Optical networking equipment manufacturers are proving that there is still some steam left in their sector. Finisar's
What should Fools make of the numbers that seem ugly at first glance but still manage to impress the market?
Decoding the numbers
Finisar's revenue for the quarter rose by 9.8% from the year-ago quarter to $228.2 million. Lower demand from Chinese telecom customers dampened what could have been higher growth.
In spite of a growing top line, the California-based company's operating margin slipped to 4.5% from 11.4% in the year-ago quarter, the primary factor being higher R&D spending related to the acquisition of optical-components company Ignis. As a result, Finisar's bottom line fell to $10.1 million from $19.1 million a year ago.
The inventory game
It's worth noting the sudden dip in the demand for wavelength-selective switches (WSS) and reconfigurable optical add/drop multiplexer (ROADM) products. These products were the primary drivers for Finisar's revenues, when things suddenly took a turn in the past few months. In the fourth quarter, sales from these products fell 28.7% sequentially, and the trend continues, with sales again slipping sequentially by 4.2% in the just-concluded quarter.
There was speculation that customers already held large inventories, meaning new orders for suppliers like Finisar have not come easily. Finisar hasn't said much on the reasons behind the fall but did hint at customer issues.
An inventory-correction issue has been looming large over the industry. JDS Uniphase's
In such situations, I would prefer seeing higher revenues that justify the rise in Finisar's inventory levels, which have gone up by almost 35% in the first quarter. The company expects major growth to come from the aforementioned products in its next quarter, and it will be worth the wait to see whether its optimism turns true.
The Foolish bottom line
Two factors worth a wait-and-watch stance are how sales go both from China and for ROADM/WSS products. Another challenge facing Finisar is to manage R&D spending in a way so that operating costs are under control, thus pushing up income margins.
Again, we'll have to see how the Ignis acquisition adds to revenues in the coming quarters. Keeping all these factors in mind, I may wait for some more visibility before getting too upbeat about the stock.
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Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.