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Finisar Management Hopes to Buy More Time

By Harsh Chauhan - Sep 25, 2017 at 10:46PM

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Finisar tries to buy more time once again, but production issues continue to plague results.

Finisar ( FNSR ) failed to live up to expectations when it released its fiscal first-quarter results on Sept. 8. Finisar's revenue guidance fell way short of Wall Street's estimates of $372.5 million.

The company is anticipating $332 million in second-quarter revenue at the midpoint of its forecast, down almost 13% from the prior-year period. Management, however, tried to sugarcoat the results by promising a turnaround in the third quarter.

But should investors give Finisar management the benefit of the doubt, given that it had made a similar promise that it later failed to meet with its fiscal fourth-quarter results in June? To find out, let's take a look at the key takeaways from the company's latest earnings call.

Man shaking hands with fingers crossed at the back.

Image Source: Getty Images

Finisar could lose big

Finisar management originally expected growth to begin from the second quarter thanks to a potential design win at Apple for its vertical-cavity surface-emitting laser (VCSEL) technology, which is used for enabling 3D sensing applications. CEO Jerry Rawls claimed that Finisar has "received production purchase orders and expect to soon receive customer approval to ship meaningful volumes in our second fiscal quarter," on the June 15 earnings call.

But Rawls was singing a different tune this time when he said:

While we continue to make progress with our high-power VCSEL array program, the timing of our production ramp has been delayed due to a change we needed to make in our manufacturing process. Therefore, while we do expect to receive customer approval to ship production units in the second quarter, we only expect to achieve a relatively low level of revenue in the quarter. We expect to start shipping much larger quantities in the fiscal third quarter.

This statement is another example of the Finisar management's habit of postponing its success one-quarter at a time.

Additionally, the manufacturing issues management is talking about might have cost it future contracts with Apple ( AAPL -0.32% ) as it is not the only supplier that Cupertino is tapping for the 3D sensing solution. Rival chipmakers Himax Technologies, and Lumentum are also in the fray to supply 3D sensing chips for the newest iPhone.

As it stands, Lumentum could end up supplying most of the VCSEL arrays to Apple for the initial wave of the new iPhones, lapping up Finisar's business in the process. Industry watchers believe that Lumentum has landed $200 million worth of bookings for the remainder of the calendar year, primarily driven by its Apple contract.

Finisar, therefore, seems to have missed a golden opportunity to enjoy windfall gains from the next iPhone due to manufacturing issues, as it might have ceded business to rival chipmakers. Investors, therefore, shouldn't bet on a turnaround at Finisar next quarter, especially considering the headwinds it is facing in the telecom business.

Telecom troubles continue

Finisar's telecom business supplies almost a quarter of its total revenue. Not surprisingly, weak demand for the company's telecom products has been weighing heavily on its top line. Finisar's telecom revenue fell almost 15% year over year during the latest quarter thanks to price erosion of its products and a decline in demand for its 10 GBPS transceivers.

Things aren't going to get any better in the future, either, as Finisar expects another quarter of weakness in this segment, driven by weak demand from Chinese OEMs (original equipment manufacturers). Additionally, there isn't much visibility about where the telecom segment is heading.

Finisar is only witnessing small-scale network deployments by Chinese telecom companies, hoping for a full-scale deployment at some point in the future so that demand for its optical components increases. But a turnaround is far from visible if data from investment research firm MKM Partners is to be believed.

Demand for optical components in China is slated to fall 30% to 40% this quarter from the first quarter of the year, though inventory restocking could boost volumes in the following two quarters. However, the volume growth will be offset by weak pricing, keeping optical component revenue flat next year.

In all, Finisar faces a lot of uncertainty. Therefore, investors should be cautious of management's promise of a turnaround as Finisar's outlook has remained clouded throughout the year due to execution issues. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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