Finisar (FNSR)

First Quarter 2009 Results

On September 8, 2008, Finisar Corporation announced financial results for fiscal 2009 first quarter ended August 3, 2008. Revenue for the quarter was $128.7 million, exceeding the company's guidance of $120 million to $125 million. This represents a 21.7% increase in revenue from the $128.7 million reported in the year-ago quarter and a 6.4% increase over the $121.0 million reported in the previous quarter. Net income for the quarter was $4.7 million or $0.02 per diluted share versus a net loss of $7.3 million or $0.02 per diluted share in the year-ago quarter and a net loss of $8.7 million or $0.03 per diluted share in the previous quarter. The company's operating results included $6.9 million of non-cash and cash charges, gains or losses related to acquisitions, sale of minority investments, restructuring activities, impairments, and financing transactions. Excluding these one-time charges but including stock-based compensation, Finisar reported adjusted net income of $0.03 per diluted share in the first quarter versus a net income of $0.00 per diluted share in the year-ago quarter and a net income of $0.02 per diluted share in the previous quarter.

Total revenues from the sale of optical subsystems and components were $115.8 million in the first quarter, up 20.1% from the year-ago quarter and 3.9% on a sequential basis. Of this, revenues for LAN/SAN applications were $60.8 million (up 23.2% year-over-year and down 3.0% sequentially) and Metro/Telecom were $54.9 million (up 17.0% year-over-year and up 12.9% sequentially). Network test revenues were $12.9 million, up 38.0% from the year-ago quarter and up 34.4% sequentially. Revenue from new products contributed to the growth in the quarter, including products for 3-6 Gbps SAS/SATA and 8 Gbps Fibre Channel storage applications. Revenues from long distance 10/40 Gbs products increased to approximately $32.2 million in the quarter, up 76.6% from $18.2 million in the year-ago period and 3.2% from $31.2 million in the prior quarter. Of the total long distance 10/40 Gbs products, approximately $10.0 million were from LAN/SAN applications (up 223.8% year-over-year and down 17.5% sequentially) and $22.2 million from Metro/Telecom (up 46.5% year-over-year and up 16.4% sequentially). Revenues from short distance 10/40 Gbs products increased to approximately $83.6 million in the quarter, up 7.0% from $78.1 million in the year-ago period and up 4.2% from $80.2 million in the prior quarter. Of the total short distance 10/40 Gbs products, approximately $50.8 million were from LAN/SAN applications (up 9.8% year-over-year and up 0.5% sequentially) and $32.7 million from Metro/Telecom (up 2.9% year-over-year and up 10.6% sequentially). During the quarter, the company had only one 10% customer. During the quarter, the company's top three customers accounted for 29.5% of total revenue versus 29.0% in the previous quarter and top ten customers accounted for 73.2% of total revenue versus 55.0% in the previous quarter.

GAAP gross margin of 38.4% was up 780 basis points year-over-year and up 550 basis points sequentially. Adjusted gross margin (excluding one-time items but including stock-based compensation) was 39.3%, up 400 basis points year-over-year and up 250 basis points sequentially. Margin expansion was driven by record revenues from network tools business and a favorable product mix within optical subsystems as most of the increase comprised of higher margin products for Metro Telecom applications. GAAP operating margin of 6.6% improved 1,010 basis points year-over-year and 4,380 basis points sequentially. Adjusted operating margin (excluding one-time items but including stock-based compensation) was 8.6%, up 580 basis points year-over-year and up 310 basis points sequentially.

Finisar exited the quarter with $150.0 million in convertible debt and $118.4 million in cash and short-term investments, up $8.4 million sequentially. This increase in cash primarily reflects an influx of $20.0 million from a new five-year term loan from a bank in Malaysia offset by $12.0 million in payments to retire a convertible note issued in conjunction with the acquisition of AZNA in March 2007. Days' sales outstanding (DSO) for the quarter were 42 days compared to 37 days in the previous quarter. The company also provided an update on its borrowing arrangement with Silicon Valley Bank. In March 2008, Finisar entered into an agreement with Silicon Valley Bank to increase its available line of credit to $70.5 million. Under the credit arrangement, Finisar has access to a $50.0 million secured line of credit in addition to $10.0 million under a non recourse receivables purchase agreement and $10.5 million under a letter of credit reimbursement agreement. The new credit arrangement may be used for general corporate purposes including a reduction in the company's outstanding convertible notes. As of the end of July 2008, the company had utilized approximately $5.0 million under the non recourse receivables purchase agreement and had letters of credit totaling approximately $9.0 million under the letter of credit reimbursement agreement. The company has not yet drawn under the new secured line of credit.

For fiscal 2009 second quarter, Finisar expects combined revenues of $156 million to $167 million. Second quarter will include two months results of Optium's quarter. By products, the company expects network tools revenues to range from $11.0 million to $12.0 million. This is slightly down from $12.9 million in the first quarter which included about $1.0 million of non-recurring revenue from the sale of NetWisdom products. Optics revenues are expected to range from $145.0 million to $155.0 million, including a contribution of approximately $35.0 million from Optium. This assumes a full quarter of about $50.0 million in revenue for Optium, up from $47.2 million in the previous quarter. As gross margins are initially lower for Optium products than that of Finisar, gross margin for the second quarter is expected to be around 36%. The company expects operating expenses to increase in the second quarter, with approximately $25.0 million in R&D, $10.0 million in sales and marketing, and $11.0 million in G&A. This would translate to an operating income of $12.0 million to $13.0 million. Finisar expects to realize synergies on operating expenses in the third fiscal quarter ending January. Net interest and other should decline in the second quarter as the company pays off the 5.25% convertible notes, which should bring the combined net income in the range of $11.0 million to $12.0 million and $0.03 per share based on additional shares outstanding with the Optium merger. With respect to the merger, the company expects to encounter additional charges in the second quarter, primarily non-cash, including a one-time non-cash charge for R&D in process as well as ongoing additional amortization associated with the value of intangible assets including current technology and customer relationships. In addition, the company might record potential restructuring charges of $8.0 million to $10.0 million. All these would result in a GAAP loss for one quarter before returning to profitability in the following quarter. Cash balance for the second quarter ended October should be in the range of $65.0 million to $70.0 million, following the $92.0 million repayment of the 5.25% convertible note.

Lines of Credit

On November 3, 2008, Finisar announced that it has renewed and extended the maturity of its lines of credit totaling $70.0 million with Silicon Valley Bank. The company's line of credit under its non-recourse receivables purchase agreement with Silicon Valley Bank has been increased from $10.0 million to $16.0 million, and its termination date has been extended from October 24, 2008 to October 24, 2009. Under this credit facility, the company may sell on a non-recourse basis certain qualifying receivables for cash. Meanwhile, the company's line of credit under its letter of credit reimbursement agreement has been reduced from $10.0 million to $9.0 million, and its termination date has also been extended from October 24, 2008 to October 24, 2009. As of August 2, 2008, the end of its most recent fiscal quarter, the company had used approximately $5.0 million under the non-recourse receivables purchase line of credit and approximately $9.0 million under the letter of credit reimbursement agreement. The company's secured line of credit which was to mature on March 13, 2009, has been reduced from $50.0 million to $45.0 million and its termination date has been extended to July 15, 2010. The company has not utilized any portion of this line of credit.

Retirement of 5.25% Convertible Notes

On November 3, 2008, Finisar announced that it has retired, through private repurchases and payment at maturity, the total remaining principal balance of its 5.25% convertible notes, totaling $92.0 million as of October 15, 2008. The remaining principal balance of $22.0 million was paid at maturity on October 15th.

New Products

On September 23, 2008, Finisar announced general availability of 50 GHz Wavelength Selection Switch (WSS) for 10 and 40 Gb/s telecom and data communication networks. Qualified to Telcordia standards, Finisar's next-generation Wavelength Selection Switches are the only production-qualified devices providing dual and mixed channel spacing for both 50 and 100 GHz channel plans. These highly flexible and reconfigurable devices increase 40G capacity in the network while reducing cost for applications from the core to the edge of the network. Finisar's WSS devices feature LCoS technology, which extends several advantages over traditional WSS and Reconfigurable Optical Add/Drop Multiplexer (ROADM) linecard implementations, including dynamic reconfiguration to meet changes in traffic demand, mixed/dual channel plans, and programmable channel contouring/filter shaping. LCoS increases reliability and enhances bandwidth performance by having no moving parts.

On September 22, 2008, Finisar introduced the new 52TR Series 40G Transponders for client-side applications. Available in an ultra-compact (4.5 x 3.5 x 0.53 inch) 300-pin MSA compliant module, this transponder provides the lowest power dissipation and smallest mechanical footprint in the industry. The 40G transponder is designed to provide a compelling option for carriers continually upgrading switching and routing equipment to meet growing Internet traffic demand. Equipped with advanced monitoring and control functions, the 52TR Series 40G Transponders support numerous clocking modes and comply with the most recent updates to STM-256 /ITU Rec. G.8251 jitter standards.

Finisar also announced the availability of its 850nm products in Pigtailed Optical Packages, which support data rates from DC to 10 Gbps in a wide range of military and aerospace applications. Pigtail connectors are ideal for military and aerospace applications where robustness and reliability are essential, providing optimal optical performance through reduced insertion loss, minimized return loss, and low reflection. With an enhanced design that can be connected and disconnected without special tooling, pigtail connectors reduce both manufacturing and installation costs while raising mechanical stability and increasing link reliability.

Finisar also announced availability of four new 1310nm optical components designed to meet the stringent specifications of high-speed video applications. Based on the emerging SMPTE 424ME standard for 3 Gbps SDI (3G-SDI) data transmissions, these components consist of FP and DFB lasers, and PIN or PIN+TIA receivers. These devices are specifically designed for Satellite and CATV broadcast equipment and modules. The new 1310nm components are built with Finisar's patented laser and optical assembly technologies, and are designed to withstand the test matrixes called out in the 3G-SDI standard. Finisar's new optical components simplify video equipment development by preserving signal integrity across links, so that engineers have more margin and therefore greater flexibility in focusing their design resources, resulting in faster time-to-market. In addition, both pigtailed and bulkhead mounted versions are available, giving engineers multiple options in designing broadcast equipment. Low-cost internal manufacturing capabilities also enable Finisar to bring these components to market at a competitive price.

On October 20, 2008, Finisar announced the delivery of the Fibre Channel over Ethernet (FCoE) 10 Gigabit Ethernet protocol testing tool suite. Built on Finisar's multi-function, multi-protocol testing and analysis platform - Xgig technology, the new 10GE/FCoE Analyzer, 10GE/FCoE Load Tester, and 10GE/FCoE Jammer offer the most complete support for storage and networking companies designing FCoE and converged Ethernet systems. Additionally, the multi-protocol capabilities of the Xgig platform enable developers to evaluate and analyze network traffic as it crosses protocol domains such as the topology of the FCoE network linking to Fibre Channel storage equipment. The 10GE/FCoE Load Tester is the first tool having the ability to generate FCoE traffic and test the FCoE and Fibre Channel network functions and performance. It supports the FCoE Initialization Protocol (FIP) for discovery and Virtual Link initialization, and PFC for traffic flow control.

New Facility

On October 23, 2008, Finisar announced the opening of its new state-of-the-art manufacturing and R&D facility. Designed specifically for high-volume, cost-effective optics production, this facility also furthers development efforts and enables lower-cost manufacturing of its advanced optical components including lasers and passive devices. Finisar's $3.0 million investment in the new Shanghai facility supports the company's ongoing R&D efforts and enhances its volume manufacturing capabilities for active and passive components used in its own transceivers as well as the merchant market. As of this date, the company has completed product qualification and is in full operation.

Acquisition Update

On August 29, 2008, Finisar announced the completion of its acquisition of Optium Corporation. The transaction was approved by the stockholders of both companies on August 28th. Under the terms of the agreement, Optium stockholders will receive 6.262 shares of Finisar common stock for each Optium share. Finisar also announced the appointment of Eitan Gertel, Optium's Chairman and Chief Executive Officer (CEO), as CEO of Finisar and a member of its Board, effective immediately. Jerry Rawls will continue in his role as Executive Chairman of Finisar's Board.

Stock Option Investigation

On July 25, 2008, Finisar received notice from the staff of the SEC regarding SEC's informal investigation into Finisar's historical stock option granting practices being terminated and no enforcement action being recommended.

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