Shares of ONI Systems Inc. (Nasdaq: ONIS) took a dive after the company last night reported a sharp decline in revenues in its third quarter, ended September 30, 2001 (see ONI Reports Its Losses). Net revenues for the quarter were $40.2 million, down from $68.2 in the second quarter. Results were in line with a previous warning.

In trading midday Wednesday, ONI shares declined -1.37 (20.66%) to 5.26.

ONI reported a net loss of $103.9 million or 77 cents a share, compared to a net loss of $35.1 million or 30 cents a share for the same period last year.

ONI had warned of the decline in revenues in late September, revising an earlier estimate of $75 million to $80 million. Since then, the company has reduced its workforce by 16 percent, consolidated its facilities, resized its inventory and equipment, and reduced planned capital expenditure.

“I think we’ve been fairly thoughtful in regard to where those cuts had to go,” CEO Hugh Martin said on the earnings conference call Tuesday night. Martin cited the industry downturn in capital spending as a reason for the cutbacks.

Alex Henderson, an analyst with Salomon Smith Barney, says that the drop in stock price didn’t come as a big surprise: “There was little visibility of cuts in the future, and there’ll probably even be rising costs. Now, that’s problematic.”

Rick Schafer of CIBC World Markets agrees. "It’s about people not wanting to wait around for profitability," he says.

In line with the changes, ONI recorded about $68 million in restructuring and special charges in the third quarter and expects another $10 million to $15 million in the fourth quarter. Before special charges, restructuring, and non-cash charges related to the amortization of deferred stock compensation, ONI said it lost $26.1 million, or 19 cents per share, and that it expected a further pro forma net loss of 16 to 20 cents per share in the fourth quarter.

The company did add three new customers in the quarter, raising the count to 27. They had originally been expecting to have 32 to 34 customers by the end of the year, but their revised prognosis calls for 28 to 30.

In addition to struggling with a tough market, ONI was hit for about $3 million in the third quarter in the process of obtaining its OSMINE certification, which the company needs if it wants to do business with the ILECs. On the conference call, Martin sounded optimistic about the process, saying that it was essential to its business with some of the larger telecom companies.

Although Martin would not give guidance on what ONI expects 2002 to look like, he did say that the company’s goal is now to set aside enough cash and cash equivalents to last for the next four years, in order to get ONI through the slump in the economy.

Martin also said he felt the company had a good chance against its competition. “There’s size, and there’s size,” he said, referring to the current problems facing both larger competitors -- like Ciena Corp. (Nasdaq: CIEN), Lucent Technologies Inc. (NYSE: LU), and Nortel Networks Corp. (NYSE/Toronto: NT) -- and new startups. “We think we can give better service and support as a so-called 'mid tier' company. We tend to be as reliable as some of these big guys.”

Shafer agrees that things aren’t looking as bleak for ONI as the fall in stock prices may indicate. “The margins are a lot better than a lot of people expected,” he says, pointing out that at 37 percent, the company is experiencing some price stabilization.

Henderson concurs, saying he thinks the stock price is also leveling out. “It ain’t going any lower,” he says.

— Eugénie Larson, special to Light Reading
http://www.lightreading.com