Is This Company's Telecom Business About to Boom?

Optical networking component supplier, Finisar's , performance over the past three months has been outstanding. The stock took off after it reported stellar fourth-quarter results in June, and soared again after posting preliminary first-quarter results last month.

Finisar is up 56% since June, and there's a strong possibility that its robust momentum could continue after it posts first-quarter results on Sept. 5. The company's preliminary results were substantially ahead of its own and the Street's estimates. So, Finisar's outlook would be under greater scrutiny, as beating estimates for the previous quarter shouldn't be an issue.

Analysts and investors will be paying close attention to Finisar's telecom business, which accounted for one-third of revenue in the fourth quarter. Revenue from telecom had declined 12%, sequentially, last time on the back of sluggish carrier spending and price reductions.

Winning share?
Management is optimistic about the company's prospects in telecom in the second half of the calendar year as it expects increased telecom spending. Moreover, Finisar might also be winning market share from peer, JDS Uniphase . Uniphase released its fourth-quarter results last month and telecom revenue came in below expectations.

At the same time, Finisar's outstanding pre-announcement further suggested that Uniphase is losing share in optical products. Uniphase's guidance was also weak -- the company expects revenue between $410 million-$430 million, while analysts were looking for $434 million.

However, Uniphase's management stated that weak telecom revenue was a result of low sales of its legacy products, but new products are doing well. So, it looks like Finisar is moving more aggressively than Uniphase in innovation, and management's commentary over the last conference call indicated the same.

Finisar is ramping up production of new telecom products and is expecting strong performance from its existing product line. For instance, Finisar's cost-effective 100G module has been adopted by a number of customers, and an expected pick up in telecom spending should lead to a better performance.

A look at customers
Finisar has a strong portfolio of clients, the likes of which include Ciena, Cisco Systems, Huawei, and Alcatel-Lucent. Management stated over the previous conference call that telecom spending in North America and China is expected to drive its telecom business.

Now, Ciena is a supplier to AT&T, which has been aggressively rolling out LTE in the United States. AT&T has outlined an expenditure of $20 billion per year for 2014 and 2015 to boost its wireless and wireline networks, in addition to the $21 billion spent this year. This substantial spending by AT&T should benefit both Ciena and Finisar, and push Finisar's telecom business into bullish territory.

There's also potential to benefit from the 4G roll out in China by China Mobile . Huawei is a key supplier to China Mobile, and the company won a significant share of initial 4G contracts, worth $3.2 billion, awarded by the telecom carrier.

China Daily reported earlier this year that China Mobile will boost its capex 49% this year to $30.5 billion. More than half of this budget is expected to be allocated to the 4G roll out as the telecom giant sets out to build 207,000 base stations in 31 provinces. Being a supplier to Huawei, Finisar might also get a share of the China Mobile 4G capex going forward and this would be another tailwind for its telecom business.

Final words
Finisar's telecom business has been a sticking point for analysts, but developments in the telco industry signify a rebound might be in the cards. Finisar's datacom business, which accounts for the majority of its revenue, has been strong and prospects here look bright.

Data center build outs, impressive products that are more efficient than rivals' offerings, and clients like Cisco are tailwinds for Finisar's datacom business. Coupled with a rebound in telecom and sustained strength in datacom, Finisar looks well-positioned to deliver sunny guidance along with its upcoming results.

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The article Is This Company's Telecom Business About to Boom? originally appeared on Fool.com.

Harsh Chauhan has no position in any stocks mentioned. The Motley Fool owns shares of China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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