Finisar Reported Its Eighth Consecutive Quarter of Sequential Revenue Growth

For fiscal first-quarter 2015 (ended 27 July 2014), fiber-optic communications component and subsystem maker Finisar Corp of Sunnyvale, CA, USA has reported its eighth consecutive quarter of sequential revenue growth, to a record $327.6m, up 7.1% on $306m last quarter and 23% on $266m a year ago.

However, revenue for telecom products rose by just 6% on $81.6m a year ago and by 4.1% on $83m last quarter to $86.4m.

In contrast, revenue for datacom products rose by 31% on $184.4m a year ago and by 8.2% on $223m last quarter to $241.2m, due mainly to strong demand for transceivers addressing wireless applications.

However, due mainly to increased sales of relatively low-margin transceivers for wireless applications plus lower sales of 100 Gigabit Ethernet transceivers (resulting in a less favorable product mix) as well as $2m extra depreciation as a result of increased capital expenditure, gross margin on a non-GAAP basis has fallen further, from 35.1% a year ago and 34.2% last quarter to 32%.

In addition, operating expenses have risen further, from $65.9m last quarter to $69.4m, again due mainly to the impact of operating expenses associated with the acquisition of u2t Photonics of Berlin, Germany (which makes phosphide-based, high-speed receivers and photodetectors), but this time for a full quarter (since the transaction closed during last quarter).

Due mainly to the lower gross margin and higher operating expenses, operating income has hence fallen for a second consecutive quarter, from $38.9m (12.7% of revenue) last quarter to $35.4m (operating margin of 10.8% of revenue). Likewise, net income has fallen again, from $37.5m ($0.36 per diluted share) to $33.3m ($0.32 per diluted share).

During the quarter, cash, cash equivalents and short-term investments fell by $15.6m, from $513m to $497.4m. This was due primarily to capital expenditure of $44.2m (up from $36.5m, and above the expected $40m), increased accounts receivables of $6.3m (due to higher revenue levels), a reduction in accrued compensation of $10.3m (due primarily to the payment of fiscal year-end cash bonuses), and increased inventory of $10.4m (due partly to the acquisition of LightSmyth Technologies).

During the quarter, Finisar completed the acquisition of LightSmyth Technologies Inc of Eugene, OR, USA, which has previously supplied grating products for Finisar’s wavelength-selective switch (WSS) reconfigurable optical add-drop multiplexer (ROADM) products. The acquisition further advances Finisar’s vertical integration strategy.

“While demand for our transceivers that address wireless applications was very strong in the first quarter, demand for these products is now expected to decrease in the second quarter,” notes CEO Eitan Gertel. “As a result of this decrease in demand for wireless transceivers, as well as a decrease in demand for telecom products due to soft carrier spending and a decrease in demand from several datacom customers with lumpy order patterns, we expect our overall revenues to decline in the second fiscal quarter,” he adds.

In fiscal Q2/2015, Finisar expects revenue to fall by 2-7% to $305-320m (the first decline in two years). Year-on-year, this is still up, by about 6%, although this is below the more-than-20% consecutive year-on-year growth of the last five quarters. The firm also expects gross margin to be flat to down, at 31-32% (due to another $2m rise in depreciation, plus the impact of annual salary increases at the beginning of the quarter). Operating expenses should rise by $1m, due mainly to the annual salary increases plus higher legal expenses from multiple patent litigations. Finisar also expects declines in operating margin to 8.5-9.5% and earnings per diluted share to $0.23-0.27 (about 30% below the prior forecast). Capital expenditure should rise to $45m, driven again by continued construction on the exterior shell of the second building of Finisar’s new factory in Wuxi, China.

“While we are disappointed with the near-term revenue outlook for our second quarter, we continue to believe in the long-term growth prospects of the company,” says executive chairman Jerry Rawls, who expects demand to return and revenues to increase sequentially for transceivers for wireless applications in the fiscal third quarter, based on continued LTE deployment around the world (especially in China). “We have a very broad portfolio of short- and long-reach and various-data-rate solutions for this important market,” he adds.

“Revenue is driven primarily by growth in the worldwide demand for bandwidth from the ever-increasing distribution and use of video, images and digital information,” continues Rawls. “Another important trend that is benefiting us is the growth in Cloud services, which drive networking hardware upgrades and the build-out of new hyper-scale data-centers. These large data-centers need many more optical connections, providing terrific opportunities for Finisar products… Finisar is uniquely positioned with our broad product line, extensive customer engagement, profitable vertically integrated business model and strong balance sheet to capitalize on these market opportunities,” he believes.

“With respect to new products, we are making excellent progress on the development of our 100G CFP2 coherent module, in which we utilize our vertically integrated advanced indium phosphide laser, modulator and receiver components,” says Gertel. “We will have an industry-leading product in terms of power consumption and performance for both metro and the long-haul coherent applications,” he believes. “We are continuing to ship qualification samples of our 10G tunable SFP+ to many of our customers. As a result of our next-generation vertically integrated optics, we continue to believe we will have the lowest-power-consumption module in the industry, at approximately 1.5 watts.”

“Our standard and low-profile dual wavelength-selectable switches program is progressing very well,” continues Gertel. “Due to our long history of developing innovative LCoS [Liquid Crystal on Silicon]-based devices and WSS product, we are offering our customers a higher level of performance than they can obtain from any other solutions,” he claims. “Our designs are using a common platform that can address multiple markets and give our customer the flexibility of buying one product that can be deployed in many different configurations.”

“In datacoms, we have production released our 100G CFP2 LR4 and are seeing very strong demand for this product,” says Gertel. “Due to our vertical integration of the lasers and receivers, our module has the lowest power consumption of any other solution in the market,” he claims. “We are currently adding capacity in order to shorten our lead times and address opportunities to extend our market share. In the 40G datacom market we believe we have the broadest portfolio in the market for both transceivers and active optical cables (AOCs) in single-mode or multi-mode configurations,” he concludes.