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Rise, Fall, Rise Again

Posted on Friday, Mar 3rd 2006

Remember the Optical Communication bubble of the late nineties? Hundreds of companies got funded, until that market collapsed?

However, before the collapse, Finisar, founded in 1996, was one company that went public and made beaucoup d’argent for everyone around the table. Stock price hit a high of $61.67 in 2000, on an annual profitable revenue of $67 Million.

Then came the crash. In 2003, stock price collapsed to 42 cents, even though revenue was a decent $166 Million. Profitability, however, was a huge issue, and the company lost $620 Million that year.

Fast forward to 2006. Great turn-around story … pretty cool reading!

Needham & Company reports:

Finisar delivered a blowout fiscal Q3, with strong qoq revenue growth, which when combined with a sequential improvement in margins, resulted in a huge surge in profitability. This one-quarter surge in profitability has been more than three years in the making, when Finisar took the controversial steps of acquiring an offshore facility, designing its own ASICs, and buying its own fab and laser supplier. These steps have enabled Finisar to maintain performance, reliability, and service, resulting in steady gains in market share. We are raising estimates, our rating to Strong Buy, and our TP to $6.

Fiscal 3Q revenues were $93.5 million, above guidance of $88 to $93 million, up 8% qoq and 28% yoy. Organic growth of 20% is expected for F06. Pro-forma gross margins grew more than 6 points qoq, and pro-forma operating margins of 10.7% are well on their way towards the 15% targeted for 2HFY07. GAAP and pro-forma EPS were $0.03, far ahead of our breakeven estimate and guidance of $0.00-$0.01.

We are raising fiscal 2006 revenue and EPS estimates sharply to $362 million and $0.03 from $353 million and ($0.01.) We are raising fiscal 2007 revenue and EPS estimates to $434 million and $0.16 from $413 million and $0.08.

Doubling price target to $6. Our $6 target is based on 25x our unpublished fiscal 2007 EPS estimate of $0.22.

Finisar is the first of our optical communication universe companies to return to sustainable profitability. We are raising our rating to Strong Buy based on our confidence in our estimates, as supported by the strong performance in Q3 and the steady improvement in margins expected in F2007.

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