Fabrinet (FN) Q2 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Fabrinet Second Quarter 2015 Financial Results Conference Call. [Operator Instructions] Please note, today's conference is being recorded. I would now like to hand the conference over to Fabrinet's Chief Strategy Officer, John Marchetti. Sir, please go ahead.

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 to the second quarter of fiscal year 2015 which ended December 26, 2014. With me on the call today are Tom Mitchell, Chief Executive Officer and Chairman of the Board of Fabrinet, and TS Ng, our 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. Please refer to our website for important information, including our earnings press release and our GAAP to non-GAAP reconciliation. I would like to remind you that 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 November 5th, 2014. We will begin the call with brief remarks by Tom, myself and TS, followed by time for questions. I would now like to turn the call over to Fabrinet's CEO and Chairman, Tom Mitchell.

Thank you, John, and good afternoon everyone. Second quarter results were solid, with both revenue and earnings per share above our guidance range. Our results also demonstrate our commitment to profitably grow our business, while making new customer investments. These investments are beginning to bear fruit as we had another quarter of strong revenue growth from new customers. I will now turn the call to John for a discussion of the markets we serve. John?

Thanks, Tom. Our second quarter results were ahead of our expectations, particularly in optical communications where, despite not being able to recognize all of the consigned shipment revenue that we expected, the business grew on both a sequential and year-over-year basis. While the demand environment remains somewhat uncertain, our new programs continue to ramp and add visibility to our near-term outlook, giving us confidence that our fiscal third quarter sales, excluding any contribution from the remaining consignment revenue, should increase sequentially in both our optical and non-optical segments on a normalized basis. Our optical communications business performed a bit better than expected in the quarter, decreasing only 1% sequentially and increasing 3% year over year. On a normalized basis, excluding the impact of the consignment revenue on our operations, the optical communications business decreased 5% quarter over quarter and 2% year over year. Our split between telecom and datacom in the quarter was approximately 71% to 29%, with the telecom segment up on both the sequential and year-over-year basis, while the datacom segment decreased quarter over quarter but grew compared to the same period a year ago. Similar to other quarters, growth in our optical communications business was driven by advanced optical components and modules, including 100 gig, while the improvements in our datacom business were driven by 10 and 40 gig solutions. As we look into the March quarter, we are expecting both our telecom and datacom businesses to increase modestly on a sequential basis. Our non-optical business performed pretty much in line with expectations, up 11% year over year and 1% sequentially, driven by increases in our automotive and sensor segments. Similar to our optical business, we are expecting the non-optical portion of our fiscal 3Q revenue to increase modestly on a quarter-over-quarter basis. We continue to win new programs on existing customers in both our auto and laser businesses and remain encouraged by the long-term outlook for this segment. In terms of our new business efforts, revenue from new accounts again represented more than 10% of revenue in the quarter, up from approximately 4% of revenue in the same quarter last year and increasing by more than 30% sequentially. Year-over-year growth in this category was driven by contributions from both new optical and non-optical programs. As Tom mentioned in his opening remarks, we are encouraged by the increased visibility that we are beginning to see in terms of the sustainability and predictability of this revenue contribution, and we are continuing to make new investments in this area to help drive additional opportunities. In order to better lead these efforts, we've added two new executives to our ranks. Todd Baggett has joined the company as Executive Vice President of Global Sales and Marketing. Todd brings more than 25 years of experience in electronics manufacturing to Fabrinet, including senior sales roles at Jabil Circuit and Epic Technologies. He will lead our worldwide sales and marketing efforts and oversee the expansion of our existing sales force and marketing efforts over the coming quarters. We're also pleased to have Bobby Singh join as Executive Vice President of U.S. Operations. Bobby brings more than 19 years of EMS operations experience to Fabrinet, with senior operations roles at Jabil and Flextronics. He has led operations teams in different parts of the globe and will lead our U.S. operations and oversee our efforts to establish a world-class NPI center and contract manufacturing operations in the U.S. We are excited to have Bobby and Todd join the Fabrinet team and believe the establishment of a world-class U.S.-based NPI center, along with the expansion of our sales force, are critical to the long-term success and growth of Fabrinet. With that, I would now like to turn the call over to TS for a review of the financial results.

Thanks, John. Good afternoon everyone. As in the past, all numbers presented here are GAAP unless stated otherwise. Total revenue for the second quarter was $188.4 million, an increase of 5.5% compared to total revenues of $178.6 million in the second quarter of last fiscal year, and down less than 1% compared to last quarter. Please note that revenue in the quarter included approximately $8.4 million in consigned shipment revenue excluded for fiscal 2014, which was below our expectations of $13 million, as we continue to work with customer to adjust the language in our contracts. Today we have recognized approximately $11.7 million of the total $16.5 million in consigned shipment revenue, excluded for fiscal 2014. We expect to recognize the remaining $4.8 million in our current fiscal year. On an end-market basis, revenue from optical communications was $133.8 million or 71% of total revenue for the quarter, while revenue from our non-optical businesses was $54.5 million, the remaining 29%. GAAP gross margin for the second quarter was 11.2%, an increase of 40 basis points sequentially. Excluding share-based compensation expenses, non-GAAP gross margin was 11.4% in fiscal second quarter, up 40 basis points quarter over quarter. For fiscal third quarter, we are forecasting a slight sequential increase in gross margin. Our total share-based compensation expenses for the quarter were $1.9 million, of which roughly $1.6 million was included in SG&A. As we move forward, we expect our SG&A expenses to increase as we have added new executive-level talents and look for further expand our sales and marketing activity. In the March quarter we expect non-GAAP operating expenses to be in the range of $8 million and anticipate that this will remain in the range through the remainder of the fiscal year. Our taxes in the quarter were a net expense of approximately $1 million, and our effective tax rate was 10.5%, above our expected range of 6% to 7%. On a normalized basis, our effective tax would have been 7% if we exclude a one-time expense related to investigation costs booked in this quarter. We anticipate that our effective tax rate will continue to be in the range of 6% to 7% moving forward, until Building 6 is substantially occupied. On a non-GAAP basis, net income totaled $14.4 million for the quarter or $0.40 per diluted share. Non-GAAP net income was essentially flat with last quarter. On a GAAP basis, including share-based compensation expenses and expenses related to the accounting investigations, our net income was $8.7 million or $0.24 per diluted share, compared to GAAP net income of $19.8 million or $0.55 per diluted share in the second quarter of fiscal 2014. Please note that our GAAP net income in the second fiscal quarter of 2014 was positively impacted by $6.6 million or $0.19 per diluted share due to flat insurance proceeds. Moving on to the balance sheet and cash flow statement. We ended the quarter with a cash and investment balance of $253 million. Total cash increased by approximately $8 million sequentially, primarily from our operations. During the March quarter, we expect a cash outlook in the range of $40 million to $45 million, which represents the purchase of the Santa Clara facility as well as the initial equipment purchase. I would now like to discuss guidance for next quarter. We expect revenues of between $181 million and $185 million, which does not include any contribution from the consigned revenue excluded from fiscal 2014. GAAP net income per share is expected to be in the range of $0.27 to $0.29, and non-GAAP net income per share of $0.33 to $0.35 based on approximately 36 million fully diluted share outstanding. That concludes our prepared remarks. At this point, I would like to turn the call over for questions. Operator?

Thank you. [Operator Instructions] Our first question comes from the line of Patrick Newton from Stifel.

Yeah, good afternoon. Thanks for taking my questions. I guess if we normalize for the $8.4 million in consignment revenue, it looks like you're actually guiding for a sequential revenue increase of 2% in the March quarter. I wanted to hear -- or did I hear correctly that this does not include the remaining consignment revenue? Number one. Two, should we think about either optical or non-optical portions of the businesses having an outsized sequential impact to normal seasonality? And then, should we think about new customer contributions to the mix as also contributing to the outsized growth?

Hi, Patrick, this is TS. Thanks for the question. Yes, that does not include consigned revenue, our guidance.

Yes. So as we're looking into the March quarter, we don't have any expected impact from that remaining $5 million to $5.5 million or so of consigned revenue. We do expect that this fiscal year, but we just wanted to make sure we didn't throw it into the quarter and have it not come through, as we continue to work through the last one or two agreements that we have to revise with customers. As to the others, Patrick, I mean we are expecting modest increases in both the optical and non-optical businesses, as we look into the March quarter. But I would say relative to prior years, that's probably a bigger departure from what we've typically seen in the optical market as opposed to our non-optical businesses. And then on the last portion of your question, absolutely the new businesses or some of the new wins that we've had and that we've talked about over the last several quarters are now starting to ramp and really contribute to some of that, you know, growth, which is normally a sort of down seasonal quarter for us as you're looking into the March quarter.

And given that you expect this consignment revenue to be recognized in the fiscal year, is there any reason why you're not pro-rating a certain amount in your guidance for the March quarter, or can you help us understand the thought process why you're pushing it all into June.

Yeah. I think the biggest reason, Patrick, I mean we had expected it all to be in the, you know, in this past December quarter, the one that we're reporting here today. If you go back to the guidance we gave, we anticipated that would all be in December. And so as we're continuing to work through the individual contracts with the different customers, some have proved a little bit more challenging to reword, if you will, than some others. And so rather than put those numbers in necessarily the 3Q results, which they very well may be, we just decided to guide without it. And if it shows up, that will be some upside to the quarter that we'll clearly call out when we report our results.

Okay. And I guess just given the modest down-tick in revenue outlook for the March quarter, what's driving the larger down-tick in earnings expectations? Is there anything on the gross margin front we should think about or is it purely the -- I think, TS, you said $8 million normalized when you think about OpEx on a go-forward basis, is that the key driver?

Yeah. So if you look at sequentially, right, last quarter we included $13.3 million consigned revenue. So in fact, if you normalize it, the revenue [inaudible] like you said earlier, 2%. As far as the P&L model is concerned, other than the USA startup which John alluded to, the Asia manufacturing site of the business, the model we guided before remains intact. Okay? I look at 12% to 12.5%, when it reached $195 million to $200 million revenue level, 9% to 9.5% operating margin. I look at it still intact. The only thing this time commingled with the $1.7 million of the startup expenses below gross margin level. That's why the earnings per share guidance is a factor. So other than that, our Asia manufacturing model remains intact from what we discussed before.

Right. So to be clear, Patrick, it is on the SG&A expense lines, not on the gross margin line. TS made a comment in his prepared remarks where we are expecting a little bit of an increase in gross margin on a sequential basis in fiscal 3Q.

Great. And then just one last one if I may, on utilization. Can you just remind us where your current building and equipment utilization stands? And then, does your opening of USA operation have any impact as to the timing of plans around capacity expansion in Thailand?

Sure. So, from a space available perspective, we're somewhere around 70% in terms of space that's occupied. We expect that that will continue to ramp up here over the next quarter or two. Wouldn't surprise us if we're at 80% space at some point in this, certainly, in this calendar year, and maybe even by the end of this fiscal year. On equipment basis, it's probably a solid 10 points or so below that, somewhere in the high 60s, low 70s range in terms of equipment utilization. That has ticked up a little bit over the last quarter or so. But I think if you're looking at what we're looking to do in the U.S. operations on the West Coast, that's more of an NPI center and a feeder into the Thai-based operation, so that's really -- doesn't have a big impact on whether or not we would need Building 7. Our expectation is that probably at some point this calendar year we'll be breaking ground on that new facility.

Great. Thank you for taking my question.

Thanks, Patrick.

Thank you. And our next question comes from the line of Sherri Scribner from Deutsche Bank.

Hi, thanks. I'm sorry, I just want to go through the P&L again. I'm a little bit confused about how you get to the EPS number. I understood the SG&A to be about $8 million and then gross margin to tick up a little bit, but I'm still not getting a number as low as your EPS guidance. So I'm just trying to understand if there's some piece that I'm missing here. Is there something in the other line? I think you said the tax rate is going to be 6% to 7%. I'm just getting an EPS number that's a bit higher, so I want to make sure I understood the numbers correctly.

Okay, all right, Sherri. In the past we talked about, you know, in this earning call, the non-GAAP SG&A or operating expense above $6 million, okay, $5.5 million to $6 million. And we kind of inched up to $6.2 million, and then we guided next quarter will be $8 million. So the increase of $1.7 million, $1.8 million, because of the new business, supporting the new USA operation, and also the hiring of two executives John was talking to, that costs us about $0.05. Okay. That alone, if you carve that out, our Asia manufacturing business model will probably generate more than $0.35, $0.34 I got at the midpoint, so, [inaudible] $0.39 [ph]. So if you look at it, last quarter we did $0.40, next quarter, without the new business, new executive costs, it'll be around 40% -- excuse me, $0.40, with a lower revenue, so.

Okay. Actually that's very helpful. Thank you. And then, I guess I'm just curious about the new product introduction center that you guys are building out in California and the new hires. What was the motivation for building the facility there? Is this something that your customers were saying that made sense to them, they thought that you should have something to better work with them in California, or is there something that you feel will help grow your business more quickly and expand your production -- or help you fill out your production in Thailand?

Sure, sure. I mean the short answer is yes to both. You know, we have been in discussions with customers, existing customers, for some period of time. And they have made it clear that they would like us to have something a little bit closer to their engineering capabilities, to do some of the earlier-stage stuff in terms of alpha and beta, and doing those sort of early-stage production runs for them in a place where the engineers would have the capability to be a little bit more hands-on and a more real-time basis. But we also, as we have been out talking obviously with new customers, see this as an opportunity to really see business that then can transition to Thailand over time as that production scale starts to move up a little bit. So again the short answer, really the question is we see it as an opportunity to do both.

Okay, great. And then just looking at the non-GAAP items, it looks like there's still some investigation costs. How much longer will we have investigation cost in the P&L? Thanks.

Yeah, I think as of today we have booked or accrued more so the investigation costs. And those are GAAP numbers. Non-GAAP we can't count that out. It's a one-time event.

Okay, great. Thank you.

Thank you.

Thank you. And our next question comes from the line of Alex Henderson from Needham. Alex Henderson - Needham & Co.: Thanks. While we're on the subject of the increase sequentially in the OpEx costs associated with the new facilities coming on, is that a step-up in being at 8 [ph] or does it step up to 8 [ph] and then have a gradual increase in costs as it becomes fully operational and you continue to produce traditional capabilities in the facility?

Yeah, I would say, Alex, certainly through the rest of this fiscal year, we see it as being, you know, kind of the step-up and then it flattens out. And then as we get a little bit further into the process and we start to add additional lines and some additional capabilities to that factory, it is likely to tick up over time. But at that point, we expect that there'll be some matching revenue for it. Here early on in the process, we're obviously frontloading some of the expenses, and we don't really have that corresponding upside to revenue to sort of offset any of that. But I think as we move forward, especially as we're getting into fiscal 2016, as those expenses start to maybe tick up a little bit more, our goal is certainly to be growing revenue faster than anything we're growing on the expense line. Alex Henderson - Needham & Co.: So the benefit from this facility coming on in terms of the revenue uptick, that could be a couple of quarters lagged?

Well, because today we still don't have -- in fact, we don't even own the building yet, we're still in that negotiation here. We wanted to highlight it, especially because we do expect the cash outlay along with some of the higher expenses going forward. We expect to be in production during fiscal 4Q, and at that point we would expect to have some revenue associated with that facility. But then that will continue to ramp up from there, and then we would be making additional investments over time that match the opportunities that we see out there specifically for that facility. Alex Henderson - Needham & Co.: And the revenue scale of what you're talking about, pulling out as a result of that facility would be bigger than a bread box, bigger than the Volkswagen [ph]? Can you give us some --

I mean certainly as we're getting into fiscal 2016, we're expecting to be able to measure that in the tens of millions of dollars. Alex Henderson - Needham & Co.: Great. And then, could you talk a little bit about on the product side, the growth rate in the Coherent market and the rate of decline and the scaling on the direct-to-tech [ph] 20-gig market?

I mean, so for us, Alex, we have seen, certainly on the Coherent market, we continue to see good demand from a number of different customers across the spectrum. We saw that in 4Q where results were certainly ahead of our expectations, at least where we were when we were sort of midway through the quarter and gave guidance back in November. So that turned out to be a little bit stronger than we were originally anticipating. We continue to see a lot of focus and expect good growth in that market, certainly as we're going through the remainder of the fiscal year. On the 40-gig side, our exposure there is a little bit more limited on the datacom side. We continue to see some pretty good traction with customers in that market. But again, as we've talked about on a number of different occasions, we certainly aren't the best read on the industry in that datacom market given our skew a little bit more towards the telco side. Alex Henderson - Needham & Co.: Right. The 40-gig direct-to-tech [ph] though is a declining market. I assume that you have declined in that business. Is that not accurate?

No. We certainly saw some of that in the -- certainly in the December quarter. Here in our March quarter, on a sequential basis that's probably flattening out a little bit. But I certainly wouldn't expect that it's a growth market as we're going through the calendar year. Alex Henderson - Needham & Co.: And could you qualify the scale of the Coherent piece at all?

We haven't, Alex. I mean I would say it's probably on the telco business, it's probably somewhere in the order of 15% to 20% of our telco business. Alex Henderson - Needham & Co.: There was a comment made about a large player in the category and building out some capacity in Thailand for Coherent modulators. Just to be clear, that's not at your facility, I understand -- as I understand it, is that correct?

I mean, Alex, we don't comment on our customer's production like that, and certainly not by product. I know what's out there, but it's not something that I can confirm or deny for our customer. Alex Henderson - Needham & Co.: Okay. And one last question. On the Coherent piece, is it being driven off of China growth or is it reasonably distributed in terms of where the end-market demand is as best as you can tell?

Again with the caveat that I don't always see exactly where this is going from an end-market basis, it does look fairly broad. It doesn't seem like it's driven solely by the China or the Asia market. Alex Henderson - Needham & Co.: Okay. I'll cede the floor. Thanks.

Thanks, Alex.

Thank you. And our next question comes from the line of Subramanian [ph] from The Jita Group [ph].

Thank you. Two questions. First, John, given that the OpEx related to this new facility is almost 40% uptick from kind of run rate. Just trying to get more detail around, is it more the optical com side or non-com side? And should we think about the opportunity -- revenue opportunity in the tens of millions of dollars you talked about for 2016 being mostly incremental or is it just geographically being where you need to be for your existing customers?

Sure, Subra [ph]. I mean I think, you know, early on we're probably likely to see more of a focus on the optical component side just because part of the big push, certainly early, would be for existing customers in terms of what they've already indicated that they would like us to be doing in that region. Over time we do anticipate that we'll be able to use that, again, as a bit of a feeder into the Thailand manufacturing campus for much more than just obviously optical communications. And I would say that some of the expenses aren't solely dedicated to the new factory, what's being worked up there. We mentioned we also brought on a new head of sales. We're broadening out that overall capability, not just in regards to what we're trying to do here on the West Coast but also, more broadly speaking, in terms of just trying to make sure that some of the momentum that we've started to gain in the new business that we've been winning with new customers, you know, we continue to feed that base, so to speak, and make sure that there's a broad enough pipeline behind that to make sure we can keep this momentum going.

Yes. If I could follow up, I guess what I'm trying to understand is, do you think about this generating some incremental opportunities over and above kind of the run rate you've seen, or is it, you know, part of the expansion that you are in the process of seeing, that you have to invest in? I'm just trying to understand --

No. I'm sorry, Subra [ph]. We do anticipate that all of this will be incremental.

And the other question I had is trend line, the business, you had some counter-seasonal business sometimes given kind of the lead and lag effects between what your customers have seen and what you're seeing. To March kind of flat to up, you think more of a kind of a seasonality offset between your customers and you or do you think there's kind of a broader improvement in the market when you look at it?

Yeah. I mean I think it's hard for us to tell where we're sitting right now, to be fair, Subra [ph]. I will say that December was also a little atypical for us in terms of the seasonality of that quarter. Usually that's a little bit stronger than what we wound up putting up there. So it may be just that March now is a little bit better because that wasn't quite as strong as it typically is, so therefore the sequentials coming off that aren't as pronounced. But I think for us, it's also a little bit of some of the new business that's coming on and ramping, that's helping push through some of that typical seasonality. So it's probably a combination of both, but it's unclear as, you know, if I look out two quarters from now, exactly how that seasonality will continue to play out as we go through the rest of the calendar year.

Final question, on datacom, you did mention that it was down a little bit quarter over quarter. How do you see the trend line on datacom just going into next quarter?

I mean we, you know, we said we do expect it up a little bit sequentially here in March. Again for us, it tends to be a little bit more customer-specific as opposed to industry-specific there, where the telco business is a fair bit broader, so we tend to be a little bit more industry-driven, if you will. But we are anticipating that it's up modestly on a sequential basis here in the March quarter.

Got it. Thank you.

Thank you. And our next question comes from the line of Dave Kang from B. Riley.

Thank you. Good afternoon. First question is regarding OpEx of $8 million. I'm assuming that's a GAAP number?

No, that's a non-GAAP, Dave.

Okay, so, non-GAAP, got it. And then, can you just talk about the pricing environment?

Yes, sure. I mean, I guess what I would say, Dave, is that, at least in the discussions that we've had with customers, our sense is that it went pretty much in line with their expectations. We're continuing to work with all of them and we always have the conversations at the beginning of calendar year where the -- where we then set out plans as we go through the year to help them recoup some of those costs. But I would say that there was nothing that we saw that was terribly unusual in this pricing year relative to certainly what we saw last year.

Got it. Got it. And I was wondering if you can just provide some customer, since you do have some major customers, their percentages in the quarter?

We typically only do that once a year, on the, you know, when we file the 10-K. But I would say that as we're, you know, in the December quarter, there probably no surprises --

Okay.

-- relative to what we did report on the 10-K back in, you know, at the end of the fiscal year.

Got it. I was wondering if you can expand a little bit more on new programs. I mean, are they, you know, any more colors as far as what kind of products you guys are making? Is it components or systems, you know, that kind of stuff?

I mean we're still primarily doing components, certainly on the optical side. On the non-optical side, we managed to continue to win some auto business, and that continues to be a good area of expected growth over the next year or two in the non-optical portion of our business. But at least quarter over quarter, the biggest increase was probably in those two categories in both optical and then in the automotive business.

And lastly, can you just give us a little bit more color, what's going on in the commercial laser segment?

I mean it's early in the calendar year. I think most customers, at least from what they've talked about publicly, they're starting to see some certain signs of optimism out there. I think fiber laser continues to be the biggest driver of growth, expected for the entire calendar year. And I would anticipate that our business would mimic that as we're going through the calendar year. So we'll have to see how some of the reduced oil and some of the China production numbers play out on the industry. But I think in general we're certainly looking at calendar 2015 as a growth year for that laser business.

Yeah, actually that was my question, is regarding fiber lasers. So what's your exposure there, I mean, in terms of percentage of your, say, laser business or non-optical business? Is it fairly meaningful?

Yeah. I mean, so, our laser business is probably about two-thirds or so of that, maybe 70% of that non-optical portion of our revenue. And within that, I would say fiber is certainly not the largest, but it's the fastest-growing. And I think it's certainly expected to be the biggest driver of growth as we go through this calendar year.

Is it over, you know, within laser revenues, is it over 50%, or if not, then can it get over 50% by sometime this year?

It is not over 50% today. Could it get there? It certainly could. But we would need some industry help to get there.

Got it. Thank you.

Thank you. And our next question comes from the line of Matt Lebow [ph] from Piper Jaffray.

Thank you. I just had one brief modeling question. I think earlier you said you expected the tax rate to drop back between the 6% and 7% level, and then it could tick higher at some point when this new factory comes under greater utilization. Is there some sort of timing on that, or just a little clarity there would be helpful.

Okay. This is TS. No. I say when the Building 6 is fully occupied, I expect the tax to go down, because Building 6 is a tax protector. Okay, new building, usually we get seven-year [ph] tax rate in Thailand. Most of our building in Thailand now has already come out of the tax holiday. So right now I'm guiding 6% to 7%. We're looking at close to 7%. But when Building 6 is fully ramped, fully occupied, the product come off on those building, the building tax will be tax-free. So the effective tax rate will be lower.

Okay. Would that be closer, you know, would that be just closer to 6%, or -- and then as a follow-up, is there any rough timing when we should expect that?

When I say when Building 6 is fully occupied, yeah, it will be closer to 6%, you're right.

Okay, thank you very much.

Thank you.

Thank you. [Operator Instructions] Our next question is from the line of Alex Henderson from Needham. Alex Henderson - Needham & Co.: Thanks. So I just want to be clear. The tax rate, the guidance you're giving here is non-GAAP, correct?

Let me think. Yes, it's non-GAAP or normalized. In other words, if you have extraordinary income or losses, we cut that out. So like for example, I have Q2, is you look at my tax rate, 10.5%. But because I got investigation costs, okay, so I cut that. Our normalized will be 6% to 7%. Alex Henderson - Needham & Co.: Okay. And then second, I'm a little -- since I haven't gone through too many of your new buildings ramping up, from the time you break ground on that facility, say, it's midsummer, just to choose a window, how long before it starts to become a cost that's run through the income statement, and B, a potential for revenue sources?

So, Alex, the way it typically works, as soon as we turn the lights on in that factory, right, we start, say, depreciate it, so it hits the P&L. And it essentially takes us 12 months, to use your timeline, if we were to start at, say, at the beginning of fiscal 2016 and the beginning of fiscal 2017, it would hit the P&L from a depreciation standpoint. In terms of revenue contribution, a lot of that's going to depend on the queue of [ph] customers that we have to move into that space. But typically when we're turning on the lights of that building, we've got customers at some point moving in. It may only be to occupy 10% or 15% of that space, but we will have revenue contributions typically for that building when we turn it on.

Just to add on to what John said, right? We turn on depreciation on day one we occupy the building. That's why if you look at the last couple of quarters, we've been carrying Building 6 costs in terms of full-blown fully-loaded cost. Obviously some of the area you don't use, we can save some utility and so on. But the depreciation turn on on day one. Alex Henderson - Needham & Co.: Going back to the capacity utilization commentary, if it's going to take essentially a year for that facility to come go from groundbreaking to first occupancy, should we anticipate that the utilization rate on your existing plant ticks up consistently between now and the end of fiscal 2016, and helps your gross margins improve as a result, and improve utilization on both the equipment and on the facilities?

Yes. That's what I said, when Building 6 is fully occupied, that's why we get to the $200 million level, and at that 12% to 12.5% margin we're predicting.

Yeah, Alex, so you should see that, you know, as that building continues to fill up, we would anticipate that to continue, you know, through construction, if you will, of Building 7, whenever we do break ground on that. And as a result of that increased utilization, that that should be a tailwind to the gross margin. Alex Henderson - Needham & Co.: And so the magnitude of the benefit of that would be what, about a half a point?

Somewhere in that range.

Yeah, yeah. Alex Henderson - Needham & Co.: Okay. Got it. Thanks.

Thank you.

Thank you. And that concludes our question-and-answer session for today. I would like to turn the conference back to management for any closing comments.

Thank you everybody for joining us today. And we look forward to speaking with you all soon. Thanks very much.

Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Everyone have a good day.