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Finisar’s Q1 on Par with Estimates

Finisar recently posted their Q1 results, which are on par with analysts’ estimates. However, the company’s guidance for revenues and margins were much lower than expected making it look as if management is “kitchen sinking” their guidance. As if that weren’t enough, the October quarter is facing a revenue equation that is weaker than expected because of stagnant growth in China’s wireless transceiver market due to chip shortage, problems in telecom due to poor OEM orders for ROADMs and tunable XFP products caused by capex constraints, and a datacom slowdown caused by continuous hardware issues for a significant Web 2.0 customer.

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Furthermore, the unpleasant situation gets worse because of a product transition in 100G Ethernet transceivers, which has basically opened the door for more suppliers to enter the market. Analysts are revising estimates downwards and the margin problems will have investors in standby as they won’t feel confident in predicting the bottom, especially considering the lack of visibility regarding the product mix as well as the problems regarding annual price negotiations in the second half of the fiscal year.

Analysts are reticent to get too constructive on Finisar shares until they see more proof of improvement in the margin trajectory. As a result, they are keeping Finisar’s rating at “Market Perform” but are lowering their forecasts. As such, they expect to see FY2015 revenue at $1,285 million, which is $30 million lower than initial estimates, while EPS has been lowered from $1.45 to $1.11. For FY2016, analysts have revised their figures for revenues from $1,420 million to $1,410 million, while EPS has been lowered from $1.68 to $1.42.

Analysts are expecting gross margins to be 31.4 percent for FY 2015 and 32.2 percent for FY2016. Shares are trading at 1.1 times analyst estimates for 2015 calendar year sales and 13 times earnings estimates for 2015 calendar year, which is on par with competitors’ median multiples for the two metrics. Considering the problems facing gross margins in the future, the slower than expected growth in the telecom sector, and the growth slowdown in the datacom sector, analysts feel that the risk to reward ratio is still neutral.

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