Finisar Corporation Earnings Call Nuggets: Cisco’s Acquisition and Inventory

Finisar Corporation (NASDAQ:FNSR) reported its third quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives have to say.

Cisco’s Acquisition

Troy Jensen – Piper Jaffray: Kurt or Eitan, (Topic to you is) Cisco’s (NASDAQ:CSCO) acquisition of Lightwire. Wondered if you could just give us your read on what Cisco is doing, maybe what’s the longer-term revenue impact if Cisco is successful in getting this technology?

Eitan Gertel – CEO: Cisco have announced acquisition of a Lightwire, that’s what we know. They are addressing some products, they will be doing some products in the future and we have the bunch – number of products that we are designing to address the same market. I think their targets will be going towards from what we see the 100G product whether it’s LR4 and other combination and currently we are addressing the same market with our CFP product, whether if CFP go into CFP2 and CFP4. So, at this point, we don’t even know what – how is the impact going to be on that product and what time will they have a product to be use, but we’re continuing with our product development and we think we are in a great position to address this market opportunities.

Troy Jensen – Piper Jaffray: Then any insight into specifically what they’re developing, how much revenues (you think is) currently downward from Cisco’s type of product line?

Eitan Gertel – CEO: In the short run, I don’t think it’ll have any impact on us at all. The question is what is going to be in 2013 and 2014 and the out years. Clearly, they have invested in a technology that they think will empower them to build smaller and lower power optical devices. We all targeted on trying to build exactly those same smaller and lower power devices, and it’s going to be interesting to see how it plays out over the coming years as to which actual technology is the most efficient and what are the packaging techniques that the industry uses to be cost competitive. I don’t think anything is clear yet, but Cisco had made an investment in this Company sometime ago and owned a substantial equity stake. I’ve heard as much as 50%, but I don’t really know exactly what it was. So they sort of bought the rest of the Company. For their purposes, I’m sure they think it’s empowering, but I don’t think what Lightwire was doing was viewed by the industry as being particularly novel.

Troy Jensen – Piper Jaffray: Probably I just had another question maybe for you, Jerry, on three consecutive quarters now where you guys had exactly the same revenue range, arguably this quarter has probably got more units rate because of the ASP reductions, but it definitely (imply) the business stability in the market here, but you’re now excited being just optimistic on products getting sold with all the content. Have you had any dialog with carriers, any confidence in kind of the second half of Q2 turning it more than acceleration in total spending?

Eitan Gertel – CEO: We’ve had a lot of conversations with equipment builders and carriers. The consensus it’s almost unanimous. They’re going to spend more money on CapEx. Now, the only question is when is it going to start. I’ll just tell you that everybody has been rolling so far, and it hasn’t started as quickly as people expected in 2012, and there was clearly a slowdown in this country in 2011. There was lots of speculation and even (why) the big carriers themselves had said, okay, we will start spending early in 2012 and the answer is, it hadn’t happened. It’s going to happen. It’s inevitable. Exactly why there is this pause and what they are waiting for is not clear to our customers and so it’s a little opaque to us as well.

Inventory

Ehud Gelblum – Morgan Stanley: First, I’ll (indiscernible) kind of many questions. I didn’t hear you give a ROADM number. Can you give us a sense of how large ROADMs were this quarter?

Kurt Adzema – EVP and CFO: They were relatively flat with last quarter, but we’re not giving an exact number.

Ehud Gelblum – Morgan Stanley: Going forward you find them not giving that number going forward again?

Kurt Adzema – EVP and CFO: We’ll give directional guidance, but we’re not going to be breaking out ROADM going forward.

Ehud Gelblum – Morgan Stanley: On the inventory, I think, Kurt, you said that it was higher because you had some extra telecom drive that was in there. Does that indicate that you would expect the telecom to do better than in fact did? It was down I think $4 million. Did you expect it to perhaps have gone higher. So when you were constructing the quarter, did you construct a flat quarter differently or did you expect to be higher? I am trying to get a sense of to datacom outperformance you had, the telecom underperformance you had and what were the – versus how you would have constructed the quarter three months ago had it come out based on what end up being in your inventory?

Eitan Gertel – CEO: Sure. So, when we gave guidance back in December, I think we thought that both datacom and telecom are going to be relatively flat. So, telecom ended up being a little weaker than we thought and datacom ended up being a little stronger than we thought.

Ehud Gelblum – Morgan Stanley: Just extending that to next quarter’s guidance when you’re again guiding to relatively flat, are you expecting the H1 to remain flat from the current spots where they are in this quarter and Q3 or do you expect them to have revert back to be the mix you had in Q2?

Eitan Gertel – CEO: We expect telecom revenues to decline some this quarter because you’ve got the full three months of the annual telecom price reduction. So, in general, I’d just say we expect telecom to be down and datacom to be flat or grow.

Ehud Gelblum – Morgan Stanley: Just to make sure I understand how the numbers were? The gross margin declined basically is at the 80 basis points, gross margin declined from this quarter to Q4. You’re guidance is based on the price declines and that kind of filters through to the operating margin and that’s how we should be looking as the only chance. So essentially if it wasn’t for the annual price declines, we’d be looking at flat margins and a completely flat numbers, correct?

Eitan Gertel – CEO: Obviously product mix enters into gross margins a lot as well, so since we’re talking more datacom and less telecom, I think that’s also a factor in terms of the margin guidance we’re giving, but obviously the big factor for the reduction next quarter is the annual telecom price reduction.

Ehud Gelblum – Morgan Stanley: The last thing on ROADMs, one of your competitors, obviously JDSU came out with the new product, the tru-flex product that is on the surface at least more similar to your ROADMs in terms of flexibility of grid. Can you talk a little bit about how you see that sitting in with your products and how you compare to their new offering?

Eitan Gertel – CEO: I mean we don’t know much about their offering, because we haven’t seen their product. I mean we know what they’re talking about and I think they’re talking about starting to sample some customers in the near future. I have no idea if the samples are ready. What we do know about our product is, we have been talking about two flex sorry – Flexgrid the way we call it – we’ve been talking about for a number of years. We started talking about Flexgrid probably in the ’07 timeframe. Now, we have the full line of Flexgrid products. Any product we made since now is a Flexgrid, whether it’s from the 1×2 to 1×23 and those products are in customers hands and being shipped. In addition, we have all the requirements of Flexgrid, we’ll make our own channel monitors, we’ll make our own in the line cards, we’ll make our own EDFAs. So, we’re not only ready to go, we have qualified products delivered to our customers and we’re actually pushing it even further and we’ll release more new products. So, as far as we are concern is we define this Flexgrid, we worked with our customers, we helped our – the end customer define their needs and we are ready to deliver and we have the leading product in the market.

To contact the reporter on this story: at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com

More from The Cheat Sheet