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14 June 2007


Finisar’s record year tempered by last-quarter

For its fiscal 2007 (to end April), fiber-optic component and subsystem maker Finisar Corp of Sunnyvale, CA, USA has reported record revenue of $419.2m (up 15.1% on the prior year’s $364.3m), comprising: network test & monitoring products $37.8m (down 1.5% from $38.3m) and optical products $381.4m (up 17% from $326.0m), driven by 10-40Gb/s revenue up 123% (from $18.1m to $40.3m). Cisco was the only customer comprising more than 10% of revenues (at 21%).

However, fiscal fourth-quarter revenues were $97.3m, down 9.5% on the prior quarter, comprising: network test & monitoring products $8.9m (down 6.6%) and optical products $88.4m (down 9.8%) - though the latter was mitigated by 10-40Gb/s revenue up 28.5% (to $14.9m).

Specifically, revenues for metro Ethernet (down 14%) as well as local/storage-area network (LAN/SAN) products were hit mainly by the transition of two customers to ‘just-in-time inventory’ arrangements (where revenue is not recognized until stock is drawn from the customer’s warehouse, leading revenue in the last six weeks of the quarter to “fall off a cliff”, said CEO Jerry Rawls).

Also, certain SAN-related customers are still using up excess inventories stockpiled last year to safeguard against any risk to supply during Finisar’s relocation of vertical-cavity surface-emitting laser (VCSEL) manufacturing in Texas (for LAN/SAN applications) from Richardson to its new fab in Allen. The fab’s first MOCVD reactor is now fully qualified internally and externally by all customers for 8 Gigabit and 10 Gigabit applications, and by almost all customers for 1 Gigabit and 2 Gigabit applications, said Rawls in Finisar’s fiscal Q4 conference call. Finisar is now qualifying the second reactor (moved from the old Richardson fab in May) and expects to have both reactors qualified and operational by the end of 2007. However, Rawls added that the firm only needs one reactor for the current level of demand.

However, the SAN-related excess inventory issues are now concluded, says Rawls.

Despite charges of $4m related to the investigation of stock option practices (see below), the better-than-expected gross margin of 39% was down only slightly from Q3’s 41%, and still higher than in fiscal first-half 2007. This is due to ongoing cost-reduction efforts and a favorable shift in product mix to more profitable longer-distance telecom and metro Ethernet applications as well as a vertically integrated business model where higher shipment levels are accompanied by a modest increase in manufacturing costs.

Cash reserves fell from $135.9m to $123.7m, due to using $13.7m to complete the acquisitions of AZNA LLC and Kodeos Communications Inc, with the aim of developing products for long-haul telecoms (a market that Finisar hasn’t addressed previously).

So, despite the year-end problems with customer supply chain and excess inventory issues, Rawls claims progress in the last fiscal year. “We rolled out a number of new products for 10Gb/s and WDM applications and strongly increased our sales to the telecom equipment industry,” he adds. After revenue growth of 123% last fiscal year, Rawls believes that 10-40Gb/s products will generally remain on the same trajectory in fiscal 2008.

Finisar wants one quarter to exceed guidance before it gives annual guidance. However, it is forecasting revenue for fiscal Q1/2008, recovering to $105-112m. All optics sectors should rise, with 10-40Gb/s product sales to telecom companies rising to $17-21m (particularly 10Gb/s XFP SR short-reach modules for DWDM, driven by the adoption of pluggable optics). In addition, X2 SR short-reach modules (for 10 Gigabit LANs) will be qualified in just a few weeks, says Rawls, with X2 LRM long-reach multimode modules following “later”.

*The above non-GAAP financial results are preliminary (until Finisar files its annual report on Form 10-K for fiscal 2007). They do not reflect any adjustments that may be needed due to the review by an audit committee of the board of directors of the firm’s historical stock option granting practices between November 1999 and September 2006 (initiated at the end of last November after an initial voluntary review by management).

Finisar has now announced the initial findings of the review. The committee has concluded that, although there was no evidence of wrong-doing, the measurement dates for a number of stock option grants differed from their recorded grant dates, and the firm will need to restate its historical financial statements to record charges for related compensation expense and the tax impact. Finisar is therefore finalizing revised measurement dates, determining the amount of the non-cash charges for compensation expenses, the resulting tax impact (which may result in additional cash tax liabilities), and the accounting impact on its financial statements for each fiscal period going back to fiscal 2000. The firm aims to complete its assessment and announce the results “at the earliest practicable date”.

*Finisar launches VCSEL-based reflective sensors

At next week’s LASER 2007 event in Munich, Germany, Finisar (which claims to be the world’s largest VCSEL manufacturer) is launching two new VCSEL-based reflective sensors for high-volume industrial and commercial applications requiring transmissive, photo-reflective, absorptive and scattering sensing capabilities (including industrial optical encoders, commercial printers, gas detection, and turbidity sensors).

Finisar claims that VCSEL-based reflective sensors offer higher resolution, concentric beam profile, better signal-to-noise ratio (e.g. SNR>20dB), higher speed, and improved reliability compared to optical edge-emitting-laser and LED-based sensing technologies.

The HVS6003-001 is packaged in a robust, high-reliability, high-temperature hermetic TO can (with an integral lens) capable of operating over -40 to 85 degrees C. It emits a narrow, coherent output at 850nm, and its focusing optics produce a spot at ~15mm. Reflected light is detected by an integral phototransistor. The HVS6003-002 uses the same VCSEL and phototransistor, but comes in an industry-standard, low-cost, small-sized, surface-mountable leadframe package without a lens and can easily detect targets beyond the range of LED-based sensors at higher speeds and at a fraction of the drive current (suiting commercial applications such as printers and peripherals). The HVS6003-001 costs $5 and the HVS6003-002 costs $2 each, both in 1000-unit quantities.

“Finisar has brought its unique VCSEL design, quality, reliability, and volume manufacturing capacity to high-volume sensing applications,” says John Kavanagh, general manager and VP of Finisar Advanced Optical Components.

See related items:

Finisar cuts revenue forecast due to excess inventories

Finisar acquires AZNA and Kodeos after shipping 10 million transceivers/transponders last year

Finisar’s 10G and metro-area growth counteracted by SAN transceiver inventory correction