Fabrinet, the optical packaging and manufacturing giant, just had a stellar quarter. Record revenue! Record EPS! All the buzzwords are flying. But amidst the self-congratulatory back-patting, there was a subtle, almost imperceptible shift in the conversation that could signal a major strategic pivot for the company.

Wall Street, as usual, was focused on the obvious: the continued dominance of datacom, fueled by the insatiable appetite for AI-driven optical interconnects. They heard the excitement around 400ZR and the cautious optimism for the eventual recovery of traditional telecom. But they missed the forest for the trees. They missed the quiet undercurrent of change, the hint of something new brewing beneath the surface.

That change, my friends, lies in Fabrinet's burgeoning relationship with DZS, a global leader in access and optical networking solutions. While DZS was briefly mentioned as a new customer whose initial business has already been integrated, the full implications of this partnership remain unexplored.

Here's why this is significant. DZS is aggressively pursuing the buildout of 5G and fiber-to-the-home (FTTH) networks worldwide. These are massive, multi-year infrastructure projects with a voracious demand for optical components. While Fabrinet currently holds a dominant position in the high-speed datacom market, it's still playing catch-up in the broader access and aggregation segments.

The partnership with DZS could be the key that unlocks this enormous opportunity. DZS, with its deep expertise in access technologies and global customer reach, provides Fabrinet with a direct pipeline into a rapidly expanding market. And Fabrinet, with its manufacturing prowess and reputation for execution, offers DZS a reliable and scalable production partner. It's a symbiotic relationship with the potential to propel both companies to new heights.

But here's where the hypothesis gets interesting. If we dig a little deeper into Fabrinet's guidance for the third quarter, we see a subtle hint of this strategic shift. While the company anticipates sequential growth in datacom, the overall revenue guidance implies a more moderate pace of expansion compared to previous quarters.

One explanation for this moderation is the impending transfer of the 100-gig Intel business to Jabil, which will impact datacom revenues. However, even accounting for this factor, the projected growth rate for datacom appears to be slowing down. This suggests that the explosive growth phase of Fabrinet's initial AI programs might be reaching a plateau.

Now, consider this: Fabrinet explicitly stated that the initial business transfer from DZS is complete and already factored into their actuals and forecasts. This implies that any *additional* business from DZS would be considered "new" and would contribute to exceeding their guidance.

Could this be the hidden driver of future upside? Is Fabrinet quietly positioning itself to leverage the DZS partnership to offset the potential slowdown in AI-driven datacom growth? The clues are certainly there.

Let's crunch some numbers. Fabrinet's Q3 revenue guidance ranges from $705 million to $725 million. The midpoint of this range, $715 million, represents year-over-year growth of 7.5%. However, if we assume a more conservative 5% sequential growth for datacom (accounting for the Intel transfer), and flat revenue for non-optical communications, we arrive at a total revenue of approximately $700 million.

This leaves a gap of $15 million that needs to be filled for Fabrinet to reach the midpoint of its guidance, let alone exceed it. Could this $15 million be the early signal of a new wave of business from DZS, driven by 5G and FTTH deployments?

Revenue Breakdown

Datacom vs Telecom Revenue Trend

The chart below visualizes the shifting revenue mix of Fabrinet, with datacom surpassing telecom in Q2 2024. It also incorporates hypothetical projections based on management commentary and the potential impact of the DZS partnership.

It's a bold hypothesis, but one that deserves serious consideration. While Wall Street remains fixated on the AI narrative, a new story is unfolding. Fabrinet, the quiet giant of optical manufacturing, is poised to enter a new era of growth, powered by the global expansion of 5G and fiber networks. And this time, those who pay attention to the subtle signals might just get ahead of the curve.

"Fun Fact: Did you know that Fabrinet was founded in Thailand following the 1997 Asian financial crisis? Talk about turning adversity into opportunity! This resilience and ability to adapt is deeply ingrained in Fabrinet's DNA, making their potential expansion into new markets all the more intriguing."