Chinese demand for 10G and 100G Optical modules looks like it could stay strong for multiple years, not just multiple quarters. The company turned in solid sequential growth in wavelength selective switching (WSS)/reconfigurable optical add/drop multiplexing (ROADM) sales in the fiscal first quarter even without Verizon Communications (VZ) qualification. Looking ahead to calendar 2017, we expect Finisar to ship ROADMs into Verizon starting early in the year, and also likely into China starting late in the year. Gross margins are always volatile over time in the industry, but strong demand, tight supply, and Finisar’s leadership in a few key product categories suggest that its gross margins could be strong-to-solid for at least several more quarters to come.
We are raising our fiscal 2017 and 2018 revenue forecasts by $80 million and $93 million, respectively, to $1.46 billion and $1.60 billion, respectively. Our new fiscal 2017/2018 gross-margins estimates are 33.6%/33.6%, respectively, compared with 30.9%/31.4%, respectively. We are also increasing our fiscal 2017/2018 EPS forecasts to $1.76/$1.95, respectively, from $1.25/$1.44, respectively.
Fiscal-first-quarter revenue/gross margins/EPS came in at $341 million/33.1%/38 cents, respectively, soundly exceeding our $334 million/30.9%/31 cents estimates, respectively. There was broad-based improvement in the Telecom segment with sales up 21% year-over-year and 29% quarter-over-quarter to $98 million, compared to our $82 million forecast, even though the company’s new ROADM line-card is not yet qualified for Verizon. Datacom segment sales of $243 million missed our estimate by $10 million due to declines in 40G in the U.S. and sub-10G for Wireless in China. However, 100G Datacom module revenue was very strong, growing 116% year-over-year and 22% quarter-over-quarter, driven by CFP, CFP2, CFP4 and QSFP28. We believe Finisar has the highest available volume of QSFP28 in the industry and this, along with strong CFP and CFP2 margins and the decline in low margin sub-10G sales, drove the company’s overall gross margins to come in 220 basis points above our estimate.
Management expects Telecom and 100G Datacom demand to continue to improve in the current quarter and directed revenues up 7% quarter-over-quarter at the mid-point to $355 million-$375 million, or well above our prior $342 million estimate. Gross margins were guided to approximately 34% versus our prior model at 31.3%, propelled again by positive trends in volume and product mix. The fiscal-second-quarter EPS guidance is 44 cents-55 cents. Our prior number was 32 cents. North America and China are driving most of the demand improvement for Finisar. The company expects to become qualified for ROADMs at Verizon at some point, but says its forecast does not assume that this project contributes in calendar 2016.
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