What to Watch in Finisar's Earnings Report

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Finisar (NASDAQ: FNSR) investors will be hoping for good news when the company releases fiscal 2018 first-quarter results after the market closes on Sept. 7. The fiber-optics component specialist has struggled as its results have fallen short of Wall Street's expectations despite terrific year-over-year growth in both revenue and earnings.

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However, Finisar investors have been buoyed by speculation that the company could benefit from Apple's (NASDAQ: AAPL) upcoming iPhone. Let's take a look at things heading into the latest quarterly report.

The guidance will reveal potential Apple gains

Finisar's first-quarter guidance was nothing to write home about. The company said it expected $340 million in revenue at the midpoint, which is slightly lower than last year. Finisar has blamed lower telecom product demand from Chinese OEMs (original equipment manufacturers).

But Q1 guidance isn't the place to focus as the new iPhones aren't due to be unveiled until Sept. 12, which will be in Finisar's second quarter. Finisar wouldn't have been able to capture the impact of a potential 3D sensing design win at Apple during the first quarter. Any gains from supplying the vertical-cavity surface-emitting laser (VCSEL) to Apple, used for enabling 3D sensing, would boost Finisar's business during the August-October quarter.

In the company's June 15 conference call, CEO Jerry Rawls stoked optimism about an Apple win with this statement:

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We have received production purchase orders and expect to soon receive customer approval ... to ship meaningful volumes in our second fiscal quarter.

Additionally, Apple's shipments could increase to 246 million units in fiscal 2018 from an estimated 217 million iPhones in the fiscal year that concludes next month. Therefore, an iPhone design win could turn out to be a big catalyst for Finisar, but investors shouldn't be relying on just one potential catalyst.

Telecom is on shaky ground

Investors should note that Finisar's spot at Apple isn't guaranteed. Investment banking firm Piper Jaffray estimates that Finisar could get just a quarter of the available 3D sensing module opportunity, as chipmaker Himax Technologies also seems to be in the fray. Therefore, Finisar needs to outline a few more catalysts to warrant a long-term investment.

This is where things start turning bearish for the company as it is facing challenges in the telecom segment, which supplies around 28% of the company's total revenue. More specifically, Finisar's telecom revenue dropped 18% last quarter on a quarter-over-quarter basis, thanks to lower demand in China that has hurt pricing.

The bad news for Finisar is that the weakness could continue. Fellow optical part supplier Macom Technology Solutions recently sounded out an alarming outlook when it released results in August. Macom's management says that there is limited visibility regarding demand for fiber-optics components from China due to delays in deployments.

As a result, the company forecast a decline in demand for optical networking products once again in the quarter that ends in September. Therefore, Finisar's guidance could again fall below expectations given the potential weakness in telecom demand.

The takeaway

Finisar investors have been resilient over the past few months, hoping for an iPhone design win. But at the same time, they shouldn't be ignoring the problems faced by the company elsewhere. Apple will probably be a small part of its business as Finisar isn't expected to land all of the iPhone business and the weakness in the telecom business could wipe out any Apple-related gains.

In fact, consensus estimates indicate that Finisar's second-quarter revenue (which runs from August to October) could increase less than 2% year over year.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has a disclosure policy.