Fabrinet (FN) Q3 2026 Earnings Transcript

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DATE

May 4, 2026, 5 p.m. ET

CALL PARTICIPANTS

• Chairman and Chief Executive Officer — Seamus Grady
• Chief Financial Officer — Csaba Sverha

TAKEAWAYS

• Total Revenue -- $1.214 billion, representing 39% growth year over year and 7% sequentially from Q2.
• Optical Communications Revenue -- $889 million, increasing 35% year over year and 7% from Q2, with telecom revenue at a record $628 million.
• Data Center Interconnect (DCI) Revenue -- $197 million, up 90% year over year and 38% from Q2.
• Datacom Revenue -- $260 million, up 4% year over year but declining 6% from Q2 due to broadening component and material supply constraints.
• Non-Optical Communications Revenue -- $326 million, up 52% year over year and 8% sequentially from Q2, driven by high-performance compute (HPC) at $107 million.
• Gross Margin -- 12.1%, an improvement of 10 basis points year over year but a 30 basis point decline from Q2, attributed to foreign exchange headwinds.
• Operating Expenses -- 1.4% of revenue, marking continued operating leverage and cost control.
• Operating Margin -- 10.7%, up 50 basis points year over year, and down 20 basis points from Q2.
• Non-GAAP EPS -- $3.72 per diluted share, exceeding guidance and previous records.
• Net Income -- $135 million, highest on record for the company.
• Cash and Short-Term Investments -- $946 million held at quarter-end.
• Operating Cash Flow -- $53 million, a decrease of $60 million from Q2, primarily due to capital spending.
• Free Cash Flow -- Outflow of $11 million, reflecting accelerated capacity investments.
• Capital Expenditures -- $64 million during the quarter, focused on Building 10 and overall business growth.
• Raytec Semiconductor Investment -- $32 million minority stake (14%), strengthening advanced packaging and CPO initiatives.
• Navanakorn Facility Acquisition -- Purchase of an eight-acre campus with 200 thousand square foot building for $11 million, expanding clean-room manufacturing capacity.
• Share Repurchase Program -- $169 million authorization remaining, with no significant repurchases during the quarter.
• Q4 Revenue Guidance -- $1.250 billion to $1.290 billion, targeting roughly 40% year-over-year growth at the midpoint.
• Q4 Non-GAAP EPS Guidance -- $3.72 to $3.87 anticipated range.
• Capacity Expansion -- Current footprint supports $4.8 billion in revenue, rising to $8.5 billion with ongoing and planned additions, including Building 10 and Navanakorn.
• DCI and Telecom Growth -- All major players as customers, with "staggering" DCI and telecom growth cited.

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RISKS

• Management highlighted that "shipments and revenue were well below demand levels" in datacom due to component supply shortages in lasers, memory, and ASICs, which "is not demand risk; it is supply constraints."
• Gross margin was pressured by foreign exchange headwinds, with similar challenges expected in Q4.
• Operating cash flow declined by $60 million from Q2.
• Datacom revenue moderated 6% from Q2, with management expecting continued supply-demand imbalance into the next quarter.

SUMMARY

Management reported that customer demand substantially outpaces current shipping capacity in several key product categories. Fabrinet (NYSE:FN) launched two datacom transceiver programs with a hyperscale customer, shipping initial volumes and projecting significant revenue ramp through fiscal 2027. The company secured and is beginning production on multiple merchant transceiver programs for datacenter scale-out, with initial manufacturing targeted for the early part of fiscal 2027. A $32 million minority investment in Raytec Semiconductor aims to advance Fabrinet’s role in co-packaged optics, broadening future growth potential in optical packaging. Facility acquisitions and expansions in Thailand reflect proactive capital deployment to meet anticipated multi-year demand, including additional clean room capacity and ample land for further growth. Strategic diversification across hyperscale, merchant, and automotive programs is combined with broadened telecom relationships, strengthening positioning in fast-growing segments.

• Seamus Grady stated, "We could have shipped a lot more if we had those components," highlighting material supply bottlenecks limiting revenue conversion.
• Csaba Sverha noted that ramping new programs across growth vectors will "creates short-term inefficiencies." impacting gross margin, but "As these programs mature, we do expect those efficiencies to improve."
• The company expects "and capacity for the next several years" but is "seriously considering what the timing might be for Building 11 and Building 12, and we are also looking for additional land" for long-term expansion.
• Operator queries and management responses confirmed that opportunities in OCS and CPO are "incremental" and expected to be meaningful contributors in the coming periods.
• Seamus Grady confirmed "ramping according to our customer's expectations." for its high-performance compute program, but signaled a one-quarter delay in reaching $150 million in quarterly revenue due to ongoing technology transition, after which growth is projected to accelerate further.

INDUSTRY GLOSSARY

• CPO (Co-Packaged Optics): Integrated optical and electronic components packaged together to minimize latency and power consumption in advanced networking infrastructure.
• DCI (Data Center Interconnect): Optical transceivers or systems enabling high-bandwidth connectivity between data centers, often over metropolitan or regional distances.
• HPC (High-Performance Compute): Specialized manufacturing for products used in data-intensive computing environments, such as supercomputers and AI clusters.
• OCS (Optical Circuit Switch): Networking equipment that routes optical signals directly at the circuit level, commonly used to optimize datacenter network topologies.
• ZR Modules (400ZR, 800ZR): Industry-standard pluggable coherent optical modules for high-speed, long-haul, and data center interconnect applications at 400 Gbps and 800 Gbps, respectively.
• ELSFP (External Laser Source Pluggable): Removable optical modules that use external lasers, typically deployed for advanced optical switch architectures such as CPO.
• Merchant Transceivers: Optical modules manufactured by third-party OEMs rather than by the datacenter or hyperscale operator, often for standard, high-volume applications.

Full Conference Call Transcript

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 Investor 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.

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 02/03/2026. 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.

Seamus Grady: 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 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. The 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 are excited to share that we have successfully completed and have already begun shipping two 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 vectors 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 are 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 Raytec 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 provide us with significant opportunities to demonstrate our differentiation and expertise that we have 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 timeline, we now expect to commission an additional floor in this five-storey structure by 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 two 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 Navanakorn Industrial Estate in Thailand, not far from our Pinehurst campus.

We have already begun renovations to make the existing 100 thousand square foot building a world-class clean room factory, with sufficient space on the eight-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 would like to turn the call over to Csaba for more details on our third quarter results and our outlook for the fourth quarter.

Csaba Sverha: 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.

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. Automotive revenue declined slightly as anticipated to $115 million, while industrial laser revenue increased to $44 million, up 25% from Q2.

As I discuss 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 a 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. Operating cash flow for the quarter was $53 million, down $60 million from the end of Q2. 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 Raytec 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 Raytec, 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 eight-acre campus in Navanakorn Industrial Estate, Thailand, located approximately fifteen minutes from our Pinehurst campus.

The Navanakorn facility currently consists of a 200 thousand 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 that 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 $1.250 billion to $1.290 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: We will now open the call for questions. Thank you. Ladies and gentlemen, to ask a question, please press 1-1 on your telephone, then wait for your name to be announced. To withdraw your question, please press 1-1 again. Our first question comes from George Notter from Wolfe Research. Your line is open.

George Notter: Hi, guys. Thanks very much. I just wanted to click on the datacom business. I know that last quarter you talked about having some new supply of 200-gig-per-lane EML coming online that would help support growth in the data business. Sounds like that did not happen. I am just wondering what is going on in terms of EML supply. Is that the gating item you are referencing, or are there other components that are problematic now? Anything more you can tell us there would be 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 assume that ELSFP 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 have not really been involved in manufacturing the switches themselves, but obviously CPO is a unique architecture. There is a giant amount of fiber attached that goes in here and fiber tech units into that CPO package. I just want to be clear on what you guys see yourselves doing in terms of that manufacturing exercise. Thanks a lot.

Seamus Grady: Hi, this is Seamus. There are a number of commodities you could say that are causing us constraints. First of all, we are very excited at the breadth and depth of the opportunities in front of us, not just with our main customer but across a number of new products and 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 while pursuing additional hyperscale direct and merchant relationships. We are excited with the progress we are making there. What we are managing right now is not demand risk; it is 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 is in a number of areas. It is not any one component. It is mainly lasers, memory—there is a global shortage of memory—and also certain ASICs.

On CPO, for us it is really an evolution from silicon photonics and precision photonics packaging capabilities that we have had for many years, and it continues to be an area of investment for us to align our capabilities with our customers' roadmaps. For many years, CPO has been just on the horizon, but it is a lot more real now than it has ever been, and we are in an excellent position to benefit. We feel we are well ahead of our competitors in making this technology a reality. We are already seeing some CPO revenue, but the amounts are relatively small at this point. We are working on a number of CPO programs with three different customers.

The specific timing on each of them we do not want to speak to on their behalf, but we are working on three separate programs, and as with our customer programs, we expect to see the impact in line with or slightly ahead of our customers' production schedules. There are several opportunities for us in CPO, and we feel we can participate at a higher level up the value chain than we have historically. We are excited about CPO.

Operator: Thank you. Our next question will come from Karl Ackerman from BNP Paribas. Your line is open.

Karl Ackerman: Yes, thank you. I have two, 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 timeframe. And how much visibility do you have with that follow-on program? And then for my follow-up, on Building 10, that was 2 million square feet adding a fifth floor. So is the 2 million square feet still the case, or is it presumably maybe two and a half or so?

And with respect to the two 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 are not capacity constrained for these very large opportunities?

Seamus Grady: Our current HPC program is ramping according to our customer's expectations. It is not ramping in a perfect straight line—these things never do. We have been working closely with the customer to transition production to their latest generation product, and that transition is making good progress. We have also been awarded some follow-on business for additional programs separate from the main programs with that customer. We are installing additional capacity right now to support both the technology transition and the additional products we will be manufacturing.

Because of this technology transition, we now believe that the $150 million mark will be pushed out by maybe one quarter, but as a result we expect our high-performance compute revenue to continue growing even after we reach the first $150 million quarterly revenue milestone. So in the short term, this quarter, we do not think we get to the $150 million, but we think it is probably a quarter away. Longer term, because we are now making more than just one family of products, we think that opportunity is more than that. While the timing has shifted slightly, the overall trajectory is stronger, and we remain very optimistic about the long-term outlook for our high-performance compute business overall.

On capacity, right now our current footprint has capacity for about $4.8 billion of revenue. As we mentioned on the last call, we are converting about 120 thousand square feet at our Pinehurst campus into manufacturing space that will add an additional $200 million of capacity, taking us to $5.0 billion before Building 10. Building 10 would add about $3.0 billion of capacity, and then the new factory that we have purchased in Navanakorn down the road from us, initially, will add capacity of about $250 million in the current factory that is on that land, with room to build another factory. Overall, that purchase will give us capacity for about another $500 million.

So $4.8 billion in our current footprint plus the Pinehurst addition plus the Navanakorn factory plus Building 10 would take us to capacity of about $8.5 billion if you add all that up. The timing on Building 10: the first floor will be coming on stream in June, and we plan to have another floor ready—which will be mostly clean room space—by September or October, and then the building would be finished by the end of the year, with the opening ceremony in January. Building 11, which we have not broken ground on yet, would give us capacity for about another $1.5 billion of revenue, and Building 12 the same.

If we were to build out everything we have on the current land and space that we have, that would give us capacity of about $11.5 billion, probably a little bit more because as our growth accelerates, our revenue per square foot is also increasing. The timing of that is too early to talk about at this stage. We are focused on meeting our customers' needs and making sure we have capacity in place. 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, and we are also looking for additional land in and around both the Pinehurst campus and Chonburi.

Karl Ackerman: Very clear. Thank you.

Operator: Thank you. Our next question comes from Samik Chatterjee from JPMorgan.

Samik Chatterjee: Hi, thanks for taking my questions. 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 size that up in terms of what these customers are communicating to you in terms of their demand at full run rate? Just trying to compare it to your primary customer with whom you are doing about $250 million a quarter or so—how do these new opportunities 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.

Seamus Grady: I think the supply chain is broadly similar across most of these primarily scale-out applications. Taking both of those in turn, for the hyperscale relationship, we are excited about the new datacom opportunities we announced today. They are two separate products. We have already begun shipping, albeit in small qualification-type quantities, and we expect growth is already in front of us. We believe it will be significant. It is a significant piece of business for us. The demand we are seeing from the customer is very significant, and we are very focused on making sure we have the right capacity, capability, and everything else in place to support the customer.

In terms of merchant programs, for several quarters we have been working towards expanding our datacom business to encompass direct hyperscale, as we talked about, and also deepening and broadening merchant relationships. We have made sizable progress there. We have a couple of programs there as well that we are working on. Both hyperscale direct and merchant are very significant and have the potential to be very meaningful revenue contributors for us. But all of those opportunities are essentially a very similar supply chain ecosystem.

Samik Chatterjee: Understood. As a clarification, are you expecting that these programs, standalone, are like 10% of your revenue—are they that sizable? And then on gross margin outlook, it sounds like you will 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 feed through the P&L?

Seamus Grady: 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. We only talk about that looking back, not looking forward. They are significant opportunities—that is all I would say about that. On gross margin, I will let Csaba provide a little more color.

Csaba Sverha: Hi, Samik. 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. The margins from an exchange rate perspective will be similar in our Q4 as they were in Q3. We have some visibility with our hedging program in place, and Q3 panned out in terms of headwinds as we had anticipated. Q4 we anticipate to be at that same level. At the same time, we are ramping a large number of new programs across multiple growth vectors, which sometimes creates short-term inefficiencies.

This is a function of strong demand and the pace at which we are scaling the business. As these programs mature, we do expect those efficiencies to improve and to get back to our higher margin ranges. The good news is that we are very disciplined on operating expenses. As you saw last quarter, we continue to generate operating leverage and OpEx is trending down overall as a percentage of revenue. Last quarter we were at 1.4%. So while there are some near-term pressures on gross margin—some of which we cannot control from an exchange perspective—the overall model continues to deliver very strong and improving profitability as we scale.

We feel very good about the underlying model and our ability to drive long-term profitability growth, and our ultimate focus is to drive strong return on capital and deliver consistent value to shareholders as we scale these programs.

Samik Chatterjee: Thank you.

Operator: Thank you. Our next question comes from Christopher Rolland from Susquehanna. Your line is open.

Analyst: Hi, this is Dylan Olivier on for Chris Rolland. Thanks for taking my question. For my first question, you spent some time talking about CPO and your role here. You mentioned that you are working with three customers or three programs and that you have begun getting revenue now. Are all these programs generating revenue today? And any color you could provide on if these are all scale-out or if any of these engagements are related to scale-up?

Csaba Sverha: We are shipping to all three customers.

Seamus Grady: They are both scale-up and scale-out. We are really putting the capacity in place and making sure we have the right technology in place. You can see with our investment in Raytec, it is to help us ensure we have the right capability. We are excited about CPO, but the revenue is largely in front of us at this point.

Analyst: Great, thank you for this. For my second question, I wanted to ask about another opportunity that you did not discuss on this call. OCS is seeing a nice explosion right now. Any color you can provide on how your engagements are going, when you think this could materialize, and if you can get a dominant share of the externally contracted OCS market?

Seamus Grady: OCS remains 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 is no change in our optimism about OCS, but to be clear, the new merchant opportunities that we talked about earlier are not OCS-related—they are separate. OCS opportunities are incremental to that and, similar to CPO, are largely in front of us. We are focused on one or two. It is too early to talk about them until we have something to announce, but we are pretty excited about OCS as a segment.

Analyst: Thank you.

Operator: Our next question will come from Ryan Koontz from Needham & Co. Your line is open.

Ryan Koontz: Just wanted to ask more generically regarding your transceiver wins. Can you expand on where you would be in your milestone process before you would announce to us that you have a win? Do you have a contract, qualification, sampling? I am not asking specific to a single customer, but generically, at what point do you typically disclose, and where might we consider these different programs in the process between ramping to material revenue and maybe an MOU that is not contractually bound? And as a follow-up, your strength in telecom—obviously DCI is a big star there. How would you characterize your customer mix within telecom? Is it changing? Can you share anything about the product mix there—400ZR to 800ZR?

Are you seeing some industry shifts that are working in your favor within the telecom mix? And do you consider Multihaul an opportunity in your wheelhouse within the telecom sector?

Seamus Grady: Good question. Generally, we do not talk about wins until we have actually won the program. That means we have been awarded the business, we have contracts and purchase orders in place, and we are qualified and approved. We are really at that milestone phase where we are getting ready to ramp at this point. We do not signal specifics on new programs until we have them won, because not all products that you think you have won early on turn into real products or real demand. In this case, we have a number of programs that we have won—contracts in place, product being shipped, and subcontracts signed with customers.

On telecom and DCI, our position supplying the DCI market is very strong. We have all of the major players as customers. Our growth in DCI has been staggering, and our telecom portfolio continues to go from strength to strength. We provide components, DCI 400ZR and 800ZR modules, as well as telecom systems. We have evolved from being a niche optical component supplier into a diversified strategic ecosystem partner for leading OEMs for both optical components and systems across AI-driven growth in both datacom and telecom. Demand looks very strong, we continue to win business in that space, and we continue to execute very well.

There are a number of new programs we are working on as well as ramping existing programs, including new products we are gearing up to ship. On Multihaul and similar opportunities in telecom, anything where we can have a high level of content is a good fit for us.

Operator: Thank you. Our next question comes from Steven Fox from Fox Advisors LLC. Your line is open.

Steven Fox: Hi, good afternoon, everyone. Seamus, on the supply constraints, it sounds like they got worse during the quarter. At the same time, even if we think about just end-market demand, end markets are getting stronger. How do constraints not get worse going forward, and how do you manage through this and start catching up with demand? Is there any line of sight to improvements? And then on the flip side, you are accelerating your own capacity additions. If we started today as another starting point, your ability to accelerate further—what else would you have to see? Would it be more new programs or loosening up of the supply chain that you need, and how long would that take?

Seamus Grady: We are not unduly concerned long term, but we do feel obliged to point out the issues in the short term because we guide one 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. Overall, it is really a function of the growth that we are seeing in the industries that we serve and in our business overall. That growth is built on excellent execution and dedication to customer service. Over a ten-year period up to FY 2025, we compounded revenue growth at 16% annually and earnings at 22%.

In FY 2025, we grew 19% versus FY 2024, and if you look at FY 2026 at the midpoint of our Q4 guidance, that will put us up 34% versus FY 2025. Growth is accelerating, and with that acceleration, it does expose certain supply constraints. The component supply ecosystem is doing everything it can to catch up with demand, but there is a lag. Our focus is on execution and ensuring we capitalize on this strong demand by having more than enough capacity in place to support our customers while we work on the challenges in the supply chain. On capacity acceleration, these are straightforward capital allocation decisions for us because of the upside potential.

We build a 2 million square foot factory that gives us capacity for an additional $3.0 billion of revenue. The CapEx is around $130 million to $132 million, depending on exchange rates. At full run rate, roughly six months' worth of operating profit would pay for the entire 2 million square feet of manufacturing space. On the downside, if there were a downturn and we ended up with no new business going into that factory, the gross margin headwind would be about 50 basis points—negligible relative to the upside. The capacity is fungible across our sites, and customers are very comfortable having products built in either location.

We have room to add two additional factories in Chonburi and can add another 200 thousand square foot factory on the land we purchased in Navanakorn. We have ample land and capacity for the next several years and continue to look for more land. As we see strong demand signals from our customers, making those capital investments is a straightforward decision to ensure we have capacity in place.

Steven Fox: Got it. That is very helpful. Thank you.

Operator: Thank you. Our next question comes from Mike Genovese from Rosenblatt Securities. Your line is open.

Michael Genovese: Seamus, in talking about the direct hyperscale datacom business, I think you mentioned that there are two products. Does that imply an 800G and a 1.6T, or two 800G products? Can you comment on that? And then on DCI, very good growth this quarter. Did 800ZR in particular drive an outsized portion of the growth this quarter, or was it more broadly spread? I also noticed that you had some telecom growth above and beyond DCI. If you could call out those products that were not DCI that also grew in telecom, that would be helpful. Thank you.

Seamus Grady: They are both 800G, but they are different applications and both scale-out. On the mix between 800ZR and 400ZR, it is probably more appropriate for our customers to talk about that. 800ZR is ramping—it is getting going—and we have very big hopes for it. It looks to be a very strong product. A lot of the new programs we have won are really in front of us and are just beginning to ramp, and I would put 800ZR in that category. Beyond DCI, we continue to win business at both the component level and the system level with a number of customers, mostly share gains from some of our competitors.

We are fortunate to serve the best companies in the industry, demand for their products is very strong, and because of the job we do executing for them, they reward us with more business. It is a self-reinforcing loop. So it is a combination of growth in DCI and other telecom systems and components.

Operator: Our next question will come from Timothy Savageaux from Northland Capital Markets.

Timothy Savageaux: Seamus, I am going to take you back to OFC. You commented that you wish you got farther out sometimes, and I am going to try to afford you that opportunity here. You mentioned maintaining momentum into 2027 and sustaining this growth trajectory. As I look at these datacom wins, it seems quite plausible that you could sustain, if not accelerate, this 34% growth rate that you are putting up in fiscal 2026. Any comments on that? And along those lines, would you expect your two datacom direct wins to be in full run-rate by 2027, or maybe even earlier than that?

Lastly, on the merchant wins and outsourcing opportunities from some of your historical one-time 10% customers—how should we think about those merchant opportunities, how they ramp, and whether that crosses into the boundary of outsourcing?

Seamus Grady: FY 2025 grew 19% and FY 2026 will grow 34% versus FY 2025 at the midpoint of our guidance. If you take this quarter compared to the same quarter a year ago, we grew revenue from $872 million to $1.214 billion—39% year-over-year growth in Q3. Our operating expenses grew by 6.2%, from $16 million to $16.99 million. Therefore, on revenue growth of 39%, our operating income grew 46% and our net income grew 48%. Growth without profits is not much fun for anyone, so we are very focused on disciplined use of the company's resources and executing in a way that delivers operating leverage, which we have been delivering for quite some time.

The growth is accelerating, and demand signals from our customers look very promising for some time to come. We will continue to guide one quarter at a time, but that does not stop us from being optimistic about the future—probably more optimistic than we have been in quite some time. On the two datacom direct wins, I would expect them to ramp throughout FY 2027, likely reaching full run-rate sometime around the middle of FY 2027. On merchant opportunities, some are very significant and demand is very strong. We do not mind who we are making transceivers for, as long as we are making somebody else’s design.

We are a services company; we will never have our own products and will never compete with our customers. Even if we were to supply a relatively modest percentage of any hyperscaler’s demand with product we can ship direct, it is still very significant. Any one of these could be a noteworthy opportunity. We have two separate programs shipping to a hyperscaler, merchant business wins, and our main customer as well, plus our telecom business that goes from strength to strength. Lots of growth vectors.

Operator: Thank you for your participation in today's conference. I am showing no further questions from our phone lines. I would now like to turn the conference back over to Seamus Grady for any closing remarks.

Seamus Grady: Thank you for joining our call today. We are excited to have delivered another impressive quarter that exceeded our guidance. Moreover, we are very enthusiastic about the several key new business opportunities that will further support our strong growth starting in the fourth quarter and that also position 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.

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

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