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Optical components sales aren't actually good, but Finisar thinks the worst might be over

Finisar Points to Optical Optimism

Craig Matsumoto
News Analysis
Craig Matsumoto
9/2/2011
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Finisar Corp. (Nasdaq: FNSR) believes the industry's overstuffed optical inventory has finally been pared down, a good sign after last month's dismal JDSU (Nasdaq: JDSU; Toronto: JDU) earnings report.

Finisar's relatively upbeat news came Thursday afternoon, hours after Ciena Corp. (NYSE: CIEN) had lifted spirits (and its stock price) with a cheery earnings report. (See Mixed Bag for Ciena's Q3.)

"We're very hopeful that this inventory correction and this downturn in the industry is over, that telecom spending is going to start moving north," CEO Jerry Rawls said on Thursday's earnings call.

"It appears that the business has finally bottomed," writes analyst James Kisner of Jefferies & Company Inc. , in a report issued Friday morning.

That's not to say things are good yet. After two disappointing quarters, Finisar managed to meet the expectations that had been dampened in the first place. Revenues for its first quarter, which ended July 31, were $228.2 million -- pretty much what analysts predicted, according to Thomson Reuters . Non-GAAP net income of 21 cents per share beat the consensus by 3 cents.

For its second quarter, Finisar is predicting revenues of $235 million to $250 million. Analysts were expecting $237 million.

The good news, though, was the possible end to inventory problems, which had held Finisar's sales down. Its ROADM sales continued to drop in the first quarter, in fact, down 47 percent compared with the fourth quarter. (See China Still Bothers Finisar.)

Inventory was also the reason JDSU announced a crushingly bad forecast in its recent earnings report.

JDSU might already be showing signs of hope, though. On Thursday, analyst Mark Sue of RBC Capital Markets upgraded JDSU to Outperform from Sector Perform, saying lead times had stopped shrinking and orders were "starting to trickle in."

But analyst Edward Zabitsky of ACI Research , who noted the optical inventory problem early on, thinks "the inventory divestment cycle has another two to three months to go," as he wrote in a note issued Friday. Of course, that would be in tune with JDSU's predictions.

And Rawls admitted he isn't sure how well the rest of the year will play out. "We don't have a lot of solid visibility into the third quarter [which ends in October], 'solid visibility' being backlog," he said.

Finisar shares were up $2.53 (14%) at $21.12 midday Friday.

— Craig Matsumoto, West Coast Editor, Light Reading

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