In fibeReality’s opinion, irrespective of II-VI leadership’s original plans with its big merger, figuring out what to do with the mess that was left by Finisar’s interim CEO, Michael Hurlston, along with the implicit approval of the corporate board, will be the biggest challenge in its entire existence. We certainly anticipated some problems a year ago: “[T]he extent of the problematic overlap between the artificial, perforated lines created by Finisar…is uncertain. The basic idea was to break up the company into pieces, and potentially sell them off. However, in doing so, a lot of synergies get thrown away in that the company is not fully taking advantage of the strengths of its personnel. With Finisar having gone down this road for a while, it may be doubtful as to whether II-VI can undo all of the damage….” Also at an EPIC conference in October, we discussed that the vendor had lost arguably the best VCSEL designer in the world and mentioned that the supplier apparently abandoned the datacom VCSEL space (while continuing to market the latest solutions at ECOC 2019). Moreover, we stated that the firm was "pushing for a business strategy with inherently low-margin generation." While we understand that II-VI’s CEO, Chuck Mattera was able to prevent a specific major fiasco from occurring before closing on the deal, the acid test as to whether the supplier can potentially ever turn the corner from being just a superficial-sounding, holding company (which we do not expect to happen), will be based on the accuracy of his description of the situation at Finisar on its earnings call this week.
Incredibly, the off-the-wall, game plan at Finisar involved converting the company into a Contract Manufacturer (CM), similar to InnoLight, and this change in direction, evidently created the most severe harm to the supplier. It certainly would not require a large amount of experience in the optical/datacom space to fully appreciate that CMs, in general, do not tend to create an exceptionally high return on investment.
Unfortunately, based on our latest intelligence gathering, we believe that Hurlston was pretty reliant on Hock Tan, the CEO of Broadcom (as well as his former boss), for advice, and undoubtedly, the former imagined following in the footsteps of the latter. As to why Hurlston would believe that Tan, a ferociously competitive executive, would have the best interests of Finisar in mind, and not Broadcom, may forever remain a mystery.
Naturally, Tan at the time could point to the fact that he had divested the optical module business to Foxconn, a leading CM. However, as we have reported, Broadcom has reacquired that business back, a plan that almost certainly was not conceived overnight, and so, it would have been really helpful to the supplier, if Finisar adopted approaches, which were detrimental to its future.
Hurlston, in partnership with COO (later co-CEO), Todd Swanson, were in agreement on avoiding overly high engineering costs, but to an extreme, given the great amount of disassembling of the vendor that occurred, especially with the CM plan. Evidently, it was widely known throughout the world that the IC Group was available for sale.
During the waiting period for regulatory approval, Mattera was able to stop a very inequitable deal from happening involving the IC Group. Still, all of the chaos resulted in detrimentally effecting key IC programs, considerable attrition, and damage to major programs in the group.
Nevertheless, we continue to strongly assert that a portfolio kind of corporation like II-VI would have ultimately followed Lumentum in moving away from transceivers and towards chips. While the downfall of the vertically integrated Finisar is certainly the worst casualty, originally resulting from the datacom ecosystem collapse, forcing it to eventually manufacture me-too transceivers using components from other players, it presumably saved II-VI from having to make a similar type of transition itself – and the parent firm is clearly free to unload that operation.
The real question is the extent of the damage that has been done to chips important to II-VI. In any event, the most likely spin this coming week will concentrate on what the Street will perceive as the big prize – the Sherman, TX plant, despite the present, bubble-like conditions in the 3D sensor space.
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As always, fibeReality does not recommend any securities, and this writer does not invest in any companies being analyzed by us.
[written by Mark Lutkowitz]