News

8 December 2009

 

Finisar’s capacity constraints suppress profit margin despite upturn

For its fiscal second-quarter 2010 (ended 1 November 2009), Finisar Corp has reported revenues from continuing operations of $145.7m. Excluding the Network Tools business (sold on 15 July), this is down 1.4% from $147.7m a year ago (the first quarter in which the results of Optium were included following the merger on 29 August 2008), but up 13.2% on $128.7m last quarter (and above the guidance of $132–142m).

Of the $17m rise in revenue from last quarter, LAN/SAN products grew 20% or $9.9m (including $6.9m for sub-10Gbps applications), reconfigurable optical add-drop multiplexer (ROADM) products grew 41% or $4.5m (despite being capacity constrained during their ramp up), and long-distance metro telecom and cable TV products grew by $2.6m.

On a non-GAAP basis, gross margin was 29.6%, up on 28.8% last quarter (due to higher product shipment levels, partially offset by lower production yields from ramping production volume for several high-speed products). However, this was still lower than expected, due to: (i) an unfavorable product mix, as revenue from sub-10Gbps transceivers rose $7.7m (12%) on last quarter; and (ii) much higher scrap levels, due to rapid volume growth in 8 and 10Gbps transceivers and ROADMs.

In particular, problems in ramping up volumes were exacerbated by simultaneous transfer activities for these products from the plants in Horsham, PA, USA and Sydney, Australia to offshore manufacturing locations, including subassemblies used in WSM ROADMs being transferred from Sydney to Shanghai as well as the first quarter of volume production for optical subassemblies formerly made at the plant in Allen TX.

“As demand ramps, we’re sometimes faced with the choice of either getting products out of the door or focusing on process improvements,” says CEO Eitan Gertel, adding that not as much production had been transferred offshore as the firm would have liked. This is leading to organizational changes in order to put more emphasis on yield improvement, but this may take a few quarters to see results, he notes.

Non-GAAP operating income was $8.9m (an operating margin of 6.1% of revenues). This is up from $3.3m (2.5% of revenues) last quarter due mainly to higher gross profit on higher revenues partially offset by slightly higher operating expenses ($34.2m, up $0.4m from last quarter).

Though down on $8.6m a year ago, non-GAAP net income has risen from $1.8m last quarter to $7.5m.

During the quarter, cash and short-term investments, plus other long-term investments that can be readily converted into cash, rose from $60.4m to $80.7m. This reflects net proceeds of $98.8m from the sale of a new series 5% convertible notes partially offset by using $82.6m in cash to retire $106.9m aggregate principal amount of existing 2.5% convertible notes. Excluding these transactions, Finisar generated $4.1m in cash.

“Incoming orders continued to be strong during the quarter, particularly for transceivers used in less than 10Gbps LAN/SAN applications,” says executive chairman Jerry Rawls. “The other area of strength was in ROADMs for telecom WDM networks,” he adds. “Our backlog position suggests that we can look forward to another sequential increase in revenues next quarter, led by a surge in demand for 10Gbps products.”

For its fiscal third-quarter (to end-January 2010), Finisar expects record revenue of $148–158m (up about 5% sequentially, and ahead of the estimated $148m), led by strong orders for 10–40Gb/s products as well as record ROADM revenue. Due to the slightly improved product mix, non-GAAP gross margin should rise to 30–32%. Also, despite reversing the 10% salary cut imposed in February — contributing $1.4m to operating expenses rising to $37–38m — operating margin will still be 6–8%.

However, although Finisar is still targeting non-GAAP operating margin of 10% in fiscal first-half 2011, it acknowledges that quarterly revenue may have to be at the top of the $150-160m guidance. It is also dependent on further cost reductions (through engineering efforts that are currently underway) and the completion of as much as possible of its transfer of production to offshore locations.

“We continue to work on the transfer of additional production activities to our off-shore locations,” says Gertel. “This work will largely be completed by the end of the fiscal year as we also work in the interim at those facilities to ramp several new products,” he adds. “We expect continued improvements in our profitability in the meantime in conjunction with a rising top line.”

See related item:

Finisar’s revenue grows 20%, driven by 10-40Gb/s applications

Search: Finisar

Visit: www.finisar.com