Good day, ladies and gentlemen, and welcome to Fabrinet's Fourth Quarter 2014 Financial Results Call. [Operator Instructions] I would like to turn the call over to your host, John Marchetti. Please go ahead.

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 fourth quarter and fiscal year 2014, which ended June 27, 2014. With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Directors of Fabrinet; and TS Ng, our Chief Financial Officer. This call is being webcast, and a replay will be available on the Investors section of our website located at investor.fabrinet.com. Please refer to our website for important information, including our earnings press release and our non-GAAP to GAAP reconciliation. I would like to remind you that today's discussion will contain forward-looking statements including our expected financial results for the first quarter of fiscal 2015, our market and growth opportunities, demand for our products and our investment strategies. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from management's current expectations. For a discussion of such risks and uncertainties that may affect our results, please refer to our recent SEC filings, in particular the section captioned Risk Factors in our annual report on Form 10-K filed on October 16, 2014. These forward-looking 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. Before I turn the call over to Tom for his remarks, I want to comment on our Audit Committee investigation, which was previously disclosed and is now concluded. Prior to the completion of Fabrinet's fiscal year 2014 financial results, management identified potential accounting violations with respect to consignment shipment and inventory. Subsequently, the Audit Committee of Fabrinet's Board of Directors initiated an internal investigation…

Thank you, John, and good afternoon, everyone. Fiscal 2014 was another strong year for Fabrinet with strong growth in both revenue and earnings per share. With the Audit Committee's investigation behind us, I am optimistic on fiscal year 2015. Our relationships with customers have never been stronger and our pipeline of new engagement continues to grow. Despite a challenging environment, I am confident that our focus will enable us to deliver another year of profitable growth. I will now turn the call back to John for a discussion on the markets we serve.

Thanks, Tom. Fiscal '14 was a solid year for Fabrinet despite a demand environment that remained stubbornly choppy. Our optical communications business performed well, up nearly 8% year-over-year, while our non-optical business was a bit lumpy but did post better fiscal 4Q results, growing in the mid-single digits both sequentially and year-over-year. In optical communications, we experienced a modest increase relative to our expectations in the quarter, primarily in the datacom portion of our business, with the telco side essentially in line with our expectations. For the fiscal year, our datacom business more than doubled, while our telco business contracted on inconsistent demand trends throughout the year. We anticipate that these inconsistent demand trends in our optical communications business are likely to continue through the remainder of the calendar year. Throughout the fiscal year, we saw a focus on the more advanced components and modules while demand for older products was more variable. We expect these trends to continue and believe the intermediate to long-term demand environment for optical communications products continues to be favorable and we expect to benefit through our customers as spending on optical equipment accelerates. Our non-optical business showed signs of improvement in the fourth quarter, driven by modest increases in all of our non-optical segments. For the year, the non-optical business posted growth of roughly 1% as demand within the segment was mixed and new programs are still on the early stages of ramping. As Tom has mentioned on several occasions, this continues to be an important piece of our long-term growth strategy, and we will continue to explore ways to accelerate our diversification efforts in these and potentially other new markets. In terms of our new business efforts, fiscal 2014 was a successful year with several new accounts signed across multiple revenue segments. Our new customer acquisition efforts are a vital part of our overall growth strategy, and while these new wins always take time to generate meaningful revenue, we believe the pipeline for this new business remains strong and combined with new business from existing customers, gives us confidence in the long-term growth opportunities for the company. As we enter fiscal '15, we are encouraged by the overall growth prospects for our business. We continue to work closely with our customers to ensure that we are aligning our resources to meet their current and future production needs. To that end, we are planning to increase our CapEx spending over the next several quarters to expand our NPI Engineering facilities and capabilities and accelerate our advanced optical packaging efforts. We believe that these investments, along with our focus on world-class customer service and manufacturing quality, and a growing pipeline of new engagements, positions us well for growth in the coming fiscal year and beyond. With that, I would now like to turn the call over to TS, our CFO, for a report on our financial results.

Thanks, John. Good afternoon, everyone. Before I begin, just a reminder that although we finished the insurance recovery process last quarter and our fiscal fourth quarter results do not have any insurance or flood impacts included in the numbers, our fiscal 2014 and fiscal 2013 GAAP results do reflect the impacts of the flood on our operations as well as subsequent insurance recovery effort. With that, I would now like to review the results for the fourth quarter and fiscal 2014. Please note that our numbers are GAAP unless stated otherwise. Our total revenue for the quarter was $160.1 million, down 4.5% sequentially and an increase of less than 1% compared to the fourth quarter of fiscal 2013. As John mentioned earlier, revenue was negatively impacted by $16.5 million in fiscal fourth quarter as we determined that certain consignment sales did not qualify for revenue recognition in the quarter due to lack of clarity of the associated contracts concerning delivery terms, the transfers of titles and the recent [ph] loss. This amount will be recognized in subsequent quarters in fiscal 2015, as these consigned goods are shipped or ambiguous terms in the contracts are revised. From an EPS standpoint, the $16.5 million of reductions in fiscal fourth quarter revenue have a negative impact of approximately $0.04 per share on both a GAAP and a non-GAAP basis. On an end-market basis, revenue from optical communications in the fourth quarter was $110 million or 69% of total revenues for the quarter, while our non-optical communications revenue was $50.1 million, the remaining 31%. For the fiscal year, our total revenue was $677.9 million, an increase of approximately 6% compared to fiscal 2013, primarily as a result of improved demand in our optical communications segment. For the fiscal year, revenue from optical communications was…

[Operator Instructions] Our first question comes from Sherri Scribner with Deutsche Bank.

I just wanted to understand a little bit the accounting adjustment made this quarter. Should we think about total revenue as being the $160 million plus $16.5 million, which was the impact from the accounting issue that you guys have talked about? And then for the guidance, I just wanted to understand that $3 million. Is it the reverse impact? I'm just trying to understand that thing.

Sure, Sherri. I think you generally got it correct, and then I'll throw it over to TS so he can go through the numbers a little bit. But essentially, we kind of took everything there in 4Q. So all else being equal, that $16.5 million would have been in the 4Q number and we would have reported roughly a $176.5 million. And then as you look at the 1Q, we would have -- without that same translation, we would be looking at a number roughly around the $186 million range. TS, maybe it's helpful if you go a little bit more into the specifics of that.

Yes. I think, John, you are right. Sherri is also right. It's all about timing. We're unable to recognize $16 million in last year F Q4, and all of this will probably come back in this year, as John alluded to earlier. So it's always about timing. I think Sherri and John got it right.

Okay. And then TS, just thinking about the gross margin guidance, I think you said gross margins should be about flat going forward. How should we think about that through the rest of fiscal '15? Does anything help that gross margin get a little bit higher? Because historically, I know you guys have had a better gross margin than 11%. Just trying to understand is there a different mix now.

Yes. Okay. Good question, Sherri. I think if you look at Q1, we mentioned in the prepared remarks that typically, beginning of the fiscal year, we give a merit increase. And John also talked about we want to beef up our advanced engineering spending. Some of these are printers, circuit boards, things like that. So I think we absorbed good chunks of depreciation at the beginning of the year, plus the merit increase once a year. So I think all these into my gross margin. So as time goes by during the fiscal year, we expect a cost reduction will be able to offset that. So right now, we are kind of looking at 11%, 11.3% gross margin as you see from a Q4 non-GAAP basis. And as you ramp to a $190 million to $200 million revenue level, we still expect to reach that 12% long-term goal we are targeting all along.

Our next question comes from Patrick Newton with Stifel.

This is Rob on for Patrick today. So first off, I just wanted to ask about inventory. It looks like there is a sequential increase of about 16% in the quarter. I just wonder if you could help me understand what drove that increase. Does that have some sort of impact from the consignment? And do you kind of expect that inventory to remain elevated?

Sure, Rob. I mean, the short answer to your question is, a lot of what we've been talking about around the accounting issue is reflected in that elevated inventory number at the end of the June quarter or the fiscal year. As we clean this up over the next couple of quarters, as TS indicated, you should see that come back down to more sort of a historic level, where we've been over the last 2 or 3 quarters and then obviously, it will move along with the revenue line as well. TS, I don't know if you've got anything extra that you want to add there in terms of the actual mechanics of how that changed from, say, 3Q to 4Q.

Yes. I think we mentioned in the prepared remarks also that of the $189 million we expect F Q1, there's about $3 million -- approximately $3 million rollover from the revenue we couldn't recognize last year. So if you look at it without the $3 million, it's $185 million, $186 million on the old basis. So from there, I think, Rob, you can just look at the growth from $176 million on the old basis in F Q4. So...

Okay. And then kind of as well you talked about some increased CapEx spending. I was hoping to get a sense of, I guess, what kind of a run rate you're thinking or do you have an annual target?

TS, why don't you go ahead and just give him some sense of where we're going with those CapEx figures this fiscal year.

Yes. If you look at the 10-K from the cash flow statement, you pretty much realize that the FY '14, our CapEx is about $11 million. Okay? And we spent about $11 million depreciation. So how we spend to offset the depreciation. Now moving forward to FY '15, as John alluded, our CapEx will be probably 30%, 40% higher than that. So because of the investment in the future.

Okay. Great. I appreciate that. And then I guess kind of my last question, so how should we think about SG&A going forward, I know you talked about some merit increases in the first quarter and also talked about gross margin being flat. I'm just wondering what are you going to see or any kind of insight into operating expenses.

Okay. I'll answer that, John. Most of the merit increases once a year go into cost of goods sold. On the SG&A, we have mostly executive salary and payroll, and executive is paid based on performance business. So it's not based on a fixed-time basis on the merit increase. So those I just explained, that's why the gross margin, as you say, 11%, 11.3%, because once a year, we have that merit increase. Moving forward, SG&A operating expense in total, we're still looking at probably less than $6 million per quarter based on a non-GAAP basis.

Our next question comes from Paul Coster with JPMorgan.

So first off, the CapEx which you talked about. I didn't really understand it. It doesn't sound like it's focused on expanding capacity in any way. It's more R&D-focused, is that correct? And if so, what is the nature of this? Perhaps you can give us some color there.

Sure thing, Paul. I mean, it is capacity-related in to some extent. It's not specifically, say, a new building construction, which is something that we undertake when we start to feel capacity constrained on the white space for our customers' manufacturing. But we are obviously responding to increased levels for NPI capabilities or new product introduction capabilities. We are expanding some of our PCB and PCBA capabilities, specifically along those lines as well. And we're making investments as you sort of correctly pointed out in some of the new advanced optical packaging areas, which is probably a little bit more R&D-type spending, but still focused obviously on our customers' needs, not something we're necessarily doing for our own product.

Okay. Got it. Just on this -- I'm sorry to flog a dead horse here, but on the consignment sales, can you just sort of explain to me what they are and is there any risk at all that they just simply cannot be sold in the future quarters, that they cannot be recognized?

Sure, yes. I mean, I'll take a stab at that and then I'll certainly pass it over to TS probably for some of the technical explanation there. But the thing here for us is, a lot of this is determined by when the customer wants it shipped. So for us, we only build product that we have a purchase order for. So it's not like we've built extra units and then squirreled them away so that when the customer asks for them, we can deliver them. These are all based on purchased orders. So what it really comes down to is the ship date. And if the ship date is, say, not immediately when the product is done, then we'll put it into consignment because we've built that product for the customer based on their purchase order request. So specifically to your question about whether or not that revenue won't be recognized in future periods, again, we built those products based on the customer's PO. So ultimately, that product will ship to the customer at the period of time, and then we'll recognize revenue then. TS, I don't know if there's anything there you want to add to that?

No. I think you explained very well, John. The only thing I want to add is that we accountants struggle with the U.S. GAAP accounting, generally accepted accounting principle. And again, as you probably know, that U.S. government is very, very complex, complicated. So I think this is all timing. It's not like we picked [ph] a $16.5 million write-off, going to the comprehensive income. No, it's not the case. I believe that most of the $16.5 million will eventually swing back.

There's no obsolescence risk here, the -- as product that, by the time it's delivered, it's just not right for the market anymore and the client doesn't take it?

I cannot see that happen because the customer pretty much already accepted. In fact, most of these products already the customers' hands -- so excuse me, in the customer control. So...

Okay. All right, fine. The last question was the sales cycle development of new customers and sales cycle for the laser and sensor segment just seems to be very, very long. Is there any signs of it, of this pipeline actually being closed out sometime soon? I guess we've been waiting a long time for some payback on that.

Well, and I think we are seeing that, to be fair, Paul. I mean, the issue here is that, there's not a lot of transfer opportunity in the new markets that we're going after. Meaning established large revenue streams that we can, say, pick up out of a customer and transfer to Thailand and keep them going at, say -- and already established at high revenue rates. So what's happening with the bulk of our new business is they are not just new business for us but new programs for the customers themselves. So they are going to start off on small revenue streams and then slowly but surely grow over time. I think that specifically, in the auto business, we've seen that really start to happen for us now as we've reached some of the critical mass, which kind of gets lumped in with some of the sensor and other segments. The laser business has been a little bit lumpier overall from a demand perspective. But I think we feel very good about where we are in terms of bringing in new programs along with new customers. And I think that's slowly but surely ramping for us as well. So I think that for us, this year, in particular in fiscal '14, if you will, was a little bit more about some of the recovery going on in optical. But I think we still saw some decent growth in the underlying non-optical business and I think that's going to continue to expand as we go into fiscal '15 and beyond.

Our next question comes from Dave Kang with B. Riley.

The first question is, just wanted to clarify, John, regarding your fiscal first quarter outlook. So you're basically going from $176 million in the fourth quarter to $186 million in the first quarter. That's a pretty big jump, especially considering the data points from some of your top customers. Just wondering where the sources of strength was. And did I hear correctly that, basically, this fourth quarter to first quarter, a lot of that is non-optical?

Not -- no, we didn't say that it was non-optical. And to answer your first question, Dave, I think on a normalized basis, you're looking at it correctly. All else being equal, we would have been roughly at $176 million, maybe about $176.5 million this fiscal Q4, going to roughly $185 million, $186 million in fiscal 1Q. We're seeing increases, I think, in terms of that sequential uptick in both the optical and non-optical businesses. So I wouldn't say that it's necessarily outsize. Obviously, when we get back on a call here in a few weeks to go through that Q1, we can certainly get into that a little bit more.

Your top customers, I mean, we all know who they are and they already gave outlook for the September quarter and they've been pretty much flattish. And yet you're looking for about 5%, 6% sequential growth. So does that mean that you're gaining more share? I mean, they're outsourcing more. Is that the trend here?

I mean, I think there's certainly some new programs, like I said, that have come on. But I think in any given quarter as well, there's always timing issues and things like that, that can affect the revenue number that we actually put up. So I think that for us as we go through and close out the books on 1Q, we are not seeing anything that I think is terribly divergent from what's going on in the industry. If we look at it on an individual customer by customer basis. But obviously, as we're rolling things up, we're seeing some growth expected in that September quarter where maybe some others are looking for something a little bit less than that.

Got it. Got it. And then in the K, you provided a percentage of your top customers. Were they kind of comparable in the fourth quarter as well, or any differences?

I don't think that they were. TS, I don't know if you got a comment there. But I think in general, the numbers that we typically put out in the K for those top customers are pretty consistent, quarter-to-quarter. There's not usually big variations to that.

Yes, the only thing I want to say is that still the 2, in the F Q4, Q2, 2 the same, 2 customer. But the only thing is that Oclaro's diversified some of their sales to II-VI, right? So I think in F Q4, we don't -- we'll cover II-VI, but for the year, we still have Oclaro's, we have a piece of those business. So...

So I just wanted to clarify, that 22% -- I think it was like 22%, something like that, that includes part of the II-VI numbers as well then, for fiscal '14?

Yes. And I think they sold the business in II-VI sometime in February, right? Yes. So before that, it was all Oclaro. So we count it as Oclaro.

And I'm assuming you're going to break II-VI out separately starting the, I guess, this quarter?

Absolutely, Dave.

Okay. Okay. And do you think II-VI will be like a 10% customer or...

I mean, I think they certainly have been a good customer for us since they acquired that business, Dave. But until we actually put those numbers out, we're not going to talk about where any specific customer is.

Okay. Fair enough. And then I thought you said, John, that datacom certainly felt better than telecom. Can you give us the latest mix in the fourth quarter, what datacom and telecom mix was?

Yes. I have to take a look, I apologize. I don't have the number directly...

Wasn't it like around 80-20, something like that? 70-30 historically?

I mean, historically, it's right around that range, and I think it probably was at quarter TS. I don't know if you have that number right in front of you.

Yes. It's 70-30, yes, Dave.

Yes. Perfect

Okay. Okay. And last question is I know it's kind of early, but just a visibility going into the December quarter, any color, any comments you can make?

No, I think that, again, we've gotten those conversations certainly going with customers now given where we are in this -- now that we've started our fiscal 2Q here. I think it's still a little early for that and obviously, when we get back in front of folks in the next couple of weeks, we'll be able to give a little bit more color around how we expect the December quarter to play out.

But I just wanted to make sure this $189 million for the first quarter is not like a fluke that sales fall off in the December quarter. That is not the case? I mean, this is a real sustainable number?

It's certainly not our expectation at this point.

Our next question comes from Troy Jensen with Piper Jaffray.

And maybe 2 quick questions for John. So it sounds like datacom was stronger than telco in the current quarter. Could you comment on September, where do you think the strength is? It sounds like you're expecting some sequential to growth in optics. Is it expected to be datacom again? And maybe telco business is still stagnant?

I think for us, Troy, as we're looking at September, we'll wrap it up here, but -- as we get back in front of folks in a few weeks. But I think we're expecting that September quarter number to really see some growth in both datacom and telco. I don't -- we haven't wrapped it up completely to where I can say for sure whether one is stronger than the other. But both were up in September.

Okay. That's good to hear. And then my second question is just there's been a lot of chatter lately about industry consolidation and we may finally see it. So just curious to know, your guys' thoughts. Obviously, it would be healthy for the industry, but it kind of depends on who's the consolidator. So what your guys' kind of just message here on industry consolidation?

Yes, sure. We've seen, I think, this optical market and the component industry in particular over the last decade go through a few different waves of this. And in general, it has always worked out pretty positively for Fabrinet. I mean, you can go back and look at Oclaro that was a combination of some optical assets and some others in their overall history. And we've had -- we've run kind of the full spectrum where we've had customers that were acquired by noncustomers in that business, not only stayed with us but grew. We've had 2 key customers come together, and that business continues to thrive. So we've kind of run the whole gamut there and in general, it's always worked out pretty well for us. And I think, as you say, consolidation for the industry as a whole, I do think is healthy and can help our customers get a little bit of pricing power and some things along those lines. So to the extent that with some of the things that are going on right now that, that maybe accelerates it, we'll have to wait and see to your point who the acquirers are and how it all shakes out. But I think, in general, we feel pretty comfortable with our position within that optical component food chain as being the sort of manufacturer of choice, if you will. And I think that as the industry looks at those options to consolidate, I think we'll still be considered the premier choice for outsourced manufacturing.

And that ends the Q&A session for today. I'll turn it back to management for closing remarks.

Well, thank you, everybody, for joining us. We look forward to speaking again here in the not-too-distant future as we get our fiscal Q1 results out to everyone. Thanks very much.

Thank you.

Ladies and gentlemen, thank you for participating in today's program. This concludes the program. You may all disconnect.