Finisar Announces Sixth Consecutive Quarter of Revenue Growth

SUNNYVALE, CA--(Marketwired - Mar 6, 2014) -  Finisar Corporation (NASDAQ: FNSR), a global technology leader for subsystems and components for fiber optic communications, today announced financial results for its third fiscal quarter ended January 26, 2014. 

COMMENTARY

"I am pleased to report third quarter revenues were $294.0 million, a new all-time record for Finisar. Revenues increased by $3.3 million, or 1.1%, over the second quarter and $55.7 million, or 23.4%, over the third quarter of the prior year. Revenues grew for the sixth consecutive quarter," said Jerry Rawls, Finisar's executive Chairman of the Board.

"During the quarter, we continued to make significant strides in new product development. We are scheduled to make several important product announcements and demonstrations at the Optical Fiber Conference trade show in San Francisco next week," said Eitan Gertel, Finisar's Chief Executive Officer.

FINANCIAL HIGHLIGHTS - THIRD QUARTER ENDED January 26, 2014
Summary GAAP Results		Third				Second
		Quarter				Quarter
		Ended				Ended
		January 26, 2014				October 27, 2013
		(in thousands, except per share amounts)
Revenues		$	294,018			$	290,722
Gross margin			35.9	%			35.6	%
Operating expenses		$	72,593			$	73,264
Operating income		$	33,096			$	30,109
Operating margin			11.3	%			10.4	%
Net income		$	27,061			$	29,965
Income per share-basic		$	0.28			$	0.31
Income per share-diluted		$	0.26			$	0.29
Basic shares			96,394				95,941
Diluted shares			104,361				103,696
Summary Non-GAAP Results (a)		Third				Second
		Quarter				Quarter
		Ended				Ended
		January 26, 2014				October 27, 2013
		(in thousands, except per share amounts)
Revenues		$	294,018			$	290,722
Gross margin			37.2	%			37.1	%
Operating expenses		$	63,209			$	63,159
Operating income		$	46,295			$	44,767
Operating margin			15.7	%			15.4	%
Net income		$	44,993			$	43,767
Income per share-basic		$	0.47			$	0.46
Income per share-diluted		$	0.44			$	0.43
Basic shares			96,394				95,941
Diluted shares			104,361				103,696

_____________

(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 third quarter of fiscal 2014:

• Revenues increased to $294.0 million, up $3.3 million, or 1.1%, from $290.7 million in the preceding quarter.
• The sale of products for datacom applications increased by $ 6.1 million, or 3.0%, compared to the preceding quarter.
• The sale of products for telecom applications decreased by $2.8 million, or (3.2)%, compared to the preceding quarter, primarily driven by the impact of one month of the annual price reductions for telecom products that typically take effect on January 1^st.
• GAAP gross margin increased to 35.9% from 35.6% in the preceding quarter.
• Non-GAAP gross margin increased to 37.2% from 37.1% in the preceding quarter.
• GAAP operating income increased $3.0 million to $33.1 million, or 11.3% of revenues, compared to $30.1 million, or 10.4% of revenues in the preceding quarter.
• Non-GAAP operating income increased $1.5 million to $46.3 million, or 15.7% of revenues, compared to $44.8 million, or 15.4% of revenues, in the preceding quarter.  
• Cash, cash equivalents and short term investments increased $238.2 million to $554.7 million at the end of the third quarter, compared to $316.5 million at the end of the preceding quarter, principally reflecting the net proceeds of approximately $255.0 million from a convertible debt offering completed during the quarter.
• During the quarter, the Company announced that it entered into an agreement under which Finisar would acquire 100% of the equity interests in u2t Photonics AG for approximately $20 million in cash, subject to certain adjustments and that Finisar would also assume net debt of approximately $7 million. This transaction closed on January 31^st, one week into the fourth fiscal quarter.

OUTLOOK

Without taking into account the acquisition of u2t, the Company indicated that it currently expects revenues for the fourth quarter of fiscal 2014 to be in the range of $290 to $305 million; non-GAAP gross margin of approximately 36%, non-GAAP operating margin of approximately 13.8% to 14.8%, and non-GAAP earnings per diluted share to be in the range of approximately $0.38 to $0.42.

After taking into account the acquisition of u2t, including the elimination of any intercompany revenue or expense transactions with Finisar, the Company indicated that it currently expects revenues for the fourth quarter of fiscal 2014 to be in the range of $296 to $311 million, non-GAAP gross margin of approximately 35.5%, non-GAAP operating margin of approximately 12.8% to 13.8%, and non-GAAP earnings per diluted share to be in the range of approximately $0.36 to $0.40.

The Company expects the acquisition of u2t to be accretive to non-GAAP earnings per diluted share in approximately one year as it realizes cost and other synergies over time.

CONFERENCE CALL

Finisar will discuss its financial results for the third quarter and current business outlook during its regular quarterly conference call scheduled for Thursday, March 6, 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 1-877-397-0298 (domestic) or +1-719-325-4770 (international) and enter conference ID 7659562.

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 7659562 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

The statements contained in this press release that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements included in this press release are based upon information available to Finisar as of the date hereof, and 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 24, 2013) 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								Nine Months Ended								Three Months Ended
				January 26, 2014				January 27, 2013				January 26, 2014				January 27, 2013				October 27, 2013
Revenues				$	294,018			$	238,351			$	850,808			$	690,918			$	290,722
Cost of revenues					187,368				168,377				546,638				496,001				186,168
Amortization of acquired developed technology					961				1,930				3,735				5,202				1,181
Gross profit					105,689				68,044				300,435				189,715				103,373
Gross margin					35.9	%			28.5	%			35.3	%			27.5	%			35.6	%
Operating expenses:
	Research and development				46,734				39,725				135,223				117,514				44,959
	Sales and marketing				10,911				10,398				35,038				31,291				12,322
	General and administrative				14,353				12,797				38,081				39,058				15,388
	Amortization of purchased intangibles				595				1,035				1,785				2,906				595
	Impairment of long-lived assets				-				4,886				-				4,886				-
		Total operating expenses			72,593				68,841				210,127				195,655				73,264
Income (loss) from operations					33,096				(797	)			90,308				(5,940	)			30,109
Interest income					335				186				834				544				282
Interest expense					(1,663	)			(648	)			(2,582	)			(2,045	)			(367	)
Other income (expenses), net					(1,873	)			(275	)			(890	)			(295	)			495
Income (loss) before income taxes and non-controlling interest					29,895				(1,534	)			87,670				(7,736	)			30,519
Provision for income taxes					2,827				2,153				4,816				1,733				568
Income (loss) before non-controlling interest					27,068				(3,687	)			82,854				(9,469	)			29,951
Adjust for net (income) loss attributable to non-controlling interest					(7	)			280				183				136				14
Net income (loss) attributable to Finisar Corporation				$	27,061			$	(3,407	)		$	83,037			$	(9,333	)		$	29,965
Net income (loss) per share attributable to Finisar Corporation common stockholders:
	Basic			$	0.28			$	(0.04	)		$	0.87			$	(0.10	)		$	0.31
	Diluted			$	0.26			$	(0.04	)		$	0.82			$	(0.10	)		$	0.29
Shares used in computing net income (loss) per share - basic					96,394				93,097				95,649				92,624				95,941
Shares used in computing net income (loss) per share - diluted					104,361				93,097				103,491				92,624				103,696

Finisar Corporation
Consolidated Balance Sheets
(in thousands)
				January 26, 2014				October 27, 2013				July 28, 2013				April 28, 2013
				(Unaudited)				(Unaudited)				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	374,902			$	316,488			$	288,433			$	289,076
	Short-term held-to-maturity investments				179,847				-				-				-
	Accounts receivable, net				195,442				186,486				171,823				149,612
	Accounts receivable, other				24,274				25,890				34,386				16,538
	Inventories				247,126				231,235				207,029				200,670
	Prepaid expenses				22,764				20,902				19,533				18,402
		Total current assets			1,044,355				781,001				721,204				674,298
Property, equipment and improvements, net					247,394				231,022				213,044				201,442
Purchased intangible assets, net					21,976				23,587				25,416				30,457
Goodwill					90,986				90,986				90,986				90,986
Minority investments					2,041				1,841				1,711				884
Other assets					21,034				16,946				12,954				9,780
		Total assets		$	1,427,786			$	1,145,383			$	1,065,315			$	1,007,847
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable			$	96,723			$	98,220			$	90,488			$	77,630
	Accrued compensation				46,402				48,182				32,001				31,492
	Other accrued liabilities				26,370				32,943				31,542				23,533
	Deferred revenue				15,620				14,235				12,582				9,182
	Short term debt				4,230				4,700				-				-
	Current portion of convertible notes				40,015				40,015				-				-
		Total current liabilities			229,360				238,295				166,613				141,837
Long-term liabilities:
	Convertible notes, net of current portion				210,029				-				40,015				40,015
	Other non-current liabilities				11,680				12,756				12,908				13,480
		Total liabilities			451,069				251,051				219,536				195,332
Stockholders' equity:
	Common stock				97				96				96				94
	Additional paid-in capital				2,440,849				2,377,198				2,363,514				2,350,146
	Accumulated other comprehensive income				18,980				27,315				22,397				28,525
	Accumulated deficit				(1,488,923	)			(1,515,984	)			(1,545,949	)			(1,571,960	)
		Finisar Corporation stockholders' equity			971,003				888,625				840,058				806,805
	Non-controlling interest				5,714				5,707				5,721				5,710
		Total stockholders' equity			976,717				894,332				845,779				812,515
Total liabilities and stockholders' equity				$	1,427,786			$	1,145,383			$	1,065,315			$	1,007,847
Note - Balance sheet amounts as of April 28, 2013 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 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:

• 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);
• Stock-based compensation expense (non-cash charges);
• Acquisition method accounting adjustment for sale of acquired inventory (non-cash charges);
• Reduction in force costs (non-recurring cash charges); and
• Acquisition related retention payments (non-recurring 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:

• Gain or loss on litigation settlements and resolutions and related costs (non-recurring cash charges or benefits);
• 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);
• Impairment of long-lived assets (non-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:

• Gains and losses on sales of assets (non-recurring or non-cash losses and cash 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);
• Debt extinguishment loss (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								Nine Months Ended								Three Months Ended
				January 26, 2014				January 27, 2013				January 26, 2014				January 27, 2013				October 27, 2013
GAAP to non-GAAP reconciliation of gross profit:
Gross profit - GAAP				$	105,689			$	68,044			$	300,435			$	189,715			$	103,373
Gross margin - GAAP					35.9	%			28.5	%			35.3	%			27.5	%			35.6	%
Adjustments:
Cost of revenues
	Change in excess and obsolete inventory reserve				384				989				55				7,858				1,199
	Amortization of acquired technology				961				1,930				3,735				5,202				1,181
	Stock compensation				2,374				2,140				6,207				5,502				2,056
	Acquisition method accounting adjustment for sale of acquired inventory				-				-				-				1,363				-
	Reduction in force costs				34				17				104				801				47
	Acquisition related retention payment				62				73				194				146				70
		Total cost of revenue adjustments			3,815				5,149				10,295				20,872				4,553
Gross profit - non-GAAP					109,504				73,193				310,730				210,587				107,926
Gross margin - non-GAAP					37.2	%			30.7	%			36.5	%			30.5	%			37.1	%
GAAP to non-GAAP reconciliation of operating income:
Operating income (loss) - GAAP					33,096				(797	)			90,308				(5,940	)			30,109
Operating margin - GAAP					11.3	%			-0.3	%			10.6	%			-0.9	%			10.4	%
Adjustments:
Total cost of revenue adjustments					3,815				5,149				10,295				20,872				4,553
Research and development
	Reduction in force costs				-				11				28				188				16
	Acquisition related retention payment				190				213				571				435				190
	Stock compensation				3,995				2,601				11,589				8,940				4,069
Sales and marketing
	Acquisition related retention payment				17				17				51				37				17
	Stock compensation				1,369				885				3,935				2,964				1,382
General and administrative
	Reduction in force costs				(82	)			25				158				94				173
	Acquisition related retention payment				(11	)			223				1,036				476				830
	Stock compensation				2,618				2,218				7,704				8,003				2,663
	Acquisition related costs				591				731				940				1,152				124
	Litigation settlements and resolutions and related costs				5				-				10				13				-
	Shareholder class action and derivative litigation costs				97				180				(4,951	)			189				46
Amortization of purchased intangibles					595				1,035				1,785				2,906				595
Impairment of long-lived assets					-				4,886				-				4,886				-
		Total cost of revenue and operating expense adjustments			13,199				18,174				33,151				51,155				14,658
Operating income - non-GAAP					46,295				17,377				123,459				45,215				44,767
Operating margin - non-GAAP					15.7	%			7.3	%			14.5	%			6.5	%			15.4	%
GAAP to non-GAAP reconciliation of income attributable to Finisar Corporation:
Net income (loss) attributable to Finisar Corporation - GAAP					27,061				(3,407	)			83,037				(9,333	)			29,965
Adjustments:
Total cost of revenue and operating expense adjustments					13,199				18,174				33,151				51,155				14,658
Non-cash imputed interest expenses on convertible debt					927				-				927				-				-
Imputed interest related to restructuring					54				148				167				374				56
Other (income) expense, net
	Loss (gain) on sale of assets				(30	)			38				(135	)			(151	)			5
	Gain related to minority investments				-				-				(743	)			-				-
	Other miscellaneous income				(3	)			(101	)			(5	)			(261	)			(2	)
	Foreign exchange transaction (gain) or loss				2,200				431				2,559				(180	)			(208	)
	Amortization of debt issuance cost				76				-				76				-				-
	Debt extinguishment loss				-				-				-				573				-
Provision for income taxes
	Income tax provision adjustments				1,327				1,107				621				(711	)			(832	)
Non-controlling interest non-GAAP adjustment					182				-				374				-				125
Total adjustments					17,932				19,797				36,992				50,799				13,802
Net income attributable to Finisar Corporation - non-GAAP				$	44,993			$	16,390			$	120,029			$	41,466			$	43,767
Non-GAAP income attributable to Finisar Corporation				$	44,993			$	16,390			$	120,029			$	41,466			$	43,767
Add: interest expense for dilutive convertible notes					539				539				1,617				1,618				539
Adjusted non-GAAP income attributable to Finisar Corporation				$	45,532			$	16,929			$	121,646			$	43,084			$	44,306
Non-GAAP income per share attributable to Finisar Corporation common stockholders
	Basic			$	0.47			$	0.18			$	1.25			$	0.45			$	0.46
	Diluted			$	0.44			$	0.17			$	1.18			$	0.44			$	0.43
Shares used in computing non-GAAP income per share attributable to Finisar Corporation common stockholders
	Basic				96,394				93,097				95,649				92,624				95,941
	Diluted				104,361				99,094				103,491				98,891				103,696
Non-GAAP EBITDA
Non-GAAP income attributable to Finisar Corporation				$	44,993			$	16,390			$	120,029			$	41,466			$	43,767
Depreciation expense					15,960				13,306				44,508				39,123				14,621
Amortization					94				86				282				559				94
Interest expense					347				314				654				1,127				29
Income tax expense					1,500				1,046				4,195				2,444				1,400
Non-GAAP EBITDA				$	62,894			$	31,142			$	169,668			$	84,719			$	59,911

Finisar-F