Fabrinet ($FN)

Good afternoon. Welcome to Fabrinet's Financial Results Conference Call for the Third 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 Garo Toomajanian, Vice President of Investor Relations. You may begin.

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 third quarter of fiscal year 2026, which ended March 27, 2026. 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 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 February 3, 2026. 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 delivered an outstanding financial performance in the third quarter along with several notable achievements that we believe can extend our strong growth trends into the fourth quarter and fiscal year 2027. Revenue was above our guidance range at a record $1.214 billion with year-over-year growth accelerating to an impressive 39%. Record non-GAAP EPS of $3.72 also exceeded our guidance range, reflecting continued excellent execution. Looking at our quarter by product area, Optical Communications revenue growth increased to 35% from a year ago. This was driven by a 55% year-over-year growth in Telecom revenue, which was fueled by strong growth in a wide range of products. Within Telecom, data center interconnect revenue grew a robust 90% from a year ago and 38% from Q2. And we believe strong longer-term DCI growth trends remain firmly intact. This remarkable telecom performance more than offset softer-than-expected Datacom revenue, which grew 4% year-over-year but declined 6% from Q2. Underlying Datacom demand remains exceptionally strong. In fact, demand during the quarter far exceeded what we were able to ship, meaning our reported revenue does not fully reflect the true momentum of the business. Right now, demand is outpacing the broader supply of certain components and we are actively working to narrow that gap. While we expect the supply/demand imbalance to persist into the fourth quarter, we remain optimistic that supply conditions will improve over time. Strong demand we are seeing today positions us well as that improvement unfolds. As we have outlined, our Datacom strategy is to continue supporting the strong demand trends we are seeing with our largest customer while actively expanding into new high-growth channels such as direct engagement with hyperscalers and partnerships with merchant vendors. With that in mind, we are happy to report that we have made meaningful tangible progress on both fronts. First, we're excited to share that we have successfully completed qualification and have already begun shipping 2 Datacom transceiver programs directly to a hyperscale customer with initial ramp starting in the fourth quarter. We expect volumes to ramp steadily throughout fiscal 2027 with these programs becoming a meaningful contributor to our Datacom revenue over time. Second, building on the groundwork laid over the last several quarters. We are on track to qualify and ramp multiple merchant transceiver programs, including several for data center scale-out applications with existing and new customers. We expect production to begin in the second half of the calendar year aligning with the early part of fiscal 2027, with additional ramps progressing into the second half of the fiscal year. We expect this combination of hyperscale and merchant program wins to further diversify our Datacom revenue and provide multiple new growth factors in the new year and beyond. In non-optical communications, revenue jumped 52% year-over-year and 8% sequentially from Q2. This growth was driven primarily by high performance compute revenue, which continues to ramp as we support our customers' transition to their latest product generation. At the same time, we are seeing encouraging traction beyond the current ramp with new program wins and expanded scope across additional products that we will be manufacturing to support their accelerated computing infrastructure. We're also increasing capacity to align with the customers' ambitious growth plans, reflecting a deepening and increasingly strategic relationship. Automotive revenue moderated in the third quarter as anticipated, with revenue decreasing modestly from Q2. This decline was more than offset by continued growth in Industrial Laser revenue, which was up 9% from a year ago and 7% from Q2. An important area of strategic focus for us over the past several years has been co-packaged optics or CPO. In this space, we are deepening our engagement with customers across the CPO ecosystem, including optical components, external laser source pluggables as well as other integrated precision optical packaging solutions, building on our long-standing silicon photonics expertise. CPO relies heavily on advanced semiconductor packaging technologies. And we have been actively investing to expand our capabilities in this area with a focus on scalable, high-quality manufacturing processes and broader system-level integration. This includes leveraging and extending our in-house silicon photonics expertise but also partnering with key technology providers to enhance our ability to deliver more integrated end-to-end manufacturing solutions. With that backdrop, we have made a minority investment in Raytek Semiconductor, a Taiwan-based provider of advanced wafer-level packaging technologies as an ecosystem partner. We already serve a number of common customers and expect this collaboration to further strengthen our capabilities and extend our offering. This investment supports our continued evolution from silicon photonics into more advanced packaging and integration solutions, reinforcing our role as a key manufacturing partner within the CPO ecosystem. Looking at our business as a whole, we are very excited by both the number and size of customer engagements for our advanced manufacturing services. The breadth and depth of these projects provides us with significant opportunities to demonstrate our differentiation and expertise that we've established as a key enabler for the success of our customers' most advanced products. As you know, we have been expanding our capacity to support our accelerating growth trends. We continue to make progress in the construction of Building 10, which will add 2 million square feet to our current 3.7 million square feet of space, with plans to be fully completed around the beginning of the new calendar year, we are on track to have a portion of Building 10 ready by next month, consistent with what we described last quarter. In addition to that, with our accelerated construction time line, we now expect to commission an additional floor in this 5-story structure by the end of September, with the rest of the building still scheduled to be completed by January. Beyond Building 10, we have sufficient land available at our campus in Chonburi for 2 additional buildings of more than 1 million square feet each. While this means we expect to have ample capacity available for the next several years, we continue to think ahead. In that context, we have recently acquired a building and land in the Nava Nakorn Industrial Estate in Thailand, not far from our Pinehurst campus. We have already begun renovations to make the existing 200,000 square foot building world-class clean room factory with sufficient space on the 8-acre site for additional expansion at a later time. In summary, our success in the third quarter extends well beyond our strong financial performance. We are particularly encouraged by the multiple new growth vectors we are adding across our Datacom business, while our diversified Telecom portfolio continues to show solid momentum, and our non-optical communications segment expands further. This combination of execution and strategic progress reinforces our confidence in sustaining our growth trajectory, extending our leadership position in the fourth quarter and carrying that momentum into fiscal year 2027. Now I'd like to turn the call over to Csaba for more details on our third quarter results and our outlook for the fourth quarter. Csaba?

Thank you, Seamus, and good afternoon, everyone. We delivered another record-breaking performance in the third quarter of fiscal year 2026. Revenue of $1.214 billion exceeded our guidance range with revenue growth accelerating to a remarkable 39% from a year ago and 7% from the prior quarter. Strong execution and FX revaluation tailwinds led to non-GAAP EPS of $3.72 that also exceeded our guidance range. Turning to revenue by market in the third quarter. Optical Communications revenue was $889 million, with revenue growth accelerating to 35% from a year ago and 7% from Q2. Within Optical Communications, Telecom revenue was a record $628 million, climbing 55% from a year ago and 13% from Q2. Within Telecom, revenue from data center interconnect modules or DCI, jumped to $197 million, growing 90% from a year ago and 38% from the second quarter. Datacom revenue of $260 million increased 4% from a year ago but moderated 6% from Q2 due to broadening component and material supply constraints in the quarter. Turning to non-optical communications. Revenue reached $326 million, growing 52% year-over-year and 8% sequentially from Q2. This strong performance was once again driven primarily by continued momentum in our HPC program, which delivered $107 million in revenue, up 25% from Q2. Automotive revenue declined slightly as anticipated to $115 million, while Industrial Laser revenue increased to $44 million. 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 third quarter was 12.1%, a 10 basis point improvement from a year ago and a 30 basis point decline from Q2 as anticipated, primarily due to foreign exchange headwinds. We continue to demonstrate operating leverage with operating expenses declining to 1.4% of revenue. This resulted in an operating margin of 10.7%, a 50 basis point improvement from a year ago and 20 basis point decline from Q2. Interest income was $7 million, and we saw a foreign exchange revaluation gain of $7 million in the quarter. Our effective GAAP tax rate for the quarter was 6.7%. We expect our tax rate to moderate in Q4, resulting in a mid-single-digit effective GAAP tax rate for the year. Net income was a record $135 million or $3.72 per diluted share. Turning to our balance sheet. We ended the third quarter with cash and short-term investments of $946 million, down $16 million from the end of Q2. Operating cash flow for the quarter was $53 million. Capital expenditure spending of $64 million reflects continued accelerated construction of Building 10 as well as capacity expansions to support the rapid growth across the business. As a result, free cash flow was an outflow of $11 million in the quarter. Before getting into our guidance, I want to provide some additional color on our recent capital allocation decisions. As Seamus mentioned, we have made a minority investment in Raytek Semiconductor to support our efforts in advancing manufacturing solutions for CPO. In April, we completed a private placement of approximately $32 million for 20 million shares of Raytek, representing approximately a 14% position. This investment deepens our partnership and supports our joint efforts toward bringing CPO technology to market at scale. Early in the fourth quarter, we expect to complete the purchase of an 8-acre campus Nava Nakorn Industrial Estate, Thailand, located approximately 15 minutes from our Pinehurst campus. The Nava Nakorn facility currently consists of a 200,000 square foot building with additional space on the site for future expansion. We have already initiated minor renovations to support world-class clean room manufacturing capabilities, and we expect to begin utilizing the space early next quarter. The total purchase price of $11 million will be reflected in our fourth quarter financials. With our very strong balance sheet, we are well positioned to deploy capital efficiently, support our growth initiatives and continue to generate superior returns while remaining committed to returning surplus cash to shareholders through our share repurchase program. In the third quarter, we did not repurchase a meaningful number of shares. However, our share repurchase program remains active, and we ended the quarter with approximately $169 million available under our current authorization. Now turning to the details of our guidance. We expect revenue in all major product categories to increase in the fourth quarter despite a broader supply constrained environment. With Datacom growth expected to be more measured as we continue to navigate component availability that is not keeping pace with strong demand. At the same time, we are excited by the number of new customer programs coming online which we expect will contribute more meaningfully to our performance in fiscal year 2027 than in the fourth quarter. With that backdrop, we expect total revenue to be in the range of $1.25 billion to $1.29 billion, representing year-over-year growth of approximately 40% at the midpoint. We expect gross margin dynamics to be similar to Q3 with continued operating leverage as top line growth continues. As a result, we expect non-GAAP EPS to be in the range of $3.72 to $3.87. In summary, our third quarter results were exceptional, with record revenue and earnings that exceeded our guidance as growth continued to accelerate. We also made strong progress against our longer-term strategic priorities, establishing additional vectors of sustainable growth that we expect to begin contributing as early as the fourth quarter, positioning us to extend our strong track record into fiscal 2027 and beyond. Operator, we are now ready to open the call for questions.

[Operator Instructions] And our first question comes from George Notter from Wolfe Research.

I just wanted to double-click on the Datacom business. I know that last quarter, you talked about having some new supply of 200-gig per lane EMLs coming online that would help support growth in the Datacom business. It sounds like that didn't happen. I'm just wondering kind of what's going on in terms of EML supply. Is that the gating item you're referencing? Or are there other components that are problematic now? Anything more you can tell us there would be great.

Yes. There's -- this is Seamus. Yes, there's a number of, I guess, commodities, you could say that are causing us constraints. First of all, we're very excited at the breadth and depth of the opportunities we see in front of us, not just with our main customer, but across a number of new products, new markets for us. Since we started to see the revenue accelerate from this AI-driven demand, our strategy has been to support the existing demand and also pursue while pursuing additional hyperscale direct and also merchant relationships. So we're -- we're excited with the progress we're making there and what we're managing right now. It's not demand risk, it's supply constraints. With respect to Datacom supply, we saw a broadening of supply shortages for components and materials for Datacom products. And as a result, shipments and revenue were well below demand levels. We could have shipped a lot more if we had those components. Without these supply constraints, Datacom revenue would have been a new record by a wide margin. While we expect the constraints to get resolved over time, we do have to deal with them right now in the near term, we anticipate that supply volatility will continue. And it's in a number of areas. It's not only one component. It's a number of areas, mainly lasers, memory, which I think is no secret that there's a global shortage of memory and also certain ASICs. So it's across a number of commodities.

Great. And then I just wanted to ask one also on CPO. I just want to be clear on where you guys see your opportunity in CPO. I guess I assume that ELSFPs that go into CPO switches are kind of a real natural for you guys. Are you also going to manufacture other elements of CPO switches? I mean, historically, you guys have not really been involved in manufacturing the switches themselves. But obviously, this is a unique architecture. There's a giant amount of sort of fiber attached that goes into your fiber tech units into that CPO package. I just want to be clear on what you guys see yourselves kind of doing in terms of that manufacturing exercise.

Yes. So for us, CPO for us is really an evolution from silicon photonics and precision photonics packaging capabilities that we've had for many years. And it continues to be an area of investment for us to align our capabilities with our customers' road maps. For many years, CPO has been just on the horizon, but it's a lot more real now than it's ever been. We're in an excellent position to benefit. We feel we're well ahead of our competitors in making this technology a reality. And we're already seeing some CPO revenue, though the amounts are relatively small at this point. We're working on a number of CPO programs with 3 different customers. The specific timing on each of them, we don't really want to speak on their behalf, but we're working on 3 separate programs. And as with our custom programs, we expect to see the impact in line with or slightly ahead of our customers production schedules. So the growth in CPO is in front of us. And as you rightly point out, there are several opportunities for us in CPO, and we feel we can participate at a maybe a higher level of the food chain than we have historically. So we're excited about CPO.

Our next question will come from Karl Ackerman from BNP Paribas.

I have 2, if I may. Seamus, do you believe you will be at the full run rate of the current HPC program in June. I think the previous expectation was March and June time frame. And I guess, how much visibility do you have with that follow-on program? I have a follow-up, please.

Yes. So our current HPC program is ramping according to our customers' expectations. It's not ramping in a perfect straight line. These things never do. But we've been working closely with the customer to transition production to their latest generation product, and that transition is making good progress. We've also been awarded some follow-on business for additional programs, separate from the main, if you like, the main programs. We've been awarded some additional programs with that customer. So we're really helping to support their accelerated computing infrastructure in a broader way than have been in the past. We're installing additional capacity right now to support both the technology transition and also the additional products that we'll be manufacturing. Because of this technology transition, we now believe that $150 million mark will be pushed out by maybe 1 quarter. But as a result, we expect our high-performance compute revenue to continue growing even after we reached the first $150 million quarterly revenue milestone. So short term, this quarter, let's say, we don't think we get to the $150 million, but we think it's probably a quarter away, but longer term because we're now making more than just, if you like, one family of products, we think the opportunity is more than that. So like I say, while the timing has shifted slightly, the overall trajectory is stronger, actually, and we expect continued growth beyond that $150 million level. And we remain very optimistic about the long-term outlook for our high-performance compute business overall.

Very helpful. And then maybe for Csaba. Building 10, that was 2 million square feet. We're adding a fifth floor. So is it 2 million square feet still the case? Or is it presumably 2.5 or so. And then with respect to the 2 additional buildings of 1 million square feet, given the high ROIC and relatively low upfront cost of building this new manufacturing fab, how quickly can you accelerate these manufacturing facility investments, so you're not capacity constrained for these very large opportunities?

So Karl, maybe I'll just comment first on the capacity. Right now, our current capacity, we have capacity for about $4.8 billion in our current footprint. As we mentioned on the last call, we're converting about 200,000 -- sorry, about 120,000 square feet at our Pinehurst campus into manufacturing space that will add an additional $200 million of capacity. So that would take our capacity up to [ $5 million ] before Building 10. Building 10 would add about $3 billion of capacity. And then the new factory that we just purchased in Nava Nakorn down the road from us, initially, that will have capacity for about $250 million in the current factory that's on that land, but then there's room to build another factory. So overall, that purchase will give us capacity for about another $0.5 billion. So $4.8 billion in our current footprint, plus the Pinehurst addition plus the Nava factory plus Building 10, that would take us to a capacity of about $8.5 billion, if you add all that up. And then building -- and the timing on Building 10, as we talked about the first floor of that will be coming on stream in June, and we plan to have another floor ready, which will be mostly a clean room space by September, October. And then the building will be finished by the end of the year, we'll probably have the opening ceremony in January towards the end of January. Building 11, which we haven't broken ground on that yet, but Building 11 would give us capacity for about another $1.5 billion of revenue and Building 12 the same. So if we were to build out everything we have on the current land and space that we have that would give us capacity for $11.5 billion there or thereabouts, probably a little bit more because while our growth is accelerating, our revenue per square foot is also going in the right direction. It's increasing as time goes on. So $11.5 billion fairly conservatively, probably a little bit more. The timing of that, it's too early really to talk about that part at this stage. We're focused on meeting our customers' needs, making sure we have capacity in place. So we have ample capacity for the next few years, but we are seriously considering what the timing might be for Building 11 and Building 12. We're also looking for additional land in and around both the Pinehurst campus and also Chonburi. So high quality problems.

Our next question comes from Samik Chatterjee from JPMorgan.

Seamus, maybe if I can start with the new Datacom customer opportunities that you outlined with both the hyperscaler and some of the merchant opportunities. Can you help us sort of size that in terms of what these customers are communicating to you in terms of what their demand will look like at full run rate? Just trying to compare it to your primary customer with whom you're doing about sort of $250 million a quarter or so. How do these new opportunities sort of size up relative to that? And is the supply chain different where we should not expect some of the supply constraints you have with your primary customer to impact the ramp with the new customers that you have. And I have a follow-up after that.

Yes. I think the supply chain is broadly similar across most of these primarily scale-out applications. It's very similar supply chain. Taking both of those in turn that you just mentioned, so the hyperscale relationship. Yes, we're excited about the new Datacom opportunities where we announced today. They're 2 separate products, and we've already begun shipping, albeit in small qualification type quantities, but we've begun shipping those, and we expect that growth is already in front of us. And we believe it will be significant. It's a significant piece of business for us. The demand that we're seeing from the customer is very significant, and we are very focused on making sure we have the right capacity and capability and everything else in place to support the customer. In terms of merchant programs, again, for several quarters, we've been working towards expanding our Datacom business to encompass again, to direct hyperscalers as we talked about, but also deepening and broadening the merchant relationships, and we have made sizable progress there. We have a couple of programs there as well that we're working on. So both very significant, both the hyperscale direct and the merchant, both very significant and have the potential to be very meaningful revenue contributors for us. But like as I say, both of those -- all of those opportunities are essentially a very similar supply chain kind of ecosystem. I hope that makes sense.

Yes. Okay. Seamus, maybe I'll just ask you a clarification question on that and have a question for Csaba. Are you expecting that these programs stand-alone are like 10% of your revenue? Is it that sizable relative to the opportunity? And then, Csaba, just the gross margin outlook here, like it sounds like you'll be at this sort of low 12% for the next quarter as well? How should we think about the recovery on the gross margin profile, particularly as ramp costs continue to sort of feed through the P&L?

Yes. On the contribution from these customers, we never predict which customer may or may not become a 10% customer. We always talk about that at the end of the year when we have to disclose which customers are 10% customers. So we only talk about that looking back. We never talk about it looking forward. But there are few other significant opportunities. That's all I'd say about that. And then on the gross margin, I'll let Csaba provide a little bit more color on the gross margin.

Samik, so basically, what we are seeing on gross margin is a combination of external and internal factors. On the external side, we have been communicating exchange rates, which have been a headwind for a while and that dynamic continues into this quarter. So the margins from exchange rate perspective will be similar in our Q4 as it was in Q3. Obviously, we have some visibility with our hedging program in place. So Q3 panned out as much as in terms of headwinds as we had anticipated. So Q4, we anticipate to be at that same level. Obviously, at the same time, we are ramping a large number of new programs across multiple growth factors, which is sometimes creates short-term inefficiencies. So obviously, this is a function of strong demand and the pace we are scaling the business. So as this programs mature, we do expect those efficiencies to improve and get back to our higher margin ranges. Obviously, the good news is that we are very disciplined on the operating expenses. As you saw last quarter, we continued to generate operating leverage and OpEx is trending down overall as a percentage of the revenue. Last quarter, we were at 1.4%. So while there are some near-term pressures on gross margin, some of it we cannot control from an exchange perspective, but the overall model continues to deliver a very, very strong and solid and improving profitability as we scale. So we feel very good about the underlying model and our ability to drive long-term profitability growth. And obviously, our ultimate focus is to remain driving strong return on capital and delivering consistent value to shareholders as we scale these programs.

Our next question comes from Christopher Rolland from Susquehanna.

This is Dylan Ollivier on for Chris Rolland. So for my first question, I wanted to ask, you spent some time talking about CPO and your role here. So you mentioned that you're working with 3 customers or 2 programs and that you've begun getting revenue now. So are all these programs getting revenue today? And then any color you could provide on if these are all scale out or if any of these engagements are related to scale up.

We are shipping to all 3 customers. They're both scale up and scale out. They're both scale up and scale out. And we're really putting the capacity in place and making sure we have the right technology in place. You'll see with our investment in Raytek. It's really to help us make sure we have the right capability. So we are excited about CPO, but it's largely -- the revenue is largely in front of us at this point.

Great. And then for my second question, I wanted to ask maybe about another opportunity that you didn't discuss on this call, OCS is kind of seeing its a nice little explosion right now. Are you -- any sort of color that you can provide on our engagements are going, when do you think this can materialize and if you can get a dominant share of the externally contracted OCS market?

Yes. So OCS remains. We think it's a great opportunity for us as we look ahead. The technology is very similar to products that we already make for our customers. So it gives us a real head start versus our competition. There's no change in our optimism about OCS. But to be clear, the new merchant opportunities that we talked about earlier that they are not OCS related, they're separate. But yes, we -- OCS opportunities are incremental to that. And again, similar to CPO are largely in front of us. But we're focused on 1 or 2. It's too early to talk about them yet until we have something to talk about, but we're pretty excited about OCS as a segment.

Our next question will come from Ryan Koontz from Needham & Co.

I just want to ask a little more generically regarding your transceiver wins. Can you just expand for us kind of where you would be in your milestone process before you'd announce to us that you have a win? Is it you have a contract, you have qualification, you have sampling? I'm not asking specifics about a single customer, but generically, at what point do you typically disclose and might we consider these different programs in the process between ramping material revenue and maybe an MOU that's not contractually bound.

Yes. It's a good question. Actually, generally, we don't really talk about wins until we have actually won the program. So that would mean we have been awarded the business. We have a contract in place. We have purchase orders. We've been qualified and approved. So we're really at that milestone phase where we're getting ready to ramp at this point. Ryan, that's really our -- we don't really signal specifics on new programs until we have them won. That's generally how we've tended to do things historically because not all products that you think you've won early on turn into real products or real demand. So in this case, I'm happy to report here, we have a number of programs that we won, like I say, contracts in place, product being shipped, contract signed with customers. So we've actually won those.

That's helpful, Seamus. And then give us a follow-up just on your strength in Telecom. Obviously, DCI and it's a big star there. How would you characterize your customer mix within Telecom is changing? Can you share anything about kind of the product mix there? 400, 800ZR, I mean I know you guys pretty much touch everything going on there, but are you seeing some industry shifts that are working in your favor within the Telecom mix?

Yes, I think there are. We're really -- our position supplying the DCI market is very strong. We have really all of the major players there as customers of ours. And as we talked about in the prepared remarks, our growth in DCI has been pretty staggering. And our Datacom -- I'm sorry, our Telecom portfolio continues to go from strength to strength. We don't just provide components, we provide the DCI, the 400ZR, 800ZR modules as well as our telecom systems. So we really -- I suppose we've really evolved our business from being a niche optical component supplier, which we were several years ago into a diversified strategic ecosystem partner for the leading OEMs. For both optical components, but also systems across all dimensions of AI-driven growth in both Datacom and Telecom. And like I say, the best example of that is probably our strength in in DCI, data center interconnect. So the demand looks to be very strong. We continue to win business in that space and continue to execute very well for our customers. And there's a number of new programs that we're working on as well. as well as ramping the existing programs as new products in the works as well that we're not shipping in volume yet, but we're gearing up to ship. So we feel very good about our momentum in DCI with the leading customers there.

Helpful. And do you consider multi-rail an opportunity for you in your wheelhouse there to go within telecom sector?

I think it's -- anything in the telecom space where we can have a good high level of content is a good fit for us. So yes, certainly, those type of products will be a good fit for us.

Our next question comes from Steven Fox from Fox Advisors, LLC.

Seamus, I guess I was curious on the supply constraints. It sounds like they got worse during the quarter. And at the same time, it sounds like even if we think about just end market demand, end markets are getting stronger. So can you paint a picture for how constraints don't get worse going forward and how you manage through this and start catching up with demand? Is there any line of sight to improvements? And then I had a follow-up.

Yes. I think we're not unduly concerned long term, but we do feel obliged to point it out in the short term because we guide 1 quarter at a time. It did impact our ability to ship last quarter, we could have shipped a lot more if we had those components and the same this quarter. But overall, it's really a function of the growth that we see in the industries that we serve and in our business overall. That growth -- we're very proud of our track record of excellent execution built on dedication to customer service. That's really the secret sauce here. That track record is what has allowed us to deliver this outsized growth we've seen over the last while. If you look over a 10-year period, Steven, up to FY 2025, we compounded the revenue growth 16% annually, the compounded earnings 22%. And then in FY 2025, we grew 19% versus FY '24. And if you look at FY '26, since we're now in Q4, if you take the midpoint of our Q4 guidance, that will put us up 34% versus FY '25. So FY '25 grew 19% versus FY '24, FY '26, at the midpoint of our Q4 guidance would be up 34% versus FY '25. So growth is accelerating. And with that acceleration of growth, it does expose certain supply constraints. The component supply ecosystem is doing everything they can to catch up with the demand. But there is a lag right now between the demand we're seeing and the supply base catching up with that demand. And really our focus is on execution and ensuring we capitalize on this really strong demand environment that we're seeing by having more than enough capacity in place to support each of our customers while we work on these challenges in the supply chain. So it's nothing unusual. We think it's really a function of just this explosive growth we're seeing.

That's fair. And then just one other question on the flip side of that, you're accelerating your own capacity additions. I guess if we started today as another starting point, like your ability to accelerate further like what else would you have to see? Would it be more in programs or loosening up of the supply chain that you -- the supplies you need? And how long would that take?

I think -- for us, it sounds like we're adding a lot of capacity. They're quite straightforward, if you like, capital allocation decisions for us because of the huge upside potential, we guess, we build a 2 million square foot factory that will give us capacity for an addition of $3 billion of revenue. The CapEx is just -- depends on the exchange rate on the day you look at it, whether it's $130 million, $132 million, something like that. The upside opportunity for us at full run rate in that factory. 6 months' worth of operating profit would pay for the entire 2 million square feet of manufacturing space. On the downside, if there is a downturn, and we end up with no new business going into that factory, which we don't anticipate, but just if we did, if that were to happen, the gross margin headwind would be about 50 basis points, something like that. So a negligible headwind and a significant upside opportunity. So that makes these decisions for us relatively straightforward. The capacity is very is fungible, whether it's the 2 million square feet in Chonburi, or the -- a couple of hundred thousand square feet that we just acquired in the Nava Nakorn or the 150,000 square feet that we're converting in Pinehurst. The capacity is very fungible. And the customers are very comfortable working -- most of the customers are very comfortable having us build their products in either location. So -- and like I said earlier, we have room to add 2 additional factories in Chonburi, and we can have another 200,000 square foot factory on the land which was purchased in the Nava Nakorn So we have ample land and capacity to see us through the next several years and then we continue to look for more land. So certainly, as we're seeing the strong demand segments seen from our customers making those capital investments is a relatively straightforward decision for us because it's -- we're not taking any big risks. We're just really making sure we have capacity in place to support the needs of our customers, and that's really our focus.

Our next question comes from Michael Genovese from Rosenblatt Securities.

Seamus, in talking about the direct hyperscale Datacom business, I think you mentioned that there's 2 products. Can I ask, does that imply an 800G and a 1.6 or are they to two 800G products? Can you comment on that?

They're both 800 gig, but they are different applications. They scale across. They're both scale across -- sorry they're both scale out.

Perfect. Okay. And then on the -- I mean just very good DCI growth this quarter, and I think you were asked, but is a little bit more kind of vaguer question. I just want to ask a little bit more pointedly, if 800ZR in particular, drove an outsized portion of the growth this quarter or if it was more broadly spread. And then I also noticed that you had some telecom growth above and beyond DCI. So if you could just call out those products that were not DCI that also grew in telecom, that would be helpful.

Yes. So on the mix between, let's say, 800ZR and 400ZR, it's probably more appropriate for our customers to talk about that. But really 800ZR is ramping, I would say it's getting going, and we do have very big hopes for that. It looks to be a very strong product. But again, the growth like a lot of these programs that we've won despite the fact that we've demonstrated really excellent growth, we think this past while. A lot of those new programs are really in front of us that are just beginning to ramp. And I would put 800ZR in that category. And your second question?

Just the telecom growth that was above and beyond, DCI didn't drive 100% of the Telecom growth. There was more Telecom growth than DCI. So if you could just call out some of the strong products outside of DCI and Telecom, that would be helpful.

Yes, we continue to win -- we continue to win business with our customers, both DCI but also outside of DCI, both in -- at the component level and also at the system level with a number of our customers. We continue to win business, mostly share gain maybe from some of our competitors. So that continues at a pace with our customers. We're very fortunate. We have the -- we believe, some of the really best companies in the industry, and the demand for their products is very strong. And because of the -- we believe, a very good job we do, taking care of them and executing, they reward us by giving us more business. So it's a kind of a self rewarding loop. The better we do, the more -- the better job we do executing for the customers, the more business they seem to give us. So it's a combination, like I said, of both the growth in DCI. It's also ramps of programs we've been awarded previously, and thirdly, new business that our customers continue to award us.

[Operator Instructions] And our next question will come from Tim Savageaux from Northland Capital Markets.

Seamus, I'm going to take you back to OFC. And I think you commented that you wished you guided farther out sometimes. And I'm going to try and to afford you that opportunity here with the following contracts.

I appreciate that.

I know my pleasure. In the context to some comments you've made earlier in the call about maintaining momentum into '27, you mentioned '27 and sustaining this growth trajectory. Now as I look at these Datacom wins, maybe by themselves, but -- and I have a follow-up question on that. But I mean it seems to me quite plausible that you could sustain if not accelerate this 34% growth rate that you're putting up in fiscal '26. Any comments on that?

Well, I think again, as you point out, yes, FY '25 grew 19%. FY '26 will grow at 34% versus FY '25 at the midpoint of our guidance. And the thing that we're particularly, I suppose, proud of is we've managed to do that if you look at, again, FY '26 at the midpoint of the guidance. If you take this quarter, for example, compared to the same quarter a year ago, we grew the revenue from $872 million to $1.214 billion, so 39% year-over-year growth in Q3. Our operating expenses grew by 6.2%. We went from $16 million to $16.99 million. So we grew the OpEx by a mere 6.2%. So therefore, on revenue growth of 39%, our operating income grew 46% and our net income grew 48%. So growth without profit is not much fun for anyone. So we're very focused on making sure as we grow that we're very cautious with the use of the company's resources and the company's assets, but that we also execute in a way that allows us to get that operating leverage that we've been delivering for quite some time. The growth is accelerating. There's no doubt about that. And certainly, the demand segments we see from our customers. There's always things going on in the world that we don't control. So we don't worry too much about those things, because we can't do anything about them other than respond to them. But certainly, if you look at the key fundamentals that drive our business and that allow us to make these capital allocation decisions and if you like, investments and expansion decisions, it looks to be very promising. And for some time to come, it looks to be very promising. Again, we'll continue to guide one quarter at a time, Tim. But at the same time, that doesn't stop us from being optimistic about the future. And certainly probably more optimistic than we've been in quite some time. It's a very, very strong demand pipeline that we're seeing across the board, both Telecom and Datacom. And also our Industrial Laser business, we're seeing some growth there, and we're making some traction there with some new business wins. So it's really across our business.

Okay. And along those lines, would you expect your 2 Datacom direct wins to be in full ramp, I guess, by the end of fiscal '27 or maybe even earlier than that?

I think probably earlier -- sorry, Tim, I didn't mean to cut across you. I think earlier than the end of fiscal '27 probably middle -- kind of middle of fiscal '27.

Great. And then last one for me is on the merchant wins, and maybe I'll -- because who knows these could be related. I want to combine that with a question about outsourcing opportunities from some of your historical, let's say, onetime 10% customers. But how do you -- I guess, how should we look at those merchant opportunities? I mean, look, on these direct things, it doesn't seem to be any reason that any one of those 2 guys could be as big as your current big Datacom customer at least. But from a merchant standpoint, how should we be thinking about that in terms of those opportunities and how they ramp? And indeed, does that kind of cross over to the boundary of outsourcing?

Yes. I think, yes, certainly both of the opportunities, both the hyperscale direct, which will probably ramp throughout FY '27. With any new program, it's hard to say exactly how quickly it will ramp, but it'll probably ramp throughout FY '27. On the merchant opportunities, again, some of these opportunities are very significant. The demand is very strong. And for us, we don't really mind who we're making, for example, transceivers. We don't mind who we're making transceivers for as long as we're making somebody else's design because we're really adamant about that, Tim. We're a service company. We will never have our own products. We never compete with our customers. It's very, very important for us, and it's very important for our customers. So we have to make sure we thread that needle carefully and never end up in a situation where we have a product design. So we don't have that. We're facilitating our customers with somebody else's design and we just happen to manufacture it. But certainly, the demand is very strong. Even if you were to take a relatively modest percentage of the -- of any hyperscalers demand and if we were to be able to supply a relatively modest percentage with a product that we can ship direct and it's still very significant. So we're very focused on it. Those represent a big opportunity. You're exactly right. And any one of these could be a significant opportunity worth noteworthy and worth talking about. And the exciting part is we have several of these. We have, like I say, 2 separate programs shipping to a hyperscaler. And we have merchants business, and we have our main customer as well. So -- and we haven't really talked that much on this call about our Telecom business, which again goes from strength to strength. So lots of growth factors.

Thank you. And I am showing no further questions from our phone lines. I'd now like to turn the conference back over to Seamus Grady for any closing remarks.

Thank you for joining our call today. We are excited to have delivered another impressive quarter that exceeded our guidance. Moreover, we're very enthusiastic about the several key new business opportunities that will further support our strong growth starting in the fourth quarter and that also positions us to extend our remarkable performance record into fiscal year 2027. We look forward to speaking with you in the future and to seeing those of you who will be attending the upcoming Needham and JPMorgan conferences. Thanks again, and goodbye.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.