Shares of fiber-optic component supplier Finisar (FNSR) are down $1.41, or over 6%, at $20.58, after the company yesterday afternoon beat fiscal Q1 revenue expectations by a hair, but missed with its outlook for this quarter's results by a wide margin, blaming a manufacturing delay in parts for so-called 3-D sensing.
Finisar is widely believed to be a supplier to Apple (AAPL) for the forthcoming " iPhone X," which will supposedly use 3-D sensing for things such as augmented reality and facial recognition. Finisar has acknowledged in prior quarters it is "ramping" its 3-D sensing business, without naming Apple explicitly. A secondary factor in the report was the continued delay of the resumption of sales of optics in China, something that has dogged the fiber names all year long.
Last night, on the conference call, the company again made reference to a single large customer, and said that Finisar had had to make some adjustments in how it manufactures its parts for the "vertical-cavity surface-emitting laser," or VCSEL "array" that is part of 3-D sensing.
One analyst, Tim Savageaux of Northland Capital, pressed Finisar's CEO, Jerry Rawls, to explain the delay, asking "is there sort of a risk that you've missed it here?" Meaning, lost Apple's business.
Rawls was adamant Finisar hasn't lost Apple's business:
No, I don't think there's a risk that we've missed it. But I -- we did have to make a change in one of the processes that we run. And that's was in order to improve the performance of the product, the reliability of the product. It was -- it turns out it was a key process parameter. And we had dialed it in a little bit off where it should have been. So we dialed it back, and the results have been terrific. So we're rolling. And I don't know if there's much risk on this.
Most analysts this morning seeming to be giving the company the benefit of the doubt that things are delayed, not lost. There are no ratings changes, that I can see, but several price target cuts. I would note other fiber-optic names have not been hit. Shares of Lumentum (LITE), Oclaro (OCLR), and Applied Optoelectronics (AAOI), for example, are all going higher.
In fact, Alex Henderson, who has a Strong Buy on Finisar stock, this morning argues the delay by Finisar is great for Lumentum, whose shares he also covers.
Ramping optical products is rarely easy, but we certainly did not expect Finisar to miss qualifications and post a near-zero October quarter. They have been working on this for a long time. Finisar insists it has fixed the issue and should be good to go to qualify in the October quarter and start to ramp in the January quarter. We see this as great news for LITE who continues to see orders roll-in and should be producing at $30 million per month.
Henderson sticks with his rating, but cuts his price target to $34 from $44, and argues the stock is "over-sold and under-valued," assuming "the China market rebounds next year" and the 3-D sensing products "gets qualified and ramps."
In addition to Lumentum, Henderson sees some good news for II-VI (IIVI), and also for Applied Optoelectronics in that Finisar "saying they expect sequentially flat pricing in Data Comm LR, CWDM4 and PSM in CY2H17."
B. Riley's Dave Kang, reiterating a Buy rating and cutting his price target to $30.75 from $38, writes that "While 3D sensing (3DS) was delayed by a quarter, we expect 3DS to be one of the major catalysts in FY18 along with the ROADM (Reconfigurable Optical Add/Drop Multiplexer) cycle."
MKM Partners' Michael Genovese reiterates a Buy rating, and cuts his price target to $31 from $33, writing "all of the meaningful catalysts for the stock are delayed, but none are canceled."
"The most important catalyst, which is 3D Sensing, is only delayed by one quarter, and full Verizon qualification and demand recovery in China are delayed by 1-2 quarters compared to prior expectations."
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.
