Fabrinet - Q1 2024

Transcript

Operator (participant)

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the first quarter of fiscal year 2024. 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. I would now like to turn the call over to your host, Garo Toomajanian, VP of Investor Relations. Please go ahead.

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 2024, which ended September 29th, 2023. With me on the call today are Seamus Grady, Chief Executive Officer, and Csaba Cserra, Chief Financial Officer. This call is being webcast, and a replay will be available on the investor 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 investor 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 22, 2023. 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 CEO, Seamus Grady. Seamus?

Seamus Grady (CEO)

Thank you, Garo. Good afternoon, everyone, and thank you for joining us on our call today. We set new quarterly records for revenue and EPS in our first quarter, both of which were above our guidance ranges. Free cash flow also reached a new quarterly record. We achieved triple digits year-over-year growth in Datacom revenue, driven by next generation optical interconnect for AI applications. This Datacom growth more than made up for continued but diminishing sequential declines in Telecom revenue as inventory absorption runs its course. Overall revenue was $685.5 million, representing an increase of 5% from the fourth quarter, as well as from a year ago. Recall that the first quarter of fiscal 2023 was a 14-week quarter, adding approximately $20 million to revenue a year ago. Excluding this impact, revenue would have grown 8% year-over-year.

Our strong revenue growth contributed to a record bottom line, with non-GAAP net income of $2 per share. Looking at the first quarter in more detail, Optical Communications revenue increased from both a year ago and the fourth quarter. Within Optical Communications, Telecom revenue decreased sequentially, though by a smaller amount than anticipated. Datacom growth more than offset the Telecom decline, again, with sequential growth of 26% from a very strong fourth quarter, and year-over-year growth of over 160%. As in Q4, Datacom growth was driven primarily by AI optical interconnect. In our non-optical communications business, revenue was relatively flat, as anticipated. A small sequential decline in automotive revenue was largely offset by growth in industrial lasers and other non-optical communications revenue. Looking to the second quarter, we expect the industry-wide inventory adjustments in Telecom to continue.

We believe that Datacom growth, particularly in AI, will more than offset these headwinds again in the second quarter. In short, we are optimistic that the Telecom inventory-related issues are temporary, whereas the demand strength in Datacom is sustainable. In summary, our record top and bottom line results represented a strong start to the fiscal year, and we are confident that we remain well positioned to continue delivering solid results as we look ahead. Now, I'd like to turn the call over to Csaba for additional financial details on our first quarter of fiscal 2024 and our guidance for the second quarter. Csaba?

Csaba Sverha (CFO)

Thank you, Seamus, and good afternoon, everyone. Revenue was above our guidance range at $685.5 million, up 5%, both sequentially and from a year ago. Keep in mind that the first quarter of the prior year benefited by approximately $20 million due to an additional week. Our strong revenue helped to produce record earnings. Non-GAAP net income was $2 per share, which was above our guidance range. We have published additional details regarding our revenue breakdown in the investor presentation, which you can find on our website. In looking more closely at revenue, I will focus my comments on the most notable changes.

Optical Communications revenue of $533.3 million was a new quarterly record. Very strong sequential Datacom growth of 26%, more than made up for a smaller than anticipated decline in Telecom revenue of 6%. Datacom growth is being driven primarily by 800G technology for AI applications. We believe there is still excess inventory in the supply chain, and in the second quarter, we expect Datacom revenue to again more than offset Telecom declines by a wide margin. Looking at Optical Communications revenue by data rate, growth in revenue from products rated 400G and faster was substantially greater than revenue declines from 100G programs. Non-optical communications revenue was consistent with the fourth quarter at $152.2 million and represented 22% of total revenue.

Automotive revenue declined 5% from the fourth quarter due to some inventory absorption. This was partially offset by a smaller sequential increase in industrial laser and other non-optical communications revenue. As I discuss the details of our P&L, expense and profitability metrics will be on a non-GAAP basis unless otherwise noted. Gross margin in the quarter was 12.6%. As anticipated, gross margin declined seasonally by about 20 basis points from Q4, primarily due to annual merit increases, which take effect in the first quarter. Operating expenses in the quarter were $14.9 million, or 2.2% of revenue, an improvement of 10 basis points from the fourth quarter. We anticipate that operating expenses will continue to decline as a percentage of revenue as our business scales.

Operating income was $71.7 million, representing an operating margin of 10.5%, consistent with the fourth quarter. Our strong balance sheet again benefited our interest income, which was $5.9 million in the quarter. Our gain from foreign currency asset and liability revaluations at the end of the quarter was relatively small, at $0.4 million. Effective GAAP tax rate was 7.2% in the first quarter, which is above the mid-single digit level we continue to expect for the fiscal year as a whole. Non-GAAP net income was a new quarterly record of $72.8 million or $2 per diluted share. On a GAAP basis, net income was $1.78 per diluted share. Turning to the balance sheet and cash flow statements.

At the end of the first quarter, cash and short-term investments were $670.8 million, up $120.3 million from the end of the fourth quarter. This increase was driven primarily by strong operating cash flow of $145 million. With CapEx of $11.4 million, free cash flow was a quarterly record at $133.6 million. Our share repurchase program was not active in the first quarter. As a result, $100 million remained in our share repurchase authorization at the end of the quarter. Now, I will turn to our guidance for the second quarter. As I mentioned, we expect inventory adjustment at our customers, primarily in the telecom space, to continue into the second quarter.

We expect sequential revenue growth from high data rate Datacom from AI programs to again more than offset these telecom headwinds. We anticipate automotive revenue to decline sequentially and expect industrial laser revenue to be relatively flat. In total, we expect revenue to be between $680 million to $700 million. From a profitability perspective, we anticipate non-GAAP net income to be in the range of $1.98-$2.05 per diluted share. In summary, we are happy to have exceeded our first quarter guidance by producing record revenue, net income and free cash flow. We continue to balance consistent growth with improving profitability. We are optimistic that we can continue to execute well to deliver strong results as we look ahead. Operator, we are now ready to open the call for questions.

Operator (participant)

Thank you. If you have a question at this time, please press star one one on your telephone. You will hear an automated message advising you your hand is raised. To withdraw your question, please press star one one again. One moment while we compile our Q&A roster. Our first question is going to come from the line of Alex Henderson with Needham. Your line is open. Please go ahead.

Alex Henderson (Senior Research Analyst)

Great. Thank you very much. I've got a quick question for you on the news that came out of Jabil about the Jabil purchase of the Silicon Photonics business over at Intel. I know Intel Silicon Photonics has been historically a customer of yours, and I was wondering how you think that will impact you over time, particularly given the difficulty of moving an existing line.

Seamus Grady (CEO)

Hi, Alex. Yeah, it looks like Intel, you know, wanted to exit that market for their own strategic reasons. They, Intel has not been a 10% customer of ours. We have been one of, one of two sources, on the program that we, the programs that we're involved with. You know, we remain focused on being a manufacturer, serving several customers in, in the market rather than selling our own products. So, you know, for us, we, we understand, you know, Intel have sold the business in its entirety to, to Jabil, including development of new products, supply of the products, et cetera. And that's just not a business that, that we're, we're involved in. The immediate impact, it's really too early to say.

The news only became official, you know, literally a few days ago, so we have to sit down with our customer and work out the transfer plan. You know, we're confident that in these situations, you know, we provide a high level of service to our customers, and in general, we've become good at managing these type of transitions and usually find a way to come out on top.

Alex Henderson (Senior Research Analyst)

Great. Do you think that this represents an increase in Jabil trying to get into the optical market? Or do you... You know, what's your assessment of the competitive implications of it?

Seamus Grady (CEO)

Well, it's a different business, I guess, to the business we're involved in. We manufacture other people's products. We have no interest in having our own products. So, I would assume for Jabil, it's more of, I don't want to speak for Jabil, but it appears to be more of an ODM-type offering that they'll be providing, and that's just not something that we're involved in. So I would see it as a different market to the market that we're involved in. But, you know, we wish Jabil well.

Alex Henderson (Senior Research Analyst)

I hope there's not too much background noise. I just got out of a cab. But I was hoping you could talk one more question, if I could, and then I'll cede the floor, about any potential pipeline activity or thoughts on how to get into the Ethernet side of the 800G AI opportunity. Thanks.

Seamus Grady (CEO)

Well, we just really follow our customers' lead, Alex. You know, whichever protocol the customers deem to be the one that they want us to work on, we're happy. For us, we don't really mind whether the products are, you know, Ethernet or any other protocol. We don't really mind. So, you know, we work with our customers, and we're working with, I would say, a number of customers in the space to make sure we continue to provide the products that they need and the volumes that they need. But we really don't mind whether it's Ethernet or InfiniBand or anything else.

Alex Henderson (Senior Research Analyst)

Well, yeah, but your current 800G customer is almost exclusively InfiniBand and, and NVLink, and obviously, over time, the world will shift towards Ethernet. So the question is, do you have a hook into that stream?

Seamus Grady (CEO)

We do indeed. We're working with, I would say, a number of opportunities that we're working on that will be both, again, InfiniBand, but also Ethernet-based products.

Alex Henderson (Senior Research Analyst)

Great. Thank you.

Seamus Grady (CEO)

Thanks, Alex.

Operator (participant)

Thank you.

Seamus Grady (CEO)

Across the world.

Operator (participant)

Thank you, and one moment as we move to our next question. Our next question will come from the line of Samik Chatterjee with J.P. Morgan Your line is open. Please go ahead.

Samik Chatterjee (Senior Equity Research Analyst)

Yep, thank you. Thanks for taking my questions. I guess, to start off, maybe I can follow up on Alex's question to you. How, Seamus, as you move towards working with customers on the Ethernet side, what are you finding relative to the competitive landscape? Just from the outside and from our perspective, looks like more companies that are in the manufacturing supply chain in relation to Ethernet. But what... Can you share your thoughts about what you're seeing from a competitive aspect, and what's sort of the differentiation that you bring there into that ecosystem? Another follow-up. Thank you.

Seamus Grady (CEO)

Yeah, I think, Samik, for you know, newer products, whether it's 800G or higher speeds, we feel pretty confident that we're well positioned to support what the customers need. I think for you know, older generation products, you know, it's the competitive landscape is you know, it's much more competitive. But for new generation products, for these kind of specific short reach you know, low power, low latency applications, there's really a handful of companies who are able to design these type of products, and we're well positioned, we think, to support them. So again, whether it's InfiniBand or Ethernet, we just follow our customers' lead. Whatever they need from us, we're happy to help them with.

And again, our focus is always on producing the current generation products, but also winning the next generation products. So we're very focused on that with our customers in the space.

Samik Chatterjee (Senior Equity Research Analyst)

Okay, got it. If I can just ask as a follow-up on the guidance. Going from 4Q to 1Q, you had a sequential increase of about $13 million or so in revenue, with Datacom easily the increase in Datacom easily offsetting the Telecom decline. As you look forward, I mean, you're carrying forward the same theme where Datacom does offset Telecom, but the magnitude of it seems to be much lower, just given the $5 million sequential increase at the midpoint that you're guiding to. So maybe if you can help us with the percentages there, is Telecom declining more than sort of what we've seen from 4Q to 1Q? Or is it that the Datacom more in ramp is moderating, just given that you are maybe reaching more capacity with the customer that you're engaged with? Thank you.

Seamus Grady (CEO)

I would say, first of all, in Q1, our Telecom declined probably less than we thought it would. It declined about 6%. We you know, going into the quarter, I guess we thought it might decline more than that. It declined about 6%, which was primarily driven by stronger demand than anticipated for certain Telecom programs, especially DCI. So again, driven by the data center and the growth going on in the data center, but DCI products, which we categorize as Telecom. So that's the first thing. And then as we go into Q2, yeah, our Telecom business will decline further into Q2. As you know, we don't guide beyond one quarter at a time, but in a general sense-...

I think we think Telecom will decline, Datacom will increase by more than that decline. And then as we look to the kind of future, again, based on the intelligence we have from our customers, we think the Telecom decline is set to continue probably until the middle of the calendar year, which would be the end of our fiscal year. So, you know, further declines this quarter and the next quarter, and then we think it will begin to bottom out in the, we call it the June quarter. And then, you know, the rate of growth of Datacom, I guess it should slow down at some point. That rate of growth, it's been very strong for us, but it will inevitably begin to, the growth will begin to slow at some point.

Samik Chatterjee (Senior Equity Research Analyst)

Okay. Thank you. Thanks for taking my questions.

Seamus Grady (CEO)

No problem. Thank you so much.

Operator (participant)

Thank you, and one moment as we move on to our next question. Our next question is going to come from the line of Michael Genovese with Rosenblatt Securities. Your line is open. Please go ahead.

Michael Genovese (Managing Director)

Great, thanks. Hi, Seamus.

Seamus Grady (CEO)

Hi, Mike.

Michael Genovese (Managing Director)

Hi. Can you give us any commentary at all on, kind of, performance breakout between 400G and 800G datacom or, or, you know, new programs versus, you know, existing older programs? Is there any color we could get there?

Seamus Grady (CEO)

Well, in general, we break out 400G and above, and which, of course, at this point is a pretty large category. At some point we may want to revise how we do that. But for now, it's really everything in that 400G and above category. So 400G inside the data center, 400 DR, DCI, 800G, AI, everything really in that 400G and above category. But the growth has been coming from primarily the higher speed, newer programs. You know, older programs and let's call it traditional datacom products, have not been as strong, especially at the lower speeds, 100G and the like.

The growth for us, certainly we don't, you know, we don't speak for the whole industry, but for us, the growth that we've seen has been primarily on the higher speed, newer programs, mainly focused around these newer AI applications. 800G being the biggest driver for us there.

Michael Genovese (Managing Director)

Perfect. Maybe I'd follow up on that question by, because I thought that the color you gave about Telecom and DCI driving, you know, less a decline in Telecom, but less than expected was, I mean, that was a, you know, great color. So, maybe comparing how Telecom came in to how the older Datacom programs, I mean, was there any surprise on the upside there, or did it behave, or downside, or did it behave as expected?

Seamus Grady (CEO)

I think the traditional, we call it traditional Datacom, I think behaved pretty much as expected. You know, newer Datacom has been just very strong, but for, for us, it's, it's expected, I think, at this point. And then like I said earlier, the, the strength in DCI was maybe a little bit of a surprise. We, we had, we had expected Telecom to be down. If you just took the guidance from our customers, going into the quarter and you just straight lined that, we, we should have been down double digits, probably 12% to 15%, in Telecom. Instead, we were down about 6%. So down a lot less than, than we thought we would be. Again, primarily driven by, by DCI. So even though it's in Telecom, it's driven by the data center expansion that's going on everywhere.

Michael Genovese (Managing Director)

Got it. Okay, great. And then, finally, for me, just could you, maybe Csaba or, or both of you, talk about just, you know, the decision to not buy back stock in the quarter and, and, you know, kind of going forward, what you're thinking about with buybacks?

Csaba Sverha (CFO)

Hi, Mike, this is Csaba. Last quarter, as I mentioned in our prepared remarks, we didn't buy anything back. We have obviously an OMR opportunity in the open window. In addition, we have a 10b5-1 plan in place. The 10b5-1 plan is rule-based and subject to certain prices. Obviously, it didn't trigger last quarter, but obviously, we are still committed to return surplus cash to our shareholders. So, obviously, we are revisiting the 10b5-1 plan from time to time, and subject to the new pricing and the market conditions, we will make amendments, and we continue to be committed to return the surplus cash we generate to shareholders.

Michael Genovese (Managing Director)

Excellent. Great, well, thanks for letting me ask the questions. I appreciate it.

Seamus Grady (CEO)

You're very welcome.

Michael Genovese (Managing Director)

Thanks a lot.

Seamus Grady (CEO)

Thank you.

Operator (participant)

Thank you. Again, if you would like to ask a question at this time, please press star one one on your telephone. One moment for our next question. Our next question is going to come from the line of Tim Savageaux with Northland Capital Markets. Your line is open. Please go ahead.

Tim Savageaux (Managing Director and Senior Research Analyst)

Hey, good afternoon, and congrats on the results. A couple of questions. You'd previously described the AI connectivity opportunity, I think, at 800G or maybe just in general, as in very early stages and very large opportunity. I actually may be missing a few variables there.

Seamus Grady (CEO)

Yes, I think, I think at one point I maybe said very twice and got called off on very, very, very early stages.

Tim Savageaux (Managing Director and Senior Research Analyst)

Well, I guess as we've moved forward a few months here, you know, into the end of the year, would you add or subtract any variables at this point? Or can you give us your current assessment of where Fabrinet is in terms of the ramp and how that opportunity is looking, you know, relative to what you were seeing previously?

Seamus Grady (CEO)

I think, we're, you know, we're still very optimistic about—you know, you can insert or remove as many varies as you like there, Tim. We're still very, very optimistic about the market in general. I would say the interconnect, the optical interconnect opportunity for artificial intelligence applications and really our position within that. You know, we're, we're building the products for the leader in the industry. It's their own design, their own product, and I know they have other choices, but for now at least, we believe they're quite committed to, to, you know, to sourcing from us. We're still ramping. We continue to ramp both the existing programs, plural, and there's additional business that we're looking at and, you know, getting qualified on.

As you know, we're maniacally focused on executing the business that we've already won, but then on making sure we win the next generation programs, the new products. So we're working very, very hard on both of those, Tim, both on executing, and I think we've done a very good job there, maybe a very, very good job executing. And we're also making sure we, you know, win the next generation products and then execute very well on those. It's the best way to stay ahead of the competition, is just, you know, work like crazy to delight the customer and make sure we do a great job and win the next generation products.

So that's really our focus, and we see a lot of kind of runway ahead of us, and we think it's a you know, a really good opportunity for us.

Tim Savageaux (Managing Director and Senior Research Analyst)

Great, appreciate that. And, just to follow up, I know it, you know, ZR, I think you'd gotten within shouting distance of 10% of revenue for you guys before the latest inventory correction. Given that you've called it out as kind of the source of unexpected growth in the quarter, maybe you can give us an update on kind of where that stands in terms of materiality of the overall business or telecom or however you want to talk about it. And I just got one more quick follow-up after that.

Seamus Grady (CEO)

Yeah, I think 400ZR is very strong for us. We haven't broken it out yet as a separate category, but it is, you know, it is quite strong for us and continues to grow. It doesn't necessarily grow in a straight line, so there'll be maybe still a little bit of stops and starts with 400ZR, but, you know, we're just very happy to be participating in it, and it was a source of really most of that offset between the, what we would have expected last quarter. You know, that kind of down 12% to 15%, the difference between that and where we ended up was primarily 400ZR for DCI applications. So we still think it's early days.

We have a number of customers and a number of programs there, and we continue to, you know, ramp those. And they're not all at the same stage. Some are ahead, some are just getting qualified. But we still think 400ZR is a good, you know, has good runway left for us.

Tim Savageaux (Managing Director and Senior Research Analyst)

Well, and this was not gonna be my question, but now that you mention it, well, should we look at this sort of ZR thing as kind of a blip that's coming in and coming back out, or are you seeing weakness elsewhere across telecom as you look forward into your December quarter guide and continued growth in ZR?

Seamus Grady (CEO)

Yeah, I think we have, you know, as I said earlier, we still see continued weakness in Telecom generally. I think were it not for 400ZR, there would be even more weakness. And that's really in the traditional Telecom, call them traditional Telecom products. We, you know, we see continued softness in the December quarter and really out to the mid, probably out into the middle of next year, when we think it will start to level out.

Tim Savageaux (Managing Director and Senior Research Analyst)

Got it. And last question for me is, you know, given the growth that you've seen and the kind of metrics you've discussed in the past, you know, where do we stand in terms of, you know, major additional capacity additions in your facilities?

Seamus Grady (CEO)

Yeah. In a way, it seems crazy that we're even talking about it, but it is something we have to keep a close eye on as we ramp. You know, it seems like at the blink of an eye ago that we opened Building 8 in Chonburi. It's now completely full and, you know, Building 9 is off to a flying start. So we'll be keeping a close eye on that. You know, I think in all probability you could say, "Well, if we pull the trigger too early, what are the implications of that?" They're very, very small implications, really.

So typically what we've said in the past is once we get to 70% utilization in our last building, we'll build another building. You know, whether we do that this time around or whether we pull the trigger a little bit earlier, remains to be seen. But I think we're... You know, I would say stay tuned over the next couple of quarters. It's not gonna take us five years or anything like that to get to capacity in Building Nine. We're off to a great start there. I was there last week, and you know, the facilitation that's going on in Building Nine and the expansion is just amazing. It's really encouraging to see.

And whether it was good luck or good planning on our part, I think our timing on Building Nine was, as it turns out, exactly right. Little bit of luck, I think, never hurt anyone. So, we'll be keeping a close eye on that, Tim, and, you know, once we do make that decision, we communicate it on this call in due course. But, you know, again, the cost would be subject to Csaba correcting me. I would say if I put a range on it, $50 to $60 million for another 1 million sq ft and about a one year to 18 months time horizon. But, yeah, it's something we'll be keeping a close eye on, Tim.

Tim Savageaux (Managing Director and Senior Research Analyst)

... Great. Thanks very much.

Seamus Grady (CEO)

Thank you, Tim.

Operator (participant)

Thank you, and one moment for our next question. We have a follow-up question from the line of Samik Chatterjee with J.P. Morgan. Your line is open. Please go ahead.

Samik Chatterjee (Senior Equity Research Analyst)

Hi. Thanks for taking the follow-up. So I'll be quick, I promise. Just, Csaba, any color on... I know you mentioned the gross margin moderated sequentially because of the merit increases, but as you embed that now into the cost structure, puts and takes on how to think about gross margin going forward. Then, Seamus, either you or for you or Csaba, like, the automotive revenue declining, and you said it will decline modestly. Is that more of a temporary production-led headwind, or is this a fall off of the legacy programs while growth is sort of continuing on the new programs? Thank you. Any clarification on those two items?

Seamus Grady (CEO)

Maybe I'll take the automotive question first, then I'll let Csaba discuss the gross margin. Yeah, we saw some. I would call it inventory digestion going on in automotive this past quarter. We think it's primarily temporary. There may be another quarter or so of inventory digestion, but nothing to get too concerned about. You know, we remain optimistic about our EV charging business overall, but like any business that's ramping, it's, you know, it's, there's a little bit of inventory digestion going on. If you look at our overall revenue, we've always said we're around kind of the $90 million mark since we overcame the component charges a couple of quarters ago. So it's been pretty stable actually, if you look at the last few quarters.

In our Q3, we had $94 million of automotive revenue. Last Q4 was $93 million, and then Q1 was $88 million. So not a huge amount of variation, kind of normal variability as our customers go through inventory digestion, I would say. But overall, we remain, you know, we remain optimistic about that business.

Csaba Sverha (CFO)

So regarding gross margins, Samik, obviously, as you know, there are lots of puts and takes in the gross margin. This last fiscal quarter, we had a mild headwinds as usually from merit increases and gross margin came in as we had anticipated, at 12.6%. Obviously, we are working hard to make sure that we continue to execute well efficiently, provide cost reductions for our customers, and also, make sure that we manage the mix of business to deliver industry-leading margins. I think we have done a good job there in the last couple of years. But obviously, there are a couple of factors to be mindful that may result some seasonalities, like the merit increases in the first quarter.

It's also subject to foreign exchanges, which have been tailwind in the past, and then we managed to overcome of the temporary headwinds there as well. So there are lots of puts and takes, but we are optimistic that we can maintain this middle 12.5 and roundabout gross margin and above. Working hard to make sure that we continue to deliver on the operating margins as we scale the business and accomplish our roadmap for growth.

Samik Chatterjee (Senior Equity Research Analyst)

Thank you. Thanks for taking the questions.

Csaba Sverha (CFO)

Thanks.

Operator (participant)

Thank you, and one moment for our next question. Our next question comes from the line of Dave Kang with B. Riley. Your line is open. Please go ahead.

Dave Kang (Senior Research Analyst)

Yes, thank you. First question is regarding your 400G+ revenue of $322 million. What is the rough split between Datacom versus Telecom?

Csaba Sverha (CFO)

We typically don't break out and provide that breakdown, but obviously, as you appreciate that what we have communicated in the past, Datacom growth in that space have been obviously far more than the Telecom growth. So you would think Datacom is going to be much stronger in that area, but we haven't provided a breakdown on that.

Dave Kang (Senior Research Analyst)

Right. And then, on the Telecom portion of that 400G+, I mean, is this growing or is it going through inventory correction? Any color on that segment?

Csaba Sverha (CFO)

I think we touched on that as well, that the traditional telecom business that's not DCI, as we typically would include that in the Telecom segment, has been going through inventory digestion and has been there for a while, and we continue to see headwind there. But our DCI and 400ZR particularly have been very strong over the last couple of quarters, and we continue to be optimistic on that space. So I think again, the puts and takes there is traditional telecom still experiencing headwinds, but the Datacom, which is again driven by data centers, DCI is going strong for us.

Dave Kang (Senior Research Analyst)

Got it. Just quickly on the number of 10%+ customers you had, or near 10% customers. Any new 10% or near 10% customers?

Csaba Sverha (CFO)

We are disclosing our 10% customers in our Form 10-K at the end of the year, so obviously we have disclosed it in August. At that time, we obviously had four 10% customers, but we are not disclosing this during the quarter, so you will have to wait for another couple of quarters to see if any changes there.

Dave Kang (Senior Research Analyst)

Got it. Thank you.

Csaba Sverha (CFO)

You're welcome.

Operator (participant)

Thank you. I'm showing no further questions, and I would like to hand the conference back over to Seamus Grady for any closing remarks.

Seamus Grady (CEO)

Thank you. Thank you for joining our call today. We're very pleased with our first quarter performance, including record revenue, net income, and free cash flow. We're optimistic about the longer-term drivers of our business and our ability to continue to execute well to produce strong results. We look forward to speaking with you again and seeing those of you participating in the Needham Virtual Conference next week. Thank you and goodbye.

Operator (participant)

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