Optical components

OFC/NFOEC 2011: Finisar Drops the Bomb

LOS ANGELES -- OFC/NFOEC 2011 -- Optical components firms might be in for a couple of tough quarters, based on the carnage in the Finisar Corp. (Nasdaq: FNSR) outlook issued Tuesday afternoon.

Finisar predicted a decline in China business and a slowdown in wavelength selective switches (WSS) and reconfigurable optical add-drop multiplexer (ROADM) line cards. The latter problem -- with ROADM-related sales expected to decline 10 to 15 percent in the April quarter compared with the January quarter -- is happening because systems companies have built up inventories that they'll now start burning off, Finisar officials said on Tuesday evening's earnings call.

(Finisar also blamed the 10-day shutdown for Chinese New Year that some customers experienced. Nobody Light Reading talked to on Tuesday afternoon was buying this part.)

It's all a bit of a coup for analyst Ed Zabitsky of ACI Research . For some time now, he's been saying the optical components business has been overheated, driven by temporary factors such as a Verizon Communications Inc. (NYSE: VZ) optical buildout (the end of which would cause ROADM sales to decline). He's also pointed out that component sales seemed to be outpacing systems sales, a pattern that couldn't last forever.

Zabitsky is not alone. "We believe the FNSR guidance is the most definite proof point yet that there will likely be an inventory correction across the components space for the next 1-2 quarters," writes analyst Mike Genovese of MKM Partners , in a note issued late Tuesday.

Finisar expects revenues for its fourth quarter, which ends April 30, to be US$235 million to $250 million, down from its third-quarter figure of $263 million. Finisar shares were down $14.34 (36 percent) at $25.70 in after-hours trading Tuesday night.

Why this matters
Arguably, the optical components sector was due for a reality check. Finisar's stock has doubled in price since November, and JDSU (Nasdaq: JDSU; Toronto: JDU), Oclaro Inc. (Nasdaq: OCLR) and Opnext Inc. (Nasdaq: OPXT) have soared as well.

The timing was certainly dramatic, coinciding with the first day of the OFC/NFOEC exhibition, which was at its busiest and most upbeat since the bubble days. It was like bringing warm beer to the party.

This doesn't mean the optical industry is about to crash. Finisar and other companies say optical networking demand still appears strong for the long term. And as analyst Andrew Schmitt of Infonetics Research Inc. notes in this video interview taken Monday, optical components executives aren't running their companies with the same exuberance that's gone into their stock prices lately.

For more
Previous mentions of possible components trouble:

— Craig Matsumoto, West Coast Editor, Light Reading

Physical_Layer 12/5/2012 | 5:10:42 PM
re: OFC/NFOEC 2011: Finisar Drops the Bomb

Ed Z has been calling for this inventory correction for a while now and I've learned that when he talks I listen.  I don't think there is anybody who works harder than he does to analyze what's really going on (at least in terms of publishing analysts in the investment community).  He analyzes what matters and never over-analyzes stuff that isn't important.

I should have taken his advice sooner.  It's not the first time I've missed a big money making opportunity.

Anyway, I'm wondering is there anyone who really thinks that these optical stocks deserve to trade at 3x sales?  It almost feels like a mini year 2000 repeating itself all over again.  Was it OFC in Baltimore that year?  The Nasdaq peaked at over 5000 and guys like Avanex had just gone public with what they called "Optical Processing" at the time?  Wall St. was so in love with this stuff that they didn't understand.  They thought it was some kind of optical computer when it was really just good quality DWDM componentry.  

Ahh, the beauty of capitalizing off of other people's lack of understanding ...

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