Nokia ( NOK) is making deals. Also making things interesting is Cisco's ( CSCO) impressive beat-and-raise performance after which the network giant hinted at broad recovery in carrier spending. With these factors in mind, it would seem appropriate to raise expectations for Finisar ( FNSR), a company I've always wanted to like but just couldn't. Although Finisar has a decent lead in the optical components space, management has not been able to convert this advantage into significant free cash flow. Now seems like the time.
Back in December I raised this same argument, suggesting the stock was poised to rebound on improved network expenditures. But here we are seven months later and these shares are pretty much where they were at the start of the year. On the heels of a solid end to the company's fiscal year, investors are back, looking for a reason to believe in this name once again. It's hard to be excited by 2% year-over-year revenue growth. But this is the mistake investors often make. But from my vantage point, the 2% revenue growth alone doesn't describe the real strength of this quarter. The company also posted an 11% sequential improvement in its data communication products, helped by increased demand for its Ethernet transceivers. Likewise, revenue for telecommunication products advanced more than 12% from the third-quarter. Remarkably, the double-digit sequential improvement was amid weak carrier spending environment and drastic price reductions of several of the company's products, most of which when into effect in January. Still, management continues to make significant advancements in terms of customer loyalty, reporting its top 10 customers now account for almost 60% of the company's business, up from 55%. This suggests to me that Finisar is more than holding its own in the face of stiff competition from the likes of JDS Uniphase ( JDSU). What's more, given the 150 basis-point sequential improvement in gross margin along with the 15% sequential rise in net income, management has figured out ways to leverage the company's strengths into profits. As the carrier spending environment continues to recover, it will be interesting to see if this trend continues. Given Finisar's upgrade cycle, which should continue to boost sales, I wouldn't bet against the company.