Optical Components Overview: Finisar, JDS

On September 8, optical component manufacturer Finisar (FNSR) reported strong first quarter results that beat market expectations. It also reported preliminary fourth quarter results for optical subsystems designer and manufacturer Optium, with which it closed its merger on August 29. Revenue increased 21.7% y-o-y and 6.4% q-o-q to $128.7 million. Net income was $4.7 million, or $0.02 per diluted share versus net loss of $48.7 million or $0.16 per share last quarter and loss of $7.3 million, or $0.02 per share last year. Excluding charges, EPS was $0.04 versus the Street estimate of $0.03 on $123 million in sales.

Gross margin for Finisar increased to 38.4%, from 30.6% last year. The increase was driven by better product mix of optical subsystems and revenues for the Network Test segment. Optium, on the other hand, saw a 76% jump in sales to $47.2 million, and its gross margin jumped from 23.5% to 25.7%. As we saw in our last post, the merger is likely to help Optium’s gross profit through manufacturing efficiencies at Finisar’s manufacturing facilities in the Far East.

For the second quarter, Finisar expects sales of $156 million to $167 million, including about $35 million from Optium. That again beats the analyst average estimate of $144 million. For further reading on the company, I suggest my interview with Jerry Rawls on Finsar’s turnaround.

Finisar has been making an effort to increase the margin structure of its business, and while Optium has given them a nice improvement, there is a lot more that will need to be done to move this rather thin-margin business to something that can call for higher multiples.

Finisar’s biggest rival JDS Uniphase Corp. (JDSU) fourth quarter results last month that missed estimates. Q4 revenue grew 11% to $390.3 million. Net loss was $29.8 million, or $0.13 per share compared with net loss of $17.9 million or $0.08 per share last year.

Q4 gross margin was 40.9%, down from 42.6% last quarter but up from 37.4% last year. The healthy gross margin was driven by better mix, higher volumes, and improved factory absorption. In July, JDS Uniphase started the transfer of its solid-state manufacturing to an Asian contract manufacturer. Expected to be completed in 2009, this initiative would further improve margins, according to the company. JDS’ outsourcing strategy is in stark contrast to Finisar’s strategy of bringing manufacturing inhouse to get better control of margins.

For the full fiscal year 2008, net revenue grew 9.5% to $1.53 billion. Net loss was $21.7 million, or $0.10 per share, better than net loss of $26.3 million, or $0.12 per share, in fiscal year 2007. Gross margins grew to 42.8% in 2008 from 37.7% in fiscal year 2007. The company saw y-o-y revenue growth in three out of four business segments. Optical communications grew 6%, communications test and measurement 12%, and advanced optical technologies 21%, while lasers declined 9%.

For Q109, the JDS Uniphase expects revenue in the range of $378 to $394 million. JDSU is currently trading around $9 with market cap of about $2 billion. It hit a 52-week low of $9.12 yesterday. Finisar is trading around $1.26 with market cap of about $390 million. Its 52-week low was $1.06 on April 18.