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9 March 2009


Finisar’s revenues fall 14.5% after December’s drop in orders

After reporting preliminary results on 4 February, fiber-optic subsystem and network test system maker Finisar Corp of Sunnyvale, CA, USA has confirmed revenue for its fiscal third-quarter 2009 (ended 1 February) of $136.4m. Though up 20.9% on $112.7m a year ago, this is due mainly to the merger of optical subsystem maker Optium Corp of Horsham, PA (completed on 29 August); excluding Optium, revenue from traditional Finisar products was down only 5% on a year ago. Total revenue is down 14.5% on $159.5m last quarter. In particular, Optium revenues have fallen from $41.5m to about $30m.

The impact of the recession has been greatest in telecoms, says chairman, president & CEO Jerry Rawls. After record revenue for both Finisar and Optium for the quarter to end-July 2008 before the firms’ merger ($176m collectively), fiscal Q3’s $136.4m is down 22.5% in just two quarters, with IT enterprise-related revenues down 17% and telecom-related revenue down 37%.

Of total revenue, Network Test tool sales of $10.3m were up 5% on $9.8m a year ago but down 12.6% on $11.8m last quarter.

Optics revenues of $126.1m were up 22.5% on $103m a year ago (due mainly to the Optium merger), but down 14.7% from $147.7m last quarter. In particular, analog and cable TV revenues were $3.3m (level with last quarter, albeit down 53% on revenues realized by Optium a year ago). Metro and telecom revenues of $69.4m are down 14.4% on last quarter. Even the data storage sector saw weakness in the midst of a 'deer in headlights' response by many IT departments as they seek to recalibrate their plans for investment this year, says executive chairman Jerry Rawls. Local-area network (LAN) and storage-area network (SAN) revenues of $53.4m are down 15.7% on last quarter (with a 19% drop for sub-10Gb/s applications offset by slight growth for 10Gb/s applications).

Almost half of the $21.6m drop in Optics revenue ($10.3m) was due to lower revenues for short-reach sub-10Gb/s LAN and SAN applications. Though up 68.5% on $29.1m on a year ago, sales of products for 10-40Gb/s applications fell by 9% ($5m) to $49.1m. Sales of reconfigurable optical add-drop multiplexer (ROADM) products fell by $2.6m. The remaining $3.7m drop was due to metro, telecom and CATV products. In contrast, revenue from 10 Gigabit Ethernet LAN and 4 Gigabit SAN applications actually rose sequentially.

Following a charge of $178.8m last quarter for the impairment of goodwill (related mainly to the Optium merger), Finisar recognized a further goodwill write-down of $46.5m (in conjunction with the continued deterioration in the macroeconomic environment and a consequent reduction in the firm’s market capitalization).

Excluding such charges, non-GAAP net income was $2.3m, down from $10.3m last quarter. During the quarter, cash and short-term investments (plus other long-term investments that can be readily converted into cash) fell from $51.9m to $35.3m.

Finisar says that demand is being impacted by some customers reducing their inventory levels on top of a decline in end-user demand. For its fiscal fourth-quarter 2009 (ending 30 April), continuing softness in orders will mostly likely result in a further 6-15% drop in revenue to $115-128m ($9m for Network Test tools and $106-119m for Optics, again down mainly due to sub-10Gb/s LAN and SAN applications).

However, the weakness appears to be concentrated at a small number of customers, says Rawls. In particular, revenue for 10Gb/s applications will be down only about 5% as demand continues to be more robust than for other segments, while revenue for short-reach 10 Gigabit Ethernet applications should actually rise for a second consecutive quarter. “Many of the postponed IT projects will get started in the next couple of quarters, as the underlying premise for making that investment is mostly unchanged,” Rawls says.

He adds that, after the the tech bubble burst in the previous telecoms slump of first-quarter 2001, Finisar’s revenue fell by 47% in two quarters (much more rapid than the current slump) and then began to rise again shortly afterwards (before growing 20% annually through fiscal 2008). “It takes at least two quarters before you can touch the bottom and any sort of correction,” he reckons. “Given that the economic downturn didn’t become visible to us until the very end of our second quarter, which ended in October, we think the upcoming quarter ended 30 April probably marks the low point of this correction... We saw orders at a much diminished rate in December. They came back a little bit in January, but have recovered quite nicely in February and even this week,” he adds.

Also, Finisar is also more highly diversified than it was in 2001 and the industry supply chain carries less inventory thanks to the proliferation of adjusting time inventory hubs at many customers, notes Rawls. “In some ways, we think that we’re better off this time around.” Rawls expects a return to revenue growth in the quarter to end-July 2009.

Also, despite the difficult economic environment, Finisar has made progress in qualifying new products at a number of customers. In the 4 February revenue announcement, Finisar noted that it continues to make progress with respect to customer qualifications of new products. In addition to those mentioned on 4 February, these also include:

  • wavelength-selectable switch (WSS) 50GHz and 100GHz products with four customers;
  • a pluggable tunable 10Gb/s transponder with two customers; and
  • a cable TV (CATV) low-cost 1310nm transmission product with one customer.

In addition, Finisar is pushing hard to get new products developed and qualified, says Rawls. At the Optical Fiber Communication event (OFC 2009) in San Diego in late March, the firm will demonstrate a new 120Gb/s parallel optical solution (while starting to deliver samples to customers) as well as a new 100 Gigabit Ethernet optical link, 16 Gigabit Fiber Channel link, and a 43Gb/s DQPSK transponder for telecom applications.

“We continue to make progress in terms of reducing costs,” says CEO Eitan Gertel. On 4 February, Finisar reported cost-reduction actions that are expected to yield annual savings of $44m. About $24m has now been realized, including: staff reductions of about 200 (17% of the workforce, excluding operations in Malaysia and Shanghai); salary reductions of 10% for officers, directors and most staff, starting in February; and a suspension of 401(k) matching company contributions. “With the reductions we have already realized, our non-GAAP EBITDA [earnings before interest, taxes, depreciation and amortization] exceeded $11m in the most recent quarter [down from $20m last quarter, but still in excess of capital expenditure requirements, which fell to $5.1m],” he adds. CapEx should continue to fall over the next couple of quarters. In fiscal Q4, EBITDA should be $7-8m (still in excess of CapEx requirements, which should fall to $4m or less).

“Combined with the additional cost reductions that we have put in place for the fourth quarter [yielding $8m in annualized OpEx savings], we should be in a good position to weather any near-term weakness in our top line,” says Gertel. Combined with a further reduction in inventory, the cash position at the end of the current quarter should stay level or even rise.

Other cost-reduction actions that should benefit the firm starting in fiscal first-quarter 2010 (ending 2 August 2009) include the transfer of certain product manufacturing to the firm’s lower-cost off-shore locations. “We see a lot of what used to be Optium products made in the West going into our locations overseas,” says Gertel (long term, most, if not all, manufacturing is going to be in Malaysia and China, he adds). Hence the remaining $12m of the $44m in annual savings should be realized by the fiscal second-quarter 2010 (ending 1 November 2009).

“We are already evaluating additional savings that will accrue as a result of a number of R&D projects that will enable us to manufacture certain components internally versus paying a higher price for those components in the merchant market,” says chief financial officer Stephen Workman.

See related items:

Finisar cuts costs after worse-than-expected 14% sales drop

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

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