Finisar Announces Second Quarter Financial Results

SUNNYVALE, CA--(Marketwired - Dec 4, 2014) - Finisar Corporation (NASDAQ: FNSR), a global technology leader for subsystems and components for fiber optic communications, today announced financial results for its second quarter of fiscal 2015, ended October 26, 2014. 

COMMENTARY

"Revenues for our second fiscal quarter were $297.0 million, an increase of $6.3 million compared to the second fiscal quarter of 2014, but a decrease of $30.7 million, or 9.4%, compared to the first fiscal quarter of fiscal 2015. The second quarter was challenging. During the quarter, we experienced decreased demand for telecom products compared to the prior fiscal quarter, due to sluggish carrier capital expenditures. In addition, sales of transceivers for wireless applications were soft as were sales to several datacom customers with lumpy order patterns," said Jerry Rawls, Finisar's executive Chairman of the Board.

"We remain confident in our industry leading market position and the long term growth potential for the industry. We expect revenue to grow sequentially in the third fiscal quarter, primarily driven by growth in the demand for 40 gigabit and 100 gigabit transceivers for datacom applications as well as transceivers for wireless applications," said Eitan Gertel, Finisar's Chief Executive Officer.

FINANCIAL HIGHLIGHTS - SECOND QUARTER ENDED OCTOBER 26, 2014
Summary GAAP Results		Second				First
		Quarter				Quarter
		Ended				Ended
		October 26, 2014				July 27, 2014
		(in thousands, except per share amounts)
Revenues		$	296,981			$	327,638
Gross margin			28.6	%			30.2	%
Operating expenses		$	92,180			$	78,451
Operating income (loss)		$	(7,259	)		$	20,368
Operating margin			(2.4	)%			6.2	%
Net income (loss)		$	(11,361	)		$	14,243
Income per share-basic		$	(0.11	)		$	0.14
Income per share-diluted		$	(0.11	)		$	0.14
Basic shares			99,621				98,241
Diluted shares			99,621				106,036
Summary Non-GAAP Results (a)		Second				First
		Quarter				Quarter
		Ended				Ended
		October 26, 2014				July 27, 2014
		(in thousands, except per share amounts)
Revenues		$	296,981			$	327,638
Gross margin			31.1	%			32.0	%
Operating expenses		$	67,306			$	69,439
Operating income		$	24,984			$	35,404
Operating margin			8.4	%			10.8	%
Net income		$	23,465			$	33,332
Income per share-basic		$	0.24			$	0.34
Income per share-diluted		$	0.23			$	0.32
Basic shares			99,621				98,241
Diluted shares			105,340				106,036

(a)

In evaluating the operating performance of Finisar's business, Finisar management utilizes financial measures that exclude certain charges and credits required by U.S. generally accepted accounting principles, or GAAP, that are considered by management to be outside Finisar's core operating results. A reconciliation of Finisar's non-GAAP financial measures to the most directly comparable GAAP measures, as well as additional related information, can be found under the heading "Finisar Non-GAAP Financial Measures" below.

Financial Statement Highlights for the Second Quarter of Fiscal 2015:

• Revenues decreased to $297.0 million, down $30.7 million, or 9.4%, from $327.6 million in the preceding quarter.
  
  
• Sales of products for datacom applications decreased by $25.3 million, or 10.5%, compared to the preceding quarter, primarily due to a decrease in sales of transceivers for wireless applications and a decrease in orders from several datacom customers with lumpy order patterns.
  
  
• Sales of products for telecom applications decreased by $5.3 million, or 6.2%, compared to the preceding quarter, primarily due to the decrease in demand for transceivers for telecom applications driven by sluggish carrier capital expenditures.
  
  
• GAAP gross margin decreased to 28.6% from 30.2% in the preceding quarter, primarily driven by decreased revenue levels and an increase in depreciation.
  
  
• Non-GAAP gross margin decreased to 31.1% from 32.0% in the preceding quarter.
  
  
• GAAP operating expenses increased $13.7 million to $92.2million from $78.5 million in the preceding quarter, primarily from expenses related to resolving a pending litigation alleging patent infringement.
  
  
• Non-GAAP operating expenses decreased $2.1 million to $67.3 million from $69.4 million in the preceding quarter. 
  
  
• GAAP operating income decreased $27.6 million, to an operating loss $7.3 million or (2.4)% of revenues, compared to $20.4 million or 6.2% of revenues in the preceding quarter, primarily as the result of lower revenue levels and gross margins, and higher expenses related to resolving a pending litigation alleging patent infringement.
  
  
• Non-GAAP operating income decreased $10.4 million to $25.0 million, or 8.4% of revenues, compared to $35.4 million, or 10.8% of revenues, in the preceding quarter, primarily as the result of lower revenue levels and gross margins.  
  
  
• Cash, cash equivalents and short term investments decreased $20.0 million to $477.4 million at the end of the second quarter, compared to $497.4 million at the end of the preceding quarter, primarily as the result of capital expenditures of $28.4 million, increased inventory of $14.7 million and legal settlement-related expenses of approximately $13.7 million.

OUTLOOK

The Company indicated that for the third quarter of fiscal 2015 it currently expects revenues in the range of $297 to $312 million, non-GAAP gross margin of approximately 31%, non-GAAP operating margin of approximately 8.4% to 9.4%, and non-GAAP earnings per diluted share in the range of approximately $0.23 to $0.27.

CONFERENCE CALL

Finisar will discuss its financial results for the second quarter and current business outlook during its regular quarterly conference call scheduled for Thursday, December 4, 2014, at 2:00 pm PT (5:00 pm ET). To listen to the call you may connect through the Finisar investor relations page at http://investor.finisar.com/ or dial 1-800-432-7390 (domestic) or +1-913-312-1454 (international) and enter conference ID 1607677.

An audio replay will be available for two weeks following the call by dialing 1-888-203-1112 (domestic) or +1-719-457-0820 and then following the prompts: enter conference ID 1607677 and provide your name, affiliation, and contact number. A replay of the webcast will be available shortly after the conclusion of the call on the Company's website until the next regularly scheduled earnings conference call.

SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This press release contains forward-looking statement concerning Finisar's expected financial performance. These statements are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on our current expectations, estimates, assumptions and projections about our business and industry, and the markets and customers we serve, and they are subject to numerous risks and uncertainties that may cause these forward-looking statements to be inaccurate. Finisar assumes no obligation to update any such forward-looking statements. Forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those projected. Examples of such risks include those associated with: the uncertainty of customer demand for Finisar's products; the rapidly evolving markets for Finisar's products and uncertainty regarding the development of these markets; Finisar's historical dependence on sales to a limited number of customers and fluctuations in the mix of products and customers in any period; ongoing new product development and introduction of new and enhanced products; the challenges of rapid growth followed by periods of contraction; intensive competition; and the uncertainty of achieving anticipated cost savings and synergies in connection with the recently completed u2t acquisition. Further information regarding these and other risks relating to Finisar's business is set forth in Finisar's annual report on Form 10-K (filed June 26, 2014) and quarterly SEC filings.

ABOUT FINISAR

Finisar Corporation (NASDAQ: FNSR) is a global technology leader for fiber optic subsystems and components that enable high-speed voice, video and data communications for telecommunications, networking, storage, wireless, and cable TV applications. For 25 years, Finisar has provided critical optics technologies to system manufacturers to meet the increasing demands for network bandwidth. Finisar is headquartered in Sunnyvale, California, USA with R&D, manufacturing sites, and sales offices worldwide. For additional information, visit www.finisar.com.

FINISAR FINANCIAL STATEMENTS The following financial tables are presented in accordance with GAAP.

Finisar Corporation
Consolidated Statements of Operations
(Unaudited, in thousands, except per share data)
			Three Months Ended								Six Months Ended								Three Months Ended
			October 26, 2014				October 27, 2013				October 26, 2014				October 27, 2013				July 27, 2014
Revenues			$	296,981			$	290,722			$	624,619			$	556,790			$	327,638
Cost of revenues				210,625				186,168				438,010				359,270				227,385
Amortization of acquired developed technology				1,435				1,181				2,869				2,774				1,434
Gross profit				84,921				103,373				183,740				194,746				98,819
Gross margin				28.6	%			35.6	%			29.4	%			35.0	%			30.2	%
Operating expenses:
	Research and development			51,184				44,959				102,190				88,489				51,006
	Sales and marketing			11,487				12,322				23,452				24,127				11,965
	General and administrative			28,772				15,388				43,491				23,728				14,719
	Amortization of purchased intangibles			737				595				1,498				1,190				761
		Total operating expenses		92,180				73,264				170,631				137,534				78,451
Income (loss) from operations				(7,259	)			30,109				13,109				57,212				20,368
Interest income				342				282				954				499				612
Interest expense				(2,867	)			(367	)			(6,001	)			(919	)			(3,134	)
Other income (expenses), net				33				495				(1,993	)			983				(2,026	)
Income (loss) before income taxes and non-controlling interest				(9,751	)			30,519				6,069				57,775				15,820
Provision for income taxes				1,610				568				3,187				1,989				1,577
Income (loss) before non-controlling interest				(11,361	)			29,951				2,882				55,786				14,243
Adjust for net loss attributable to non-controlling interest				-				14				-				190				-
Net income (loss) attributable to Finisar Corporation			$	(11,361	)		$	29,965			$	2,882			$	55,976			$	14,243
Net income (loss) per share attributable to Finisar Corporation common stockholders:
	Basic		$	(0.11	)		$	0.31			$	0.03			$	0.59			$	0.14
	Diluted		$	(0.11	)		$	0.29			$	0.03			$	0.56			$	0.14
Shares used in computing net income per share - basic				99,621				95,941				98,931				95,275				98,241
Shares used in computing net income per share - diluted				99,621				103,696				102,390				102,771				106,036

Finisar Corporation
Consolidated Balance Sheets
(in thousands)
			October 26, 2014				July 27, 2014				April 27, 2014
			(Unaudited)				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	186,952			$	287,455			$	303,101
	Short-term held-to-maturity investments			290,478				209,927				209,922
	Accounts receivable, net			213,721				231,312				225,020
	Accounts receivable, other			34,573				41,595				33,749
	Inventories			284,789				270,122				259,759
	Prepaid expenses and other assets			38,065				38,582				33,022
		Total current assets		1,048,578				1,078,993				1,064,573
Property, equipment and improvements, net				306,331				301,020				273,328
Purchased intangible assets, net				31,508				33,680				34,141
Goodwill				106,735				106,735				106,115
Minority investments				2,547				2,317				2,117
Other assets				22,528				20,907				17,272
		Total assets	$	1,518,227			$	1,543,652			$	1,497,546
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	113,235			$	143,224			$	119,439
	Accrued compensation			35,354				28,215				38,541
	Other accrued liabilities			33,529				27,568				31,533
	Deferred revenue			12,358				16,872				16,659
	Short term debt			187				247				243
	Current portion of convertible notes			36,665				40,015				40,015
		Total current liabilities		231,328				256,141				246,430
Long-term liabilities:
	Convertible notes, net of current portion			216,775				214,496				212,253
	Other non-current liabilities			24,900				24,042				22,804
		Total liabilities		473,003				494,679				481,487
Stockholders' equity:
	Common stock			100				100				97
	Additional paid-in capital			2,485,133				2,469,687				2,456,110
	Accumulated other comprehensive income			17,282				25,116				20,025
	Accumulated deficit			(1,457,291	)			(1,445,930	)			(1,460,173	)
		Total stockholders' equity		1,045,224				1,048,973				1,016,059
Total liabilities and stockholders' equity			$	1,518,227			$	1,543,652			$	1,497,546
Note - Balance sheet amounts as of April 27, 2014 are derived from the audited consolidated financial statements as of the date.

FINISAR NON-GAAP FINANCIAL MEASURES

In addition to reporting financial results in accordance with U.S. generally accepted accounting principles, or GAAP, Finisar provides the following financial measures defined as non-GAAP financial measures by the Securities and Exchange Commission: non-GAAP gross profit, non-GAAP operating income and non-GAAP income per share. These non-GAAP financial measures are supplemental information regarding the Company's operating performance on a non-GAAP basis that excludes certain gains, losses and charges of a non-cash nature or which occur relatively infrequently and which management considers to be outside our core operating results. Some of these non-GAAP measures also exclude the ongoing impact of historical business decisions made in different business and economic environments. Management believes that tracking non-GAAP gross profit, non-GAAP income from operations, non-GAAP net income and non-GAAP net income per share provides management and the investment community with valuable insight into our current operations, our ability to generate cash and the underlying business trends which are affecting our performance. These non-GAAP measures are used by both management and our Board of Directors, along with the comparable GAAP information, in evaluating our current performance and planning our future business activities. In particular, management finds it useful to exclude non-cash charges in order to better correlate our operating activities with our ability to generate cash from operations and to exclude certain cash charges as a means of more accurately predicting our liquidity requirements. We believe that these non-GAAP measures, when used in conjunction with our GAAP financial information, also allow investors to better evaluate our financial performance in comparison to other periods and to other companies in our industry.

In calculating non-GAAP gross profit in this release, we have excluded the following items from cost of revenues in applicable periods in this release:

• Changes in excess and obsolete inventory reserve (predominantly non-cash charges or non-cash benefits);
• Amortization of acquired technology (non-cash charges related to technology obtained in acquisitions);
• Duplicate facilities costs during facilities move (non-recurring charges)
• Stock-based compensation expense (non-cash charges);
• Abandonment of fix assets (non-cash charges);
• Reduction in force costs (non-recurring cash charges); and
• Acquisition related retention payments (non-recurring cash charges). 

In calculating non-GAAP operating income in this release, we have excluded the same items to the extent they are classified as operating expenses, and have also excluded the following items in applicable periods in this release:

• Gain or loss on litigation settlements and resolutions and related costs (non-recurring cash charges or benefits);
• Gain on fair value re-measurement of contingent consideration (non-cash benefit);
• Employee and employer tax liabilities related to the 2006 special investigation into our historical stock option granting practices (non-recurring cash charges);
• Shareholder class action and derivative litigation costs (non-recurring cash expenses associated with the derivative litigation related to our historical stock option granting practices and related to the class action and derivative litigation related to our March 8, 2011 earnings announcement);
• Acquisition related costs (non-recurring cash charges); and
• Amortization of purchased intangibles (non-cash charges).

In calculating non-GAAP income and non-GAAP income per share in this release, we have also excluded the following items in applicable periods in this release:

• Imputed interest expenses on convertible debt (non-cash charges);
• Imputed interest related to restructuring (non-cash charges);
• Gains and losses on sales of assets (non-recurring and/or non-cash losses and gains related to the periodic disposal of assets no longer required for current activities);
• Gains and losses related to minority investments (non-cash or non-recurring benefits or charges);
• Other miscellaneous expenses (income) (non-recurring charges or benefits);
• Dollar denominated foreign exchange transaction losses (gains) (non-cash charges or benefits);
• Amortization of debt issuance costs (non-cash charges);
• Non-controlling interest non-GAAP adjustment (non-cash and/or non-recurring charges or benefits attributable to the non-controlling interest in majority-controlled subsidiaries); and
• Differences between cash payable for income taxes and the provision for income taxes in accordance with GAAP, less discrete items.

A reconciliation of this non-GAAP financial information to the corresponding GAAP information is set forth below:

Finisar Corporation
Reconciliation of Results of Operations under GAAP and non-GAAP
(Unaudited, in thousands, except per share data)
			Three Months Ended								Six Months Ended								Three Months Ended
			October 26, 2014				October 27, 2013				October 26, 2014				October 27, 2013				July 27, 2014
GAAP to non-GAAP reconciliation of gross profit:
Gross profit - GAAP			$	84,921			$	103,373			$	183,740			$	194,746			$	98,819
Gross margin - GAAP				28.6	%			35.6	%			29.4	%			35.0	%			30.2	%
Adjustments:
Cost of revenues
	Change in excess and obsolete inventory reserve			2,048				1,199				3,769				(329	)			1,721
	Amortization of acquired technology			1,435				1,181				2,869				2,774				1,434
	Duplicate facility costs during facility move			766				-				766				-				-
	Stock compensation			2,588				2,056				4,864				3,833				2,276
	Abandonment of fixed assets			124				-				124				-				-
	Reduction in force costs			319				47				794				70				475
	Acquisition related retention payment			89				70				207				132				118
		Total cost of revenue adjustments		7,369				4,553				13,393				6,480				6,024
Gross profit - non-GAAP				92,290				107,926				197,133				201,226				104,843
Gross margin - non-GAAP				31.1	%			37.1	%			31.6	%			36.1	%			32.0	%
GAAP to non-GAAP reconciliation of operating income:
Operating income (loss) - GAAP				(7,259	)			30,109				13,109				57,212				20,368
Operating margin - GAAP				-2.4	%			10.4	%			2.1	%			10.3	%			6.2	%
Adjustments:
Total cost of revenue adjustments				7,369				4,553				13,393				6,480				6,024
Research and development
	Reduction in force costs			353				16				685				28				332
	Duplicate facility costs during facility move			767				-				767				-				-
	Acquisition related retention payment			166				190				359				381				193
		Stock compensation		4,727				4,069				9,163				7,594				4,436
Sales and marketing
	Acquisition related retention payment			9				17				29				34				20
	Stock compensation			1,625				1,382				3,154				2,566				1,529
General and administrative
	Reduction in force costs			59				173				54				240				(5	)
	Duplicate facility costs			116				-				116				-				-
	Acquisition related retention payment			(55	)			830				(39	)			1,047				16
	Stock compensation			2,617				2,663				5,429				5,086				2,812
	Payroll taxes related to options investigation			17				-				17				-				-
	Acquisition related costs			8				124				238				349				230
	Litigation settlements and resolutions and related costs			13,728				-				12,416				5				(1,312	)
	Shareholder class action and derivative litigation costs			-				46				-				(5,048	)			-
Amortization of purchased intangibles				737				595				1,498				1,190				761
		Total cost of revenue and operating expense adjustments		32,243				14,658				47,279				19,952				15,036
Operating income - non-GAAP				24,984				44,767				60,388				77,164				35,404
Operating margin - non-GAAP				8.4	%			15.4	%			9.7	%			13.9	%			10.8	%
GAAP to non-GAAP reconciliation of income attributable to Finisar Corporation:
Net income (loss) attributable to Finisar Corporation - GAAP				(11,361	)			29,965				2,882				55,976				14,243
Adjustments:
Total cost of revenue and operating expense adjustments				32,243				14,658				47,279				19,952				15,036
Non-cash imputed interest expenses on convertible debt				2,279				56				4,522				113				2,243
Imputed interest related to restructuring				50								101								51
Other (income) expense, net
	Loss (gain) on sale of assets			(27	)			5				211				(105	)			238
	Gain related to minority investments			-				-				-				(743	)			-
	Other miscellaneous income			(10	)			(2	)			(11	)			(2	)			(1	)
	Foreign exchange transaction (gain) or loss			327				(208	)			2,318				359				1,991
	Amortization of debt issuance cost			154				-				308				-				154
Provision for income taxes
	Income tax provision adjustments			(190	)			(832	)			(813	)			(706	)			(623	)
Non-controlling interest non-GAAP adjustment				-				125				-				192				-
Total adjustments				34,826				13,802				53,915				19,060				19,089
Net income attributable to Finisar Corporation - non-GAAP			$	23,465			$	43,767			$	56,797			$	75,036			$	33,332
Non-GAAP income attributable to Finisar Corporation			$	23,465			$	43,767			$	56,797			$	75,036			$	33,332
Add: interest expense for dilutive convertible notes				533				539				1,072				1,078				539
Adjusted non-GAAP income attributable to Finisar Corporation			$	23,998			$	44,306			$	57,869			$	76,114			$	33,871
Non-GAAP income per share attributable to Finisar Corporation common stockholders
	Basic		$	0.24			$	0.46			$	0.57			$	0.79			$	0.34
	Diluted		$	0.23			$	0.43			$	0.55			$	0.74			$	0.32
Shares used in computing non-GAAP income per share attributable to Finisar Corporation common stockholders
	Basic			99,621				95,941				98,931				95,275				98,241
	Diluted			105,340				103,696				106,133				102,771				106,036
Non-GAAP EBITDA
Non-GAAP income attributable to Finisar Corporation			$	23,465			$	43,767			$	56,797			$	75,036			$	33,332
Depreciation expense				20,915				14,621				40,563				28,548				19,648
Amortization				33				94				72				188				39
Interest expense				196				29				424				307				228
Income tax expense				1,800				1,400				4,000				2,695				2,200
Non-GAAP EBITDA			$	46,409			$	59,911			$	101,856			$	106,774			$	55,447

Finisar-F