Finisar: Disappointing Revenue Guidance, Strength In Metro Modules

Finisar (FNSR) reported revenue Monday evening of $107.5M. No written transcript of the call is available, though a replay is and the company overview was updated. I thought there were three notable announcements:

Flat Revenues

The flat revenue guidance for FQ407 of $104-$110M was particularly disappointing after a flat FQ307. This revenue plateau is entirely due to 11% quarter over quarter reductions in multimode LAN/SAN revenue. Other product areas made up for the shortfall resulting in flat top line revenues.

Sales of LAN/SAN 850nm VCSEL based products dropped from $62.6M in FQ207 to an expected $49.5M in FQ407, a reduction of $13M in revenue.

Finisar is the leading provider of multi mode optical modules in the world. This is a very big drop, something that Wall St. isn’t questioning sufficiently.

The culprit, as explained to me by Finisar, was an inventory correction tied to 4G Fibre Channel SFP products. At one point these modules were on allocation and the company witnessed a classic case where customers double order in order to assure a large allocation of scarce product.

The sheer magnitude of the shortfall ($13M) seems awfully large to be tied to such a narrow product area, though I have received assurances from the company this is the case. Is this inventory correction prolonged by a move to 8G Fibre Channel? What else is at work here? Comments and thoughts are welcome.

Metro and Telecom Revenue Growth

The strength in Metro modules, primarily high-end tunable transceivers, is very notable. This is not where I expect Finisar to take share, since their competitive advantages are in multi mode LAN/SAN market. This new strength comes not just from customers shifting away from 300-pin MSA modules, as well as taking share from companies like Optium (OPTM), Avanex (AVNX) and Intel (INTC).

The company mentioned component supply chain constraints as the reason they could not deliver sufficient 10G modules to meet demand. A little known fact is that Finisar, unlike all other module makers, has taken the additional step of vertically integrating their analog IC requirements. Instead of purchasing components from Mindspeed (MSPD), AMCC (AMCC) or Vitesse (VTSS.PK), Finisar designs and fabs their own laser drivers, clock and data recovery, transimpedence amps, etc. This is not an easy thing to do and I suspect was the cause of their 10G hiccups.

This in-house IC expertise makes them as the most vertically integrated module maker in the world. Customers like Cisco certainly notice and appreciate the future pricing benefits this will bring regardless of short term problems.

$1M in Cisco X2 Module Revenue

$1MM in X2 module revenue at Cisco (CSCO) is a drop in the bucket. Cisco purchases about $40M in 10GE modules on a quarterly basis. This is not negative for Finisar, it’s an an indicator that the ramp at Cisco has lots of runway.

Wall St. does not understand the architectural transformations underway at Cisco and how this will impact the module supply chain. While all analysts agree this is positive for Finisar, our internal research indicates they are underestimating the revenue impact.

Full disclosure: Author is long Finisar.

FNSR 1-yr chart