Fabrinet (FN) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to Fabrinet's Financial Results Conference Call for the Fourth Quarter of Fiscal Year 2020. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Garo Toomajanian, 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 fourth quarter of fiscal year 2020, which ended June 26, 2020. 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 Investors section of our website located at investor.fabrinet.com. Please refer to our website for important information, including our earnings press release and investor presentation, which include our GAAP to non-GAAP reconciliation. I would like to remind you that 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 May 5, 2020. 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?

Thank you, Garo, and good afternoon, everyone. During the fourth quarter, we demonstrated the flexibility of our business model as we generated financial results that exceeded our guidance ranges while we continued to strictly observe enhanced measures to monitor and mitigate the potential impact of COVID-19 on our employees, customers and operations. I am very proud of our team and I'm grateful for their efforts in helping us achieve these excellent results. Revenue in the fourth quarter was $405 million or $5 million above the high end of our guidance range, driven by less severe supply constraints than contemplated in our guidance, coupled with stronger-than-expected telecom demand at the end of the quarter. From a profitability perspective, as we anticipated, our fourth quarter gross margin fell short of our target 12% to 12.5% but improved from the third quarter at 11.8%. Continued efficiency gains more than offset the slight headwind that we continued to see from efforts to mitigate the potential for COVID-19 infection. That said, we remain fully committed to returning to our target gross margin range of 12% to 12.5% and expect to do so during fiscal 2021. From an operating perspective, we continue to run a very tight ship, with SG&A expenses coming in just under 3% of revenue in the quarter. We continue to expect SG&A expenses to be a lever for operating margin improvement over the longer term. As a result, revenue upside in the fourth quarter largely fell to the bottom line, resulting in non-GAAP net income of $0.96 per share. In the fourth quarter, we produced a substantial $46 million in operating cash flow and $31 million in free cash flow. We anticipate that cash flows will remain very healthy as we look ahead. For the full fiscal year, we produced record revenues of over $1.64 billion and non-GAAP net income of $3.73 per share. Total operating cash flow for the year was a record $151 million and free cash flow was $108 million. Looking at some of the details, the quarter played out much as anticipated, with sequential revenue growth in both telecom and datacom, while the industrial laser and automotive markets showed sequential declines. As a result of these dynamics, optical communications grew to 78% of total revenue with 22% coming from non-optical communications. Optical communications revenue of $315 million also represented slight growth from the third quarter. This includes the anticipated impact of an inventory correction at one of our customers as we discussed on last quarter's call. Within optical communications, telecom revenue was $229 million, up more than $5 million from Q3, and datacom revenue was $86 million, up $1 million sequentially. We believe the inventory issues that impacted our telecom business in Q4 will be largely over in the fiscal first quarter which, when combined with the increasing demand we saw at the end of the fourth quarter, should contribute to strong telecom growth in the first quarter. By technology, silicon photonics-based optical communications revenue increased 4% from the third quarter to $90 million or 22% of total revenue. Revenue from QSFP28 and QSFP56 transceivers also continued to grow and was up 6% from the third quarter and 18% from a year ago at $54 million or 13% of total revenue. By data rate, revenue from 100G programs of $159 million was down slightly from $161 million in the third quarter, while products rated at speeds of 400G and above grew by nearly 50% sequentially to $43 million. We expect revenue from 100G products to remain strong while those at 400G and faster data rates should continue to trend upwards. Looking at our non-optical communications business. Revenue of $90 million moderated as expected from $103 million in the third quarter due primarily to anticipated sequential declines in revenue from the industrial laser and automotive markets. Industrial laser revenue was $41 million compared to $46 million in the third quarter, and automotive revenue was $27 million compared to $31 million in the third quarter. Sensor revenue was $3 million in the fourth quarter, consistent with the prior quarter, and other revenue was $19 million, representing a $3 million sequential decrease. As we look to non-optical communications drivers in the first quarter, we expect to see continued softness in industrial lasers and automotive, reflecting broader market conditions. However, we remain optimistic about opportunities in these markets over the longer term as the COVID-19 impact settles down. We also believe that current ramps of new automotive products, such as LIDAR sensors from Velodyne, would soon begin to offset some of the weakness in the traditional automotive market. As we look ahead, our new product introduction, or NPI capabilities, will continue to be an important factor for winning new business. By partnering with customers during the design process, we can provide quick turnaround prototyping services, help them improve design for manufacturability and enable them to accelerate time to market before we begin volume manufacturing. We provide these NPI services in Thailand as well as closer to our U.S. customers in Silicon Valley and now also in Israel. Our Israel operation is up and running as well as being fully ISO 9001 qualified, and we completed our first revenue shipments to customers in the fourth quarter. We're seeing good traction with new customers in Israel and are excited about this additional on-ramp to volume manufacturing in Thailand, which we expect to replicate the success we've seen at Fabrinet West in Silicon Valley. All in all, we remain optimistic about the markets we serve, and in particular, the demand trends that we see for the products we are producing for our customers despite the COVID-19 headwinds. Our optimism is also reflected in our increased customer penetration and diversity, as measured by the number of customers contributing more than 10% to our total revenue, which we disclose annually. We had 3 10% customers in fiscal 2020 compared to just 1 in 2019, increasing the diversity of our major revenue sources. Lumentum represented 19% of revenue, and revenue from Acacia and Infinera each increased in 2020 to represent just over 10% of revenue for the year. Our top 10 customers overall represented 79% of revenue. Our ability to quickly transfer and ramp complete network systems was illustrated by our successful transfer of Infinera's network systems products in 2020. We expect further evidence of the success of our proven transfer capabilities to be demonstrated with the transfer of Cisco products currently underway at our Chonburi campus. This program remains on track to ramp at the end of the calendar year. We continue to monitor the increasing demand from existing customers for additional capacity and consequently have begun the next capacity expansion of our Pinehurst campus. We have begun the process of relocating some existing office space in order to expand our manufacturing footprint at Pinehurst, enabling existing customers to further expand capacity at that site. We expect this expansion to add approximately 100,000 square feet of manufacturing space at Pinehurst, an increase of 10% from our current manufacturing footprint at this campus. Even with these investments in growing our business, we anticipate generating significant free cash flow again in fiscal 2021. When combined with a record cash balance of nearly $500 million at the end of fiscal 2020, we are very favorably capitalized entering the new fiscal year. As such, our Board has increased our share repurchase authorization up to $100 million. This expanded buyback program reflects our commitment to returning value to shareholders while continuing to invest in our long-term growth. In summary, we delivered a strong fourth quarter with revenue that was above our guidance, and we are confident that we can deliver an even stronger performance in the first quarter. We ended the fiscal year with 3 10% customers and record cash balances that, in combination with our expectation that we will continue to generate significant cash flows, are enabling us to step up our share repurchase activity and return additional value to our shareholders. We entered fiscal 2021 with investments already underway to expand our manufacturing footprint in support of growing demand and with our new facility in Israel now contributing to our growth. While we remain vigilant in keeping our employees safe, we are very proud of the excellent results we delivered in fiscal 2020. Our track record demonstrates that our strategy is working, and we are more optimistic than ever about the future. Now I'd like to turn the call over to Csaba for additional financial details and our guidance for the first quarter of fiscal 2021. Csaba?

Thank you, Seamus, and good afternoon, everyone. I will provide you with more details on our financial results for the fourth quarter and our guidance for the first quarter of fiscal year 2021. We were very pleased to deliver financial results that exceeded our guidance ranges in the quarter. Upside in the quarter was due to a smaller-than-anticipated COVID impact that we assumed in our guidance and telecom demand that grew faster than anticipated towards the end of the quarter. As a result, revenue was $5 million above the high end of our guidance range at $405.1 million. These results also include an impact of an inventory correction at a particular customer, which was in line with our expectations at approximately $15 million. We believe these corrections are largely behind us at this point. Now turning to the details of our P&L. A reconciliation of GAAP to non-GAAP measures is included in our earnings press release and investor presentation, which you can find on our website. We continue to follow strict safety procedures in our facilities to keep our customers, employees and their families safe during the pandemic. While the cost associated with this are a slight headwind to gross margin, with other efficiencies, we were able to drive a sequential improvement from 11.2% to 11.8% in the fourth quarter. We remain committed to gross margins in the range of 12% to 12.5% and believe that, with continued efficiency efforts, we can return to that range during fiscal 2021. Non-GAAP operating expense during the quarter was $11.9 million or 2.9% of revenue, resulting in a non-GAAP operating income of $36.1 million or 8.9% of revenue. We expect that the improvement we can generate in gross margin going forward will largely be reflected in improving operating margins as well. Taxes in the fourth quarter were $0.6 million and our normalized effective tax rate was 4.1%. Non-GAAP net income was $36 million or $0.96 per diluted share, a $0.04 increase from the third quarter despite lower revenue due primarily to our improved gross margins. For the full year, revenue was $1.64 billion, non-GAAP gross margin was 11.7% and operating expenses were 2.9% of revenue, resulting in non-GAAP net income of $3.73 per diluted share. On a GAAP basis, net income for the fourth quarter was $28 million or $0.75 per diluted share. In addition to share-based compensation expenses, amortization of debt issuance costs, our GAAP results for the fourth quarter included a nonrecurring goodwill impairment expense and other expenses. Turning to the balance sheet and cash flow statement. At the end of the fourth quarter, cash, restricted cash and investments were a record $495.5 million, an increase of approximately $30 million from last quarter. Operating cash flow was $46.2 million, and with CapEx of $14.8 million, free cash flow was $31.4 million in the fourth quarter. Our cash flows for the full year were also strong. Operating cash flow was a record $150.7 million and free cash flow was $108.3 million. We did not repurchase shares during the fourth quarter. At the end of the year, we had $41.5 million remaining in our share repurchase program. For fiscal 2020, we repurchased a total of 355,000 shares at an average price of $58.37 for a total cash outlay of $20.7 million. From a capital allocation perspective, our first priority remains maintaining sufficient funds for working capital and maintenance CapEx, closely followed by risk mitigation, which includes FX hedging and maintaining balances that we believe would carry us through unanticipated risks like natural disasters or prolonged economic downturns. Our current cash balance sufficiently covers this operational safety and security priorities as well as an allocation for opportunistic M&A. We expect to continue to generate strong cash flows in the years ahead. We now believe we can leverage cash generated in a balanced way by reinvesting in growth while also more aggressively returning value to shareholders. As such, our Board has increased the size of our current stock repurchase authorization from the remaining $41.5 million to up to $100 million. In addition to our open market share repurchase program, we will evaluate implementing a 10b5-1 program to enable us to repurchase shares automatically even during periods where our open market program has been restricted. We believe that this overall capital allocation strategy, which is focused on maintaining operations and risk mitigation while also reinvesting in growth and returning value to investors, ideally serves all of our stakeholders, including employees, customers and shareholders. I would now like to turn to our guidance for the first quarter of fiscal year 2021. We are encouraged by growing demand trends in optical communications that we believe will more than offset the current softness we are seeing in other markets. We expect a stronger telecom demand that we saw at the end of the fourth quarter to continue in the first quarter. We expect datacom and industrial laser revenue to slightly decrease, and we believe traditional automotive revenue softness will continue, partially offset by growth from advanced automotive technology programs. We expect total revenue in the first quarter to be in the range of $410 million to $430 million. We are optimistic that we can drive continued efficiencies in gross margin even with seasonal cost increases that we typically face in the first quarter. From an earnings perspective, we anticipate non-GAAP net income per share in the first quarter to be in the range of $0.93 to $1 and GAAP net income per share of $0.77 to $0.84 based on approximately 37.7 million fully diluted shares outstanding. In conclusion, we are very pleased to have exceeded our guidance ranges for the fourth quarter and to deliver record results in a number of key metrics for the full year. We are optimistic that stronger demand trends in telecom will more than offset headwinds in other parts of our business, and we are confident that we can continue to deliver strong value to shareholders as we look ahead. Operator, we are now ready to open the call for questions.

[Operator Instructions] Our first question comes from Samik Chatterjee with JPMorgan.

If I could just start off with the outlook here, particularly in relation to capacity additions, and quite a strong outlook and you're seeing strength across your businesses. What are your customers communicating to you in terms of capacity additions required over fiscal '21? And we did see your CapEx tick up a bit here, so are you kind of -- are we looking forward to a more material increase in CapEx in fiscal '21? Or are you primarily -- have you already cycled past the CapEx additions that you needed to do for your customers? And I have a follow-up.

Yes. I think -- hi, Samik. I think that would be a fair assessment. The CapEx increase that you saw was additional capacity we've been adding throughout the year. And then as we've communicated in our prepared remarks, the roughly 100,000 square feet of manufacturing space that we're adding at the Pinehurst campus, where we're relocating a number of office spaces into 1 location and then effectively building a new building and converting existing office space into manufacturing space. And that would yield, as we said, about 100,000 square feet of additional capacity. As we've said previously that our existing customers, for the most part, who are in the Pinehurst campus, they really want to stay in Pinehurst. So as their business expands, we have to expand our footprint somehow in Pinehurst, rather than try to force the customers to relocate to Chonburi. So really, Chonburi is aimed at capacity additions for new customers. But we're quite, I would say, quite optimistic about the demand trends we're seeing in the marketplace, notwithstanding, let's say, the COVID impacts. From our perspective, I think the way we're thinking about COVID right now is it's a -- we're in the new normal situation now so we factored it in. We've taken it into account. And the demand that we're seeing is really what's driving the increasing capacity that you're seeing us talk about here.

Got it, got it. Just following up on gross margins here. You did mention that you expect to be back in the long-term range of 12% to 12.5% here in fiscal '21. Just help me think about outside of the revenue as it kind of -- as we go through the year. Probably you'll have sequential growth in revenues as we go through the year. But outside of that ramp, what are the other drivers here? Because I think you mentioned most of the COVID impact, you should be seeing, cycling past that in the first quarter itself. So what are the other drivers to think about timing when you get back to that range?

Hi, Samik, this is Csaba. So with regards to our gross margin projections for the next fiscal year and fiscal quarter, obviously, as we mentioned in our prepared remarks, we'd like to think that the COVID-19 impact is becoming part of our existing business model now. So other than that, we are making up the costs that we are spending on employee safety and all the social distancing-related expenses, which we anticipate to continue. We are anticipating to offset that with operational efficiencies. If you look at our performance in Q4, we were able to increase our gross margins by about 60 basis points from continuous efficiency improvement. So typically, in the first quarter, we see a bit of headwinds from annual [ rate ] increases, and obviously, with the ongoing expenses that we foresee from COVID-19, we are working hard and diligently to offset those by productivity and efficiency improvements so, such as automation and all those productivity improvement actions that the operations is driving through. So other than the revenue and operating leverage, we are working hard to improve the efficiencies. So again, we might think the COVID-related headwinds are going to be offset in the longer term, and we can return to our target gross margin range during fiscal 2020.

Yes. And if I could just maybe add to that, Samik. If you take our -- the headwinds and the tailwinds that we're looking at right now. So the headwinds, obviously, as Csaba mentioned, the COVID headwinds that are now just part of the normal way that we do business, and that's probably 20 to 25 basis points of a headwind that we're -- additional costs we're carrying with all of the protocols to do with COVID. Secondly, we have the merit increase that we implement yearly. So even though we're in a COVID situation, we want to make sure we take great care of our employees. So we have implemented merit increases for our employees that presents a headwind mostly in Q1 in this quarter. And then the tailwinds, obviously again, as Csaba mentioned, the efficiency improvements that we've been able to generate, frankly, very tight cost containment and cost control. We keep our costs under very tight control. You'll see our OpEx, for example, it's 2.9% of revenue. I don't think there are too many other EMS companies with that kind of OpEx. So therefore, the leverage we get as we grow the company, a lot of the incremental gross margin drops to the bottom line so we get the leverage there. So again, a combination of all of those factors, we feel we're in quite a good place in the sense that the headwinds, we know about them, we factor them in, and we've managed to claw back the vast bulk of it so that we can improve the gross margin as we go forward.

Our next question comes from John Marchetti with Stifel.

Seamus, I was wondering if you could go back and talk a little bit about the strong telecom demand that you saw that came in towards the end of the quarter. Curious if that was across multiple segments, if it was really geared towards geographies that maybe were starting to come out of COVID a little bit earlier than some others, or any kind of color there that you can provide would be helpful.

Yes. So the telecom revenue growth that we saw was really a combination of the -- maybe the inventory correction that we had seen in the prior quarter coming back, as we had expected, coming back last quarter. And then we did see some growing demand at the end of Q4 and into Q1, like I say, with the effects of that inventory correction and also at some of the higher -- I would say, the higher speeds, the higher-rated products, so the higher-end products that we saw coming back. And we -- as we look into Q1, we do see telecom being -- continue to be quite strong, actually. And Csaba, if you'd add anything to that?

No, as you mentioned, Seamus, it's been pretty much across the board. So telecom was pretty strong and we see an uptick demand in the higher data rate programs, John, so that's what we have seen. Again, it's hard to tell whether it's a particular geography or a particular customer that we feel good about this trend in the telecom demand that we saw, and we expect to continue that in the next quarter.

Got it, understood. And then maybe on the supply chain side, Seamus, you talked a little bit last quarter and through the quarter about some of the challenges on the supply chain side and making sure that, that was being adequately planned for. Just curious where that stands now. It sounds like from your remarks, the bulk of that is behind you and you feel like the supply chain is also getting back to normal. Just want to make sure that I read that correctly.

Yes. I would say the supply chain challenges, John, we're always, I would say, borderline paranoid about supply chain because if you're missing that last resistor, you can't ship. So we're always completely paranoid and remain very, very vigilant on supply chain. I think the way I would characterize it, John, is we have a good feel for what's going on. We feel we have our arms around it. But I wouldn't say it's behind us. We always start every quarter with a big nut to crack in terms of the challenges, the supply chain challenges we have. And then we have just -- we believe, I would say, the best supply chain team in the industry. We just go after it every quarter, every day -- not every quarter, every day, and really go after those challenges to make sure we get our fair share, and in some cases, our own fair share of the parts that are out there and the parts that are on allocation, in some cases. It's a little bit different to maybe prior supply chain challenges. If you go back a couple of years ago, you had the MLCC situation. And at this time around, it's more widespread, which makes it a bit more of a challenge. You could look at that a couple of ways. You could say, well, it's spread across multiple commodities. Therefore, there's no one commodity that's going to become a [ godship ]. But there really are still, I would say, a number of challenges. We feel we have our arms around it. And the biggest impact we feel right now is, maybe less to do with leaving revenue on the table and more to do with revenue and output being nonlinear. So we'd be a little bit more back-end loaded than we'd like to be. We'd like to produce in a very linear fashion so that we can produce the quarter. If you look at our production, our operations, we like to be kind of flat-loaded for the quarter, not always possible but we certainly target to be level loaded. And this quarter, we feel we're a little bit more back-end loaded. So a little bit of an impact on linearity more so than on actual output, if that makes sense.

Yes. And just to follow up on that, Seamus, I mean, obviously, that has a little bit of an impact on margins. But do you see customers or are you asking customers then to place orders with a little bit longer lead times just so you can make sure that you have your arms around that supply chain? Or is it -- are customers still pretty much behaving the same way on the order side?

Yes. No, that's -- you've hit the nail on the head John. That's exactly what we're doing. We're working with customers to make sure we go beyond the normal component lead time because if -- at -- in the end, if -- when components are tight, when component supply is tight, whoever -- whichever customer makes a commitment to the supplier to order beyond the component lead time would typically get the parts. So we're working with our customers to make sure because, as you know, once we order beyond lead time, we can't be financially responsible for that. We have to make sure that our customers, if you like, underwrite that. So that's really what we're working on right now, is to make sure we have that arrangement in place, a kind of a 3-way understanding with our customers, if you like, underwriting any orders we place beyond the component lead time and then the suppliers honoring that, that they see value that component suppliers will really see value in we're able to give them orders beyond the component lead time. So that's really the challenge we have right now, is to work through all of that to make sure we secure our share in parts.

And our next question comes from Alex Henderson with Needham.

Just a couple of mundane ones to start off with, if I could. Could you give us some sense of what's going on with your tax rate? Obviously, it's moving around a lot because of the exchange rate moves and the government, I think, it talked about giving some discounts. Can you give us some guidance on what we should be using for FY '21?

Alex, this is Csaba. So basically, if you see our tax rate was slightly down year-on-year in fiscal 2020, our effective tax rate came in at about 4.14%, which was slightly below last year, again, as you mentioned, certain movements around. So in the longer term, for modeling purposes, we still anticipate the tax rate to be around 5% range and below 5%.

Below 5%, great. And then the second one I wanted to ask, more poignant, is around the systems business. Clearly, it's a pretty big nut coming down the pike. You have 2 potential customers impacting the numbers. First one obviously had an inventory correction. That should be falling out sequentially but I don't think it fully falls out until the December quarter. And then you have a second customer coming in, in the December quarter. Should we be thinking about that as a material contribution in this December quarter from that additional customer? Or is that really going to be metastasizing as a revenue driver starting in the March quarter and into the June quarter? How do we think about those tethering in?

So we've actually started some of that transfer. It's not meaningful in terms of revenue this quarter, but we actually do have some of that transfer activity going on. And it's more of the, if you like, transfer and qualification type activity that's going on. And we'll be ramping that over Q2 and Q3 and out into Q4, actually. I think it will become...

If I could, when you say not relevant this quarter, did you mean the June quarter or the September quarter? I'm not sure what you meant.

I mean the September quarter. Yes, it's not particularly meaningful. Meaningful in the sense that we'll have a number of programs and part numbers in the qualification loop, in the qualification process but not particularly meaningful in terms of actual shipped revenue in the quarter. I think the December quarter, yes, it will become -- it will start to become meaningful, I think, in the December quarter, but it's probably really more out into the March and June quarter that it becomes quite significant and quite meaningful. The other customer that you mentioned, they -- from our perspective, we think the inventory corrections are largely behind us. We understand they may have inventory corrections still going on but they have more suppliers than just Fabrinet. So it may be affecting those other suppliers, we're not quite sure. And then, of course, there's other system companies, and it's really an important part of our strategy. We're not trying to target every company in the world, but there are a handful of companies who we feel would be a really good fit where we can -- we're currently supplying, let's say, the optical components to those companies, that even if Huawei gets kicked out of networks around the world, those other companies will benefit from that. And in the end, they'll come back to our optical component suppliers to get those optical components. And so we should end up, if you like, being neutral from that point of view. And then the upside for us is, as those companies then start to hopefully pick up Huawei business around the world and become customers of Fabrinet for system-level business, we're quite hopeful that it should represent an opportunity for us to grow our business in the system space.

Just to fine-tune it a little bit. So is it a sufficient positive sequentially from the December quarter into the March quarter to offset normal seasonality? Is that the right way to think about the magnitude of it?

I think that would be a good way to think about it, yes. That would be correct [indiscernible].

[Operator Instructions] Our next question comes from Tim Savageaux with Northland Capital.

Congratulations on the results. You'd mentioned a combination of factors. I mean, it looks like -- I certainly expected the telecom business to decline, and it looks like it was up about $20 million relative to where my expectations might have been. And you mentioned a couple of factors: one, kind of less supply headwinds; two, accelerated telecom demand, looks to be on the 400G, 600G side toward the end of the quarter. If we look at what you might have expected entering the quarter and how it ended up, is -- am I kind of in the range here or you expected telecom down, it was up pretty nicely. And how would you apportion the upside via those 2 factors, less supply issues versus increased demand?

So I think we had anticipated that COVID would impact us to the tune of about $25 million, $30 million in the quarter. That's what we had factored into our guidance, and the actual impact was probably much smaller than that. It was in the $10 million to $15 million range, thereabouts. So I think it's a combination of a number of factors. I think that's a big factor. Also, the customer, as you mentioned, with whom we had the inventory correction, for the most part, that has self-corrected this past quarter and we're back to where we would like it to be. So a couple of factors. And then as you said, the higher bandwidth, higher-speed products, we did see an uptick in demand there towards the end of the quarter. So a few factors impacting the telecom growth there.

Yes, very helpful to kind of quantify that COVID impact. Question on the datacom side, I guess both results and guidance. Given some pretty broad-based strength we're seeing in cloud, 100G datacom modules in particular, kind of across the ecosystem from the module level down to the IC level, flattish, flat to down, is I think a little surprising in that context. I wonder if you could talk about dynamics on the datacom side, so you did see an uptick in QSFP here in the June quarter, look like you expect that to tick down a little bit. I wonder if you could talk about what's impacting the datacom outlook.

Yes, so a couple of things. So first of all, I think some of the kind of historical pricing, maybe price erosion that we had seen, the kind of outsized price erosion that we had seen historically, that's going to settle down now. We're back to, I would say, normal levels of price erosion in the datacom space for us. We do have a couple of, I would say, customer-specific program transition things going on, where maybe an existing program is tapering off at a particular customer, where the new generation product is beginning to ramp but hasn't fully ramped to the extent that it's offsetting the declines in the program that's ending, if you follow me. So that's really what we see going on in datacom. Overall, we're quite optimistic about datacom. I would say we haven't -- we don't believe we've lost any share or anything like that. It's more of a, like I say, a customer, a program transition that's going on, where one particular product is ramping down as another one ramps up.

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Seamus Grady for any closing remarks.

Thank you, operator. Thank you for joining our call today, everyone. We are pleased to have exceeded our guidance in the fourth quarter. Our track record of success demonstrates that our strategy is working, and we have never been more optimistic about our future. We look forward to speaking with you again next time. Until then, goodbye and stay safe.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your program, and you may now disconnect.