A gigabyte here, a gigabyte there, and pretty soon, it starts to add up.
Finisar Corporation (NASDAQ:FNSR) is in the gigabyte business, developing technology for fiber optic subsystems and network test and monitoring systems. This week, the company announced its quarterly earnings and, well, investors decided to unload giga-blocks of shares. The stock plunged nearly 16% on volume exceeding 18 million shares.
The top line was fine; indeed, the company reported 9% sequential growth in revenues to $42.8 million. Expenses were a slightly different story. For a variety of reasons, gross margins fell to 22.7% from 27.9% in the prior quarter.
One particular reason, however, has a silver lining, or at least an asterisk: The company recently launched a new line of products. In the wake of major product launches, it is never easy to judge the initial impact on margins.
Most importantly, Finisar is a survivor and recognizes the balance between investing in new products and short-term profitability. The company faces fierce competitors in JDS Uniphase (NASDAQ:JDSU) and Agilent Technologies Inc. (NYSE:A). To gun for short-term profits would be suicide.
And the company has the resources to handle a little cash burn with $236 million in the bank. With all that cash, coupled with a market cap made healthier by the stock's strong performance (excluding yesterday, of course), don't be surprised if Finisar gets back on the M&A trail next year and picks up more assets at cheap prices.
Given the stock's recent strength, a bout of profit taking may have been due, but on the balance, the earnings call was upbeat. The backlog is bulging and new orders are coming in at a healthy rate. Add to this, new product introductions, and Finisar is positioned to take advantage of a recovery in demand.
Tom Taulli is the author of six books on investing, such as Investing in IPOs (Bloomberg Press), as well as a professor of finance at the USC School of Business (don't worry, but he does come out of his ivory tower). You can reach him at [email protected].
