By William Trent, CFA of Stock Market Beat

Finisar Corporation’s earnings release started out sounding quite upbeat:

Finisar Corporation (FNSR), a technology leader in gigabit fiber optic solutions for high-speed data networks, today reported record quarterly revenues for its fiscal second quarter ended October 29, 2006 of $108.2 million, an increase of 24.9% over the second quarter of last year, marking the thirteenth consecutive quarter of revenue growth and the ninth consecutive quarter of record revenues.

Sounds great, until one realizes that the consensus expectation was $110 million in revenue. Perhaps the company is making up the revenue shortfall with cost reductions? We don’t know, because their backdated options are going to force a charge, the amount of which they haven’t figured out yet. Not surprisingly, the stock declined significantly after hours.

The revenue shortfall perhaps is unsurprising, as it appears there is adequate capacity out there to cover current demand. The slowdown is not a one-time phenomenon, either, judging from the guidance offered on the conference call:

For the third quarter we expect total revenue to be in the range of 108 to 112 million with Optics revenue in the range of 99 to 102 million and Network Tools revenue between 9 and 10 million. Non-GAAP gross margin should be between 38 and 40%. Non-GAAP operating expenses should be approximately 30 million. DSO is projected to be 55 days for the remainder of the year. Inventory turns are projected to be between 4.7 and 5 for the remainder of the year. Available cash is expected to increase 5 to 10 million to 135 to 140 million. Our fiscal year 2007 guidance remains unchanged with total revenue expected to be in the range of 430 to 460 million. Non-GAAP gross margin of 38 to 40% and non-GAAP operating expenses of approximately 120 million.

Too bad consensus called for $113 million in Q3 and $450 for the year. It’s a good thing the company recently engineered some cash flow flexibility with their shareholder-unfriendly note exchange. The way things are going, they’ll need all the flexibility they can get.

The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Lion’s Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Ceradyne (CRDN) put options; Lion’s Gate (LGF) call options; Dell (DELL) put options; Plantronics (PLT) put options

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