Optical Networking Getting Hot

Everyone is using the Internet now, and not just on their computers and laptops but also on their iPhones, BlackBerries, netbooks, and tablets. But online video, social networking, and multimedia applications on smartphones hog a lot of bandwidth. This huge appetite for bandwidth has stressed the current infrastructure, calling for an upgrade. And who is the beneficiary? The optical networking sector.

According to Cisco’s recent Global Mobile Data Traffic Forecast Update, by 2014 about 66% of mobile data traffic will be video. I like how Time describes this trend: bandwidth is the new black gold. And to cater to this trend, Cisco recently launched a new router to bring in the ‘zettabyte era’ (four orders of magnitude up from today’s gigabit/gigabyte world). Google also announced plans to test a high-speed broadband network that it claims will outpace Internet speeds by 100 times.

These trends have seen the stocks of fiber optic companies JDS Uniphase (NASDAQ:JDSU) and Finisar (NASDAQ:FNSR) surge over the past month. Both companies were struggling during the downturn, but as the economy recovers, we can expect the huge demand for bandwidth to follow its course and improve their fortunes.

Last month JDSU, with annual revenue of $1.29 billion, reported second quarter revenue of $342.9 million, up 15% q-o-q but down 3% y-o-y. Its net loss has been improving consistently: from $722.9 million last year and $31.9 million last quarter, net loss has improved to $19.5 million. Through the downturn, JDSU has been streamlining its business and expanding margins through initiatives such as the transfer of its solid-state manufacturing to an Asian contract manufacturer. Non-GAAP gross margin improved to 44.6% versus 44% last quarter and 43.5% last year. The company ended the quarter with $698.0 million in total cash and investments. Q1 coverage is available here.

For the third quarter, JDSU expects non-GAAP revenue to be in the range of $325 million to $350 million. This week, the company expanded its portfolio of reconfigurable optical add drop multiplexer (ROADM) and tunable XFP optical products to increase the agility of optical networks. The stock is currently trading around $11 with market cap of about $2.5 billion. It hit a 52-week high of $11.36 on March 2.

On the other hand, Finisar, with annual revenue of $541.2 million, swung to a profit in its third quarter owing to improved margins. Revenue grew 32.4% y-o-y and 14.6% q-o-q to $166.9 million. Net income was $5.6 million versus a loss of $49.2 million last year and $31.4 million last quarter. Gross margin increased to 31% from 27.6% last year and 27.3% last quarter. The company ended the quarter with $79 million in cash and investments. Q2 coverage is available here.

For the fourth quarter, Finisar expects revenue in the range of $175 million to $185 million. Finisar last week offered 8.6 million shares of its common stock at a price of $14 per share. Its stock has since surged  and is currently trading around $15.6 with a market cap of about $985 million.

I am happy to see the optical networking sector improving. It has become a very important piece of the global information superhighway to build up, and for the infrastructure to continue smoothly, this sector needs to be healthy and performing. It also needs to be able to continue with highly complex R&D to maintain the cutting-edge innovation. All of this requires that the companies in the sector have strong profitability. Against that backdrop, I am delighted to see Finisar returning to profitability and JDSU reducing its losses.