Fabrinet - Q2 2024
February 5, 2024
Transcript
Operator (participant)
Good afternoon. Welcome to Fabrinet's Financial Results conference call for the second quarter of fiscal year 2024. At this time, all participants are on 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, Vice President of Investor Relations. You may begin.
Garo Toomajanian (VP of Investor Relations and Corporate Development)
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 2024, which ended December 29, 2023. With me on the call today are Seamus Grady, Chief Executive Officer, and Csaba Sverha, 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-Q, filed on November 7, 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 (Chairman and CEO)
Thank you, Garo. Good afternoon, and thank you for joining our call today. We had a very strong second quarter, which again set new records for revenue and EPS and also exceeded our guidance ranges. Rapid Datacom growth continues to fuel our overall performance, driven by next-generation AI interconnect. Telecom revenue remains impacted by inventory absorption in the ecosystem, but we are encouraged that the magnitude of these declines is getting smaller.
Total revenue was $712.7 million, an increase of 7% from a year ago and 4% from the first quarter. Our strong execution helped to improve operating margins from the first quarter and generate non-GAAP net income of $2.08 per share, a new quarterly record. Looking at the second quarter in more detail, Optical Communications revenue grew both from a year ago and the first quarter.
Within Optical Communications, Telecom revenue decreased sequentially as anticipated. However, within Telecom, we saw increasing demand for extended reach pluggable optics, which helped soften the sequential decline. We expect that this trend will continue in Q3. When combined with what appears to be a diminishing impact from inventory absorption, we believe Telecom revenue could be up slightly in the third quarter.
Datacom revenue growth was strong again in the second quarter, driven by AI optical interconnect products. For the first time in our history, Datacom revenue exceeded Telecom revenue, largely driven by AI programs. We expect to maintain this higher Datacom revenue mix even as sequential Datacom growth moderates and as Telecom revenue trends improve. Our Non-Optical Communications business saw a small sequential revenue decline in the second quarter. This was primarily due to continued inventory absorption from certain Automotive programs.
We expect this inventory digestion in the automotive market to persist into the third quarter, but we currently anticipate a sequential improvement in the fourth quarter. Industrial laser revenue remained stable in the second quarter. Operationally, we performed very well in the second quarter, with operating margins improving to 10.7%, a 20 basis point improvement from the first quarter. Looking to the third quarter, we are optimistic that we can deliver another strong performance for revenue and profitability.
Despite softer near-term automotive trends, we believe Telecom is positioned to show sequential revenue improvement led by growth in ZR. In addition, we expect further growth in Datacom revenue, which continues to be driven primarily by strength in AI programs. At the same time, we expect to extend our track record of strong operational execution and profitability.
In summary, we are excited to have delivered another record quarter for both revenue and earnings per share, and we are confident that we can deliver another strong performance in the third quarter. Now, I'd like to turn the call over to Csaba for additional financial details on our second quarter of fiscal 2024 and our guidance for the third quarter. Csaba?
Csaba Sverha (CFO)
Thank you, Seamus, and good afternoon, everyone. Second quarter revenue was above our guidance range at a record $712.7 million, up 7% from a year ago and up 4% from the first quarter. This strong top-line performance led to non-GAAP earnings per share of $2.08, which was also above our guidance range.
This record EPS includes the impact of a foreign exchange revaluation loss, which reduced net income by $0.10 per share. Details regarding our revenue breakdown are included in the investor presentation on our website. My comments today will focus mainly on the most noteworthy areas. Optical Communications revenue was $567.9 million, or 80% of total revenue. Datacom revenue was $288.1 million, exceeding Telecom revenue for the first time.
Datacom revenue increased 19% from the first quarter, driven primarily by 800G AI programs. Although the rate of sequential growth has begun to moderate, Datacom revenue still increased by over 150% from a year ago. We expect new high data rate Datacom programs to continue making significant contributions to our top line as we look ahead.
Telecom revenue was $279.8 million, or just under half of total Optical Communications revenue. Telecom revenue declined 4% sequentially, as we continue to see softness due to excess inventory in the channel. Similar to the first quarter, growing demand for 400ZR programs helped to offset some of this impact. We are optimistic that in the third quarter, we could see a small sequential increase in Telecom revenue.
By data rate, products rated 400G and faster grew 118% from a year ago and 18% from the first quarter, and represent that two-thirds of total optical communications revenue. Non-optical communications revenue decreased 5% sequentially to $144.8 million and comprised 20% of total revenue. This decline was driven primarily by inventory absorption of certain automotive products, as we indicated last quarter.
We anticipate automotive revenue will continue to decline in the third quarter, but expect to see a return to sequential growth in the fourth quarter. Industrial laser revenue was flat sequentially, and we expect that trend to continue in the third quarter. 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 second quarter was consistent with the first quarter at 12.6%. Operating expenses were $14 million, or 2% of revenue. This produced operating income of $76 million, representing an operating margin of 10.7%, an improvement of 20 basis points from the first quarter.
With a strong balance sheet, we benefited from $7.7 million of interest income, which more than offset the $3.8 million FX loss from foreign currency asset and liability revaluations at the end of the second quarter. Effective GAAP tax rate was 5.2% in the second quarter, in line with the mid-single digit level we anticipate for the fiscal year. Non-GAAP net income was a new quarterly record of $76.1 million, or $2.08 per diluted share.
On a GAAP basis, net income was $1.89 per diluted share. Looking at the balance sheet and cash flow statements at the end of the second quarter, cash and short-term investments were $740.6 million, up $69.8 million from the end of the first quarter. The primary driver of this increase was healthy operating cash flow of $84.2 million. With CapEx of $9.8 million, free cash flow in the quarter was $74.4 million. We were active in our share buyback program during the quarter, repurchasing approximately 38,000 shares at an average price of $166.61 per share, for a total cash outlay of $6.4 million.
In addition to investing in our growth, returning value to shareholders remains a key capital allocation priority. At the end of the second quarter, $93.6 million remained in our share repurchase authorization. Now, I will turn to our guidance for the third quarter. We remain optimistic about our business momentum and ability to execute well. In the third quarter, we expect further sequential revenue growth in Datacom, which continues to be driven by demand for optical communications products for AI applications.
In the telecom market, after several quarters of declines, we believe that we could see modest sequential revenue growth in the third quarter. We expect this increase to be driven by further stabilization of industry-wide inventory issues, coupled with continued growth of data center interconnect products.
We foresee another quarter of softness in our automotive business due to inventory absorption in the channel, and we expect that industrial laser revenue will be flat. As a result, we anticipate total revenue will be in the range of $705 million-$725 million in the third quarter. We expect to continue to execute well and anticipate net income of $2.08-$2.15 per share.
In summary, we are excited to continue with our strong track record of exceeding guidance, as well as achieving new records for both revenue and EPS. We are optimistic that we are well positioned to deliver strong results again in the third quarter and extend our leadership position in the market. Operator, we are now ready to open the call for questions.
Operator (participant)
Thank you. Ladies and gentlemen, to ask a question, please press star one one on your telephone and then wait to hear your name announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.... Our first question comes from the line of Karl Ackerman with BNP Paribas. Your line is open.
Karl Ackerman (Managing Director of Equity Research, Semiconductors and IT Hardware)
Yes, thank you, gentlemen. I know you don't typically guide beyond one quarter, but perhaps you could discuss the backlog visibility you have on 400 gig and 800 and above optics over the next few quarters, as perhaps well as the breadth of high-speed optical programs ramping.
I ask because while a peer of yours indicated a temporary pause in 400 gig and 800 gig deployments in March, you know, backlog visibility appears very good for 800 gig, and multiple hyperscalers appear to be deploying 800 gig this year. So if you could comment on that, the visibility you have, that'd be very helpful.
Seamus Grady (Chairman and CEO)
Thanks, Darren. Yeah, we have we have pretty good visibility, especially on the newer programs. You know, typically in, in normal steady state business, we, we would have rolling 13 weeks forecasts, but for these newer programs, we have visibility beyond that. As you rightly point out, we just guide one quarter at a time, so I, I won't get into too many specifics. But I will say we are optimistic about the, the breadth of the, of the pipeline for 400 gig and above, 400 gig, 800 gig, and, and higher. And, you know, we have, we have a number of programs and a number of customers in the pipeline that we're pretty excited about.
But again, nothing to get into too much detail about, and we don't, we certainly don't want to be announcing any products on behalf of our customers, but we're, we're pretty optimistic about the pipeline that we have for those higher speed, higher data rate products.
Karl Ackerman (Managing Director of Equity Research, Semiconductors and IT Hardware)
Great. Thank you for that. Perhaps, if I may have a follow-up.
Seamus Grady (Chairman and CEO)
Sure.
Karl Ackerman (Managing Director of Equity Research, Semiconductors and IT Hardware)
You know, could you, could you provide any update on the timing of Building 10? And also if you could address your ability to service, you know, what appears to be very strong demand for high-speed optics in Datacom, certainly if capacity that's serving Telecom were to tighten quickly as well. Thanks.
Seamus Grady (Chairman and CEO)
Yeah, Building 10, you know, we opened Building 9 a little over a year ago, and we're, you know, we're already ramping at a fast pace in Building 9. Excuse me. Typically, when we get to 70% utilization on our last building, we'll then pull the trigger on the next building. We're not at that point yet, and nothing to announce certainly at this stage. It is getting closer.
I think we are pleasantly surprised by the pace at which we've been adding capacity and ramping in Building 9. You know, demand in particular for optical interconnect for AI applications is very strong and has been probably the biggest driver of our capacity additions in Building 9.
So again, nothing to announce, but it is something that's in, you know, I would say, if not the top of our mind, it's close to the top of our mind and something we're very mindful of and paying very close attention to, and will be really making a decision on in the coming quarters, I would say.
If I go back maybe a couple of years ago, you know, a 1 million sq ft facility like Building 9, to think that we'd be even contemplating a Building 10 a little over a year after opening Building 9, would have been hard to imagine, but here we are. Capacity, the second part of your question, capacity additions in general. Yeah, we've been adding capacity at a fairly blistering pace and keeping up with supply really.
We have been able to keep up with all the demand, thankfully. Any constraints we've seen along the way are typically component related. But we have been, you know, we would have been able to ship more, I would say, over the last while, were it not for a couple of component constraints along the way. You know, with any of these new products, especially when they're ramping very quickly, component constraints can catch you out sometimes. But overall, we've been very happy with the pace of growth and with the strength of the pipeline.
Karl Ackerman (Managing Director of Equity Research, Semiconductors and IT Hardware)
Very helpful. Thank you.
Seamus Grady (Chairman and CEO)
You're welcome.
Operator (participant)
Thank you. Please stand by for our next question. Our next question comes from the line of Alex Henderson with Needham. Your line is open.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
Great, thanks. First, just a clarification. Can you detail whether you're expecting any currency translations in the March quarter? I know the baht has peaked around the very end of the December quarter, and it's come off some since then. So, are you assuming flat in that calculation?
Csaba Sverha (CFO)
Well, hi, Alex, this is Csaba. Certainly we had a revaluation impact in the December quarter, so we are off the peak. But as you know, we are continuing to hedge our currency exposure. So from operations perspective, we anticipate a flat FX environment going into Q3. However, obviously in the March quarter, we do contemplate certain exchange rate revaluation impact. Again, baht has reached a peak earlier, so we are contemplating some reval impact in the EPS, but not in the cost of goods sold environment, if that makes sense.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
Great. And the taxes, I assume, are gonna be pretty, pretty consistent with the first half level and the second half. Is that a reasonable-
Csaba Sverha (CFO)
Yes, that's a reasonable assumption that we-
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
Perfect.
Csaba Sverha (CFO)
We anticipate mid single digits.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
So I wanted to ask a couple of questions on the operations. Can you give us any sense of what the non-speed products did, particularly in the telco space, the ROADMs and OLS type products? And second, can you give us some sense of what's going on with systems business, which obviously is, you know, become an increasingly large piece of your business over time?
Seamus Grady (Chairman and CEO)
Non-speed rated, Alex. In the quarter, maybe Csaba, you can help me with the exact numbers, and then I'll talk about what's in non-speed rated.
Csaba Sverha (CFO)
... Yeah, so the non-speed rated business was flat, Alex, in Q2 versus Q1. It was $118 million revenue from non-speed rated, and I'll pass back on to Seamus, but it does include more than ROADMs, so I'll let Seamus to clarify on that.
Seamus Grady (Chairman and CEO)
That's right. Yeah, it was $118, so up $1 million, slightly up from the prior quarter. And for us, non-speed rated includes ROADMs. It's about a third of the non-speed rated business, also fiber arrays, another third, and then the balance is made up of other, other components, primarily optical amplifiers. So there's a good mix of products in there. It's not just one, one particular, one particular category.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
Right. And systems?
Seamus Grady (Chairman and CEO)
Systems, you know, we don't break that out separately. We remain optimistic about our pipeline of new business that we're working on in that space. There, of course, are several opportunities to win additional systems business over time, both at our existing customers and new customers.
We have probably upwards of a dozen programs that are in our sights right now. You know, while the favorable economics are typically quite easy to demonstrate to the customer, the sales process for those can be very long, often requiring some external catalyst. So we're being patient, but we're very focused on that.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
Okay. One last question, and then I'll cede the floor. On the AI side, I assume that you're still capacity constrained on production as opposed to any demand issues, and that's probably gonna stay that way all year. Can you give us any sense of what the rate of commitment to new production capacity coming on looks like for that AI product line? And whether you expect to broaden your customer base in terms of other AI customers? Thanks.
Seamus Grady (Chairman and CEO)
So the pace of capacity adds has been very strong, and we have been able to, you know, more than keep up with the demand. Any constraints we've seen, Alex, have been at the component level. You know, from time to time, there are certain components that are in very high demand, so any constraints we've seen have been more in terms of component supply than actually our ability to manufacture.
So we've been able to keep up with the demand from a manufacturing point of view, and we're continuing to add capacity. In terms of additional customers and maybe additional products, you know, there's really a couple of routes for us for additional a business that's fueled by AI. And when we say AI interconnect, we don't mean things like DCI.
We mean specific short reach, you know, low latency, low power, optical interconnect that's used, specifically for these, these AI products. We have, I would say, two ways that we see some or two causes for optimism in that space. One is, you know, our existing customer base. We're working hard to make sure we win, obviously meet all the requirements for the current products, but also win the follow-on products and the next generation products.
So we're working very hard on that. And then in addition, there are a number of other customers who, we're working with to bring on new products. They're probably a little bit further out, but what we have more than one, one set of opportunities we're working on. We have a number of customers that we're working hard to win in the AI space.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
So just to be clear, you had said in the past that, you know, 10%-15% to 25% quarter-to-quarter capacity growth was attainable over the next year. I think... Is that still the reasonable way to think about capacity growth?
Seamus Grady (Chairman and CEO)
I'm not sure that we talked about capacity growth in those terms. I mean, typically, you know, we work with the customer to give us a, again, on these new products, a long visibility so that we can put capacity in place. It's quite an involved process, working with the customer, with the equipment suppliers.
Some of these, you know, some of this equipment is on very long lead time, so it's quite an involved process. We've been able to keep ahead of the capacity, so our... Sorry, keep ahead of the demand. We have not been constrained by demand in any way, and we have also not been constrained by capacity. I wouldn't feel comfortable sizing it exactly at, you know, 20% or 25%, but what I would say is we remain confident we can keep capacity added ahead of demand.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
Great. Thanks.
Seamus Grady (Chairman and CEO)
Thanks, Alex.
Operator (participant)
Please stand by for our next question. Our next question comes from the line of Samik Chatterjee with JPMorgan. Your line is open.
Samik Chatterjee (Executive Director and Networking Equipment/IT Hardware Senior Analyst)
Hi, thanks for taking my questions. I have a couple. Maybe for the first one, you, in related to your Datacom business, you had a sequential revenue growth of about $46 million this quarter. When you're talking about the guidance for fiscal 3Q, it just appears to be the case that you're talking about a more moderate sequential growth, going from 2Q to 3Q.
Just looking at the overall guidance as well, appears to be a bit more moderate than what you've seen in the past couple of quarters. So just curious if that's the case, and what are the drivers there potentially? Is it the component constraint that you talked about, or is it the customer, more timing around the customer purchases, or is it market share? Any drivers that you can call out that's driving more moderation there? Thank you.
Seamus Grady (Chairman and CEO)
Sure. Thanks, Samik. Yeah, a couple of parts to the question and also a couple of parts to the answer. You're correct that the Datacom growth, you know, we're certainly calling out some moderation in our guidance, but still very healthy growth. Just to point out our overall growth, if you look, you know, we have a track record, of course, of exceeding our guidance, and we always work hard to make sure we do that.
Our guidance right now for Q3, at the midpoint of the guidance, you know, if we were to accomplish that, at the midpoint of the guidance, would see us up 7.5% year-on-year in what has traditionally been a seasonally soft quarter.
At the high end of the guidance, we will be up 9% year-over-year. So, you know, if we were to exceed the high end of the guidance, double digits growth year-over-year is not out of the question in Q3. The quarter-over-quarter guidance we've given for Q3 contemplates a number of factors, one of which is, you know, the transfer out of the 100G Intel business will really begin in Q3. And the impact will really be in Q3 and in Q4. So that's one factor that's, if you like, factored into our guidance. Secondly, growth in Datacom will moderate somewhat as our initial AI programs pass the initial part of the growth curve.
So as we get to the point where we're beginning to lap ourselves with four consecutive quarters of growth, that growth will begin to moderate. Albeit, we're working hard to win, you know, the follow-on programs and the follow-on products and the new products and other customers. But that initial phase of growth will begin to moderate.
You know, that said, we do believe we're still very early in the overall AI cycle, and that will continue to contribute to our performance for a long time. And we do expect Datacom to remain our biggest revenue contributor. It's a little too early to call out specific future programs, new programs, and we don't have anything to announce today, but we believe we're very well positioned to win additional AI programs.
But to the specific question you asked in relation to the, to the guidance, really a couple of factors, primarily the 100G business. And 100G has started to really taper off as well. We think that, you know, the industry is transitioning to 400 gig, probably quicker. So 100G is beginning to taper off, and we're going to be transferring that program out in Q3. And secondly, as I said, the growth in Datacom will temporarily moderate as our initial AI programs, you know, begin to be lapped at this point, if that makes sense.
Samik Chatterjee (Executive Director and Networking Equipment/IT Hardware Senior Analyst)
Got it. Yep. Thank you for the color. And for my follow-up, on the telecom business, for fiscal 3Q, the takeaway that I had from your prepared remarks for sequential growth into 3Q was the growth driver are the ZR pluggables. If I can just maybe not ask for a guide, but sort of ask you for a bit more of a forward look. Is there enough pipeline that you see for growth in ZR pluggables to sort of drive you back to more sequential growth on a bit more sustainable basis beyond the March quarter?
Or, are we sort of seeing a very limited or very moderate investment, inventory-related sort of headwinds at this point, where the growth in ZR pluggables can be a bit more of a sustainable tailwind to drive you back to sequential growth there? Thank you.
Seamus Grady (Chairman and CEO)
Yeah, I think you hit the nail on the head. The growth in telecom is primarily driven by, you know, let's broadly call it ZR and DCI, generally. You know, that doesn't mean that traditional telecom is going away, far from it. The traditional telecom is really going through this inventory digestion. So, you know, but that said, there is a longer-term trend.
If you look at our mix and the shift in our mix to, for the first time, having more Datacom than Telecom, it's really driven by, you know, the explosive growth we've seen in AI, but also the cloudification, the trend towards cloudification of telecom that's underway, which lets telecoms...
Telcos leverage elastic cloud computing to scale their network capacity based on demand to meet the workload needs. That's a trend that's ongoing. But the growth we're seeing, you know, it is coming back to a little bit of growth, which is encouraging to see, but it's primarily driven by 400ZR and DCI. And we have a good pipeline of 400ZR currently, but also some other, you know, follow-on products that we're working on with our customers. So we're quite optimistic about that. Again, 400ZR and DCI generally seems to be quite strong.
Samik Chatterjee (Executive Director and Networking Equipment/IT Hardware Senior Analyst)
Thank you. Thanks a lot.
Operator (participant)
Thank you.
Seamus Grady (Chairman and CEO)
Thanks, Samik.
Operator (participant)
As a reminder, ladies and gentlemen, that's star one one to ask a question. Please stand by for our next question. Our next question comes from the line of Mike Genovese with Rosenblatt Securities. Your line is open.
Mike Genovese (Managing Director and Senior Research Analyst)
Great. Thanks a lot. Seamus, do you have a sense of your market share in 800G cables for NVLink applications?
Seamus Grady (Chairman and CEO)
We do, but it's not something we would be prepared to discuss publicly. We have a very good sense of it.
Mike Genovese (Managing Director and Senior Research Analyst)
I mean, is it... But you can't tell me, is it 100% or, or less than 100%?
Seamus Grady (Chairman and CEO)
Well, let's say let me put it this way: For our main customers, for their own design products, we're the only manufacturer. There are other interconnect solutions that they use, but for the product that they've designed themselves, we're the only people who manufacture that. So, I mean, I guess you could say we have 100% market share.
Mike Genovese (Managing Director and Senior Research Analyst)
Yeah. I guess I'm just thinking for the very shortest application of just sort of GPU to GPU.
Seamus Grady (Chairman and CEO)
Mm-hmm. Yes.
Mike Genovese (Managing Director and Senior Research Analyst)
I don't know if there's other cables out there. Are you aware of any others?
Seamus Grady (Chairman and CEO)
Other what?
Mike Genovese (Managing Director and Senior Research Analyst)
Other competing products out there besides your own? Like, do they exist, or are you the only one making the very, very short ones?
Seamus Grady (Chairman and CEO)
No, there are two other approved. Again, it's our customer who decides, you know, what's in, what's approved for that, let's call it the socket. There are two other approved manufacturers, but those two companies have their own designs.
Mike Genovese (Managing Director and Senior Research Analyst)
Okay.
Seamus Grady (Chairman and CEO)
Um-
Mike Genovese (Managing Director and Senior Research Analyst)
Okay, perfect. And then, well, I guess, with other, you know, GPU makers to, to make the same kind of product for, you know, I guess one or two or three other companies out there that also make GPUs? Is that, is that an opportunity that you're pursuing?
Seamus Grady (Chairman and CEO)
Yes, it is, and we think we're well positioned. You know, we have a very strong track record of producing transceivers generally, but these, you know, very high speed, low power, low latency, short reach transceivers, we have a very good reputation. We're very good at this. And we think we're the leader, you know, we're the leader in terms of service, delivery, quality, and also, we believe our costs are the lowest.
So, we think we're very well positioned to capture more business in that space from other... You know, as other companies push into that space and start to capture market share, they will all need optical interconnect, and we think we're in a good position to help them.
Mike Genovese (Managing Director and Senior Research Analyst)
Yeah. Great. And then last, last question from me, I guess, is when we think about sort of what comes next, as you go from the GPUs to the top-of-rack switches and then out to other parts of the data center, and you need longer cables and sort of discrete 800G transceivers. My, my question is: Do you see yourself participating in that market, with direct relationships with the end customer?
Or should we think about you participating in that market through your more traditional, Datacom transceiver customers, who, who will clearly need help to ramp up to the volumes they need to get to? What, what-- how should we think about that, you know, the, these longer, reach, Datacom transceivers, evolving for you?
Seamus Grady (Chairman and CEO)
Yeah, so we think probably both. Both, directly with the, with the, the, you know, the large consumers of these devices, but also with the, with the optical interconnect company. So we think we can support both. We don't have our own products, nor will we have. We're not an ODM. We have no plans to have our own products, so that's one of the things that's a little bit different about Fabrinet, is we're not an ODM, and we won't be an ODM. But if, you know, if one of the hyperscalers, hypothetically, if they have their own design or if they have a design that they own, that they want us to manufacture, we'd be happy to do that.
But conversely, you know, the traditional transceiver companies, we're happy to support them as well. We support both, and I think that's something that's quite unique about us, is we're able to support both, and we don't have any kind of conflicts because we don't have our own products. That allows us to support both.
Mike Genovese (Managing Director and Senior Research Analyst)
So it sounds like we should probably think about Datacom being larger than Telecom for... I mean, we don't have any expectations of Telecom becoming larger than Datacom at any particular point here, do we? It seems like Datacom will sort of stay larger. Is that correct?
Seamus Grady (Chairman and CEO)
I think so, yeah. We seem to have crossed over to the point where Datacom is larger than Telecom for us, and again, it's driven by really a couple of things, the growth in AI, the cloudification of Telecom generally, but also this inventory digestion. But the inventory digestion, of course, is temporary. That demand will come back. So for all those reasons, we think that Datacom will continue to be larger for us, at least, than Telecom.
Mike Genovese (Managing Director and Senior Research Analyst)
Perfect. Thanks very much.
Seamus Grady (Chairman and CEO)
Thanks, Mike.
Operator (participant)
Thank you. Mm-hmm. Please stand by for our next question. Our next question comes from the line of Tim Savageaux with Northland Capital Markets. Your line is open.
Tim Savageaux (Senior Research Analyst)
Thanks, and good afternoon.
Seamus Grady (Chairman and CEO)
Hi, Tim.
Tim Savageaux (Senior Research Analyst)
I don't know if you... Hi, Seamus. I don't know if you touched on this, but, you know, can you—I mean, assuming that's, you know, going over to Jabil or associated with their acquisition of the Intel transceiver assets, but can you quantify the impact of that? I mean, and I know it's come down a lot, but it seems like it could still be significant. You know, I don't know, $10 million-$20 million. Can we take a swing at that?
Seamus Grady (Chairman and CEO)
No. We wouldn't be prepared to take a swing at that. I think if you know, over the next couple of quarters, you'll see that 100 gig business decline and really that, as that 100 gig business transfers out, but we... But it's factored into our guidance, so we- but I wouldn't be prepared to put a number on it right now, Tim.
Tim Savageaux (Senior Research Analyst)
Fair enough. At a higher level on the AI front, and you touched on this before, you had described the stage of this market with varying numbers of the word vary to describe how early it was. Seems like we might have lost one here. So, I just want to get your kind of update on, you know, now that you've ramped pretty substantially, you know, where you think we are in terms of that market growth and are we— You know, we're clearly less early than we were, but has your view changed over the last six months as to where we are from an AI Datacom growth stage or market perspective?
Seamus Grady (Chairman and CEO)
I think it depends on what your time horizon is. If your time horizon and the prism that you're looking through is, you know, a quarter or two, then yeah, you're probably right. We're probably beyond that initial phase, but if your time horizon is much longer, I think we're in the very early stages of this. You can add or subtract as many variables as you like, but I still think we're in the very, very early stages of this, and we're just beginning to see what, you know, this explosive growth in AI and the infrastructure that's required to power this network will do and what it will need in terms of optical interconnect.
I think it's because optical is the only way that you can get the speed and the bandwidth that you need to get the signals to move around. You just can't do it with traditional interconnect. So I think there's a kind of a paradigm shift to, you know, optical interconnect becoming kind of almost mainstream, and you have to have optical for this. There's no other way to do it. So I still think we're in the very early stages, but I'm still as optimistic as I was, you know, six or eight months ago. My view hasn't changed on that.
I think it's amazing to see what these products can do and what they drive in terms of technology, and we're just so excited to be a part of it and to be able to continue to produce, again, not just the current products that are powering the data centers, but also to be working on the next generation products.
Tim Savageaux (Senior Research Analyst)
Got it. And last one for me, and thanks for that. In terms of ZR, is any more color on that? Are you back through previous peak levels in ZR? You know, are we now looking at getting over 10% of revenues, or could you try and size that for us or give us any color on where we are now versus what we've seen in the past?
Csaba Sverha (CFO)
Tim, let me take this, Seamus. So Tim, we haven't gotten back to the high levels that we have been. Obviously, you have to be mindful about the inventory digestion in the industry, so. But we are excited to see that it returned to growth sequentially, and the outlook is very promising for us. So I think there is still a lot of runway left on ZR to become a significant growth driver. So I guess the narrative in our prepared remarks was filled with excitement because of the return to growth and the early signs of recovery of the industry. But it's still far from where it could be and where it has been in the past.
Tim Savageaux (Senior Research Analyst)
Okay, thanks very much.
Seamus Grady (Chairman and CEO)
Thank you, Tim.
Csaba Sverha (CFO)
Thank you.
Operator (participant)
Thank you. Please stand by for our next question. Our next question comes from the line of Dave Kang with B. Riley. Your line is open.
Dave Kang (Senior Research Analyst of Technology Research)
Thank you. Good afternoon. My first question is on the telecom side. So it sounds like, Seamus, you're splitting them up between DCI versus a traditional telecom. Just wondering if you can kind of what the mix is between DCI versus a traditional telecom.
Seamus Grady (Chairman and CEO)
Yeah, we haven't actually broken out the mix that way. I guess the point I was making, Dave, was that the growth that we're seeing in telecom is primarily coming from DCI and 400ZR in our forecast. You know, traditional telecom is still somewhat flat and digesting inventory, but you know, because the industry categorizes DCI into telecom, we are seeing some growth in telecom from DCI and 400ZR, but we don't actually break them out separately.
Dave Kang (Senior Research Analyst of Technology Research)
Fair enough. But then is it fair to assume that traditional segment is still larger than DCI? I mean, if you look at, like, Ciena and the Infinera of the world, you know, traditional is certainly bigger than DCI.
Seamus Grady (Chairman and CEO)
Yes, that'll be correct.
Dave Kang (Senior Research Analyst of Technology Research)
Okay. And then just on, go ahead.
Csaba Sverha (CFO)
Bear in mind, Dave, that our traditional business includes system business, so this DCI being larger than our traditional telecom business would take a lot of growth. So just another-
Dave Kang (Senior Research Analyst of Technology Research)
Got it.
Csaba Sverha (CFO)
Color.
Dave Kang (Senior Research Analyst of Technology Research)
Yeah. And then on just, just sticking with the traditional side. So you're guiding telecom to be up sequentially, but just wondering, I'm assuming that's mostly driven by DCI or, or ZR. How should we think about traditional? Is it gonna be kind of flat or still down?
Csaba Sverha (CFO)
Traditional would be still slightly down, Dave. So the growth we are seeing, a moderate, modest improvement quarter on quarter is driven by DCI and ZR.
Dave Kang (Senior Research Analyst of Technology Research)
Got it. And my second question is on DZS. You talked about them as a new customer last year. Just wondering what the latest is. Have they become, you know, sort of a meaningful customer or still ramping? Any color would be appreciated.
Seamus Grady (Chairman and CEO)
We've transferred, let's say, everything that was in the initial list of products that was slated to transfer. We've transferred everything now, so they're, you know, the business from DZS is baked into our forecast, and it's in our actuals for last quarter. So that's already wrapped. There's other business we're working on. We're working hard on to win and grow with DZS, but that initial phase of business is already wrapped at this point.
Dave Kang (Senior Research Analyst of Technology Research)
Got it. Thank you.
Seamus Grady (Chairman and CEO)
Thank you, Dave.
Operator (participant)
Thank you. Please stand by for our next question. We have a follow-up question from the line of Alex Henderson with Needham. Your line is open.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
Give me half a second. There we go. So, doing the mechanics of the math that you've given on the non-optical and the telco, and comparing the remainder to the guidance, it implies kind of low single-digit Datacom growth.So a couple of questions. One, is the fallout of the Intel business in the Datacom piece, is that where that would be located?
Seamus Grady (Chairman and CEO)
Yes.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
And second, within that context, is this a function of supply of components that is causing a fair amount of flatness sequentially, that you just can't get the components necessary to ramp that business sequentially, on the AI side? Because it implies fairly modest AI growth, certainly not in line with the growth at your major customer on a quarter-to-quarter basis.
Seamus Grady (Chairman and CEO)
So obviously, on the first part of your question, the Intel business is in Datacom. So any of that business that we're, we'll be transferring out in Q3, that will, will hit our Datacom number. Our, our growth in Datacom, you know, there's, there's a lot of moving parts there, and I wouldn't attribute it all to, to one customer or anything like that.
There's a lot of moving parts there. The other thing that we don't have visibility to necessarily is, you know, the inventory position that our customer has. You know, we, we ship to their demand. What they hold in inventory versus what's getting, you know, installed straight out of the oven, we don't really have visibility to that. So there's probably a little bit of inventory normalization going on there as well. But overall, the demand remains strong, but that's the piece we don't have visibility to, is the inventory.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
So if I were to look at the Datacom business, it's, including AI, it's been pretty stable at around $40 million a quarter, I believe. And, you know, so I could take some stuff out of that for the Intel piece, but it still implies a meaningful deceleration in the AI. Is that something that you see as fairly temporary, and that the overall growth rate is still on track to, you know, for fairly high rates of growth for the calendar 2024 year?
Seamus Grady (Chairman and CEO)
Well, we're expecting Datacom to be up sequentially in the quarter. I'm not sure I follow your logic or your numbers.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
If I take the company's guidance and subtract out the comment about slightly up on Telecom, flat on Automotive, or excuse me, down on Automotive and flat on industrial lasers, subtracting that out gives you the Datacom piece. So the Datacom piece is kind of low single-digit growth, I believe, if I do the math right.
And sequentially and, you know, certainly there's a piece falling out, but that's a lot slower growth than that you had been posting. And I guess I'm trying to get to the elephant in the room, which is why that's the case, and to what extent that that's a temporary lull before continuing a steep ramp in future periods.
Seamus Grady (Chairman and CEO)
Yeah, but as I said, it's a combination of the Intel business transferring, and also those initial AI programs, you know, they're passing into stable production now. They're through the initial part of the growth curve. So that's why we called out that the growth's you know, starting to moderate in Q3 for that very reason. I'm not sure what else to say, Alex. I can't really get into the specifics of an individual customer, but again, it's a combination of both of those. Continued growth in AI, but then offset by business transferring out and 100 gig transceiver business.
Alex Henderson (Managing Director of Security, Data Networking, and Optical Research)
Okay, thanks.
Seamus Grady (Chairman and CEO)
Thanks, Alex.
Operator (participant)
Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Seamus for closing remarks.
Seamus Grady (Chairman and CEO)
Thank you for joining our call today. We are pleased to have exceeded our guidance again in the quarter. With another quarter of record revenue and EPS behind us, we are optimistic that we are well positioned to continue our strong execution track record in the third quarter. We look forward to speaking with you again. Goodbye.
Operator (participant)
Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.