Is This Optical Components Supplier Set for a Post-Earnings Pop?

This fiber-optics company is on a roll this year, but will it be able to sustain its momentum?

Harsh Chauhan
Harsh Chauhan
Jun 9, 2014 at 2:05PM
Technology and Telecom

Fiber-optics components supplier Finisar (NASDAQ:FNSR) is set to report its fourth-quarter results this week, but investors were in for a pre-earnings bash. One of Finisar's clients, Ciena (NYSE:CIEN), posted terrific results recently. Since Ciena's outlook came in well-ahead of consensus estimates, investors are expecting Finisar to follow in its footsteps when its reports results. As such, Finisar jumped more than 10%. 

But, will Finisar be able to satisfy investors' expectations? Analysts, according to Yahoo! Finance, expect Finisar's revenue to jump almost 25% year over year in the fourth quarter. Earnings are expected to increase to $0.38 per share from $0.20 per share in the year-ago quarter. Clearly, the expectations are high, but a closer look at Finisar's business will reveal why it is poised for outperformance going forward.

Favorable trends
Finisar specializes in data communications and telecommunications products. Both these segments are benefiting from secular trends such as strong data center spending and build-out of faster networks. According to TechNavio, the global data center construction market is expected to grow at a strong annual compound rate of 21% till 2018.

The growing number of mobile devices and new concepts such as Cisco's Internet of Things are driving demand for higher bandwidth and data centers. The deployment of data centers, and upgradation of telecom networks, is leading to strong demand for Finisar's 100G products.

Robust end-market demand
As Finisar's customers are opting for 100G switches instead of the legacy 10G products, the company's gross profit margin is getting better. According to Goldman Sachs, 100G optical products carry a higher gross margin of almost 15 percentage points when compared to 10G. As the roll-out of 100G by telcos such as Verizon and AT&T (NYSE:T) in the U.S. is gaining momentum, Finisar stands to benefit.

AT&T is Ciena's largest customer, accounting for almost 22% of its revenue in the previous quarter. Historically, Ciena's revenue from AT&T used to fluctuate in the 13%-18% range annually, so a bump in the previous quarter can be attributed to the telco's accelerated spending.

Ciena saw robust demand for its converged packet optical products in the previous quarter, a trend that's poised to continue. AT&T is planning to deploy its ultra-fast fiber network to up to 100 candidate cities and municipalities across the U.S. Ma Bell's fiber network aims to deliver broadband speeds of up to 1 gigabit per second, apart from AT&T's TV services to consumers and businesses.

On the other hand, Verizon has also deployed around 21,400 miles of 100G network, and it is on track to deploy more lines. In fact, even Verizon is tapping Ciena to provide 100G gear. An impressive fact is that Ciena has around 100 customers for its 100G gear, and 10 of them are Tier 1 accounts. As such, the fiber-optics business of Ciena should continue doing well, which in turn should result in good business for Finisar as it supplies optical components to Ciena.

Google Fiber prospects
Finisar might also benefit from Google's (NASDAQ:GOOG) (NASDAQ:GOOGL) Fiber initiative, according to Raymond James and Associates. Finisar is one of the company's with the highest exposure to data center spending. The analyst firm points out that Finisar's data center business is growing at a faster pace than capital-expenditure growth due to a shift from copper to fiber ports. 

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Hence, Finisar can be a beneficiary of Google Fiber as it specializes in fiber-optics components. Google is aggressively raising its capital expenditure, spending $2.35 billion in the previous quarter, almost double from the year-ago quarter's $1.2 billion.

Google's spending was aimed at procuring fiber equipment, data center construction, and real estate investments. The technology giant is planning to extend its Fiber coverage from three cities at present to 34 cities going forward, which won't be possible without further investments. 

Final words
The growing usage of optical networking components in different applications is a tailwind for Finisar. As mentioned earlier, the company is benefiting from secular trends in Big Data, and it counts major customers such as Ciena, Cisco, Huawei, etc. So, Finisar's business should continue improving on the back of the several catalysts, and enable it to sustain the robust revenue and earnings growth going forward.