Fabrinet (FN) Q2 FY2026 Earnings Call Transcript & Summary

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the Second Quarter of Fiscal Year 2026. [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, VP of Investor Relations. 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 second quarter of fiscal year 2026, which ended December 26, 2025. With me on the call today are Seamus Grady, Chairman and 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. During this call, we will present both GAAP and non-GAAP financial measures. Please refer to the Investors 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 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 4, 2025. 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 Chairman and CEO, Seamus Grady. Seamus?

Thank you, Garo. Good afternoon, everyone, and thanks for joining our call today. We had an excellent second quarter. Revenue and earnings significantly exceeded our guidance ranges with multiple large key strategic programs across our business, all contributing to our strong performance. Second quarter revenue was $1.13 billion, a new record for the company, which represented growth of 36% from a year ago and is the fastest year-over-year growth we've achieved since our IPO over 15 years ago. Our remarkable top line performance also represents 16% growth from the prior quarter. Non-GAAP EPS also set a new record at $3.36 per share, exceeding our guidance range despite stronger FX headwinds in the quarter. Looking at our performance in greater detail. Optical communications revenue grew 29% from a year ago and 11% from the prior quarter. Telecom revenue reached a new record, increasing 59% from last year and 17% from Q1. Within telecom, DCI revenue grew 42% from a year ago and 3% from Q1 as strong longer-term growth trends remain firmly intact. Datacom revenue grew 2% sequentially, while the year-over-year decline narrowed to 7% as demand continues to strengthen. In non-optical communications, we delivered a very strong performance, with revenue surging 61% from a year ago and up 30% from last quarter as high-performance computing revenue soared to $86 million in the quarter. We expect this strong sequential growth to continue in the near term, particularly as our second and third fully automated production lines get qualified. Automotive revenue grew 12% from a year ago, but was down slightly from Q1 as anticipated, while industrial laser revenue demonstrated respectable growth of 10% from a year ago and 4% from last quarter. We are confident that the same growth drivers that contributed to our success in Q2 will extend into Q3. This includes growth in all major areas of our business, with the positive exception, of automotive. We are experiencing sustained telecom demand, including strong DCI module growth, ongoing datacom momentum and continued growth in HPC as our business ramps. In addition, we continue to aggressively pursue new opportunities across all areas of our business. As our business scales, we remain focused on execution as well as strategic capacity expansion. Construction of Building 10, which will be a 2 million square foot facility is still on track for completion at the end of calendar 2026. We are making progress on completing about 250,000 square feet of that by the middle of the calendar year. At the same time, we are creating additional manufacturing space at our Pinehurst campus, by converting office space into manufacturing space and relocating those offices into a new building on that campus. With this capacity expansion, we are well prepared to continue supporting our anticipated growth in 2026 and beyond. In summary, we delivered an impressive second quarter performance with numerous significant customer programs contributing to our outstanding results. We are well positioned to extend our track record of profitable growth and to meet the increasing level of demand we are experiencing in the third quarter and beyond. I'll now turn the call over to Csaba for more financial details on our second quarter results and our outlook for the third quarter. Csaba?

Thank you, Seamus, and good afternoon, everyone. We are extremely pleased with our performance in the second quarter of fiscal year 2026. Revenue exceeded our guidance range, reaching a record $1.13 billion, up 36% from a year ago and 16% from Q1. Strong execution produced non-GAAP EPS that also exceeded our guidance range at $3.36, which includes the negative impact of a $3 million or $0.09 per share FX revaluation loss. Turning to revenue performance by market in the second quarter. Optical communications revenue was $833 million, up a strong 29% from a year ago and 11% from Q1. Within optical communications, telecom revenue grew to a record $554 million, surging 59% from a year ago and 17% from Q1. Within Telecom revenue from data center interconnect or DCI modules was $142 million. DCI module revenue delivered another strong year-over-year performance, increasing 42% and grew 3% from the first quarter. Datacom revenue was $278 million, while revenue declined 7% year-over-year, it increased 2% sequentially and trends appear favorable for continued sequential growth. Turning to non-optical communications. Revenue in this category was $300 million, up a sharp 61% from a year ago and 30% from Q1. This exceptional growth was primarily driven by high-performance computing products, which contributed $86 million to revenue in the quarter compared with $15 million in Q1, the first quarter in which we broke out this category. We are confident that our first HPC program will continue to grow rapidly and is on track to be fully ramped over the next 2 quarters. Automotive revenue of $117 million was up 12% from a year ago, but was slightly down sequentially as anticipated. Industrial laser revenue grew 10% year-over-year and increased 4% sequentially, contributing $41 million to the non-optical communications category. As I discussed the details of our P&L, all expense and profitability metrics will be presented on a non-GAAP basis, unless otherwise noted. Gross margin in the second quarter was 12.4%, a 10 basis point improvement from Q1 and consistent with a year ago despite foreign exchange headwinds. At the same time, a modest increase in operating expenses, combined with strong top line growth continued to drive operating leverage. Operating margin reached 10.9% in second quarter, up 30 basis points from both Q1 and a year ago. Interest income was $9 million, and was partially offset by a $3 million foreign exchange revaluation loss. The effective GAAP tax rate for the quarter was 5.9%. As a result, net income was $122 million or $3.36 per diluted share. Turning to our balance sheet. We ended the second quarter with cash and short-term investments of $961 million, down $7 million from the end of Q1. Operating cash flow for the quarter was $46 million. Capital expenditures of $52 million continued to run above maintenance CapEx levels, reflecting construction of Building 10 and capacity enhancements at our Pinehurst campus. As a result, free cash flow was an outflow of $5 million for the quarter. Turning to our share repurchase program. During the second quarter, we repurchased just over 12,000 shares at an average price of $387 per share for a total cash outlay of $5 million. At the end of the second quarter, $169 million remained available under the program. Turning to our Q3 guidance. We are confident that the very strong growth trends we have been seeing across our business will continue in the third quarter. We expect revenue to grow sequentially in telecom, datacom and HPC, while anticipating another modest sequential decline in automotive revenue. We expect total revenue to be in the range of $1.15 billion and $1.2 billion, representing approximately 35% year-over-year growth at the midpoint. While we anticipate that FX headwinds will persist in Q3, we expect to offset of that pressure through continued strong operating leverage. As a result, we expect non-GAAP EPS to be in the range of $3.45 to $3.60, representing approximately 40% year-over-year growth at the midpoint. In summary, we delivered an excellent second quarter with strong momentum across multiple areas of our business, we are well positioned to extend our track record of success into the third quarter. Operator, we are now ready to open the call for questions.

[Operator Instructions] One moment for our first question, it comes from Samik Chatterjee with JPMorgan.

Maybe, Seamus, starting with you. You had a pretty strong ramp with the HPC customer, but maybe if you can sort of share your thoughts in terms of where you are with the ramp with that customer, particularly, I think you talked about a second and third production line. I mean what does the fully ramped volume look like relative to the $80 million plus sort of level you did this quarter? Are you sort of halfway relative to the full ramp? Or you're sort of only 1/3 in because you are adding 2 more production lines. If you can just share your thoughts in terms of what the full ramp looks like? And when do you expect that full ramp? And I have a follow-up.

Samik, thank you. Yes, we're a little bit about halfway, I would say, to be a little bit more than halfway. We expect the revenue from our current HPC program to be north of about $150 million when it's fully ramped. We're currently running on 2 fully automated production lines. We had one line. We got a second production line qualified, and we're in the process of qualifying additional lines. Once we're able to achieve that and get the lines ramped, we'll be well be on our way to that run rate, again, which we expect to achieve over the next couple of quarters. After that, we believe there's a couple of growth paths for us in HPC, given our one-stop shop kind of value proposition and competitive cost structure. We're pursuing other HPC customers, of course, as our relationship with AWS is not exclusive. But the time lines for these can be fairly long. Meanwhile, if we can exceed our main -- our initial customer, if we can exceed their expectations for cost quality and deliveries, we may be able to earn a larger piece of our current program because we're currently a second source in that program. So no matter how you look at it, we're very excited to see our high-performance computing business, rapidly becoming a pretty meaningful revenue and growth driver.

Got it. Okay. And then maybe I wanted to ask you on couple of opportunities as well. I mean, one of your big customers is now closer to commercializing CPO in more large volume. So any more clarity that you have on that front as to what your role in co-packaged optics is going to be and what maybe the content opportunity on that front is going to be? And there's a lot of excitement in the optical space around OCS products as well, optical circuit switches, do you see that as an incremental opportunity, any customer engagement on that front as well?

Yes. So we -- for us, co-packaged optics, it's really an evolution from silicon photonics and the precision photonics packaging capabilities we've developed over many years. We have and will continue to invest heavily and working closely with our customers to align our capabilities with their road maps. For many years, co-packaged optics has been just on the horizon. But for now -- right now, it's much more real than it's ever been, and we are in an excellent position to benefit from that. We believe we're far ahead of most of our competitors in the space, in making this technology a reality. And we're already seeing some CPO revenue, although the amounts are relatively small right now. We're working on co-packaged optics programs with 3 different customers. It's not just 1 customer, Samik, it's actually 3 different customers. And the specific timings on when the revenue would become more material, depends on our customers' road maps and schedules, but we're very excited about CPO. Again, we don't really want to speak on our customers' behalf, but rest assured, we're quite excited and we have several products that we're working on our projects with our customers. As we -- with other customers, we'd expect to see the impact in line with or slightly ahead of our customers' production schedule. On optical circuit switching. We are engaged on a number of fronts. And again, it's a product -- it's a completely new product category. We're quite excited about it. And looking forward, nothing -- again, nothing to announce. But really will depend on our customers' ramp schedules, but we are working on a couple of projects on -- in that space. And we are quite excited about OCS as a technology. We think it has a significant role to play in the future.

Our next question is from Karl Ackerman with BNP Paribas.

Two questions for me, please. First off, do you remain supply constrained on datacom transceivers? Because I would have thought that you might be maybe improving datacom mix as laser capacity comes online. I guess as you address that question, could you speak to the growth opportunities you see within that segment across hyperscale and across merchant transceivers OEMs? Any update on that would be helpful. And then I've a follow-up, please.

Thanks, Karl. So yes, we have been, as you say, supply constrained in our datacom, particularly on the leading-edge products, the 200 gig per lane both 800 gig and 1.6. Demand continues to strip supply, and we continue to ship significant volumes to our main customer, but of course, we could ship more if we had more components. We did get approval for a second source, for the EML for the laser, which has been the main cause of the supply constraints. So we were able to get a second source. Our customer was able to approve a second source for the laser during the quarter. And that should benefit us this quarter and in future quarters. So we are making good progress there. We've always felt that, that supply constraint will resolve itself and we're starting to see that resolution come through now. The mix between 800 gig and 1.6 at that 200 gig per lane, it's really not that relevant to us. We don't mind which the customer orders. We're happy to ship what they need from us. So again, good progress, and we're making good progress there. As regards to other potential growth drivers in the datacom space. Again, we have several projects that we're working on, both with hyperscale direct and with other potential product companies who need our services. So several projects that we're working on. Again, nothing to announce yet, but several that we're working on, again, both hyperscale direct and other, let's say, merchant transceiver manufacturers.

Got it. Very helpful. Perhaps if I can talk about telecom for a moment, over the $80 million sequential increase, was that evenly split between Satcom and the core telecom or optical module system business? Just trying to get a relative mix of the Satcom business there. And then as you address that, do you believe that your Satcom business opportunity can be similar to your high-performance computing opportunity over time?

Yes. I mean, our -- as you follow, the satellite communications business has been growing steadily for us. It's been a meaningful contributor for a while. We haven't really broken it out separately. A lot of the growth in the quarter was more focused on the DCI. I think, DCI has been very strong for us. We have a number of customers there and really -- mostly 400ZR and 800ZR modules, that business has been growing very nicely for us. So again, we're very optimistic, I would say, about telecom generally, both from a satellite communications point of view and the DCI point of view. And also complete network systems, our network system business continues to grow as well. So really solid growth, I think, on all fronts in our telecom business.

Our next question comes from the line of Christopher Rolland with Susquehanna.

I guess the first 1 is around CPO switches as opposed to scale up. Are you hearing about increased desire for CPO switches? Is this perhaps upsiding your capacity plans? And just generally, your outlook for CPO switches versus the typical transceiver set up. How do you think this might move over time?

Yes. I mean, we're involved in the CPO, let's say, supply chain. We're in the ecosystem there. We haven't actually talked about exactly what we are doing, but certainly CPO switches and a number of the products that our customers are working on are very exciting for us. We haven't really -- like I said, we haven't really talked about the switch -- the CPO switch opportunities in detail. But yes, certainly something we're excited about. But I really wouldn't want to go much deeper than that at this point, Christopher.

Understood. Perhaps as a follow-up, DCI seemed a little bit disappointing versus at least our model. And then non-DCI under telecom had some upside. If you could perhaps address the -- at least the DCI portion? What's going on there? Is that also laser and supply based? Or is there -- is that a pure demand dynamic?

No, it's -- the demand remains very strong. We continue to see great momentum in our DCI module business. We grew 59% year-over-year. And we have all of the market-leading customers in the space. And we do believe the long-term demand is durable and as we work with the customers on the next-generation 800ZR products, which are yet to ramp. Like any leading edge, leading technology product, there's always going to be constraints here and there. So with new products and leading technology products, it's not always straightforward. All the components have to line up, the designs have to work, everything has to go perfectly, but the demand remains very strong. Telecom revenue growth was particularly strong as we started to ramp Sienna's new system program, as well as other new program wins that we're particularly excited about [Technical Difficulty] Specifically on DCI, we broke out our DCI revenue. We talked -- we want to be clear that in reporting our DCI revenue, it's for coherent telecom modules that we have high confidence are being used in datacom interconnect -- sorry, data center interconnect applications. And these include both 400 and 800ZR modules and their variants as well as some embedded coherent line card modules as well. So our DCI revenue does -- it does not include telecom systems. That's our pure DCI coherent module business. So -- but overall, I think we're we remain very optimistic about DCI. There will always be puts and takes. It won't always grow in a straight line, especially again because, as I said, when you're you're dealing with leading-edge products, there's always going to be challenges here and there, but nothing we're concerned about. The demand remains very robust.

Our next question comes from the line of George Notter with Wolfe Research.

I just wanted to kind of lean in on new customer opportunities on the telecom side of the business. Like I think you're kind of suggesting that you're working with other customers. Are these like OEM customers that are in the marketplace and shifting existing business from other manufacturers to Fabrinet? Or are these new product categories? I guess I'm just trying to understand what you guys are looking at in terms of new opportunity? And I noticed from Nokia's earnings call, they talked about expanding their optical manufacturing capacity. I'm just wondering if you guys are involved in that?

Yes. I think we're very excited about, obviously, not just the strength in the business but also the new opportunities. It's a really good pipeline we have, that we're looking at, that's in front of us. And we're always pursuing new opportunities, both with potential new customers as well as existing customers. The kinds of opportunities that we've talked about and continue to pursue things like the datacom opportunities we've talked about, including producing transceivers directly for hyperscalers and also building transceivers for merchant vendors. On the telecom opportunities, yes, it would include additional system wins and further penetrating existing customers and also new customers or maybe new to Fabrinet customers. So we've had some success. We think we have a winning formula where we're able to deliver. We believe superior technology, excellent delivery, quality, responsiveness at a lower cost because we don't margin stack. And we also don't have our own products, which is very important to our customers. We're a pure contract manufacturer. We don't have any of our own products. And that's actually a positive for many of our customers. They don't want us to have our own products. So overall, we have several new opportunities there that we're that we're pursuing, George, including existing customers and some new customers that we're trying to win. They take time though. These things always take time. And we also have additional high-performance compute customers that we're pursuing and an additional CPO. So several growth drivers that we're working on right now.

Great. And then you mentioned potential transceiver designs for hyperscalers and other merchant vendors. I guess, at one point, I kind of thought that was maybe a number of quarters away, but I'm just curious like programs like that, assuming you guys have success, is that a quarter away, multiple quarters away, multiple years away? Like what do you think the time line would look like?

I would say we're quarters away. I don't think it's years away. I think it's quarters away. We've been working on it for well over a year, probably 18 months at this stage. And we're -- so I would say, quarters away rather than years away, George, from that turning into meaningful revenue.

Our next question, it comes from the line of Steven Fox with Fox Advisors.

I guess I had 2 questions. First of all, on the hyperscale business, the ramp is obviously substantial. You mentioned that maybe improving from a second source position was possible. From the outside looking in, it looks like it's ramping very well, like you don't see any sort of holes in margins or anything like that. Can you just give a little bit more color on your chances of doing that? And also I thought there was potentially a second program with that customer that was going to ramp. Can you just comment on that as well? And then I have a follow-up.

Yes. So I'll take the second question first. So the second program, there's multiple programs. I mean there's no program excluded from what we're working on. We're working on current products and also new products. So we are ramping multiple products. Our chances of growing the business further, like I said in my previous answer, we have 2 lines, 2 production lines, fully qualified and additional lines being qualified where little bit more than halfway into the ramp to capacity on those production lines, which we have ample capacity, and we can build more products. Our chances of growing the business more than that level, we're reasonably confident but we have to execute. It's really a case of earning the business by doing an excellent job for the customer, excellent job, excellent delivery, quality, responsiveness, et cetera at very competitive costs. So we're -- we enjoy the competition. We -- the existing suppliers is a very good supplier with a long relationship with the customer. But we're confident that we can continue to grow that business because the business is very strong, and we're performing very well. So both things we think are in our favor.

Great. That's helpful. And then just as a follow-up, just on the dollar-baht currency issue. So $0.09 drag in the quarter you just reported. Any help on how the drag -- EPS drag looks this quarter versus maybe 90 days ago?

Steve, this is Csaba. Yes, indeed, the exchange rate environment has been favorable for the last several quarters. So we called out about $3 million drag in the last quarter in the -- below the line. And also on the gross margins, we have been seeing unfavorable headwinds. So based on our hedging program that we have in place, we continue to expect about the same impact going into the third quarter from exchange rate perspective. Obviously, we are not forecasting anything on the revaluation and below the line, but we do anticipate about 20, 30 basis point headwind in the gross margin. And Nevertheless, obviously, we have been able to deliver a slight improvement on gross margin in last quarter as well as we drive continuous operating leverage. So we are hopeful that we will be able to offset most of the exchange rate headwinds in operating leverage by keeping our OpEx in check. And as we grow the top line, we should see continued operating leverage on operating income. But we don't put any guidance for exchange rate other than the color that based on the hedging program we have in place, we do anticipate similar headwinds in the gross margin as in the prior quarter.

Our next question comes from the line of Mike Genovese with Rosenblatt Securities.

Congrats on the record results. Maybe my first question is more of a comment. But I think if you counted that Sienna business where that stuff was going in DCI, you'd find the vast majority of your telecom growth was driven by DCI and then you had a huge sequential DCI quarter. But that's just like kind of a segmenting thing. Any thoughts on that?

Yes, I think that's pretty accurate. DCI has been very, very strong for us. The growth is not just DCI, but it's predominantly DCI. It's been very good, and it continues to grow and the demand looks to be very, very durable, and it's not just Sienna, it's across multiple customers.

Yes. Can you give any details on the data center side or datacom side, I mean, between the 800 and 1.6 mix, whether in terms of like what the mix is or what the trends are? Is one growing faster than the other? Anything you could tell us about that?

Not particularly. I mean it's predominantly 200 gig per lane, almost all 200 gig per lane, 1.6 terabits and 800 gig. The exact mix between the 2, we don't really -- I won't say we don't care, but we don't put a huge amount of thought into it because it really is a decision that our customer makes and our customers make. The exact puts and takes as to why the customers would want 800 gig, 200 gig per lane versus 600 -- sorry, versus 1.6, 200 gig per lane. It's not really something we're involved in. But we're producing everything we can with the components we have and the demand remains very robust. But the mix -- again, the mix between 1.6 and 800 gig, we don't put too much emphasis on because it's not that important to us. They're both produced on the same production line and very similar products.

I guess just a final question. In datacom, I mean, when you -- I understand you're projecting sequential growth for this quarter. You usually don't guide more than another, but would you continue more than 1 quarter of sequential growth and kind of how many in datacom, do you have visibility to?

Well, we have a pretty good visibility, I would say, our visibility right now, it's certainly the furthest that I've in my experience. I think, we have more visibility now than we've ever had. I can say, we guide 1 quarter at a time, but we're very optimistic. We're adding capacity as Csaba mentioned in his remarks, we've -- we're converting significant office space and warehousing space into manufacturing space at our Pinehurst campus. We're accelerating the build-out of our 2 million square foot Building 10 in our Chonburi campus. We'll have 250,000 square feet completed by the middle of the year, by June. And then the balance of that 2 million square feet would really by probably early 2026, January or February 2026. So -- and there's other ways to expand the capacity that we're looking at, we'll probably talk about it in our next earnings call, but there's a number of activities we have underway that should help us to add additional capacity. So we're pretty excited, Mike, about the demand we have in front of us. It's a very exciting time. I'd say, when you look at what's going on with our customers and what they need from Fabrinet, it's a good place to be right now. We're pretty excited about it.

Our next question comes from Ryan Koontz with Needham.

Appreciate the updated milestones on Building 10. But you can share just a little more color about where you are in that process? What kind of shape facility is in, in terms of the construction? And where you are really in the procurement of all the materials you need as well as customers to outfit the building and what that process looks like over the balance of '26?

So we're well underway. I was there a few weeks ago. We're well underway The building is a -- it's a phenomenal building. And it will be a real showcase when it's finished. 2 million square feet, it's a lot of factory. It's a big factory. But we're well underway. We've had no delays or anything like that with the availability of material to build the factory. It's going very, very well. And we'll have about, like I said, about 250,000 square feet finished and ready to move into by the end of June. So that's well ahead of the completion schedule for the full factory. Then the balance of the factory will complete as we go throughout the year. And I think we'll probably take possession of the balance of the factory in like January, February of 2027. So it's going very well. The customer demand to consume the factory. Again, we don't ask our customers to make a hard commitments. We have to have capacity in place ahead of demand. That's why we're moving so fast with this. We see strong demand and strengthening demand from our customers. So we'll put the factory up and the customers. We're optimistic, I would say, Ryan, about our ability to fill the factory. When we built Building 8, it was 550,000 square feet, and we filled it pretty quickly. Building 9 was 1 million square feet, and that's almost full. So we're pretty optimistic about Building 10. We also have room for Building 11 and Building 12 on the same campus. So lots of runway in terms of capacity in front of us.

Our next question comes from Tim Savageaux with Northland Capital Markets.

Congrats on the results from me as well. A couple of questions. First just, I guess, continuing on the capacity front, so as you look to add that 250,000 square feet, I guess, at this point where we're standing right now, and I don't know if this is a reference to transceivers being quarters away? Or do you have an idea about where that capacity is going, I guess, since it's coming online pretty soon. Any color on what drove that pull in? And if there's any particular projects that are driving that? And as a quick aside to that, still on capacity, I wonder if you might be able to size the kind of Pinehurst repurposing in the context of the 250,000 that you're adding? I assume it's smaller, but anything you can give us there? It's look like you're adding, what, $300 million in annual revenue capacity plus Pinehurst. So just wondering if we have any more visibility on where that's going?

Yes. So I'll let Csaba cover the Pinehurst capacity addition in a moment. Yes, Chonburi, we're, as you say, pulling in 250,000 square feet, that's 6, 8 months ahead of the original schedule. There's several customers, Tim, we wouldn't want to quantify them all here, but it's really several, the several drivers. Again, our telecom business is very strong. And it's not just DCI, it's DCI, but it's not just DCI, there's also some additional new business and new customer wins that we're working on in the telecom space. Datacom, its growth with our main customer, but also we're confident in our ability to win other new datacom customers, both merchants and also hyperscale direct. Our business overall, Tim, is just very strong. Our demand profile we have from our customers is very strong. And for us, it's a relatively easy decision to add this capacity because the way we add this capacity, our balance sheet is very strong. As you know, we have a very strong balance sheet. We're able to build these buildings and add this capacity with 0 debt. So the downside risk for us is very small. As we build Building 10, it will be, I don't know about $130 million of CapEx. Csaba can Correct me if I'm wrong on that, about $130 million of CapEx. It will add 2 billion -- sorry, 2 million square feet and capacity for an additional -- it depends on the mix, but we said, 2.5 million, in the past, it's is probably a little bit north of that at the moment, given the mix that we're looking at. So the upside opportunity is huge. It's the -- if you like, the operating profit that we can generate from that business. The downside risk is very small. The downside risk for us of building a factory that doesn't get consumed as quickly as we'd like is probably 15 basis points, something like that on a full year basis. So 15 basis points gross margin headwind. So the downside risk is tiny because of the strong balance sheet we have, the way we're able to build these in a very efficient way with no debt. Downside risk is very small. The upside opportunity is huge. So it's a relatively easy decision for us to add this capacity. Coupled with that, our ROIC is about 40%. So really the best return for us is to add capacity, fill that capacity with new business that's able to generate outsized margins for our industry and also outsized returns. So it's a relatively straightforward decision for us, Tim.

Great. If I could follow up. And you mentioned strength across the business demand-wise, it sounds like that hasn't really changed as you've gone through the quarter and into the new year here. But given where you're guiding and then the sharpness of that HPC ramp, while -- so you expect telecom to grow, it seems like only slightly on a sequential basis and relative to very strong results you just put up here in the quarter. And I guess am I -- first, am I reading that right? And second, do you attribute that to anything in particular seasonality of customers or anything else, if indeed, I'm kind of working through the segments properly.

I'm sorry, Tim, I didn't understand the question. Are you interpreting what correctly? I missed the question.

Just your segment guidance. Basically, I'm saying with HPC likely up another big chunk in the quarter, while you're talking about telecom and datacom growth, it seems like much slower sequential growth than you saw in December in terms of what you're forecasting in your March [indiscernible]. Is that accurate? And why would that be? I guess, would be the question.

I think I'll let Csaba give a little bit of color, but I think our HPC growth, it's not in a straight line because we are dealing with some new products that don't always grow. The growth is a little bit lumpy, I would say. So HPC won't necessarily grow in a straight line. It looks like a nice straight line. But really, we only have 2 data points, 2 quarters of revenue. And as everyone knows, 2 data points is not a trend. So we have to wait until we have a little bit more HPC experience under our belt. And then I'll let Csaba talk about telecom and datacom and also the question you had about the capacity additions in Pinehurst.

So Tim, so let me give you some pointers on the guidance. So as we mentioned, all the segments, we anticipate to grow with the exception of automotive. So HPC, we had a nice bump of about $70 million sequentially last quarter. So that's not going to grow in that space. But we do anticipate double-digit growth in that area. Within telecom, we anticipate that DCI is going to grow faster than we have seen in the past quarters. So that strength continues into our third quarter, and we also anticipate datacom to growth. So that's the color that we can provide at this stage. And automotive will probably be down in a similar way as it has been in the prior quarter. With regards to Pinehurst campus, to answer your prior question, so we are able to create about 120,000 square feet of space or convert offices and warehouse spaces to manufacturing space. A couple of years back, we were able to acquire an adjacent piece of land, which is in a zone that we are able to build office buildings on those -- on that land, but we are not able to put a factory. So we were able to convert some of the office and manufacturing space in the existing campus. So that adds up to about 120,000 square feet, which if you do the math, again, it's highly dependent on mix that should give us over a $150 million revenue upside opportunity. Again, this is subject to mix. So overall, and again, in terms of customer requirements for additional space, obviously, Pinehurst is prime from that perspective because one of our legacy customers are there, and they would like to have more space in Pinehurst. So hence, we are doing the best we can to accommodate all those requirements.

Great. And just very quick. And is the Pinehurst addition, is that on the same time line as the Building 10 pull on -- in midyear? Or is that kind of happening now or anything [indiscernible] on that.

Yes, it is happening now. Seamus doesn't have an office anymore in the campus. So we used to joke, when he comes next time to Pinehurst, he'll no longer have an office. So it's happening for [indiscernible].

And this will end our Q&A session, and I will pass it back to Seamus for closing comments.

Thank you for joining our call today. We are very pleased with our excellent second quarter performance and with continued momentum across our business. We're optimistic that we can deliver a very strong third quarter as we expand on our strong market position. We look forward to speaking with you in the future and to seeing those of you who will be attending Susquehanna Conference later this month and the OFC Conference in Los Angeles next month. Thanks again, and goodbye.

And with that, we conclude our conference. Thank you all for participating. You may now disconnect.