Fiber-optics maker Finisar (NASDAQ:FNSR) reported stronger than anticipated fiscal fourth-quarter results. Revenue rose 2% sequentially to $243 million, modestly exceeding expectations. Earnings per share increased 18% quarter-over-quarter to $0.20 per share on a non-GAAP basis (which excludes stock-based compensation and impairment charges), which was far better than expected.
Surprisingly, telecom spending was not what drove the improved results at Finisar. This runs counter to what we heard from Ciena (NYSE:CIEN) just a few weeks ago. In fact, telecom revenue declined 12% sequentially to $79.5 million. Management said the problem in telecom was twofold-sluggish carrier spending combined with lower telecom prices that it had in place a year ago. Though Finisar's weaker telecom results aren't consistent with the increased carrier spending that supported Ciena's, Cisco's (NASDAQ:CSCO), and Juniper's (NYSE:JNPR) recent performance, we still believe carrier capital spending will be advancing higher in coming periods. The significant pricing reductions the firm had to take in the period on its telecom offerings suggest that perhaps its product mix isn't a great fit.
Even though Finisar's telecom business was weak, the firm experienced solid growth from its data communications business, which grew 11% sequentially to $164 million. Data centers have robust demand for Finsiar's 10GB and 100GB Ethernet Transceivers that help transport Ethernet frames at higher speeds. Not surprisingly, this is an area where Finisar is investing heavily, with management noting on the conference call:
"…we are developing multimode fiber products including SR10, which is 10 channels of 10 gigabits and SR4, which is 4 channels of 25 gigabits, each of which utilizing our patented digital diagnostics functionality. We're also continuing our efforts on the CFP4 form factor, which allows further reduction of size by about 50% and reduce the power consumption even further. CFP4 modules will be available in the 2014."
On the cost side, Finisar saw solid performance in its gross margin, which increased 150 basis points sequentially to 32.2% (thanks to growth in Ethernet Transceivers). Operating expenses were up 4% sequentially, but the firm's operating margin still expanded 90 basis points, to 8.2%.
Going forward, Finisar anticipates fiscal first-quarter 2014 revenue (ends July 2013) in the range of $245-$260 million driving a non-GAAP operating margin of 9%-10.5%. Both numbers imply material profit expansion, which is why we were excited about the firm's performance. However, higher margins signal an ongoing mix shift to data communications products, suggesting telecom revenue may continue to be subdued at the firm -- at least for the next couple quarters. Management, however, expects increased carrier spending to bolster its telecom segment in the second half of fiscal 2014.
Though Finisar's quarter was better than anticipated, we do not like to see the firm's telecommunications business struggling -- especially since the market potential and future capital spending at the major telecom companies looks enormous in coming periods. However, Finisar is doing a nice job of capitalizing on cloud growth, and its 10GB/100GB Ethernet Transceivers appear to be well received. Still, we believe shares of Finisar look fairly valued, and we point to Cisco as our favorite fundamental idea in the space.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.