Demand For Bandwidth A Boon For Optical Networking

The optical networking sector is on a strong growth curve as the demand for bandwidth continues unabated. Smartphones, tablets, and netbooks have led to a surge in the demand for online video, social networking, and multimedia applications, which in turn consume a lot of bandwidth. Riding high on these trends, optical networking players, JDS Uniphase (NASDAQ:JDSU) and Finisar (NASDAQ:FNSR) reported strong quarters in their recent results.

Finisar’s Stellar First Quarter
In our coverage last quarter, we saw that Finisar, the world’s second-largest fiber optic equipment maker with annual revenue of $629.9 million, swung to a profit.  This quarter, the company bettered its performance driven by strong demand for its reconfigurable optical add-drop multiplexer (ROADM) products.

Q1 revenue was up 61.5% y-o-y and 10.3% q-o-q to $207.9 million. Net income was $19.4 million or $0.24 per share versus loss of $11.1 million or $0.18 per share last year and profit of $14.1 million or $0.19 per share last quarter. Gross margin increased to 34.1% from 22.8% last year and 31.2% last quarter. The company ended the quarter with $192.2 million in cash and investments.

Finisar experienced strong demand across nearly every product line, especially in higher speed products and ROADMs. Revenue from products for applications equal to or greater than 10 Gbps increased 81.3%, products for applications less than 10 Gbps increased 27.2%, ROADM-related products increased 178.5%, and products for cable TV (CATV) applications increased 15.0%.

Finisar’s Strong Outlook
Finisar expects ROADM growth of 20%-30% q-o-q versus 40% q-o-q growth in the April quarter and 13% q-o-q growth in the recent July quarter. For the second quarter, Finisar expects revenue in the range of $215 million to $230 million, much higher than the average analyst estimate of $206.2 million.

Finisar Acquires Broadway
Following a stellar quarter, Finisar last week announced that it has acquired Broadway Networks, Ltd. for an undisclosed sum. Broadway has developed a pluggable transceiver that incorporates an EPON optical network unit (ONU) in a small form-factor pluggable (SFP) and enables switches, routers, and other customer premises equipment (CPE) to connect directly to passive optical networks. Broadway has also developed a “smart SFP” with built-in remote management designed to enable telecom carriers to monitor and diagnose the fiber links connecting customer sites and lower operating costs in the process.

Jerry Rawls, Finisar’s executive chairman of the board, adds that Broadway’s technology fits nicely with Finisar’s strong position in digital diagnostics and its strategic goal of incorporating more functionality inside a transceiver. I interviewed Rawls in 2007 in a turnaround series. Since then Finisar, has undergone many changes. It acquired Optium, its stock hovered close to $1 as the economy worsened, and had a reverse split of 1:8 last year. The stock is currently trading around $18 with market cap of about $1.35 billion. It hit a 52-week high of $18.37 on September 21.

JDS Uniphase Swings to Profit in Fourth Quarter
Last month, JDS Uniphase reported its fourth quarter and fiscal year 2010 results. Its annual revenue in 2010 reached $1.364 billion, an increase of 6%. Net loss for the year was $61.8 million or $0.28 per share, an improvement over a loss of $909.5 million or $4.22 per share in 2009.

In the fourth quarter, JDS Uniphase swung to a profit of $1.5 million or $0.01 per share compared to a loss of $11.9 million or $0.05 per share last quarter and loss of $63.6 million or $0.29 per share last year. Net revenue in the fourth quarter was $390.9 million, including $15.7 million from the acquisition of the Network Solutions Division from Agilent Technologies, increased 20% q-o-q and 45% y-o-y. Gross margin was 45.5% compared to 44.1% in the prior quarter and 42.2% in Q4 last year. JDSU ended   the quarter with cash and investments of $600 million.

For the first quarter, JDS Uniphase expects revenue in the range of $410 million to $425 million versus the analyst consensus of $415.4 million. The stock is trading around $12 with market cap of about $2.5 billion. It hit a 52-week high of $13.95 on April 15.

JDS Uniphase recently won a new contract for the next-generation (4G) long-term evolution (LTE) network with Taiwan’s Chunghwa Telecom. Wireless carriers are slowly upgrading their networks to 4G, and this is a strong growth factor for the optical networking sector. Analyst firm Piper Jaffray says, “The optical space continues to impress with better-than-expected growth and all the favorable bandwidth drivers which consume increasingly more optical components should continue to drive growth for this industry.”