Fabrinet (FN) Q4 2025: DCI Revenue Hits $107M, Fueling Multi-Segment Growth Visibility
Fabrinet’s Q4 marked a decisive inflection as Data Center Interconnect (DCI) revenue surged to 12% of sales, and the company set the stage for further expansion by segmenting high-performance compute (HPC) as a new disclosure. A wave of next-gen optical and compute ramps is driving both topline and margin outperformance, but persistent component constraints and customer concentration raise new execution questions as fiscal 2026 begins. The company’s capacity acceleration and capital allocation signal confidence, yet investors should watch for supply normalization and the durability of new growth vectors.
Summary
- DCI Momentum Reshapes Segment Mix: Data Center Interconnect revenue breakout signals structural demand shift in telecom.
- Capacity Acceleration Underway: Building 10 expansion fast-tracked to meet multi-segment customer ramps.
- Component Bottlenecks Remain Material: Supply constraints in next-gen optical products continue to cap upside.
Performance Analysis
Fabrinet delivered a record Q4, with revenue up 21% year over year, propelled by robust telecom and optical communications growth. Telecom revenue, which now includes a separate DCI line item, grew 46% year over year and represented the bulk of optical communications gains. DCI revenue debuted at $107 million, or 12% of total revenue, reflecting the growing importance of cloud data center connectivity as a secular demand driver. Data communications (datacom) revenue, while down 12% year over year, rebounded 10% sequentially due to strong demand for 1.6T transceivers, which Fabrinet has now begun shipping at volume—a milestone for next-generation optical networking.
Non-optical communications also contributed, with automotive and industrial laser steady, and the “other” category up sharply due to normalization of non-cash contra revenue items. Gross margin improved to 12.5% on operational efficiencies, offsetting ramp costs and FX headwinds. Operating leverage remained evident, with operating expenses below 2% of revenue. Free cash flow was muted by higher capital expenditures for capacity expansion, and customer concentration remained high, with NVIDIA and Cisco at 28% and 18% of revenue, respectively.
- Telecom Outpaces Core Market: Telecom’s 46% YoY growth and DCI’s $107 million debut underscore cloud and AI-driven infrastructure demand.
- Next-Gen Optical Ramps: Volume shipments of 1.6T transceivers and 21% YoY growth in 800G+ products highlight Fabrinet’s role in leading-edge optical transitions.
- Margin Resilience Amid Expansion: Gross margin beat expectations, reflecting operational discipline even as new program ramps and FX losses introduced headwinds.
Despite these wins, supply constraints in key optical components limited upside in datacom, and the business remains highly concentrated among top customers. The company’s ability to sustain margin and growth as new programs scale will be tested by temporary but meaningful supply chain friction and the ramp-up of capital expenditures tied to Building 10.
Executive Commentary
"With multiple growth drivers providing clear visibility toward reaching $1 billion in quarterly revenue, we are now evaluating options to accelerate the completion of a portion of building 10 to meet increasing customer demand."
Seamus Grady, Chief Executive Officer
"Gross margin in the fourth quarter was better than anticipated at 12.5%, with operational efficiencies offsetting a smaller than expected impact from large project ramps. Operating expenses remain below 2% of revenue, resulting in record operating income of $97 million, or an operating margin of 10.7%, a 50 basis point improvement from Q3."
Chavez-Ferra, Chief Financial Officer
Strategic Positioning
1. DCI and Next-Gen Optical as Growth Engines
Fabrinet’s explicit breakout of DCI revenue marks a structural shift in its business model, with cloud and AI infrastructure spend driving telecom and optical demand. The company is now a key manufacturing partner for hyperscale and merchant customers, with 1.6T and 800G transceiver ramps providing multi-year growth visibility. By working across four datacom growth vectors—main customer, other OEMs, merchant suppliers, and direct hyperscalers—Fabrinet is diversifying its pipeline and embedding itself deeper in the value chain.
2. Capacity Expansion and Capital Allocation
Building 10’s accelerated timeline reflects Fabrinet’s willingness to deploy capital ahead of demand, betting on sustained customer ramps across telecom, datacom, and high-performance compute. This move, combined with a record $126 million in share buybacks, signals management’s conviction in long-term secular growth, but also raises the stakes for execution as capital intensity rises.
3. Managing Supply Constraints and Execution Risk
Component shortages in next-gen optical products (especially 200G per lane EMLs) are capping near-term growth in datacom and telecom, with management projecting these issues could persist for one to two quarters. While these are not expected to impact gross margin structurally, they underscore the fragility of supply chains in advanced optics and the importance of supplier diversification and customer collaboration.
4. Segment Disclosure Evolution and Customer Mix
The introduction of an HPC (High Performance Compute) revenue category for Q1 2026, driven by the AWS partnership, signals Fabrinet’s expansion into new compute adjacencies. However, customer concentration remains acute, with NVIDIA and Cisco accounting for nearly half of revenue—a risk if ramp schedules or demand shift unexpectedly.
Key Considerations
Fabrinet’s Q4 and FY25 results reflect a company at the intersection of cloud, AI, and next-gen optical infrastructure, but also one navigating complex supply and demand dynamics. Investors should weigh the following:
Key Considerations:
- DCI and 1.6T Transceiver Ramps Set the Pace: Ongoing volume growth in these categories is critical for sustaining topline momentum and segment diversification.
- Building 10 CapEx Acceleration: Early spend signals confidence, but raises exposure to demand timing and execution risk if ramps stall or supply issues persist.
- Supply Chain Fragility Remains: Component shortages in high-speed optical products are a real bottleneck, with management expecting resolution over the next two quarters.
- Customer Concentration Heightens Volatility: Nearly half of revenue from two customers leaves Fabrinet exposed to program shifts or competitive moves at these accounts.
- Margin Management in Ramp Cycles: Operational discipline and cost control will be tested as multiple new programs scale and merit increases cycle through the P&L.
Risks
Fabrinet’s upside is tempered by persistent supply chain constraints, especially in next-gen optical components, which could dampen growth if not resolved quickly. Customer concentration with NVIDIA and Cisco remains a structural risk, while increased capital expenditures for Building 10 could pressure free cash flow if demand softens. Macroeconomic volatility, tariff policy, and evolving customer ramp schedules add additional layers of uncertainty.
Forward Outlook
For Q1 2026, Fabrinet guided to:
- Total revenue in the range of $910 to $950 million
- Non-GAAP EPS between $2.75 and $2.90
For full-year 2026, management did not provide formal guidance but emphasized:
- Expectations for continued growth in telecom and datacom, with DCI and HPC as incremental drivers
- Temporary margin pressure from merit increases and ramp inefficiencies, with recovery expected as the year progresses
Management highlighted strong demand visibility, the impact of new program ramps, and the likelihood of resolving component shortages within one to two quarters.
Takeaways
Fabrinet enters FY26 with a strengthened growth profile, but faces a balancing act between capitalizing on secular demand and managing near-term execution risks.
- DCI and Next-Gen Optical Ramps Anchor Growth: Structural demand from cloud and AI infrastructure is driving segment expansion and capacity investments.
- Supply Constraints and Customer Mix Are Key Watchpoints: Execution on supply normalization and customer diversification will determine if momentum is sustained or stalls.
- Investors Should Monitor Margin Trajectory and CapEx Discipline: As Building 10 spending rises, maintaining margin and free cash flow will be central to valuation support.
Conclusion
Fabrinet’s Q4 capped a year of record execution and strategic repositioning, with DCI, 1.6T, and HPC now central to its growth narrative. The company’s willingness to accelerate capacity and segment disclosure signals confidence, but the next two quarters will test its ability to translate demand into scalable, profitable delivery amid supply headwinds and concentrated customer exposure.
Industry Read-Through
Fabrinet’s results reinforce the secular upcycle in cloud, AI, and high-speed optical infrastructure, with DCI and next-gen transceivers emerging as critical bottlenecks and growth drivers across the supply chain. The company’s experience with supply constraints and customer concentration is a cautionary signal for peers and suppliers in the optical and compute ecosystems. The move to break out HPC revenue and accelerate capacity expansion foreshadows broader industry shifts as hyperscalers and OEMs deepen partnerships with manufacturing specialists to meet escalating compute and connectivity demands. Investors in adjacent sectors should monitor how supply normalization and capital allocation trends shape the competitive landscape in FY26 and beyond.