2:14PM Finisar (FNSR) 1.75 -0.03: Finisar is a designer and manufacturer of gigabit fiber optic components and subsystems, and network test and monitoring systems for LAN/SAN/Metro data networks. The company sells its transceiver products to the majority of LAN/SAN and telecom equipment vendors. One customer accounted for 10%+ of sales in Q4; top three customers contributed 38% of revenue; top ten customers contributed 63%.
Q4 pro-forma EPS came in at ($0.06) on revenue of $56.995MM (+43.3% Y/Y) vs. Reuters Research consensus at ($0.06) on $57.08MM. Optical subsystems and components revenue increased 45.6% Y/Y to $48.664MM (85% of sales), driven by demand from the LAN/SAN market which contributed $32.8MM in revenue. Network test and monitoring revenue increased 31.0% Y/Y to $8.331MM (15% of sales).
Gross margin declined 522 bps Y/Y to 21.9% but is expected to improve to 30-35% by fiscal year end due to scale economies and a number of cost reduction engineering efforts undertaken over the past few quarters. Operating margin improved 693 bps Y/Y to (21.9%). Operating expense is expected to remain flat at approximately $25MM per quarter or 33% of sales in Q4, with R&D at 18%, sales and marketing at 9% and G&A at 6%.
Guided for Q1 revenue of $58-63MM (+45.8-58.4% Y/Y). Optics revenue is expected to be $49-54MM due to full quarter contribution from Advanced Optical Components and a 3-8% increase across all other optical products. Test and monitoring revenue is expected to be $8.5-9.5MM.
Management believes the company can ramp to $70-80MM in revenue per quarter by Q4, with optics contributing $60-68MM and network tools $10-12MM. Growth is expected to be paced by a 25-30% increase in the LAN/SAN/Metro business, higher growth in the telecom business, and a number of new products that are expected to go into production over the coming quarters. FNSR is in qualification at approximately 50 customers with 10 gigabit XFP transceivers. Telecom equipment OEMs are designing pluggable OC192 solutions into their next-generation systems. In fibre channel, OEMs are working on transitioning from 2 gigabit to 4 gigabit solutions.
The company is issuing 125MM shares to acquire the Infineon's fiber optics business. IFX will own approximately 38% of the combined company, which will have the broadest offering of pluggable optics solutions for LAN, SAN and metro applications, and is expected to generate approximately $80-90MM in optical revenues per quarter and $4-5MM per quarter in pre-tax earnings after eliminating redundant operations. IFX's optics business posted revenues of approximately $32MM for its Q2 ended Mar 31, 2004.
The IFX business gives FNSR a range of products for other datacom applications including fiber optic transceivers for automotive applications, diplexers and triplexers for fiber-to-the-home applications, parallel optic products for high speed telecom back plane connections, a number of 10 gigabit products, and over 450 patent and patent applications which management believes can be mined to develop additional datacom and telecom products.
Acquisition extends FNSR's geographic and customer market reach. FNSR derives almost 90% of sales from North America. The IFX unit derives 55% of sales from Europe and 20% from Asia. There is an 8% overlap in customer revenue.
The following table shows price multiples and Y/Y growth rates for FNSR compared against a broad group of comps within the communications equipment, semiconductors, electronic instruments and controls, and scientific and technical instruments groups.
Company *P/SG **P/OPG P/S Y/Y Rev Growth (%)
TTM 2004E 2005E TTM 2004E 2005E
Finisar (FNSR) 2.0 (9.1) 2.1 1.5 1.3 11.5 38.9 17.1
Avanex (AVNX) 1.6 2.1 5.1 3.8 2.9 313.0 5.0 31.8
Bookham (BKHM) 0.6 (5.6) 2.0 1.7 1.5 157.7 15.4 19.4
Exfo Electro (EXFO) 4.0 (20.8) 5.1 4.5 3.8 (5.6) 12.2 20.2
JDS Uniphase (JDSU) 7.4 (38.5) 7.6 7.5 6.4 (15.6) (7.1) 16.8
Molex (MOLX) 1.7 30.3 2.7 2.5 2.2 14.7 20.4 15.3
Oplink (OPLK) 5.7 (29.2) 9.2 8.1 5.9 25.5 52.1 38.9
Stratos Lightwave (STLW) 1.7 1.3 1.5 1.6 1.2 (1.8) (6.1) 40.0
Triquint (TQNT) 1.4 (12.9) 2.2 2.0 1.8 19.5 19.3 11.3
Ixia (XXIA) 2.9 37.3 6.4 5.5 4.7 26.1 23.3 16.8
Spirent plc (SPM) 1.4 35.8 1.4 n/a (31.6) n/a
Communications Eqpt 2.0 31.3 2.6 n/a (3.5) n/a
Semiconductors 2.6 30.6 4.4 18.9
Elec Instr & Ctrls 0.8 n/a 1.1 5.8
Scien & Tech Instr 1.0 16.0 1.4 (1.3)
Blended 1.7 n/a 2.4 4.0*P/SG Ratio: Normalized Trailing 12 month (Price / Sales) / Growth ratio as of June 04, 2004.
**P/OPG Ratio: Normalized Trailing 12 month (Price / Operating Income) / Growth ratio as of June 04, 2004.
Business momentum is accelerating due to ramp of new products, budding recovery in end markets and the acquisition of IFX's opticals business, which gives FNSR breadth and scale. Limited downside risk with potential for material appreciation but expect only modest upside unless management accelerates and delivers on operating improvements and synergies from IFX acquisition.
FNSR shares trade at a discount to direct comps, in-line with peer groups average and, based on our inverted EVA/DCF model, which factors in IFX business, are priced for sustained mid teens revenue growth from F06 assuming 23-24% operating margin. Eight year historical peak operating margin is 32.1%.--Ping Yu, Briefing.com |
