First quarter fiscal 2027 earnings call, November 2, 2026
Capacity is the story: Building 11 grows to $3 billion and the long-range ceiling rises
The most consequential disclosure on Fabrinet's call was about physical capacity rather than the quarter itself. CEO Seamus Grady said the company will begin construction of Building 11 at its Chonburi, Thailand campus as soon as Building 10 is completed in January. Building 11 is now sized at about 1.5 million square feet and roughly $3 billion of revenue capacity, up from the roughly $2.1 billion management previously cited. Grady attributed the change to a better mix of space: "We don't need much office space in Building 11 because we're more than covered with the other buildings on the campus. We don't need much warehousing space." He added that denser, more revenue-rich products continue to lift revenue per square foot.
The revised arithmetic is significant. Fabrinet ended fiscal 2026 with revenue capacity of about $5.8 billion and expects to start calendar 2027 near $10 billion. Building 10 contributes about 2 million square feet and $3.5 billion, which Grady equated to roughly 75% of fiscal 2026 revenue. The newly commissioned Navanakorn campus adds about $400 million and the expanded Santa Clara footprint about $300 million. Building 11 would take capacity to $13 billion, and a potential Building 12 on the same campus would reach $16 billion. Management had previously framed the full build-out at about $14 billion.
Timing is a constraint worth noting. Building 11 will take about 18 months to build and is expected to come online around the end of fiscal 2028, or mid-calendar 2028. Grady acknowledged the company will likely need space before then and said it is "actively looking" at land and existing factory buildings. Fabrinet has therefore committed to a 2028 capacity step while already signaling that demand may outrun it in the interim.
Quarter beat was broad-based, with data center up 78%
Revenue of $1.474 billion rose 51% year over year and 12% sequentially, well above guidance. Non-GAAP EPS of $4.34 was a record and also above the high end of the guided range. It was the 14th consecutive quarter of growth and the seventh consecutive quarter of accelerating year-over-year growth. Data center revenue rose 78% to $777 million, or 53% of the total. Communications infrastructure grew 35% to $444 million, and automotive, industrial and other grew 20% to $253 million, with lasers the biggest sequential contributor as customers that previously manufactured in-house shift volume to Fabrinet.
Pressed by Steven Fox of Fox Advisors on whether the upside came from higher forecasts or faster new-program ramps, Grady said it was both, and stressed that it was not a single-customer event: "It wasn't a onetime big upside from one customer. It's just significant increase in demand across all of our customers." He noted that new programs contribute little at first but quickly become existing programs that ramp rapidly.
For the December quarter, Fabrinet guided revenue to $1.6 billion to $1.65 billion, or 43% year-over-year growth at the midpoint, and non-GAAP EPS to $4.77 to $4.92. Grady said his confidence in accelerating growth for the fiscal year is "as positive as they were when we spoke approximately 90 days ago, if not a little bit more positive." The first-half growth rate implied by guidance is about 47%.
New programs: transceivers, OCS and NPO/CPO could each reach hundreds of millions
Management confirmed that more than one merchant transceiver customer is ramping alongside hyperscale-direct transceiver programs, but declined to be more specific. Capacity is being installed for optical circuit switches and multi-rail systems, which Grady said are "just starting to get going." Near-packaged optics programs should contribute in the second half of fiscal 2027, with co-packaged optics further out.
Tim Savageaux of Northland suggested that OCS and NPO/CPO could each become a multi-hundred-million-dollar business, citing the roughly $5 billion win that Lumentum discussed earlier in the day. Grady called that "a fair way to think about it," adding that neither is in the numbers yet and Fabrinet has not shipped meaningful volume. He also pushed back on the view that co-packaged optics will cannibalize pluggables, calling the argument "reductive" and pointing to the Cisco and NVIDIA roadmap for ultra-dense small form factor pluggables. Fabrinet has not announced any coherent-lite wins, though Grady said the products fit its capabilities.
Lumentum-Marvell deal: customers on both sides, history favors Fabrinet
The call took place hours after the announced acquisition involving Lumentum and Marvell, both Fabrinet customers. Grady said the company had not seen the terms or spoken with either party. Lumentum has been a customer essentially since Fabrinet's founding, while Marvell is more recent. He argued that past consolidation, including Lumentum with NeoPhotonics, Infinera with Coriant and Nokia with Infinera, ultimately increased Fabrinet's business with the combined entity. Management offered no assurance beyond that precedent, and customer concentration in a consolidating base is a risk investors should keep in view.
Margins hold at a low level while operating leverage does the work
Non-GAAP gross margin was 12.1%, down 10 basis points sequentially on annual merit increases and down 20 basis points year over year on FX. Operating expenses were 1.3% of revenue, leaving operating margin at 10.8%, down 10 basis points sequentially but up 20 basis points from a year ago. CFO Csaba Sverha said fixed costs are only about 5% of total cost, so there is little gross-margin leverage, and that early program ramps can pressure margins as the company hires ahead of demand. He said hedges imply no further FX headwind in the second half. He expects value-add from the photonics and electronics convergence to be margin-accretive over time, but offered no quantification.
Cash flow turns negative as the build-out accelerates
The expansion is not free. Operating cash flow was only $21 million, and capital expenditure rose to $159 million, including the $77 million Santa Clara campus purchase, leaving free cash flow at negative $137 million. Cash and short-term investments fell $119 million to $757 million. Sverha said that excluding large capacity projects, capex runs at about 5% of revenue, but Building 11 and further site additions will push fiscal 2027 spending higher. The company borrowed about $75 million in long-term debt, which Sverha attributed to cheaper financing in Thailand than liquidating dollar investments held in the U.S. Grady said the expansion is being funded from the balance sheet and that return on invested capital remains above 30%.
Fabrinet repurchased about 77,000 shares at an average of roughly $380 for $29 million, and its board added $103 million to the authorization, leaving $200 million. Sverha ranked buybacks behind funding growth. Tax is a source of noise: a $20 million noncash Pillar 2 top-up provision was excluded from non-GAAP results, and Thai mitigating credits have not yet been implemented, so management expects variability in reported tax expense. GAAP EPS was $2.86, also reflecting a $21 million unrealized loss on the Raytek investment.
Components remain tight, and the downside case rests on the asset-light model
On supply, Grady said components are "in tight supply across the board," though Fabrinet has been getting "our fair share and thankfully, in some cases, our unfair share." He said the company could ship more if it had more parts, so supply remains a real limiter. On the risk of a downturn, he pointed to the low fixed-cost base: "Even in the doomsday scenario, if there is a downturn, we haven't added any real significant fixed costs." With roughly $10 billion of capacity against a $6.5 billion-plus annualized revenue run rate, that claim will be tested only if demand softens, but for now management reports customers showing visibility "as far as the eye can see."