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Finisar Beats Consensus Revenue by $2 Million in the April Quarter

Finisar Beats Consensus Revenue by $2 Million in the April Quarter

Finisar beat consensus revenue by $2 million in the April quarter but missed on the bottom line by $0.02, primarily as a result of the impact of the full three months of the annual price reductions for telecom products and slightly more dilution than expected from the u2t acquisition, whose products carry roughly 25% gross margin.

Telecom pricing, as feared, was toward the high end of the 10%-15% annual range. The two headwinds drove blended gross margin to 34.2%, 300 basis points lower than the prior quarter, which was shy of management guidance of 35.5%. The datacom segment was in line with our forecast, while telecom came in slightly ahead (by $1 million), including roughly $6 million of revenue from u2t.

Management guided margins to 32% in the July quarter, attributing slightly greater than 50% of the sequential 200-basis-point drop to new 4G/LTE wireless applications (for which it began to ship sub-10G optical transceivers) and slightly under 50% to inefficiencies and startup costs related to the new construction facility in Wuxi, China. Competition from Chinese players flooding the market with low data-rate transceivers played a role, driving datacom margins significantly lower than the typical average for a datacom transceiver. Gross margins are expected to remain in the low-30s range due to this 4G/LTE deployment opportunity in China, which management chose to pursue to drive unit volumes in the business.

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While it will add to growth the revenue outlook was raised by roughly $10 million in the July quarter the margin haircut is significant enough to cause Street estimates come down by $0.25-$0.30 in fiscal 2015 and 2016. We were $0.30 lower than Street heading into print and are cutting our estimates lower. Management expects margins to return to the mid-30s level by fiscal 2016 as Wuxi is fully ramped up and product mix becomes favorable.

While Finisar enjoys a strong leadership position in the datacom market, we hear of increased pressure from other players (e.g., Avago [AVGO $71.76]) contending for a bigger slice of the market, particularly with Finisar s largest customer, Cisco (CSCO $24.66; Outperform). In addition, we prefer to gain more evidence of improved margin trajectory before getting constructive on shares.

Lastly, as a derivative call, we remind investors what Ciena said last week on its earnings call. Its business correlates less with the forecast from optical component suppliers, from which one should infer not to extrapolate the action on Finisar to optical equipment vendors i.e., we are buyers of Ciena and Infinera on any weakness.

Finisar Beats Consensus Revenue by $2 Million in the April Quarter

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