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Finisar Feels the Pain

Craig Matsumoto

Shares of Finisar Corp. (Nasdaq: FNSR) fell 25 percent this morning, a sign that the optical components sector hasn't quite stabilized in its recovery -- not on the stock market, anyway.

By late morning, Finisar shares had fallen $1.17 (26%) to $3.30, erasing much of the gains Finisar saw in March, when optical optimism sparked after the company's third-quarter earnings report. (See Finisar Ignites Optics Explosion and Optical Stocks Climb Again.)

For its fourth quarter, which ended April 30, the company reported net income of $1.7 million, or 1 cent per share, on revenues of $102.4 million, compared with net income of $8.3 million, 3 cents per share, on revenues of $93.5 million in the previous quarter.

For its fourth quarter a year ago, Finisar reported losses of $37.8 million, 15 cents per share, on revenues of $74.9 million.

The numbers weren't bad -- Finisar's pro forma net income of 3 cents per share met analyst's estimates. But maybe, after last quarter's run-up, investors wanted more.

"Some investors were likely expecting a blowout quarter," writes John Harmon, an analyst with Needham & Co. "We remain positive on Finisar, since the company is developing a slew of new 10-Gbit/s products to attack a large, growing market."

One element of disappointment might have been gross margins. "Our growth next quarter will be weighted in the direction of our LAN/SAN business, so in terms of our product mix, that may put a little pressure on our gross margin," CFO Steve Workman told analysts on a conference call yesterday. LAN and SAN products draw smaller margins than 10-Gbit/s and metro products.

The company therefore predicted its first-quarter gross margins will be 37 to 39 percent, rising to a range of 38 to 40 percent in the last half of Finisar's fiscal 2007.

"We believe many investors were looking for upside in revenue, with a particular focus on gross margin expansion," writes analyst Jeff Osborne of CIBC World Markets , in a note issued this morning.

Finisar expects first-quarter revenues to fall between $104 million and $110 million, and the company increased its fiscal 2007 revenue forecast by about $10 million, to a range of $430 million to $460 million.

Other optical stocks took their lumps today, possibly reflecting the disappointment in Finisar. In late-morning trading, JDSU (Nasdaq: JDSU; Toronto: JDU) was down 18 cents (6.2%) at $2.73, Avanex Corp. (Nasdaq: AVNX) was down 16 cents (8.8%) at $1.66, and Bookham Inc. (Nasdaq: BKHM; London: BHM) was down 13 cents (3.5%) at $3.54.

— Craig Matsumoto, Senior Editor, Light Reading

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