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Can Finisar Make a Comeback?

By Harsh Chauhan – Apr 5, 2018 at 9:18AM

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Finisar's latest results are giving ominous signals.

Finisar (FNSR) stock has lost about a quarter of its value since the company reported third-quarter earnings on March 8. The optical components specialist's revenue and earnings fell short of expectations thanks to weakness in the telecom business and tepid fourth-quarter guidance didn't help matters.

The 3D sensing business was the silver lining in Finisar's latest quarterly report, but will it be enough to help the company get back on track? Let's find out.

Man standing in front of a chalkboard on which are written question marks.

Image Source: Getty Images

3D sensing isn't enough

Finisar supplies vertical-cavity surface-emitting laser (VCSEL) arrays to Apple to enable 3D sensing applications such as Face ID in the iPhone X. Apple was reportedly finding it difficult to source parts to integrate facial recognition in its flagship device, so it went ahead and made a substantial advance to Finisar to ramp production.

Finisar didn't quantify the contribution of the VCSEL business to its top line in the quarter, but it did point out that sales of these chips boosted its data communications business by almost 4% as compared to the second quarter.

However, the weakness in the telecom side of the business dented the company's performance. Lower demand and weak pricing of telecom products led to a 12.3% sequential decline in revenue from this segment, and it also hurt the company's margins. The company's adjusted gross margin was down from 37% in the year-ago quarter to 28.6%.

As a result, Finisar posted a net loss of $55.6 million in the quarter as compared to a profit of $46.3 million in the year-ago period.

Tough times ahead

Finisar's third-quarter revenue fell close to 13% year over year, but the telecom business alone shouldn't be blamed for this weakness. The data communications business supplies 80% of Finisar's total revenue, and the segment's sales fell 1% year over year because of lower demand for its ethernet transceivers.

The telecom business, meanwhile, shrank almost 40% year over year, and it is unlikely that an increase in overall VCSEL demand from Apple will be enough to cover the losses elsewhere. This is because Finisar isn't the only one competing for the 3D sensing spot at Apple, and an increase in sales wasn't enough to arrest the decline of the data communications segment in the just-reported quarter.

Competitor Lumentum's (LITE -1.89%) 3D sensing sales had shot up to $200 million last quarter as compared to $40 million during the preceding one. The company remains upbeat about demand for its 3D sensing chips, claiming that it will have to start ramping up production sooner than expected to meet an expected surge in demand.

Finisar, on the other hand, is aiming to complete the construction of its VCSEL facility in the second half of the year, so it might lose some ground to Lumentum. Meanwhile, the optical components market might not recover enough to boost Finisar's performance. Demand for optical components out of China has recovered to some extent, but it hasn't stepped on the gas just yet.

Additionally, Rosenblatt Securities points out that optical component customers in China have started designing components in-house, and this will negatively impact demand. So, Finisar is facing a lot of uncertainty right now, and a weak guidance indicates that a turnaround isn't coming anytime soon. Moreover, any potential increase in VCSEL sales in the latter half of the year could be crippled by Lumentum's presence, which is why Finisar is best avoided until and unless there are concrete signs of a turnaround.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Finisar Stock Quote
Apple Inc. Stock Quote
Apple Inc.
$142.48 (-4.91%) $-7.36
Lumentum Holdings Inc. Stock Quote
Lumentum Holdings Inc.
$69.49 (-1.89%) $-1.34

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