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Optics Overview: Tough Times

Posted on Friday, Sep 25th 2009

With the increasing use of high-bandwidth applications to use the Internet to download videos and music, play games, and watch IPTV, there is increasing demand for optical networks. At the same time, the economic slowdown has impacted the revenues of optical component manufacturers, JDSU and Finisar as telecom operators slow down their IT spending. Let’s take a closer look.

On August 19, JDS Uniphase (NASDAQ:JDSU) reported its fourth quarter and fiscal year 2009 results. Q4 revenue was down 29% to $277 million, missing analyst estimates of $279 million. Net loss narrowed down from net loss of $6.9 million or $0.03 per share in the previous quarter to $2.3 million or $0.01 per share, beating analyst estimate by $0.01. Q3 coverage is available here.

Non-GAAP gross margins improved to 42.3% from 41.8% in Q309 and 40.9% in Q408. The company was free cash flow positive by $9.7 million for the fourth quarter and ended the quarter and fiscal year 2009 with $695.5 million in total cash and investments. Its contractual obligations including long-term debt amount to $656.5 million at the end of fiscal 2009 with $170 million payable within a year and $363 million payable in the next three to five years.

Operating expenses for Q4 were $121 million, down from $125.2 million in Q3 and down by over $30 million from $151.4 million last year. JDS Uniphase’s goal for 2010 is to complete its contract manufacturing outsourcing initiatives and shift to a more variable cost model.

For the full fiscal year 2009, net revenue was down 15.4% to $1.29 billion. Net loss widened to $866.4 million, or $4.02 per share, from a net loss of $21.7 million, or $0.10 per share, for fiscal 2008. Fiscal year 2009 included impairments, primarily for goodwill and intangibles, totaling $759.8 million and restructuring and related charges totaling $38.7 million.

For fiscal 2009, Communications Test and Measurement revenue was $606.2 million or 47% of net revenue, Communication and Commercial Optical Products (CCOP) revenue was $481.1 million or 37% of net revenue, and Advanced Optical Technologies revenue was $208.4 million or 16% of net revenue. Despite the tough conditions in the T&M industry in fiscal 2009, JDSU’s CommTest business remained a market leader with an estimated 24% market share. It has the number two market share position at 23% in the high-growth 10 G Ethernet test market.

For the fourth quarter, Communications Test and Measurement revenue was $135.5 million, down 20.5% y-o-y but up 4.9% q-o-q. CCOP revenue was $90.7 million, down 45.8% y-o-y and 9.8% q-o-q. Within the CCOP segment, Optical Communications revenue of $79.3 million decreased 45.3% y-o-y and 10.9% q-o-q while Commercial Lasers revenue was $11.4 million, 48.4% y-o-y and 0.9% q-o-q. Advanced Optical Technologies revenue was $50.8 million, down 4% y-o-y and 0.4% q-o-q.

By region, revenue from the Americas was $139.3 million, up $22.2 million from the prior quarter. EMEA revenue was $79.5 million, down $16 million sequentially. Revenue from Asia was $57.3 million, down $11 million from the prior quarter mainly due to reduced demand from network equipment manufacturers.

For the first quarter, JDSU expects revenue to be between $283 million and $300 million. On July 15, JDSU closed its acquisition of Finisar’s Storage Network Tools business, which accounted for $44.2 million revenue or 8.2% revenue in 2009 for Finisar. JDSU expects revenue from this acquisition to contribute between $6 million and $8 million in Q1. The acquisition is going to add to operating expenses by $3 million.

JDSU is currently trading around $7 with market cap of about $1.5 billion. The stock hit a 52-week high of $8.38 on September 22.

Chart for JDS Uniphase Corp. (JDSU)

Finisar (NASDAQ:FNSR), which had annual revenue of $541.2 million in 2009, reported its first quarter results on September 10. Q1 revenue was $135.5 million including $6.7 million from the Network Tools Division before its sale. Optics revenue was up 11.2% y-o-y and 19.8% q-o-q to $128.7 million, short of analyst estimates of $130.8 million. Net loss was $11.1 million or $0.02 per share compared to net income of $2.9 million or $0.01 per share last year and net loss of $27 million or $0.06 per share last quarter. Excluding charges, the company broke even meeting analyst estimates. Q4 coverage is available here.

Excluding $28.8 million revenue from the Optium merger, optics revenue was down 13.7% y-o-y and up 21.3% q-o-q to $99.9 million. ROADM sales were $10.9 million, up 52.6% q-o-q. Revenue from the sale of products for 10/40 Gbps applications was $51.9 million, up 61.1% y-o-y and 27.8% q-o-q, mainly due to the Optium merger.

Gross margin was 22.8% compared to 21.6% last quarter and 35.2% last year. Non-GAAP operating expenses were $33.8 million, up by $2.9 million, or 9.5%, reflecting $1.3 million in higher R&D expenses and $0.8 million in higher sales and marketing expense on higher revenue. Opex was higher by $2.8 million versus last year mainly due to the Optium merger.

Finisar’s contractual obligations including long-term and convertible debt amounted to $224.6 million at the end of fiscal 2009 with $21.8 million payable within a year and $166 million payable in the next one to three years. On April 30, 2009, total long-term debt and convertible debt was $163.4 million, compared to $257.6 million on April 30, 2008.

Cash and short-term investments, plus other long-term investments that can be readily converted into cash, totaled $60.4 million at the end of the first quarter, including the sale of the Network Tools business for $40.6 million in cash.

For the second quarter, Finisar expects revenue to increase to a range of $132 million to $142 million driven by its ROADM sales and 10GB products for both LAN and metro telecom applications. Its board of directors also approved a 1-for-8 reverse split of its common stock, effective from today, September 25. The stock is currently trading above $1 with market cap of about $643 million. It hit a 52-week high of $1.18 on September 17, recovering from its 52-week low of $0.21 on March 3.

Chart for Finisar Corp. (FNSR)

This segment is a part in the series : Optics Overview

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