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An Interesting Optical Play to Watch Out for

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It's never smooth sailing for optical networking equipment manufacturers. Before an obstacle ends, another crops up. Finisar's (Nasdaq: FNSR  ) sales remained muted and profits slipped miserably in its second quarter, but there are some interesting things brewing here.

Finisar could gain from something that's hurting other players badly. How? Read along to know.

Sad numbers
Finisar's numbers were nothing less than a bummer. Its revenues remained absolutely flat from last year at around $241 million, as demand remained weak. Weak demand has been a pain for Finisar for the last few quarters.

Stagnating revenues and higher expenses dented Finisar's bottom line, which slumped an astounding 82% from the year-ago quarter to $5.9 million.

A silver lining
With the demand for new and faster technologies always on the upside, things should look up for Finisar. Unfortunately, problems never seem to bid farewell to the industry. From inventory glut to haphazard customer orders to nature's fury -- the industry has to bear it all.

The inventory correction issue didn't spare any player in the industry. Whether it was JDS Uniphase (Nasdaq: JDSU  ) or Oclaro (Nasdaq: OCLR  ) , everyone had to bear the brunt of declining sales in their fourth quarters. But the good news is, things seem to be improving, evidenced from higher orders for products like reconfigurable optical add/drop multiplexer (ROADM) and wavelength-selective switches (WSS).

JDS's first-quarter ROADM bookings touched their highest level in three quarters, climbing nearly 25% from the previous quarter. Finisar's revenues were up, too, primarily because of higher orders for their WSS/ROADM line card products. This is really good news for the industry, and for Finisar.

I'll smile when you cry
While the inventory situation is improving, a new problem has hit the industry hard -- flooding in Thailand, which has been a headache for many tech companies as well as optical players.

Interestingly though, when Mother Nature is hammering down peers, Finisar could gain. Morgan Stanley feels that Finisar could gain by trying to capture a bigger market at a time when rivals like JDS and Oclaro are facing setbacks.

One of the factories which represent a major portion of Oclaro's revenues is flooded, and Oclaro expects the Thailand challenge to continue for two quarters. JDS has also reduced its next quarter's earnings guidance by 15%-20%, estimating a probable loss of $35-$45 million in revenues due to the floods. Industry giant Cisco Systems (Nasdaq: CSCO  ) is trying to minimize the adverse effects of flooding and expects the challenging situations in Thailand to continue for few quarters to come.

Finisar says it could see demand slowing a bit as customers may face problems in sourcing other components that come from Thailand. Yet, Finisar could also stage a coup if it can take advantage of the whole situation and sell more products. It should be interesting to see how Finisar handles the situation.

The Foolish bottom line
Finisar's profits might have slumped, but it's impressive to see how aggressively it is launching new products. In the second quarter, it launched the world's first high 1x20 port count WSS, and also expanded its WaveShaper processors product line. Leadership in these products should help Finisar get a stronger hold in the highly competitive market.

While you may remain cautious on Finisar till we see higher revenues and a stronger bottom line, it should, nevertheless, be extremely interesting to see if Finisar can make hay while rivals wilt under the water. Add it to stock to your Watchlist, and stay updated on how Finisar and its peers are tackling the headwinds.

Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Cisco Systems. The Fool owns shares of and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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