Optical subsystem vendor Finisar Corp. (Nasdaq: FNSR) is on a roll. Yesterday, it announced plans to purchase privately held Sensors Unlimited Inc., for roughly $700 million, a move that signals Finisar's full-scale move into the telecom components market. At the same time, it revealed that pro forma earnings will be up 95 percent year to year, beating expectations.

Strong signals, surely. But Finisar's also taking a big risk: It's making a bold bid in the optical components market at a time when competition is at a record high. Further, Finisar's got a monkey on its back in the form of a massive patent lawsuit filed last year by rival Methode Electronics Inc. (Nasdaq: METHA) and its subsidiary Stratos Lightwave LLC (Nasdaq: STLW).

First, the good news: Finisar's pro forma results show quarterly earnings exceeding $27 million, up 95 percent year to year and 30 percent since last quarter. The company said its optical subsystems, including gigabit Ethernet and Fibre Channel transceivers and a wave-division multiplexer with a range of 120 kilometers, should account for $22 million of that figure, a rise of 132 percent for the quarter. Gross margins, the company said, will be about 40 percent. The official results are slated for announcement on Tuesday, August 22.

Analysts like the preliminary results. "Although we would have liked to see gross margins slightly higher, it was a solid quarter and investors have nothing to complain about," said a report issued by investment bank CIBC World Markets Corp.

As to Finisar's $700 million bid for Sensors Unlimited, a company with revenues of about $20 million, that too was greeted positively. Today, Finisar's stock rose on Nasdaq more than three points to 38.5 before noon. And CIBC also backs the buy: "The deal looks accretive from day one," its report states.

The price was in the ballpark for such deals, CIBC maintains, and Sensors, whose customers include JDS Uniphase (OTC: JDSU) and Lucent Technologies Inc. (NYSE: LU), should help Finisar round out its optical telecom pitch.

Here's why: Until recently, Finisar specialized in making gigabit Ethernet and Fibre Channel transceivers. But it's now trying to extend that expertise to cover short-range Sonet networks too. Last week, Finisar made its first big move in this direction with the announcement of a series of short-reach OC48/SDH STM-I16 transceivers. Now, Finisar says, it will be able to offer components not only to makers of datacomm gear but suppliers of short-range optical switches and routers for metro-area service providers.

By purchasing Sensors Unlimited, Finisar says it will build on its new strategy. Sensors specializes in making so-called photodetector arrays, or tiny monitors that can track the performance of wavelengths in DWDM (dense wavelength-division multiplexing) gear at rates above 10 Gbit/s. Having these tiny monitors is key to creating multichannel DWDM. Adding the sensors to Finisar's existing components will help Finisar make compelling products for suppliers of metro optical networking gear, Finisar says.

Finisar's potential seems bright. But on the downside, it's entering a market that's teeming with competition and combinations, typified by the recent acquisition of NewPort Communications by Broadcom Corp. (Nasdaq: BRCM) (see Broadcom Buys Its Way In) earlier this month.

Then there's the matter of the Methode lawsuit. According to Finisar's 10K report, Methode is seeking $224.3 million plus interest from Finisar, which it claims has violated a number of its patents. Methode reportedly also has a similar suit pending against Hewlett-Packard Co. (NYSE: HWP). If it loses this case, Finisar admits, its business could be significantly harmed. Furthermore, to win the case, Finisar intends to prove not that it's innocent of patent violations, but that those patents aren't valid in the first place.

But Finisar is optimistic. "The risk factors are there.... We have to do the lawyerly thing and state them. But that said, we view this as more of a nuisance, and we have an extremely strong position in this matter," says Steve Workman, VP of finance and CFO at Finisar.

-- Mary Jander, senior editor, Light Reading http://www.lightreading.com