What: Fiber optic hardware producer Finisar's (NASDAQ:FNSR) stock dove 28% lower during the month of September, according to S&P Capital IQ data. The slump has left shares down by 40% since the start of 2015 and lower by roughly the same amount over the past five-year period.
So what: The stock lost its footing after Finisar posted quarterly earnings results on Sept. 10 that included three worrying signs for investors. First, the company missed sales and profit expectations for the quarter that just closed. Revenue fell by 4%, rather than the 1% drop that Wall Street was targeting. Earnings also came in light at $0.23 per share versus analysts' $0.26 per share target. Finisar's operating margin sank to 8.4% from the prior quarter's 9% mark, indicating rising competitive pricing pressure.
Yet two other developments likely played a bigger role in Finisar's drop last month: the surprise departure of its CEO and a weak operating forecast for the next nine months. Eitan Gertel resigned from the company's top spot, to be succeeded by executive chairman Jerry Rawls. Finisar didn't provide a reason for the resignation, saying only that it was a mutual decision made between Gertel and the board of directors.
The company also issued weak guidance on the rest of its fiscal year, which runs until the end of April 2016. That period will be "challenging" due to rising price competition from the lower end of the industry, together with a growing trend of large clients opting to delay their network upgrades, executives warned.
Now what: Management plans to focus on cutting costs during this period of relatively weak operating trends, which is good news for shareholders. In addition, Finisar's business is ultimately tied to the demand for bandwidth, and the long-term outlook for that sector remains strong as networks require ever-heftier infrastructure to support spiking data volume requirements. A period of weak results, even if spans three quarters, doesn't threaten that big-picture trend. But a surprise change of leadership at the top, together with expectations for a second straight year of falling profits, has understandably convinced many investors to take a more cautious view of Finisar's future.