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For its fiscal third-quarter 2008 (ended 27 January), fiber-optic component and subsystem maker Finisar Corp of Sunnyvale, CA, USA has reported record revenue of $112.7m (exceeding November’s guidance of $104-108m). Network test & monitoring system revenue was $9.8m (level with last quarter). Optical subsystems and component revenue was $103m (up 13%), including: $55.3m for LAN/SAN applications (up 9%); $18.7m for metro (up 19%); $24.9m for telecoms (up 21% ).

Total revenue was up 12% on last quarter’s $100.7m, due to: revenues from 8Gb/s Fibre Channel storage-area network (SAN) transceivers exceeding $2m; revenues from 10-40Gb/s products rising 60% from $18.2m to a record $29.1m (up $8m due to shipments of SFP+, XFP and X2 transceivers for 10Gb/s Ethernet and SONET applications; up $2m from shipments of 40Gb/s 300-pin transponders delayed from last quarter due to firmware problems).

Excluding charges of $17.6m ($7.4m related to completion of the stock option investigation), non-GAAP gross margin rose from 37% to 38.2%, reflecting the richer product mix (due to greater 10Gb/s revenues), and net income rose from $2.5m to $6.7m. Cash and short-term investments grew from $114.9m to $122.4m. However, this is down from $135.9m a year ago due to the $13.9m acquisition in fiscal Q4/2007 (last March-April) of photonic component and subsystem manufacturer AZNA LLC of Wilmington, MA and transponder manufacturer Kodeos Communications Inc of South Plainfield, NJ (with the aim of developing products for long-haul telecoms, a market that Finisar had not addressed previously).

R&D expenses were up $1m on the prior quarter (related mainly to developing ICs for the firm’s transceivers) and up $2m year-on-year (due mostly to the AZNA and Kodeos acquisitions, which didn’t begin hitting results until fiscal Q4/2007).

“It was gratifying to see our revenues reach record levels after spending the last few quarters working our way through several customer-specific issues,” says president and CEO Jerry Rawls. “Demand for our products for 10-40Gb/s was particularly robust this past quarter, and we expect that demand to remain healthy for the foreseeable future,” he adds. “We will continue to innovate and introduce new products for both the data center and telecom markets.”

In datacoms (products for 1 and 10 Gigabit Ethernet LAN and 2, 4 and 8 Gigabit SAN applications), fiscal Q3/2008 revenue was $78m, up from $70m the prior quarter (driven by enterprise spending).

Following the higher-than-expected 1Gb/s LAN/SAN revenue in fiscal Q3/2008, combined with revenue from test equipment for 8Gb/s applications nearly doubling, SAN business may be surprisingly strong in calendar 2008, adds Rawls.

In addition, the growing adoption of virtualization and data centers should increase demand for high-speed optics in the SAN market. However, datacom sales have been constrained by Finisar’s lack of 10 Gigabit Ethernet products, says Rawls. The datacom market for 10Gb/s applications alone is estimated to be $320m in calendar 2008 (up from $250m in 2007), but Finisar’s revenue was just $30m in 2007 (including $13m coming in the last quarter). Despite historically focusing on the XFP form factor, about $10m of the revenue in that last quarter came from products just introduced and qualified in the previous few quarters (X2-SR, XFP-SR and, more recently the SFP+, all for short-distance 10Gb/s data center applications). SFP+ is developing faster than I expected, says Rawls. “Revenues have grown very nicely with a number of customers both for 10 Gigabit Ethernet and for 8 Gigabit Fiber Channel. So, we expect that it’s going to be a mainstream product because it offers really excellent density and low power.”

“There are several products, we will qualify to gain a competitive exposure to this portion of datacom market,” says Rawls. These include X2 LRM, for the transmission of 10Gb/s signals up 220m over multi-mode fiber (typically found inside buildings) and X2LR and ZR for longer-distance metro applications. “We will be working hard to qualify our products in the next couple of quarters,” he adds.

Short-wavelength SAN business should therefore be strong, with additional 10Gb/s revenues: “We can continue to grow [SAN] revenues in each quarter beyond Q1/2009, especially when we consider some of the trends at work in this industry in 2008 and 2009,” reckons Rawls.

In telecoms, however, Finisar’s opportunity for growth has been limited by its lack of long-haul products, says Rawls. Long-haul sales are currently very small, as much of its revenue is in LAN/SAN (over distances of less than 500m) and metro (up to 120km – this includes including SONET/SDH, although telecoms is an emerging market for Finisar, acknowledges Rawls ) . For example, of the $29.1m revenue from 10-40Gb/s products, revenue for short-reach LAN applications (including the X2 SR, XFP SR, and SFP+) was $9.9m (almost double the $5.2m last quarter), revenue for 10Gb/s metro applications (mostly XFP transceivers) was $3.1m (also almost doubling from $1.7m), while 10Gb/s telecom revenues (also mostly XFP transceivers) was $16.1m (up ‘just’ 43%, from $11.3m). While the smaller XFP form factor is increasingly being adopted by telecom equipment suppliers, the market for the 10Gb/s 300-pin tunable transponder remains strong. Finisar estimates that, out of a $500m market for 10Gb/s telecom products in 2008, XFP represents only about 25% of the market.

The strategy is to therefore to launch products that have higher levels of performance. “We are working hard to increase our exposure to this market opportunity through the introduction of a small-form-factor 300-pin transponder for 10Gb/s tunable applications that is based on reliable CML [chirp managed laser] technology from AZNA,” says Rawls. CML competes with lithium niobate external modulators by reducing the size and cost of components needed for longer-distance transmission [up to several hundred kilometers] while reducing power consumption, he adds.

At last week’s Optical Fiber Conference (OFC 2008) in San Diego, CA, Finisar demonstrated this technology in two new products: the first narrowly tunable 200km 10Gb/s DWDM XFP transceiver for OC-192 and 10 Gigabit Ethernet applications; and a 10Gb/s SFP+ transceiver which operated over 50km of fiber while using less than 1.5W of power.

The AZNA and Kodeos acquisitions have yet to generate a significant amount of incremental revenue. However, Finisar expects to launch several new products towards the end of 2008 and in 2009, which should start to boost long-haul revenue.

In fiber-to-the-home (FTTH), Finisar has not yet had any exposure to the market for transceivers. However, last year it introduced a Gigabit passive optical network (GPON) transceiver for FTTH and is engaged with several customers in qualifying the product.

According to consulting firm Light Counting, the FTTH transceiver market was over $300m in 2007 and is expected to grow to $350m in 2008. The GPON portion was just $27m in 2007, but is expected to grow to over $60m in 2008 and over $100m in 2009. Despite being a very competitive part of the telecom sector, Finisar believes it can achieve reasonable gross margins (comparable to its 1-8Gb/s LAN/SAN margins). Offering these products is in line with its objective to become a strategic supplier to telecom equipment manufacturers by offering them a broader product line, Rawls says. “We are very excited about the prospects for growth in the telecom portion of our business, both near-term and longer-term,” he adds.

Overall, for fiscal Q4/2008, taking into account that fiscal Q3 benefited from $2m of 40Gb/s product shipments delayed from Q2, Finisar expects revenue of $110-115m ($10m from network tools; $100-105m from optics, with 10-40Gb/s applications rising from $29.1m to $30-35m, comprising most of the revenue growth). For Q1/2009 (ending in July), revenue should rise to $113-120m. Overall, customer demand remains strong, says Rawls. “We think fiscal 2009 will be a better year than 2007 and our fiscal 2008.”

See related items:

Finisar’s record revenue driven by 10-40Gb/s products

Finisar’s revenues dip due to 10/40Gbps shipment glitches

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