RE: FNSR - Undertand your trading philosophy, but I'm confounded by investor behavior. Can't understand why FNSR jumped up, considering the following semi-negative report on FNSR by Epoch:
Finisar Sheds Inventory -- Bottom in 1Q?
05/31/01
By Mark Langley
Director, Senior Analyst
John Harmon, CFA
Associate Analyst
Finisar³ reported its fiscal 4Q in line with expectations, but lowered guidance for fiscal 2002, indicating that there is one more sequentially down quarter before revenue growth picks up.
The company also recorded a $19.8 million charge for obsolete inventory and related commitments.
We anticipate further price erosion in the current quarter and margin weakness as Finisar shifts manufacturing to its 700,000 square-foot facility in Malaysia.
Our revised fiscal 2002 revenue estimate is $248.6 million, versus our prior estimate of $272.1 million. We forecast that Finisar will slip into unprofitability in fiscal 1Q02 with pro forma EPS of ($0.01), break even in 2Q and return to profitability in 3Q and 4Q. We estimate EPS of $0.07 for fiscal 2002.
We think our still-encouraging long-term view of the company's prospects is more than reflected in the price of Finisar shares, which look richly valued at current levels.
Clouds over Sunnyvale?
Finisar's 4Q fell in line with management's reduced guidance, which it gave on April 16. Once again, guidance was lowered and warning signs of the times remain. Management reduced its fiscal 2002 revenue guidance to $250 million - $300 million from $275 million - $325 million. Inventory was $51 million at the end of fiscal 3Q01, then $62 million at the end of fiscal 4Q01, after a $19.8 million write-off -- suggesting (1) inventory management issues, (2) a rapidly changing environment, or (3) both. According to management, most of the inventory write-down was in 1 Gbps Fibre Channel product, due to the combination of a market slowdown and a shift from 1 Gbps to 2 Gbps product. In explaining the write-down, management said that it did not expect to sell the product within 12 months. Other than Fiber Channel softness, we anticipate further price erosion in the current quarter and margin weakness as Finisar shifts manufacturing to its 700,000 square-foot facility in Malaysia. Days sales outstanding (DSOs) increased to 64 days from 58 days, and cash and short-term investments decreased from $200 million to $146 million in the quarter.
Details on the Quarter
Core Business. Revenue from Finisar's core business (subsystems and test equipment) was $35.0 million, a sequential decrease of 28%.
Acquisitions. Revenue from acquisitions (Sensors Unlimited, Shomiti, Medusa, and Demeter) was $9.5 million in the quarter. Revenue from Sensors Unlimited was affected by the downturn in telecom, and decreased 30% sequentially to $5.9 million, according to our estimates.
Subsystems. Excluding acquisitions, optical subsystem revenue was $35.0 million, a decrease of 27% sequentially and an increase of 125% year over year. Including the $6.9 of revenue from the Sensors Unlimited and Demeter acquisitions, total subsystems revenue was $41.9 million. Gigabit Ethernet revenue increased 17% sequentially, to $5.4 million, while total Fibre Channel revenue (including subsystems and test equipment) declined 34% sequentially, to $31 million.
Test Equipment. Test-equipment revenue (also excluding acquisitions) was $7.7 million, flat sequentially and an increase of 49% year over year. Total test equipment revenue was $10.3 million (including the $2.6 million from Shomiti and Medusa).
Customers. Of Finisar's sales to top customers, we believe only sales to Brocade increased in the quarter. Those sales increased from $5.6 million to $7.1 million. EMC contributed 19.6% of sales in fiscal 3Q, but dropped off the 10% customer list in 4Q, representing at least a 50% decline in revenues. Revenue from Extreme, the only other 10% customer, also dropped by half in the quarter. Revenue from Emulex increased 26% in the quarter.
Inventory. Finisar wrote down $11.9 million of 1 Gbps Fibre Channel product and took a charge of $9.5 for non-cancelable and open purchase agreements after evaluating its inventory in light of the industry transition to 2 Gbps product.
Changes to Our Model
We have updated our model to reflect continuing sequential revenue decline in the fiscal first quarter, a modest recovery in fiscal 2Q02, and a pickup in 3Q and 4Q. We now estimate revenue of $42.4 million in 1Q, a sequential decline of 19%. Our fiscal 2002 revenue estimate is $248.6 million, versus our prior estimate of $272.1 million.
We think Finisar will continue to spend aggressively on research and development (R&D) in fiscal 2002. We estimate R&D spending to peak as a percentage of sales at 27% in 1Q and decline sequentially, exiting fiscal 2002 at 16% of sales.
We forecast that Finisar will slip into unprofitability in fiscal 1Q02 with pro forma EPS of ($0.01), then break even in 2Q and be profitable in 3Q and 4Q. We estimate EPS of $0.07 for fiscal 2002.
Our Take
We still think the outlook is only partly cloudy. We believe fiscal 1Q02 will serve as the inflection point for Finisar, with rising pro forma EPS following the manufacturing shift to Malaysia, further inventory depletion at its customers, a more modest burn rate, further traction in its cable digital return-path product, a strong product pipeline, the acquisition of Marlow Industries (expected to be accretive in 2001, and not factored into our estimates), the potential for additional consideration of $25 million in cash in connection with the Opticity product line sale to ONI Systems, and our long-term outlook for Finisar's addressable markets.
Valuation and Outlook
Unfortunately, our brighter long-term view of the company's prospects is more than reflected in the price of Finisar shares. While an improvement in the outlook for the sector could quickly propel the shares higher, FNSR looks richly valued at 13.3 times our calendar 2001E 11.9 times our fiscal 2002E revenue estimates.
Read our full company report on Finisar
3. Ameritrade, a minority shareholder of Epoch Partners, has been an underwriting manager or co-manager of the company in the last three years.
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Guess bad or negative news regarding current valuation has to hit many of the investors out there right square between the eyes, with blunt force trauma, to get the point across?
Still tempted to take another short position on FNSR at these prices, but hate to sit on the position over a weekend. |
