News

10 December 2008

 

Finisar’s growth in storage offsets Optium’s CATV downturn

For its fiscal second-quarter 2009 (ended 2 November) Finisar Corp of Sunnyvale, CA, USA has reported revenue of $159.5m. This is up 23.9% on last quarter's record $128.7m and up 58.4% on $100.7m a year ago (although, excluding $36.5m from about two months of revenue from optical subsystem maker Optium Corp of Horsham, PA, USA following its takeover on 29 August, revenue of $123m was down 4% on last quarter).

Revenue from network test equipment was $11.8m, up 20.4% on $9.8m a year ago but down 9.1% on the record $12.9m last quarter due mainly to the spin-off of the NetWisdom product line into the new firm Virtual Instruments (in which Finisar has a minority stake).

Revenue from optics (fiber-optic communications components and subsystems) was $147.7m, up 27.6% on $115.8m last quarter and 62.5% on $90.9m a year ago (although, excluding the $36.5m from Optium, revenue of of $111.2m was down 4% on last quarter). In particular, revenue for 10-40Gb/s applications was $54m (up 67.6% on $32.2m last quarter and almost triple $18.2m a year ago, due mainly to Optium). Of total optics revenue, by application:

• Revenue for short-range LAN/SAN applications (unaffected by the Optium merger) was $63.3m, up 4% on $60.8m last quarter due to increased revenue from 8 Gigabit Fiber Channel products (compensating for 10 Gigabit Ethernet and 2-4 Gigabit LAN/SAN revenues dropping slightly).

• Revenue for metro telecom applications was $81m (up 48% on $54.9m last quarter, but due to the merger). Of this, $25.4m was for <10Gb/s applications and $45.1m was for 10-40Gb/s applications (with 40Gb/s, in particular, continuing to grow sequentially). Reconfigurable optical add-drop multiplexer (ROADM) products for metro and telecom applications contributed $8.8m (about the same as recorded by Optium last quarter).

• Revenue for analog and cable TV products was down more than expected from the $8.1m reported by Optium last quarter to just $3.4m (attributed to the credit crunch and the fact that many cable TV operators are highly leveraged). This accounts for Optium’s full-quarter revenue of $41.5m ($36.5m post-merger plus $5m from the month before the merger) being down on its previous quarter's $47m.

Non-GAAP gross margin was 35.6%, down on 40% last quarter due mainly to Optium (whose gross margins were lower than Finisar’s prior to the merger): the blended gross margin for the combined firm for last quarter would have been just 36.2%.

Excluding charges (including $178.8m for goodwill impairment in conjunction with a deterioration in the macroeconomic environment and a material reduction in the firm’s market value as of the end of the second quarter), non-GAAP net income was $10.3m, but down slightly on $10.9m last quarter due mainly to the inclusion of the Optium results. Nevertheless, earnings before interest, taxes, depreciation, and amortization (EBITDA) was a healthy $20m, up slightly from $19.4m last quarter.

During the quarter, Finisar’s cash balance fell from $124.6m to $51.9m. This was due to the payment of $92m in debt reduction for the firm's 5.25% convertible notes (which matured on 15 October), partially offset by adding $31.8m in cash as a result of the Optium merger.

“We have largely completed the integration of both companies as of the end of last quarter and are already racing to realize the additional synergies,” says CEO Eitan Gertel. These are expected to amount to $10-15m annually, including $5-10m related to manufacturing, mainly transferring products to lower-cost facilities. Capital expenditure hence rose from $5.6m last quarter to $9.9m, due to the ongoing expansion of the Shanghai facility and the build-up in production capabilities in Malaysia and Shanghai (in anticipation of transferring certain products there). But, correspondingly, operating expenditure of $44m is down on both last quarter and a year ago.

“Current economic conditions are challenging,” says president & executive chairman Jerry Rawls. Some storage customers forecast stable revenues or small increases (probably a reflection of the continued growth in information to be stored), Finisar has seen some networking and telecom customers guide to sequential revenue declines of 10-14%, adds Rawls. “Based on a variety of data points, it appears that revenues in our upcoming quarter will be down on a sequential basis.”

For fiscal Q3, Finisar expects revenue to fall 5-10% to $143-151m, including $10-11m for network tools (down from $11.8m) and $133-140m for optics (down from $147.7m, including Optium again down about $5m on its pre-merger quarterly run-rate of $47m). On a non-GAAP basis, gross margin should fall to 34% and net income to just $4m.

The firm has hence undertaken actions to cut operating costs by $3m per quarter, including cutting about 120 jobs (12% of the US workforce). Whereas the impact of a full quarter of the merger would otherwise raise operating expenditure by $2m in Q3, OpEx should fall by $1m. EBITDA should still be a healthy $12m (despite more than $8m in depreciation expense). Lower CapEx of $7-8m will help the cash balance to stay above $50m, despite an upcoming payment of $8.4m in non-recurring items related to merger obligations.

For fiscal Q4 (to end April), Finisar expects its pipeline of new products nearing qualification in customers' labs (particularly 10-40Gb/s products and LAN/SAN business) to enter production and drive a return to sequential growth. This could raise revenue back to fiscal Q2's levels, non-GAAP gross margin back to 35% and EBITDA back to $20m, while CapEx is expected to continue to fall. Also, over the next couple of quarters inventory levels should decline by perhaps $10m, so the cash balance should start to rise again.

“Just as we grew at a compound rate of 20% per year for several years following the crash of the tech bubble [of 2001], we believe we will emerge from this downturn in a much stronger position as we continue to expand our product portfolio, our addressable markets, and our market share,” believes Rawls.

See related items:

Finisar and Optium hit record revenues prior to merger

Finisar completes merger with Optium

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