Investors in Finisar (FNSR) are having a decent year on the back of solid momentum in the second half of the year. Continued operational improvements make shares look attractive after a recent correction.
Shares offer growth and thereby long-term appeal while trading at fair valuation multiples. I remain cautiously optimistic, and argue that the recent sell-off provides investors with a reasonably attractive entry point.
Second Quarter Results
Finisar generated second quarter revenues of $290.7 million, up 25.3% on the year before and up by 9.3% on a sequential basis.
GAAP earnings came in at $30.0 million compared to earnings of just $0.3 million last year. Diluted earnings per share came in at $0.29 per share, up three cents from the last quarter.
On a non-GAAP basis, earnings rose by 40.0% on a sequential basis to $43.8 million, coming in at $0.43 per share. Last year's non-GAAP earnings came in at $0.15 per share.
CEO Eitan Gertel commented on the second quarter performance, "During the quarter, we continued to make significant strides in new product development that we believe will drive future revenue growth. For example, we demonstrated our new 100Gbps CFP4 Ethernet transceiver for short reach datacom applications."
Looking Into The Results...
Finisar reported very solid revenue growth, and sales leverage resulted in a solid increase in earnings. GAAP gross margins were up by 810 basis points to 35.6% of total revenues, and up by 130 basis points on the quarter before.
On top of the gross margin expansion, operating expenses were falling. Operating expenses fell by 230 basis points compared to last year, coming in at 25.2% of total revenues.
Despite nearly 10% dilution over the past year, Finisar has seen a significant increase in profitability, more than offsetting the negative effects of dilution.
...And Looking Ahead
Third quarter revenues are seen between $290 and $305 million. At the midpoint of the guidance, revenues are seen up 2.3% on a sequential basis, and up by 24.8% on the year before. Analysts were looking for revenues of $289.8 million.
GAAP margins on an operating basis are seen around 11.5%, resulting in GAAP earnings of around $34 million, around $0.33 per share on a diluted basis.
Non-GAAP earnings are seen between $0.43 and $0.47 per share. Consensus estimates for third quarter earnings stood at just $0.38 per share.
Finisar ended the second quarter with $316.5 million in cash and equivalents. Total debt stands at $44.7 million, for a net cash position of $271.8 million.
Revenues for the first six months of the year came in at $556.8 million, up 23.0% on the year before. Finisar reported earnings of $56.0 million, compared to a $5.9 million loss in the comparable period last year. At this pace, annual revenues could come in around $1.15 billion, while earnings could come in around $120 million.
Trading around $22 per share, the market values Finisar at about $2.1 billion. This values operating assets of the firm at around $1.8 billion, the equivalent of 1.6 times annual revenues and 15 times annual earnings.
Despite the solid earnings being reported by the company at the moment, and the solid financial position, Finisar does not pay a dividend at the moment.
Some Historical Perspective
Very long-term holders of Finisar are still suffering from large losses sustained around the turn of the millennium. Ever since, shares have seen a lot of volatility, trading between levels of $2 and $40 over the past decade. Shares fell from $40 in 2006 to lows of $2 in 2009 to recover to $40 in 2011. Shares fell back to lows of $12 at the start of the year, and have nearly doubled in the meantime.
Between 2009 and 2013, Finisar is on track to increase its annual revenues by a cumulative 80% to an expected $1.15 billion. Earnings have been volatile and after posting a modest loss last year, earnings are set to improve towards an expected $120 million this year.
Finisar is a play on the continued spending by large telecom carriers to upgrade their networks. On the back of these increased investments by players like AT&T (T) and Sprint (S), among others, shares have already advanced by a third so far this year.
The important telecom activities have been a drag on the firm's results last year, but are resulting in strong growth this year. On top of the very strong headline growth in revenues, strong gross margin expansion, and leverage in operating expenses, Finisar has seen an explosion in earnings.
Continued investments in LTE networks drive the results for the fiber-optics maker. While telecommunication product revenues make up nearly a third of total revenues, Finisar still largely relies on data communication services for the majority of its revenues.
While the current times are good, and short-term momentum will most likely persist given the continued investments in LTE and data centers, it is important to note that Finisar operates in a cyclical industry.
Fortunately, the firm operates with a strong financial position and trades at fair multiples. Despite the reasonably fair earnings multiples at 15 times earnings, combined with strong growth, investors should realize that Finisar's operations are volatile, despite the strong operational performance at the moment.
The continued long-term improvements, combined with a relatively modest share price performance have improved the appeal of the shares. While shares were trading around $40 at the start of 2011, they have nearly halved in the meantime. At the same time, Finisar has shown meaningful revenue and earnings growth compared to those days, making the valuation increasingly more attractive.
I am cautiously optimistic about the company's medium to long-term prospects and believe that the nearly 20% correction from October's highs provides investors with a very nice long-term entry opportunity.