Finisar Corp. (Nasdaq:
FNSR), a maker of optical subsystems, test equipment, and storage networking
gear, may be a “roll-up” company (one that builds a business by acquiring
smaller companies). But Finisar’s earnings report, released after Tuesday’s
market close, shows that even a roll-up’s revenues, combined with
the added financial impact of new acquisitions, don’t necessarily add up to
much during an industry recession.
Finisar reported a painful quarterly sequential revenue drop from $52 million in its fourth fiscal quarter 2001 ending in May, to $34 million during its first quarter 2002 ending July 31. Compared with year-ago revenues of $27 million, however, sales were up 26 percent (see Finisar Reports on Q1).
CEO Jerry Rawls said he expects revenues for the second fiscal quarter to be “flat to up slightly” on a sequential basis. But he refused to forecast beyond that due to “limited visibility” and the fact that his customers are refusing to forecast their own prospects. Rawls said orders are already up in the Gigabit Ethernet and Fibre Channel SAN business. But he hedged on how quickly these orders will be booked as sales. He added he expects “substantial revenues for 10-gigabit products” in the third fiscal quarter.
The sorest spot during the quarter was the bottom line, with an $8.3 million pro forma loss, or a nickel a share. That compares with a pro forma profit of $4.9 million, or three cents a share, for the corresponding quarter last year. The pro forma results exclude one-time charges for deferred compensation, merger costs, and inventory write-downs.
The company’s actual loss (according to generally accepted accounting principles) was $69 million, or 40 cents a share. That compares with a $3.2 million profit, or 2 cents a share, profit for the quarter last year.
Cash on the company’s balance sheet dropped from $146 million to $120 million over the last three months, while gross margins took a sequential plunge from 38 percent to 24 percent. Company officials assigned part of the blame to the transition of their manufacturing to a new plant in Malaysia. Once the new operation ramps up, they expect margins to improve significantly.
Practitioners in the half-baked science of market research expect the SAN market to sizzle over the long haul. For instance, Gartner/Dataquest expects revenues for the “fabric attached storage market," which includes SANs and networked attached storage products, to grow at a 45 percent compound rate between 2000 and 2005. Some financial analysts believe corporate earnings for these vendors should exceed this amount due to the increased operating efficiencies of large-scale production. But with the near-term outlook in corporate IT spending still murky, the demand for SAN products is not likely to leap from the freezer to the broiler pan.
With Rawls boasting of new customer wins and a pickup in orders, perhaps the company is already in the midst of a rebound. “In the last two or three quarters, Fibre Channel hasn’t seen a lot of growth, but I think sales will pick up soon due to new software products in the storage space from companies like Legato Systems Inc. (Nasdaq: LGTO) and Veritas Software,” says analyst Matt Bryson of Avian Research LLC.
As an indicator of the company’s near-term prospects, investors should pay attention to the results of its biggest customers. Brocade Communications Systems Inc. (Nasdaq: BRCD), for instance, recently reported earnings that were in line with analysts’ expectations (not great, but not the negative news that everyone has come to expect nowadays -- see Brocade Hits Numbers). On the other hand, EMC Corp. (NYSE: EMC), another major customer, has been stung recently by negative news regarding its sales force (see EMC Hits New Lows ).
Analysts’ views on Finisar have soured recently due to the company’s announcement in July of lowered expectations for the quarter just ended and the company’s inability to forecast beyond the current quarter. The First Call consensus of 10 analysts gives Finisar an average rating of 2.2, down substantially from the 1.7 rating at the time of its last earnings report three months ago. (A no. 1 rating is a Strong Buy, a no. 2 is a Buy, and a No. 3 is a Hold.)
Last fall, when analysts were very bullish on the stock, Finisar began its descent from a 52-week high of $51. In Tuesday aftermarket trading on Island, the stock was around $11. Now that the financial community has become so bearish, perhaps it’s time to buy.
— Tom Davey, special to Light Reading, http://www.lightreading.com