In an article published this month, Finisar’s CEO, Michael Hurlston said: “To be truthful, I didn't know much about optics.” Certainly, by now, such a revelation would not be news to anybody in the industry, and fibeReality believes the continuation of making statements at least about his previous high level of ignorance would start to have diminishing returns, particularly with analysts on the Street. When Hurlston earlier in the year asserted, "That there is a much wider level of competition [in optical communications] than has existed in semiconductors, has been a big surprise,” we actually gave him the benefit of the doubt in pushing the naivete story a little much either for purposes of modesty or to give competitors a false sense of confidence. There was no other legitimate explanation, as somebody in the telecommunications world, would have to be under a rock not to know that chips in general compared with optics devices are like night and day in terms of margin generation. Hurlston is going on eight months of immersion into optics technology, and should be arguably past the potential of “driving people crazy with all my questions about why we do things this way.” By now, the bulk of his discussions should not be internal anymore, but with large customers, contract manufacturers, and other experts outside the company to get a greater amount of objective feedback, and “to build successful partnerships.” Moreover, there soon has to be more of a perceived emphasis by him on a very aggressive plan to make the hard business decisions concerning pullbacks on unattractive products, and determining the specific area of focus with the highest margin potential.
In not shifting to a higher gear more quickly, a particular narrative, which has mainly been beneath the surface may begin to get wider exposure. We are aware that a small number of Hurlston’s detractors contend that at Broadcom, he was handed a cash-cow business from previous managers, and supposedly all he had to do was not foul anything up, which, if true, would have made it a dubious achievement.
The criticism is reminiscent of what was heard concerning JDSU when a new CEO was appointed, Kevin Kennedy, around the start of the last decade, and similarly, on the positive side, it was pointed out that Kennedy did a great job at Cisco Systems. However, for almost the bulk of his tenure, Cisco never experienced a recession or any growth issues. In fairness to both gentlemen, it would be difficult for anyone to take over a company in the optics space, which even during normal times has rather awful margins, either after a breakdown in the optical ecosystem or after a burst of a humongous bubble.
Nevertheless, it is also important for Hurlston not to appear like he is dismissing the gravity of Finisar’s current situation. It is not really a stretch to point out that he is dealing with a “fixer upper,” and “trying to save a distressed asset.”
On a favorable note, it is important that Hurlston understands that “each of the hyperscalers has a different way to build data centers.” This realization initially came as a shock to optical executives in the past, and the lack of uniformity has potential implications for a firm striving to move in a chip-centric direction.
Interestingly, Hurlston is pointing to on-board-optics “perhaps at 800G or terabit-class speeds.” It is hardly an endorsement of that solution.
As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.
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[written by Mark Lutkowitz]