Fiber Optics Maker Finisar Surfs Wave Of Data Demand


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After revving up investor enthusiasm with a solid first quarter and bright prospects, fiber optics firm Finisar suffered a stock-market setback when roughly two months later Cisco Systems, its biggest customer, sent out a warning of slower days ahead.

And while Wall Street expectsFinisar ( FNSR ) to post another triple-digit profit gain when it reports second-quarter results on Thursday after the close, the company's stock has yet to recover much of its lost ground.

Finisar is a leading supplier of components for fiber-optic networks. Its technologies enable high-speed voice, video and data communications in telecommunications, networking, storage, wireless and cable TV applications.

After eight straight quarters of earnings declines, Finisar hit the comeback trail in its first quarter of fiscal 2014, reported on Sept. 5. Earnings soared 158% year over year to 31 cents a share and sales rose 21% to $266.1 million.

Demand For Bandwidth

"Finisar's revenue was driven primarily by growth in the world demand for bandwidth, for the ever-increasing distribution and use of video, images and digital information," said Executive Chairman Jerry Rawls on the first-quarter conference call.

In the wake of the report -- during which Finisar also raised second-quarter guidance -- Finisar's shares climbed 15% in the week ended Sept. 6.

But the tide turned after networking gear leaderCisco ( CSCO ), from which Finisar derives a substantial chunk of revenue, gave a disappointing outlook for its current quarter and missed analyst revenue estimates in its first quarter of fiscal 2014, reported on Nov. 13.

Finisar's shares sank 7% on Nov. 14.

"The stock was down so much because Cisco is their top customer at 17% of its fiscal 2013 revenue, and Cisco's guidance was really bad," said MKM Partners analyst Michael Genovese.

But Genovese is still upbeat about Finisar's second quarter.

"I still think their October quarter will have strong earnings," he said. "Cisco has become less of a driver for Finisar. The Web 2.0 customers likeGoogle ( GOOG ) ( AMZN ) are driving the growth at Finisar, not Cisco."

He expects Finisar to report a "good" second quarter and guidance for the January quarter to be "in line" with consensus.

Analysts polled by Thomson Reuters see second-quarter earnings rising 160% to 39 cents a share. They expect full-year earnings to climb 122% to $1.42 a share.

William Blair & Co. analyst Dmitry Netis says Finisar will "likely print a solid second quarter."

"But I'm cautious into the January and April quarters," he said.

He cites annual price negotiations and the "macro impact in Europe and China as raised by Cisco, which may put the brakes on a telecom segment ramp-up," as the reasons for his caution.

Finisar makes optical transmission modules that go into telecom and datacom applications. It sells mainly to manufacturers of storage systems, networking equipment and telecom equipment, such asAlcatel-Lucent S.A. ( ALU ),Brocade Communications Systems (BRCD), Cisco andHewlett-Packard Co. (HPQ)

Data Traffic Growth

Finisar is benefiting from a few trends, says Genovese.

"The biggest is the growth in data traffic, which is the biggest ever since the advent of Internet," he said.

Global data traffic, he says, is growing over 50% a year, which in turn is driving the demand for added optical transmission capacity.

Finisar's datacom business has been the driver of its recent growth spurt. Two or three years ago, the percentage of sales was split equally between that and telecom. Now, about 70% is from datacom and around 30% is from telecom amid faster growth on the datacom side, says Genovese.

The datacom business "has massively accelerated" in the last two quarters overall and for Finisar, says Genovese.

In its first quarter, Finisar's sales of products for datacom applications rose 12.5% over the prior quarter, while sales of products for telecom applications rose 2.7%.

What's driving the strength in datacom?

"Companies like Google and Amazon are building bigger and bigger data centers and upgrading their older centers," said Genovese. "There's been a lot of investment in datacom."

That investment should continue, wrote Craig-Hallum Capital Group analyst Richard Shannon in a report following Finisar's first-quarter results.

"We believe the datacom spending trends have good visibility for at least the next couple of quarters, driven by the transition to 10G (10-gigabit data communication networks) in mainstream enterprise and 40G/100G in larger data center builds," he wrote. Finisar is "well-positioned with multiple products that will bolster the continued growth in datacom (and) should continue to benefit from strong 10G momentum with its Ethernet transceivers."

Telecom Growth

Things could be looking up for Finisar on the telecom side, which had been weak.

"While telecom has been slow to return to a growth path, we think trends are slightly improving," Shannon wrote. Among the reasons is "reiterated" capital spending guidance by the three main Chinese telecom companies, suggesting "strong spending patterns" for the second half of 2013.

Rawls also sees an uptick on the telecom front in the second quarter: "We expect the growth rate for telecom to accelerate, and both datacom and telecom revenues to increase over the first quarter," he said on the first-quarter conference call.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas
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