SEPTEMBER 10, 2009 -- Finisar Corp. (NASDAQ: FNSR) announced financial results for its first fiscal quarter ended August 2, 2009. In an earlier announcement dated August 4, 2009, Finisar indicated that its preliminary revenues for the quarter, including revenues from the operations of the Network Tools Division prior to its sale, would total approximately $134 million. Final revenues for the quarter totaled $135.5 million including $6.7 million from the operations of the Network Tools Division. In reporting financial results for the first quarter, the company noted that current quarter results and previously reported periods have been adjusted to reflect the following:
- During the three months ended August 2, 2009, the company completed the sale of substantially all of the assets of its Network Tools Division to JDSU. Accordingly, the operating results of this business, through the date of its disposition and for all applicable prior periods, are reported as discontinued operations in the condensed consolidated financial statements for the period ended August 2, 2009, and the prior period comparative financial statements have been restated to exclude assets, liabilities, and results of operations (including revenues, associated cost of goods sold and operating expenses) related to the discontinued operations.
- Effective at the beginning of the first quarter, the company adopted FSP APB 14-1, under which the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion may separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. The separation of the conversion option creates an original issue discount in the bond component which is to be accreted as interest expense over the term of the instrument using the interest method, resulting in an increase in interest expense and a decrease in net income and earnings per share. Due to the modification of $100 million of the company's 2.5% convertible notes in October 2006, the company has accounted for the debt and equity components of the notes to reflect the estimated nonconvertible debt borrowing rate at the date of issuance of 8.59%. Because FSP APB 14-1 requires retrospective application of the financial statement for all periods presented, prior period balances have been restated to effectively record a debt discount equal to the fair value of the equity component and an increase to paid-in capital for the fair value of the equity component as of the date of issuance of the underlying notes. Prior period balances have also been adjusted to provide for the amortization of the debt discount through interest expense (non-cash interest cost).
Highlights for the quarter per GAAP include the following:
- Total optics revenues increased to $128.7 million, up $21.3 million, or 19.8%, from $107.5 million in the preceding quarter and up $13.0 million, or 11.2%, from $115.8 million in the first quarter of the prior year. The increase from the first quarter of the prior year includes the impact of the Optium merger completed on August 29, 2008.
- Excluding approximately $28.8 million of additional revenues in the quarter as a result of the Optium merger, optics revenues were $99.9 million, up $17.6 million, or 21.3% from $82.3 million in the preceding quarter and down $15.9 million, or 13.7%, from $115.7 million in the first quarter of the prior year prior to the merger (a revenue record for the company at that time). Revenues from the sale of products for 10/40-Gbps applications increased to $51.9 million, up $11.3 million, or 27.8%, from $40.6 million in the preceding quarter and up $19.7 million, or 61.1%, from $32.2 million in the first quarter of the prior year primarily due to the Optium merger.
- Gross margin from continuing operations was 22.8%, an increase from 21.6% in the preceding quarter and a decrease from 35.2% in the first quarter of the prior year.
- Operating loss from continuing operations was $8.8 million, or (6.8)% of revenues, compared to an operating loss of $10.9 million, or (10.1)% of revenues in the preceding quarter (before a charge for the impairment of goodwill and current technology) and operating income of $7.9 million, or 6.8% of revenues, in the first quarter of the prior year.
- A loss of $11.1 million, or $(0.02) per share, from continuing operations compared to a loss of $27.0 million, or $(0.06) per share, in the preceding quarter including a $13.2 million charge for the impairment of goodwill and current technology in the preceding quarter, and income of $2.9 million, or $0.01 per share, in the first quarter of the prior year.
- Income net of taxes from discontinued operations was $37.1 million, or $.07 per diluted share, reflecting the gain on the sale of the assets of the Network Tools Division in the quarter and compared to $1.2 million, or $0.00 per share, in the preceding quarter and a loss of $125,000, or $(0.00) per share, in the first quarter of the prior year.
- 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 compared to $37.2 million at the end of the prior quarter reflecting the sale of the Network Tools business in the quarter for $40.6 million in cash and the lack of sales of accounts receivable under the company's credit accounts receivable credit facility which sales totaled $15.7 million in the prior quarter. The company continues to maintain a secured credit facility totaling $45.0 million under which $3.4 million was used for letters of credit while no borrowings were outstanding at the end of the quarter. Finisar has classified certain of its investments as long- term based on its intent to hold these securities until maturity, although they can be readily sold if required.
In addition to reporting financial results in accordance with U.S. generally accepted accounting principles, or GAAP, Finisar provides supplemental information regarding its operating performance on a non-GAAP basis. Finisar believes this additional information provides investors and management with additional insight into its underlying core operating performance by excluding a number of non-cash and cash charges as well as gains or losses principally related to acquisitions, the sale of minority investments, restructuring or other transition activities, impairments, and financing transactions. For the first quarter of fiscal 2010, these excluded items included, among other items described in Finisar Non-GAAP Financial Measures, a non-cash charge of $5.3 million for slow moving and obsolete inventory; $4.2 million in non-cash stock-based compensation expense; $1.9 million in non-cash amortization charges related to acquired developed technology and purchased intangibles arising from previous acquisitions; and a $1.2 million non-cash charge for imputed interest expense on the company's debt obligations, offset by non-recurring gains of $36.0 million from the sale of the Network Tools division and $1.6 million from the sale of minority investments in two separate entities.
Excluding these items:
- Non-GAAP gross margin from continuing operations increased to 28.8% compared to 27.2% in the preceding quarter but decreased from 36.6% in the first quarter of the prior year. The sequential increase in non-GAAP gross margin reflects the impact of higher product shipment levels and the incremental contribution margin thereon, while the decrease compared to the prior year reflects the impact of lower revenues and lower yields associated with making certain of our higher speed components as well as the impact of the Optium merger ahead of additional manufacturing cost synergies expected to be realized over the next three quarters.
- Non-GAAP operating expenses related to continuing operations were $33.8 million in the first quarter, an increase of $2.9 million, or 9.5%, from the preceding quarter and an increase of $2.8 million, or 9.1%, from the first quarter of the prior year. The increase in operating expenses from the preceding quarter reflects $1.3 million in higher research and development expenses, $0.8 million related to higher sales and marketing expense on higher revenue levels, and $0.8 million in higher general and administrative expense primarily related to an increase in the estimated allowance for doubtful accounts. The increase as compared to the prior year was primarily a result of the Optium merger, which is not reflected in the prior year results. In this regard, the company notes that Optium's operating expenses in the same prior year period prior to the merger totaled approximately $11.5 million whereas total company operating expenses in the most recent quarter increased just $2.8 million from the prior year period.
- Non-GAAP operating income from continuing operations was $3.3 million, or 2.5% of revenues, up $4.9 million from an operating loss of $1.6 million, or (1.5%) of revenues, in the preceding quarter, and down $8.1 million from operating income of $11.4 million, or 9.9% of revenues, in the first quarter of the prior year. The increase in operating income from the previous quarter was due primarily to higher gross profit levels on higher revenues partially offset by higher operating expenses. The decline from the prior year was primarily related to lower gross profit levels and higher operating expenses resulting from the Optium merger.
- Non-GAAP income from continuing operations was $1.8 million, or $0.00 per share, compared to a loss of $3.4 million, or $(0.01) per share, in the preceding quarter and net income of $9.0 million, or $0.03 per share, in the first quarter of the prior year.
- Non-GAAP EBITDA from continuing operations was $10.4 million as compared to$6.1 million in the preceding quarter and $17.5 million in the first quarter of the prior year.
- Non-GAAP income from discontinued operations was $0.7 million, or $0.00 per share, as compared to $1.9 million, or $0.00 per share in the preceding quarter and $2.0 million, or $0.01 per share, in the first quarter of the prior year.
"Order trends continue to underscore healthy customer demand for ROADMs and products capable of transmitting at 10 Gbps for use in datacom and telecom applications," said Jerry Rawls, Finisar's executive chairman of the board. "I was also pleased to see the first orders arrive and revenue recognized for our QuadWire product for 40-Gbps parallel optics applications. This product marks our first foray into that new market for us."
"While gross margins for optics were up from last quarter and a little better than we expected, we can look for additional improvement in the near term as our top line continues to improve, product mix turns favorable, and additional synergies are realized with respect to manufacturing costs," said Eitan Gertel, Finisar's CEO.
The company also announced that, following the completion of an exchange offer on August 6, 2009, where it retired $47.5 million in principal amount of its convertible subordinated notes due October 15, 2010, that it had retired an additional $15.2 million principal value of its notes in an all cash, privately negotiated transaction.
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