Fabrinet's 51% Growth Comes at a Cash Cost: Rapid Earnings Reaction
Key Points
Fabrinet's fiscal first-quarter revenue rose 51% and landed above the company's own guidance range.
A new global minimum tax kept GAAP earnings growth far below the pace of sales.
Heavy spending on inventory and factories pushed free cash flow negative for the quarter.
Fabrinet (NYSE:FN) grew revenue 51% to about $1.47 billion in its fiscal first quarter, above the top of its own guidance range. Shares rose about 10% in after-hours trading. The demand is real, but this growth phase is eating cash. Fabrinet built inventory and factory capacity so fast that free cash flow turned negative and it took on debt.
Key numbers
- Revenue: about $1.47 billion, up from $978 million a year ago.
- Operating income: $146 million, up from $94 million.
- GAAP diluted EPS: $2.86, up from $2.66.
- Free cash flow: negative $137 million, versus positive $57 million.
What it means
Costs didn't cause the gap between sales growth and GAAP profit growth. Operating income grew faster than sales. Taxes and a write-down did the damage. Fabrinet booked a charge for the new global minimum tax and a loss on a private stake, then left both out of adjusted EPS. The write-down may be a one-off, but the tax isn't. Second-quarter guidance excludes another $0.60 per share for it, so GAAP earnings are the better guide to what owners keep.
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
The cash drain is the price of scaling. A contract manufacturer buys parts and builds capacity before customers pay. Capital spending more than tripled to about $159 million, while inventory and receivables swelled. Fabrinet sold short-term investments and drew loans that weren't on its balance sheet in June to cover the gap.
Guidance says the ramp isn't slowing. Management expects second-quarter revenue of $1.6 billion to $1.65 billion, up from this quarter. If that holds, the spending is buying real growth, not idle capacity.
What to watch next
Watch whether operating cash flow recovers next quarter as new programs ship and customers pay. Also watch whether Fabrinet keeps buying back stock while free cash flow stays negative.
David Kretzmann has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.