Finisar (FNSR) is trading modestly lower today after
reporting disappointing Q4 (Apr) earnings results and providing guidance for Q1
(Jul) last night. In terms of quick background, Finisar is a supplier of
optical subsystems and components that are used in data communication and telecom
applications. Its optical subsystems consist primarily of transmitters,
receivers, transceivers, transponders, and active optical cables, which provide
the fundamental optical-electrical, or optoelectronic, interface for
interconnecting the electronic equipment used in these networks, including the
switches, routers, and servers used in wireline networks as well as the
antennas and base stations used in wireless networks.
These products rely on the use of semiconductor lasers and photodetectors in conjunction with integrated circuits to provide a cost-effective means for transmitting and receiving digital signals over fiber optic cable at speeds ranging from less than 1 gigabit per second (Gbps) to more than 200 Gbps.
Finisar also supplies wavelength selective switches (WSS). In long-haul and metro networks, each fiber may carry 50 to more than 100 different high-speed optical wavelengths. WSS are switches that are used to dynamically switch network traffic from one optical fiber to multiple other fibers without first converting to an electronic signal.
Demand for its products is largely driven by the continually growing need for additional network bandwidth created by the ongoing proliferation of data and video traffic from video downloads, Internet protocol TV, social networking, on-line gaming, file sharing, enterprise IP/Internet traffic, cloud computing, and data center virtualization. 3D sensing lasers is a promising new market for Finisar.
Finisar sells its products primarily to manufacturers of storage systems, networking equipment and telecom equipment. Its largest customer is Cisco Systems (CSCO) at 12% of sales and Huawei at 11%. Other key customers include Brocade, Ciena, Dell EMC, Ericsson, FiberHome, Fujitsu, HPE, IBM, Juniper, Nokia, QLogic, and ZTE. These customers, in turn, sell their systems to businesses and to wireline and wireless telecom service providers and cable TV operators.
Turning to the Q4 (Apr) results, non-GAAP EPS fell to just $0.05 from $0.50 in the prior year period. This was well below prior guidance of $0.09-0.15. Revenue fell 13.3% year/year to $310.1 mln, in-line with prior guidance of $300-320 mln. Whenever you see revenue in-line but a big miss on EPS, that usually means margins came in weaker than expected. And that's exactly what happened here. Non-GAAP gross margin fell to 24.7% from 28.6% in the prior year period. Non-GAAP operating margin fell to just 1.5% from 6.8% last year. Looking ahead to Q1 (Jul), FNSR sees non-GAAP EPS of $0.10-0.16 and revenue of $305-325 mln. These numbers are roughly in-line with market expectations, but the mid-point of the EPS guidance is below expectations.
So, what happened to margins? On the call, management said it was primarily due to the impact of telecom price reductions, under-absorption of fixed manufacturing expenses in its Allen, Texas VCSEL laser fab, and an increase in non-cash inventory reserves. The good news is that FNSR expects non-GAAP gross margin to improve in Q1 (Jul) to the 26-27% range while non-GAAP operating margin is expected to climb to 4-5%.
While FNSR says it was disappointed in its Q4 (Apr) performance, they are encouraged by the outlook for revenue growth and improving gross margins in JulQ. FNSR expects to see an increase in demand for its VCSEL laser arrays for 3D sensing applications in Q2 (Oct) in connection with the expected timing of new product introductions by customers. In addition, FNSR has closed a number of design wins for VCSELs in consumer and automotive applications. Its opportunity funnel continues to increase in areas beyond automotive and handsets.
FNSR continues to make progress with respect to uplift of the building and the ordering and receipt of capital equipment for VCSEL laser fab in Sherman, Texas for 3D sensing applications and still expects to be qualified and in production using 6-inch wafers by the end of calendar 2018. In its core business, FNSR is seeing increased demand for its ROADMs as India and China deploy more advanced networks. In its datacom transceiver business, the company is seeing increased unit volumes in the datacenter market, but this is being offset by continued ASP pressure.
On the horizon, FNSR believes it's well-positioned with the major 5G wireless OEMs on 25-gig and 100-gig data rates for both short and long-reach applications. FNSR also believes it's well-positioned for the 400G transition starting in calendar year 2019. Given this horizon, FNSR believes it can ultimately get to a sustainable operating margin of 12% to 15% by ramping in new markets, changing its product mix, and focusing R&D priorities.
In sum, this was a difficult quarter, but the stock is not down much thinks to management’s good work shifting the focus to what should be better results in JulQ. Also, they sound pretty positive about 3D sensing opportunities and the ramp-up of production there.
- OUR VIEW
- LEARNING CENTER