Finisar CEO Rawls To Retire: Could Kindle M&A, Says William Blair

Shares of fiber-optic component supplier Finisar (FNSR) are down a penny at $22.20, after the company this morning announced that its chief executive, Jerry Rawls, will retire at the end of net year, and that the company is starting a search for his replacement.

The announcement comes ahead of the company's fiscal Q1 report tomorrow afternoon, after the closing bell.

Finisar's lead director, Robert Stephens, expressed the company's "deep gratitude" for Rawls' work. Rawls helped to found Finisar back in the late 1980s, and took the company public in 1999.

Rawls thanked employees and expressed confidence that "Finisar will continue on its successful path."

From the Street this morning, Dmitry Netis with William Blair, who has an Outperform rating on the shares, writing that he thinks Rawls is likely to remain chairman after retiring.

Netis notes the company is at record levels of revenue and profit and "even better prospects" in the "near future," given its roll in the "multi-billion 3-D sensing opportunity."

Netis thinks the news is not a surprise to investors, and also is likely to be "well received" because it "reopens M&A discussions for consolidation within the industry."

Netis speculates on who they could name from within the company as a successor to Rawls:

As far as internal talent contending for the CEO role, we place our bets with Todd Swanson, 46, executive vice president of sales, marketing, and R&D, Mr. Rawls's closest partner and confidant since joining the company in 2002, or Kurt Adzema, 48, executive vice president and chief financial officer since 2010 and previously vice president and of strategy and corporate development from 2005 to 2010.

A couple of Street observers today are offering their thoughts as far as tomorrow's report. The consensus is for $341 million in revenue and 40 cents per share in net income.

D.A. Davidson's Mark Kelleher, who has a Buy on Finisar stock, and a $40 price target, is looking for results about in line to slightly lower, at $340 million and 38 cents per share.

He really is focused on the outlook for Q2 and beyond, as he expects sales of parts for 3-D sensing for Apple (AAPL) and other OEMs should drive "strong Q2 guidance." Kelleher points to comments from management back at the lastearnings call when they said that they "expect big revenues" for Q2.

Likewise, Dave Kang at B. Riley, who's got a Buy rating on the stock and a $38 price target, is looking for in-line results for the quarter, but for Q2 to show two "catalysts," the one being 3-D sensing, the other being "analog coherent optics," or "ACO":

While near-term visibility remains limited, two catalysts are expected to emerge in F2Q and beyond that will drive the company's top-line growth. 3DS will be the main catalyst near-term while the qualification of ACO's (per a competitor's comments) at a major account, which we believe is Verizon (VZ; N/R), could provide incremental growth as well. Last, China Mobile (CHL; N/R) recently issued a tender notice for approximately 42k ports. While detailed information regarding the tender remains vague, our industry contacts believe that the majority of the 42k ports will be for 100G applications. In terms of timing, our contacts believe the CHL program will most likely commence in 1Q CY18 and could last for 4-6 quarters. Specifically for FNSR, China Mobile tender is important in that it directly stated the inclusion of ROADMs; FNSR is a leading supplier or ROADMs along with LITE [...] Based on Lumentum Holdings' (LITE) 3DS data, we expect FNSR's 3DS revenue to ramp meaningfully in F2Q. For example, LITE noted that it has received 3DS orders of $200MM which are expected to ship in C2H17; $50MM likely in C3Q and $150MM in C4Q. Since we expect LITE to have significant market share initially, we believe 3DS revenue for FNSR could be in the range of $10MM-$25MM in F2Q. We expect 3DS to be accretive to margins, and as such, have modeled GM to expand from 30.3% in FY16 to 36.2% in FY18.

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

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

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