you, Mike.

Operator

Thank you. From Tim Savageaux of Northland Capital Markets. Please go ahead, Tim.

Tim Savageaux
MD & Senior Research Analyst at Northland Capital Markets

Yeah, thanks for the follow-up. And just a couple of quick ones. One, could you take a shot at quantifying the impact of the component shortages on datacom? I assume without that they'd be up. Would that be up significantly?

Tim Savageaux
MD & Senior Research Analyst at Northland Capital Markets

Know, there was a number on that one. And also, obviously, 800 gig and above grew quite sharply in the quarter, but much more sharply in not as sharply as datacom. Sorry. Datacom didn't grow that sharply. So it looks like you had a big kick up at 800 gig and above telecom. And that was kinda what I was asking with Sienna before. But if I'm reading the numbers right, I wonder what might be driving that. And that's it for me. Thanks.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Yeah, think on the impact of the component shortage in Datacom, we're not gonna quantify that, Tim, but put it this way, it's meaningful enough for us to call it out. We would be up fairly significantly were it not for that issue. We're not going to quantify it, but it's a substantial enough headwind for us this quarter. On the 800 gig and above, yeah, that's a mix of, as you rightly point out, both datacom and telecom. So, good growth in datacom business, the 800 gig and above, but also primarily DCI and other products in the in the 800 gig telecom category.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

So, Nachal, if you want to add anything to that?

Csaba Sverha
CFO at Fabrinet

No, I think that's the color we can provide in there. So, obviously, we are seeing some DCI. We have it's below 800 gig team. So 400 ZR was very strong in DCI segment. So that potentially that's called a reason for not going as fast as as data.

Tim Savageaux
MD & Senior Research Analyst at Northland Capital Markets

Okay. Thanks a lot.

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

Thank you, Tim.

Operator

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

Seamus Grady
Seamus Grady
CEO & Director at Fabrinet

I thank you for joining our call today. We are very pleased with our strong fourth quarter results, culminating in another record year for the company. As we look to the first quarter and fiscal twenty twenty six, we are very excited about the opportunities that lie ahead and believe we are better positioned than ever to extend our strong track record of growth and execution. We look forward to speaking with you in the future and to seeing those of you who will be attending the Wolfe Research Conference in September. Goodbye.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

Executives
    • Garo Toomajanian
      Garo Toomajanian
      VP - IR & Corporate Development
    • Seamus Grady
      Seamus Grady
      CEO & Director
Analysts
    • Csaba Sverha
      CFO at Fabrinet
    • Karl Ackerman
      MD - Equity Research, Semiconductors & IT Hardware at BNP Paribas
    • Tim Savageaux
      MD & Senior Research Analyst at Northland Capital Markets
    • Samik Chatterjee
      MD & Equity Research Analyst at J.P. Morgan
    • Steven Fox
      Founder & CEO at Fox Advisors, LLC
    • George Notter
      Managing Director at Wolfe Research LLC
    • Ryan Koontz
      MD - Research Analyst at Needham & Company
    • Mike Genovese
      Senior Research Analyst at Rosenblatt Securities
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