SAN JOSE -- Oclaro, the largest customer of Fabrinet, has terminated its supply agreement, but is expected to remain with the EMS provider. Oclaro delivered a notice of termination to Fabrinet as required under a 2004 agreement, and said in an SEC filing that it  is currently in discussions with multiple third-party manufacturers to manufacture its products currently being built by Fabrinet.

However, the move is being seen a negotiating ploy by Oclaro, a designer of amplifiers and other optical communications network components. Fabrinet, which has been its primary contract electronics manufacturer since 2004, is among those bidding on the new deal, Oclaro said.

Indeed, the supply agreement between the firms automatically renews for a term of one year unless a notice of termination is delivered by either party 180 days prior to the expiration of the current term. Oclaro made up 17% of Fabrinet's revenue in fiscal 2010.

In a research note, analyst Sherry Scribner of Deutsche Bank said Oclaro's move was a tactical and the impact on Fabrinet would be minimal. "As indicated in the filing, the company terminated its agreement in order to freely enter into replacement agreements. We believe Oclaro terminated the current agreement in order to renegotiate and update terms and not because it was dissatisfied with Fabrinet’s service. We expect Fabrinet to continue to be a significant supplier to Oclaro over the next year, and do not anticipate any change in Fabrinet’s revenue or earnings through fiscal year 2012 based on Oclaro’s announcement."

Fabrinet is one of the world's 20 largest EMS companies, according to the CIRCUITS ASSEMBLY Top 50.

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