Fabrinet (FN)

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Fabrinet (FN)

Morgan Stanley Technology, Media & Telecom Conference

February 26, 2013 16:55 ET

Executives

John Marchetti - Chief Strategy Officer

Analysts

Kim Watkins - Morgan Stanley

Presentation

Kim Watkins - Morgan Stanley

Okay. I think we are on, so I will get started. Welcome to the Fabrinet presentation, here just talking about a car. My name is Kim Watkins; I’m the Communications Equipment Team here at Morgan Stanley headed up by Ehud Gelblum who unfortunately could not be with us here today. So, it’s a great pleasure of welcoming John Marchetti, the Chief Strategy Officer from Fabrinet. And before we get started I need to read some disclosures. Please note that all important disclosures including personal holding disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/research disclosures or are available at the Registration Desk. And so with that I think most of you may know John that John actually joined Fabrinet about a year ago from the Salt Lake.

John Marchetti - Chief Strategy Officer

Yes.

Kim Watkins - Morgan Stanley

Prior to that. So he is intimately familiar with the industry. So just to kick it off John I thought it would be a great way to start to just talk about the different addressable markets that you focus on.

John Marchetti - Chief Strategy Officer

Sure.

Kim Watkins - Morgan Stanley

Clearly it’s the largest piece today is optical but there are opportunities for you in lasers and sensors. Can you just contrast the size of the relative TAMs of those three markets and where we are with respect to outsourcing penetration?

John Marchetti - Chief Strategy Officer

Sure. So obviously the largest market that we serve today is Optical Communications, it’s roughly 70% of our total revenue and when we roll up the COGS of that industry we think we’ve got roughly 25% give or take of that market today. Over time we think that can obviously grow a little bit but we’ve got a fair bit of share there, the largest of the outsourcers within that group, that TAM for us is probably somewhere in the 3 to 3 plus billion maybe or $2 billion to $3 billion range rather. So, that is again the largest piece of our business today.

If you look at our other segments which today to be fair is primarily lasers, industrial lasers and automotive sensors. The laser market I think has an opportunity from a TAM perspective to be in that $1.5 billion to $2 billion range over time and from an outsourcing perspective it’s still very early stages, again doing the same kind of COGS rollup we’ve got mid single digit kind of share in that market today. And as far as we can tell there is no real major player in that group besides us in terms of outsourcing and manufacturing.

The automotive sensor market is or really the sensor market as a whole is a massive market, you are talking 10s of billions of dollars. For us so really trying to carve out a couple of specialty niches within that and focus on customers what we still think we can keep through to our model of being sole-source and being unique in terms of the value chain in terms of production.

That’s again probably $1 billion to maybe $2 billion market depending on how you slice it. So when you roll all that up we think we’ve got about $5 billion to $6 billion TAM that we can address over the next several years. And our challenge as we look out is how do we continue to diversify and accelerate that non-optical revenue portion of our business so that we can smooth out some of the cyclicality that’s inherent in that Optical Communications business.

Kim Watkins - Morgan Stanley

Actually I love to hear more about that. What’s the catalyst for a center, company or even looking back at the automotive business that you have one, what was the catalyst for those companies to even outsource model.

John Marchetti - Chief Strategy Officer

Sure.

Kim Watkins - Morgan Stanley

Even on the laser side?

John Marchetti - Chief Strategy Officer

I mean the key challenge I think for these customers are why they consider coming to somebody like us quite frankly is really they are not manufacturing companies and generally what we do tends to be low volume high mix which even adds more complexity to manufacturing to be able to change over quickly to manage so many additional parts across a supply chain, its easier if you are doing a high volume low mix business where you can order kind of consistently, it’s easier to manage, easier to plan for.

So to specialize in sort of that area of the market ultimately what we bring to the customers is cost savings and really those cost savings are associated with manufacturing excellence is being able to improve the company’s yields which as a result of that lower material cost which is the biggest challenge in terms of cost for most of the customers that we work with. And that’s really what we bring to the table I mean at the end of the day we are a services company. We don’t make our own products, we manufacture for our customers and we ultimately deliver cost, quality and on-time deliver and we have to excel across all three of those metrics in order to A), attract the companies, but B), keep those customers over time.

Kim Watkins - Morgan Stanley

Read the rest of this transcript for free on seekingalpha.com