Optical Networking On The March

Cloud computing, social networking, video and music streaming, and HDTV are some of the trends driving the need for increased bandwidth. The existing network infrastructure based on copper cabling cannot withstand such bandwidth pressure, which is why fiber optic cabling is fast replacing it. Optical networking companies JDS Uniphase (NASDAQ:JDSU and TSX:JDU) and Finisar (NASDAQ:FNSR) are seeing steady growth and improving profitability due to this trend. Let’s take a closer look.

Finisar, the world’s second-largest fiber optic equipment maker, recently reported fiscal 2010 revenue of $629.9 million, up 26.7%. Loss for fiscal 2010 was $22.8 million or $0.35 per share, an improvement over loss of $262.5 million or $4.99 per share.

In the fourth quarter, however, the company swung to a profit of $14.1 million or $0.19 per share compared to a loss of $27 million or $0.45 per share last year and profit of $5.6 million or $0.08 per share last quarter. Q4 revenue was $188.5 million, up 75.4% y-o-y and 12.9% q-o-q. Gross margin increased to 31.2% from 21.6% last year and 31% last quarter. The company ended the quarter with $207 million in cash and investments. Q3 coverage is available here.

For the first quarter, Finisar expects revenue in the range of $190 million to $205 million, much higher than the average analyst estimate of $186 million. The stock is currently trading around $15.74 with market cap of about $1.14 billion. It hit a 52-week high of $17.19 on April 15.

Last month JDSU, with annual revenue of $1.29 billion, reported third quarter revenue of $332.9 million, up 19% y-o-y but down 3% q-o-q. JDSU continued to improve its losses. Net loss improved to $11.9 million or $0.05 per share from $101.7 million or $0.47 per share last year and $19.5 million or $0.09 per share last quarter. Gross margin was 44.1% versus 44.6% last quarter and 41.8% last year. The company ended the quarter with $713.1 million in total cash and investments. Q2 coverage is available here.

For the fourth quarter, JDSU expects non-GAAP revenue to be in the range of $385 million to $410 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 $11.68 with market cap of about $2.57 billion. It hit a 52-week high of $13.95 on April 15.

Last quarter, I observed that the optical networking sector was getting hotter. I don’t see any slowing down of this trend anytime soon, giving both Finisar and JDS a good solid runway ahead from which to take off. Jim Cramer of Mad Money had this to say for JDSU: “I am a believer in JDSU at $11 . . . I want to pull the trigger . . . I am not backing away for one minute from JDSU, which stands for ‘Just Don’t Sell Us!'”