Q3 2024 Earnings Summary
- Robust datacom growth and pipeline expansion: The company reported 150% year-over-year growth in datacom revenue with strong sequential performance, driven by robust demand for 800-gig products and an active pipeline for 1.6 terabit solutions, which are additive to existing offerings.
- Strong operational execution and capacity expansion: The firm's expansion in Building 9 is progressing ahead of schedule, ensuring it can swiftly meet increasing demand. Additionally, the potential for low-risk capacity additions further positions the company for sustained growth.
- Emerging opportunities in telecom and AI connectivity: Despite a short-term softness in traditional telecom, there is optimism from multiple customer engagements in 400ZR/ZR technology, and demand for high data rate products in AI applications remains robust, underlining a positive market trend.
- Extended Telecom Weakness: The Q&A revealed that telecom revenue continues to be a soft spot, with expectations for inventory digestion potentially lasting into mid-2025, which could affect overall performance.
- Uncertain Ramp for Next-Generation Products: There is uncertainty regarding the precise timing and magnitude of the ramp for 1.6 terabit products, which adds risk to future revenue projections in datacom.
- Capacity Expansion Risk: Although additional capacity is viewed as a low-risk investment, the substantial CAPEX of ~$55–$60 million per new facility—with a slight margin headwind—could become a disadvantage if anticipated demand fails to materialize.
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Telecom Outlook
Q: Why will telecom soften sequentially and for how long?
A: Management expects telecom to remain soft due to ongoing inventory digestion, with recovery likely delaying until early to mid-2025 while DCI and ZR engagements offer some promise for the future. -
Datacom Growth
Q: What is the underlying datacom growth excluding 100-gig?
A: Besides phasing out 100-gig, datacom showed strong performance with 150% YOY and 6% sequential growth, supported by robust 800-gig demand and anticipated future contributions from 1.6T products, though timing remains uncertain. -
AI Connectivity
Q: How does 1.6T impact the existing 800-gig market?
A: The view is that 1.6T is additive rather than cannibalizing 800-gig, based on a clear mathematical approach that aligns with evolving product architectures and growing AI connectivity needs. -
Optical vs. Copper
Q: Is there any cannibalization between AOC-based optical and copper?
A: Management noted that there is no observed cannibalization; 800-gig demand remains strong while the newer 1.6T products complement rather than replace existing optical interconnects, with copper serving its specific market segment. -
Customer Design Wins
Q: Are customer design wins expanding for 800-gig and 1.6T?
A: There are early-stage engagements beyond the main customer, indicating a broadened design win pipeline that supports continued strength in 800-gig and positions the company well for the upcoming 1.6T ramp. -
Capacity Timeline
Q: What is the timeframe from decision to operational ramp for new capacity?
A: When a decision is made to expand, management expects a facility to be up and running in approximately 18 months, ensuring a swift execution of capacity enhancements. -
Facility Expansion
Q: What are the current plans for increased capacity or expansion?
A: While Building 8 is already full, expansion at Building 9 is progressing ahead of schedule, and additional capacity is being closely evaluated, indicating a proactive approach to meet future demand.
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