Finisar Corporation (NASDAQ:FNSR) has been profitable and the stock has risen over 75 percent since hitting its fifty-two-week low of just over $13. But has the momentum run out? Finisar’s most recent earnings miss suggests the momentum is indeed fizzling.
Finisar isn’t your everyday company. This specialty company provides optical subsystems and components for data communication and telecommunication applications in the United States, Malaysia, China, and internationally. The company’s optical subsystems primarily consist of transmitters, receivers, transceivers, transponders, and active optical cables that provide optical-electrical or optoelectronic interface for interconnecting the electronic equipment used in building communication networks, including the switches, routers, and servers used in wireline networks, as well as the antennas and base stations for wireless networks.
It also offers wavelength selective switches that are used to dynamically switch network traffic from one optical fiber to multiple other fibers without converting the optical signal to an electronic signal. The company’s optical components primarily consist of packaged lasers and photo detectors for data communication and telecommunication applications. It also makes passive optical components for telecommunication applications. It markets its optical products through its direct sales force, as well as through a network of distributors, manufacturers’ representatives, and manufacturers of storage systems, networking equipment, and telecommunication equipment.
The company beat on revenues but missed earnings by $0.02, but there was a lot to be desired after this report. Revenues increased to $306.0 million, up $12.0 million, or 4.1 percent, from $294.0 million in the preceding quarter. The sale of products for datacom applications increased by $12.6 million, or 6.0 percent, compared to the preceding quarter. The sale of products for telecom applications decreased by $0.6 million, or (0.7) percent, compared to the preceding quarter, primarily driven by the impact of the full three months of the annual price reductions for telecom products that typically take effect on January 1.
The company’s GAAP gross margin decreased to 31.7 percent from 35.9 percent in the preceding quarter, primarily driven by the impact of the full three months of the annual price reductions for telecom products that typically take effect on January 1st as well as the impact of the u2t Photonics AG acquisition whose products carry a lower than corporate average gross margin. The company’s non-GAAP gross margin decreased to 34.2 percent from 37.2 percent in the preceding quarter. Further, GAAP operating income decreased $11.5 million to $21.6 million, or 7.0 percent of revenues, compared to $33.1 million, or 11.3 percent of revenues in the preceding quarter. Non-GAAP operating income decreased $7.4 million to $38.9 million, or 12.7 percent of revenues, compared to $46.3 million, or 15.7 percent of revenues, in the preceding quarter. Finally, cash, cash equivalents and short term investments decreased $41.7 million to $513.0 million at the end of the fourth quarter, compared to $554.7 million at the end of the preceding quarter, principally as the result of the acquisition of u2t Photonics AG, an increase in accounts receivable of $29.6 million and capital expenditures associated with the build out of the second building at its new manufacturing site in Wuxi, China.
Jerry Rawls, Finisar’s executive chairman of the board, stated, “I am pleased to report that fourth quarter revenues were $306.0 million, and annual fiscal 2014 revenues were $1,156.8 million, both new all-time records for Finisar. Quarterly revenues increased by $12.0 million, or 4.1 percent, over the third fiscal quarter and $62.6 million, or 25.7 percent, over the fourth fiscal quarter of the prior year. Quarterly revenues grew for the seventh consecutive quarter. Annual revenues increased by $222.5 million, or 23.8 percent, over the prior fiscal year.
“Demand for transceivers operating at 10Gb/s and faster continued to be strong during the quarter. Demand was also strong for our transceivers for LTE wireless applications. We continue to develop and release new products, which we expect will enable Finisar to expand our market share and continue to develop and release new products, which we expect will enable Finisar to expand our market share and continue to grow revenue.”
Looking ahead, there does not seem to be much on the horizon to excite me about Finisar’s stock. The company will continue to make money, but the growth and year-over-year improvement simply is not there. The company currently expects revenues for the first quarter of fiscal 2015 to be in the range of $320 to $335 million, non-GAAP gross margin to be approximately 32 percent, non-GAAP operating margin to be approximately 10.3 percent to 11.3 percent, and non-GAAP earnings per diluted share to be in the range of approximately $0.30 to $0.34. All things considered, the stock does not deserve to trade at its current premium of 30 times earnings. I expect shares to fall in the coming week and thus assign a sell rating to the stock.
Disclosure: Christopher F. Davis holds no position in Finisar and has no plans to initiate a position in the next 72 hours. He has a sell rating on the stock and a $17.25 price target.