Fabrinet is a key player in the optical supply chain, providing advanced and high-precision optical manufacturing services as a contract manufacturer to OEMs, hyperscalers and Nvidia. The company has multiple growth outlets ahead, including its HPC platform ramp with Amazon, the ‘big growth’ with Nvidia on 1.6T and 800G transceivers, along with new product ramps with Ciena and Cisco, its second largest customer behind Nvidia.
There are a handful of puts and takes to Fabrinet’s story, primarily that its positioning as a contract manufacturer lends to thin margins with limited ability to expand in that regard. Growth in key outlets such as transceivers remains supply constrained and showing minimal sequential growth, though with the expectation that those soon ease. Q3 was also guided to see low single-digit QoQ growth, likely weighed down once again by transceiver constraints on the EML side.
Looking further ahead, strong demand in 800G and 1.6T transceivers as well as within DCI provide a solid backdrop for continued growth, and the expansion of its HPC program with Amazon or with hyperscalers could represent substantial new revenue streams. Fabrinet also leads in CPO with early revenue now appearing, with the company expected to serve as the primary CPO module manufacturer for Nvidia, while other optical solutions like optical circuit switching could soon layer in.
Capacity will also not be a problem in future growth, with Fabrinet’s new Building 10 and Pinehurst expansion in Thailand unlocking more than $2.6 billion in revenue potential, or nearly 50% higher than next year’s estimated revenue.
Brief Product Overview
Fabrinet provides advanced optical packaging, high-precision optical and electro-optical manufacturing services to OEMs; as management put it: “We're a pure contract manufacturer. We don't have any of our own products. And that's actually a positive for many of our customers. They don't want us to have our own products.” This neutral model with no proprietary products means Fabrinet does not compete with its customers, regardless of where they are positioned in the optical stack.
Fabrinet also serves as a key optical partner for Nvidia (who generated 27.6% of its FY25 revenue, or ~$944 million), with some of its main contributions said to be for short-reach active optical cables and 800G transceivers for Nvidia’s InfiniBand platforms, as well as optical engine packaging. Fabrinet was also stated as key partner for Nvidia’s upcoming silicon photonics CPO switch platforms during GTC 2025.
Fabrinet’s manufacturing primarily spans three main component lines: optical communications devices, industrial lasers, and sensors.
Fabrinet’s optical communication (OC) services include selective switching products such as reconfigurable optical add-drop multiplexers (ROADMs), optical amplifies and modulators for fiber optics. OC also includes transceivers and tunable lasers, active optical cables for high-speed data center interconnect (DCI), and InfiniBand, Ethernet, fiber channel and optical backplane connectivity.
OC is the core focus of this analysis as we delve deeper into the optics supply chain, as the shift to Nvidia’s Rubin generation and push to bring optics closer to the networking switch are expected to see silicon photonics silicon photonics capture incremental value, even though copper remains relevant and intact at the shortest distances.
OC is also the core revenue driver for Fabrinet, generating nearly three-quarters of revenue; sensors for automotive is the second-largest product line at roughly 10% of revenue, while industrial lasers are a much smaller contributor at ~4%.
HPC Segment Ramping for AWS
Fabrinet’s new ‘HPC’ segment relates to its manufacturing of high-complexity electronic assemblies for hyperscale AI accelerator platforms, and though it is only in its second quarter post-introduction, there are clues showing that HPC could be quite lucrative for long-term growth. Though HPC is currently limited to one customer, AWS, the program is expected to scale to more than $600 million annually, or north of 10% of annual revenue, implying future HPC program wins or expansion can easily and quickly add substantial growth to the top-line.
Fiscal Q2 marked the second quarter of Fabrinet ramping its HPC program for AWS, which is understood to be for high-complexity printed circuit board assembly (PCBA) likely for Trainium3, with management hinting at a goal of expanding into optical interconnects and other products in the future. Fabrinet also issued warrants allowing Amazon to purchase up to 381,922 shares at $208.48 vesting on certain purchase requirements, though it did not state the duration or scope of the agreement with Amazon.
Although the program is only in its second quarter of ramping, growth was very strong in Q2, up 455.8% QoQ to $85.6 million. Fabrinet remains confident that the program will continue to experience rapid growth and will be fully ramped over the next two quarters. Management clarified that the program is a “little bit more than halfway” ramped and has a second production line qualified, and we're in the process of qualifying additional lines.” Once these lines ramp, Fabrinet stated that it will be on its way to achieve its full run rate of above $150 million per quarter, to be achieved over the next couple of quarters.
While management guided for strong sequential growth in the near term as the second and third lines get qualified, they also cautioned not to take Q2’s sequential growth and extrapolate forward linearly:
“HPC growth, it's not in a straight line because we are dealing with some new products that don't always grow. The growth is a little bit lumpy, I would say. So HPC won't necessarily grow in a straight line. It looks like a nice straight line. But really, we only have 2 data points, 2 quarters of revenue.
So HPC, we had a nice bump of about $70 million sequentially last quarter. So that's not going to grow in that space. But we do anticipate double-digit growth in that area.”
Assuming Fabrinet still reaches the full run rate within two quarters but sees a softer Q3, say to the $100 million revenue region (or high-teens QoQ), this would imply a sharper ~50% QoQ increase in Q4. At the full run rate, the program will be a key growth driver, with the roughly $600 million annual run rate representing ~13% of FY26’s estimated revenue and ~11% of FY27’s estimated revenue.
This is especially important when taking into account all of the facts around the Amazon deal – Fabrinet is not the sole supplier or even the primary, but rather the secondary supplier, with future growth opportunities hinging on its ability to execute and deliver excellent quality and delivery at ‘competitive costs’ (ie, not guaranteed).
If this first deal is any indication of what initial engagements with new customers could look like, HPC could shape up to be a much larger contributor down the road. However, the main downside is that Fabrinet has said engagement timelines for HPC are long, meaning it may be multiple quarters before new growth arises.
Transceivers Remain Supply Constrained, but EMLs Easing
Optical component supply constraints have been impacting Fabrinet’s datacom revenue, which has been essentially flat for the last three quarters, after having peaked at nearly $330 million in Q1 FY25. Revenue in FQ2 was up just 2% QoQ but down (7%) YoY to $278.1 million, primarily due to these shortages, as management noted that demand is very robust and that they are shipping everything they can, including significant volumes to its main customer, understood to be Nvidia.
Easing shortages should open the doorway for Datacom revenue to begin accelerating through 2026, considering the signals that we are seeing across the optics supply chain pointing to strong demand for 800G and 1.6T transceivers. Fabrinet also sees that as the case, explaining that the “the big growth with NVIDIA is really in front of us on 1.6T and 800G,” meaning quickly resolving EML constraints are a key factor in its ability to reaccelerate Datacom revenue growth.
Fabrinet had revealed last quarter that they believed they would face another quarter to two of tight supply before constraints start to ease, and commentary this quarter suggests they might soon be seeing the end of the tunnel. Notably, Fabrinet explicitly called out EMLs as the main cause of supply constraints and implied that Nvidia qualified a second supplier during the quarter, meaning its main constraint will likely ease over the coming quarters.
There was another interesting tidbit from the call that is worth some attention – management explained that they are indifferent to product mix, whether it favors 800G over 1.6T or vice versa. This is important because as a contract manufacturer, Fabrinet benefits from volume, not ASPs, meaning that it will benefit from increasing volume as either 800G or 1.6T are selected. Fabrinet’s growth will remain largely insulated from nuances within the upgrade cycle, such as if some customers take a slower ramp on 1.6T, whereas transceiver suppliers are hammering on 1.6T for revenue and margin uplifts, where a slower ramp will more acutely impact growth.
Fabrinet also mentioned some future transceiver opportunities, such as building transceivers for merchant vendors and producing directly for hyperscalers, noting that these opportunities would be “quarters away rather than years away” in terms of becoming a meaningful revenue stream.
DCI to See Faster Growth in Q3
DCI revenue (now provided as a separate breakout within Telecom) has been steadily increasing over the prior two years, having scaled from a ~$70 million quarterly run rate to $100 million in mid to late fiscal 2025, and now moving higher to the $140 million range.
Growth was moderate in Q2 at 42% YoY and 2% QoQ with DCI module revenue up 59% YoY, slowing from the 92% YoY and 29% QoQ growth in Q1 as this quarter faced a tougher comp. Although Q3 guidance was somewhat vague, management stated that they expect DCI to “grow faster than we have seen in the past quarters.” Regardless of whether this faster growth comment is applied to YoY or QoQ, or a return to either >90% YoY or >30% QoQ, it could imply DCI revenue approaching around $190 million next quarter. This is likely to be driven by EML capacity coming online, or strong demand for 400ZR products as the 800ZR ramp approaches.
Looking ahead, management expects demand to be durable as the ramp of 800ZR products approaches, similar to how Ciena noted that 800ZR is ramping later this year; however, management cautioned that growth will not always be in a straight line as challenges may arise from time to time with leading-edge products.
For a quick note on Ciena, Fabrinet clarified that they started to ramp Ciena’s new system program in Q2, and this was a key driver of Telecom’s strong growth of nearly $81 million of 17% QoQ: “Telecom revenue growth was particularly strong as we started to ramp Ciena's new system program, as well as other new program wins that we're particularly excited about.”
While Fabrinet did not clarify if Ciena was included in the DCI breakout, Rosenblatt’s Michael Genovese commented that “if you counted that Ciena business where that stuff was going in DCI, you'd find the vast majority of your telecom growth was driven by DCI and then you had a huge sequential DCI quarter. But that's just like kind of a segmenting thing. Any thoughts on that?”
Seamus Grady, CEO
“Yes, I think that's pretty accurate. DCI has been very, very strong for us. The growth is not just DCI, but it's predominantly DCI. It's been very good, and it continues to grow and the demand looks to be very, very durable, and it's not just Ciena, it's across multiple customers.”
Fabrinet Already Seeing CPO Revenue, Multiple Customers Engaged
Fabrinet was quite bullish on the upcoming opportunities around CPO, with management essentially revealing that they are the leader in CPO, far ahead of competitors and already shipping small amounts. Additionally, Fabrinet is working on separate CPO programs with three different customers, not only Nvidia, though analysts from Rosenblatt believe Fabrinet is well positioned to benefit as “Nvidia's primary transceiver and co-packaged optics module manufacturer.”
Fabrinet CEO Seamus Grady explained that Fabrinet is “already seeing some CPO revenue, although the amounts are relatively small right now. We're working on co-packaged optics programs with 3 different customers. It's not just 1 customer, Samik, it's actually 3 different customers. And the specific timings on when the revenue would become more material, depends on our customers' road maps and schedules, but we're very excited about CPO. Again, we don't really want to speak on our customers' behalf, but rest assured, we're quite excited and we have several products that we're working on our projects with our customers.”
For brief clarification on the revenue timing part, Fabrinet will see revenue impacts in line with, or slightly ahead of customer production timelines, meaning that Nvidia’s move for initial production of its Spectrum-X Ethernet switches supporting CPO in late 2026 may be appearing now through the next two quarters, while strong growth is likely to appear in 2027 as CPO volume ramps. Other industry commentary around CPO, such as from Lumentum, points to CPO seeing stronger contributions in 2027 with scale-out shipments beginning, implying CPO could see a strong ramp for Fabrinet into year end and next year from its positioning a few quarters.
For OCS, details were a bit limited, though Grady noted that Fabrinet is engaged on multiple fronts and reemphasized that growth would depend on customer ramp schedules. Again, Lumentum recently pointed to larger contributions for them from OCS this year, raising revenue forecasts from $100 million to $400 million, implying this could also quickly turn into a key revenue stream for Fabrinet later this year.
Capacity Expansion Underway, “Building 10” Fully Ready by 2027 and Adding $2.5B in Revenue Potential
Fabrinet is accelerating its capacity expansion plans, pulling ahead the first portion of its Building 10 in Chonburi, Thailand by six to eight months, while expanding at its Pinehurst facility in Pathum Thani, Thailand to help meet strong demand. Combined, the two facilities add substantial revenue generation capacity of >$2.65 billion annually. Fabrinet also sees very minimal margin headwinds even in the event of a slower ramp stemming from its capex-lean construction abilities.
Management provided some color on the completion timelines for the new building, with the first 250K square foot portion expected to be ready by June, six to eight months ahead of schedule, and the full factory ready by early 2027.
Fabrinet revealed at Barclays’ Global Tech Conference in December that Building 10 can add $2.5 billion in revenue at full scale, with estimated capex of around $130 million for the building — simply put, Building 10 has the ability to generate nearly 20X of capex as revenue at full scale. Additionally, Fabrinet sees minimal headwinds from the factory if the ramp is slower than expected, at just 0.15 points to gross margin if it sits completely idle.
With management also adding in Q2’s call that Pinehurst can support $150 million revenue, dependent on mix, both buildings add $2.65 billion in annual revenue potential. Compared to Fabrinet’s current footprint having room to support up to $4.8 billion in revenue (slightly above its current $4.5 billion run rate), the two buildings offer >50% upside in revenue capacity, implying that Fabrinet could support approximately $7.3 billion once is finished, or multiple years of runway. Additionally, the extensive capacity in Thailand serves as a key-value add to customers, as Fabrinet benefits from lower labor costs, thus giving them an ability pass margins on to key customers such as Nvidia and AWS.
Financials
FQ2 Revenue Grew by 36%
Fabrinet’s Q2 FY2026 revenue ending December grew by 35.9% YoY and 15.8% QoQ to a record $1.13 billion, beating estimates by 5.2%. Revenue growth accelerated by 14.3 percentage points from 21.6% YoY and 7.5% QoQ growth in the previous quarter. It was the fastest YoY growth since the company’s public listing in 2010 and was primarily driven by the strong growth in the Telecom and High-Performance Computing (HPC) revenue.
Management has guided FQ3 revenue in the range of $1.15 billion to $1.20 billion, implying a YoY growth of 34.8% and 3.7% QoQ. For some detail on where growth is coming from, management explained that “within telecom, we anticipate that DCI is going to grow faster than we have seen in the past quarters. So that strength continues into our third quarter, and we also anticipate datacom to growth. So that's the color that we can provide at this stage. And automotive will probably be down in a similar way as it has been in the prior quarter.”
Analysts expect strong growth to continue and FQ4 revenue is expected to grow by 36.9% YoY to $1.24 billion.
The company’s FY2026 revenue ending June is expected to grow by 32.7% YoY to $4.54 billion and will then moderate to 18% YoY growth to $5.35 billion for FY2027 and 14.5% YoY to $6.13 billion for FY2028.
Revenue by Product Category
Optical Communications Revenue Grew by 29%
Fabrinet’s FQ2 Optical Communications revenue grew by 29% YoY and 11% QoQ to $832.6 million. Revenue growth accelerated by 10 percentage points from 19% YoY and 8% QoQ growth in the previous quarter.
Within optical communications, telecom FQ2 revenue grew by 59% YoY and 17% QoQ to a record $554.4 million. The telecom revenue was up 59% YoY and 15% QoQ in the previous quarter. The strong telecom revenue growth was primarily due to early ramp of Ciena’s systems program and other new program wins. Management expects telecom revenue to grow sequentially in the next quarter.
Within telecom, Data Center Interconnect (DCI) revenue grew by 42% YoY and 3% QoQ to $142.2 million. Revenue growth decelerated from 92% YoY and 29% QoQ growth in the previous quarter.
Datacom FQ2 revenue was down (7%) YoY and up 2% QoQ to $278.1 million compared to a decline of (17%) YoY and (1%) QoQ in the previous quarter. Management expects sequential revenue growth in the next quarter, while Q2 growth was impacted due to component shortages.
Non-Optical Communications Revenue Grew by 61%
Fabrinet’s FQ2 Non-Optical Communications revenue grew by 61% YoY and 30% QoQ to $300.3 million. Revenue growth accelerated by 31 percentage points from 30% YoY and 5% QoQ growth in the previous quarter.
The strong growth was primarily driven by high-performance computing (HPC) products. HPC revenue in FQ2 came at $85.6 million and was up 456% QoQ from $15.4 million in the previous quarter. FQ1 was the first quarter in which the company broke out this category.
FQ2 automotive revenue grew by 12% YoY and down (4%) QoQ to $117 million. Management expects another modest sequential decline in automotive revenue in the next quarter.
Industrial Laser FQ2 revenue grew by 10% YoY and 4% QoQ to $41.4 million compared to 12% YoY and flat QoQ in the previous quarter.
The other revenue grew by 26% YoY to $56.4 million compared to 36% YoY in the previous quarter.
Margins
The company’s gross margins and operating margins improved in FQ2 despite the foreign exchange headwinds.
- FQ2 gross profits grew by 36.5% YoY to $137.68 million. Gross profit margin showed an improvement of 10 basis points YoY and 30 basis points QoQ to 12.2% despite the foreign exchange headwinds. Adjusted gross profit margin was flat YoY and up 10 basis points QoQ to 12.4%.
- FQ2 operating income grew by 43.7% YoY to $114.4 million. Operating margin improved 60 basis points YoY and 50 basis points QoQ to 10.1% primarily driven by operating leverage. Adjusted operating margin improved by 30 basis points YoY and QoQ to 10.9%.
- FQ2 net income was $112.6 million or 9.9% of revenue compared to $86.6 million or 10.4% of revenue in the same period last year. The company reported a foreign exchange loss of $3.2 million compared to a gain of $4.0 million in the same period last year. Adjusted net income was $121.6 million or 10.7% of revenue compared to $95.1 million or 11.4% of revenue in the same period last year.
FQ2 Adjusted EPS Grew by 29%
The company’s FQ2 GAAP EPS grew by 30.7% YoY to $3.11, beating estimates by 3.7%. The adjusted EPS grew by 28.7% YoY to $3.36, beating estimates by 3.4%.
Analysts expect strong growth to continue and expect adjusted EPS to grow by 40.7% YoY to $3.55 for FQ3 and 41.8% YoY to $3.76 for FQ4. The company’s FY2026 ending June adjusted EPS is expected to grow 33.5% YoY to $13.58 and FY2027 adjusted EPS is expected to grow 20% YoY to $16.29.
Cash Flow and Balance Sheet
The company’s cash flows have been weak in FQ2 due to higher working capital and increase in capex.
- FQ2 operating cash flow was $46.26 million or 4.1% of revenue compared to $115.9 million or 13.9% of revenue in the same period last year. It was lower due to higher working capital.
- FQ2 free cash outflow was ($5.3 million) or (0.5%) of revenue compared to $94 million or 11.3% of revenue in the same period last year. It was down due to lower operating cash flows and the increase in capex. The capex increased by 135.7% YoY to $51.6 million due to the expansion of capacity to support the future growth.
- Cash and short-term investments were $960.8 million and no debt at the end of the December quarter compared to $968.8 million and no debt at the end of the previous quarter.
- Inventories grew by 63.3% YoY and 10.6% QoQ to $798.9 million to support the future growth.
Conclusion
Fabrinet sees multiple different outlets to growth from 800G and 1.6T transceivers with Nvidia, the continued ramp at Amazon, the upcoming ramp of 800ZR modules for data center interconnect and new platforms with Ciena and Cisco. Fabrinet is also leading in CPO and shipping small amounts now, with analysts expecting the company to be a key beneficiary as Nvidia’s main CPO module manufacturer, with two other customers engaged as well.
Revenue growth is expected to remain around 35% to 37% in fiscal Q3 and Q4, before decelerating to the low 30% range in early 2027. The company’s new Building 10 will unlock significant revenue generation potential and open the door for growth to remain strong, as long as demand does. However, as a pure-play contract manufacturer with no original products, Fabrinet fundamentally sees thinner margins and soft cash flows, with little power to materially increase either of those two fundamental aspects. Despite this, the bottom line remains rather defensible with earnings expected to grow nearly 34% to $13.58 this year.
Damien Robbins, Equity Analyst at I/O Fund contributed to this analysis.
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