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Avanex Concerns Continue

Avanex Corp.'s (Nasdaq: AVNX) stock sank while Bookham Inc.'s (Nasdaq: BKHM; London: BHM) rose today, both apparently set into motion by a note from Avanex's auditors questioning the company's viability.

"The Company’s recurring losses and negative cash flows from operations raise substantial doubt about the Company’s ability to continue as a going concern," auditors Deloitte & Touche USA LLP write in a note accompanying Avanex's 10-K filing, submitted to the SEC on Sept. 28. (See Avanex Files 10-K.)

A press release issued late Friday called attention to the statement. That might be what sent Avanex's stock reeling today, down $0.19 (20%) at $0.78 in late afternoon trading. As if on the other end of a pulley, shares for competitor Bookham shot up $0.53 (11%) to $5.41 late in the day.

Reeling from a continued slump in photonics, both companies are shifting some manufacturing efforts to Asia in an effort to lower costs. Along those lines, Avanex made strides in April by announcing cutbacks at its French facilities. (See Avanex Does a French Trim and Components Competition Is Killing.)

But they're racing against the clock, as persistent losses are eating into each company's cash reserves. Both companies admit they have to raise more money to keep rolling.

Avanex's 10-K lays out some of the numbers. For the three years ended June 30, Avanex's net losses totaled $335.4 million. Its cash flow from operations for the year ended June 30 was negative $82.9 million.

As of June 30, Avanex reported cash and equivalents of roughly $74 million.

Avanex recently saw its CFO depart after just five months on the job, and its sub-$1 stock price attracted a warning from Nasdaq. On the plus side, Corning Inc. (NYSE: GLW) appears ready to sell off the Avanex shares it acquired when Avanex purchased Corning's components business; analysts believe this could lighten up the doom cloud hovering over Avanex. (See Avanex CFO Leaves , Nasdaq Warns Avanex , and Corning May Sell Avanex Stake.)

Bookham has shown some signs of hope recently. But the company has to continue a feverish financial dance to stay upright. One recent deal involved a long-awaited sale of land in the U.K.; another particularly complicated exchange involved an aircraft-leasing operation acquired for tax benefits. (See Bookham Shows Signs of Recovery, Bookham Sells Land , and Bookham Bags $11.9M.)

— Craig Matsumoto, Senior Editor, Light Reading

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Pete Baldwin 12/5/2012 | 2:59:03 AM
re: Avanex Concerns Continue We should also mention Deloitte listed a whole litany of accounting control issues, most of them stemming from Avanex's finance division being understaffed.

I'm no accounting expert but some of these sound kind of important ... for example, there was insufficient control over tracking inventory at one facility. Deloitte notes that this could lead to misstated financials. (They are NOT saying this happened; in fact, they've signed off on AVNX's 2005 financials. They're just pointing out that improper inventory control can be, well, bad.)

That might be a clue why the new CFO left so quickly.
optigong 12/5/2012 | 2:59:02 AM
re: Avanex Concerns Continue no big deal, auditors covering their butts after sarbanes oaxley. I am much more concerned about Avanex business model, lack of vision and strategy.
allidia 12/5/2012 | 2:59:00 AM
re: Avanex Concerns Continue for bankruptcy this month to avoid the new stricter laws going into place in October? They must be down to less than 2 Q's cash as far as we can trust the suspect Books. Who benefits most by AVNX's bankruptcy?
optiplayer 12/5/2012 | 2:59:00 AM
re: Avanex Concerns Continue How does Corning's planned sale of AVNX help? Doesn't it put more downward pressure on the stock making less likely AVNX trades north of $1 any time soon? Isn't it also a bad sign that Corning is willing to unload at such a low price?

I'm looking for the silver lining here...
deauxfaux 12/5/2012 | 2:58:59 AM
re: Avanex Concerns Continue Usually, liquidity problems (lack of working capital) drive companies into bankruptcy. Avanex shows no signs of having a liquidity crisis for at least 2 more quarters, but after that, their situation will start to unravel unless they can get their costs in line with their revenue.

I still don't see a scenario for vastly improved margins (30% or better), nor do I see a simple way for them to raise additional financing in the capital markets. The pressure on the stock price from Corning's stock sales doesn't make it any easier to construct an equity offering that makes sense, and debt seems out of the question.

It seems to me that the auditors pushed the GC language for these reasons and a few more relating to the uncertainty of AVNX's true position with respect to liabilities.

It will be very, very difficult for them to last more than a year
paolo.franzoi 12/5/2012 | 2:58:59 AM
re: Avanex Concerns Continue
Uh....its October. Did you mean after October?

Pete Baldwin 12/5/2012 | 2:58:58 AM
re: Avanex Concerns Continue How does Corning's planned sale of AVNX help? Doesn't it put more downward pressure on the stock making less likely AVNX trades north of $1 any time soon? Isn't it also a bad sign that Corning is willing to unload at such a low price?

Corning is allowed to sell a couple million shares of AVNX per quarter, and they've been doing so. Each of those sales puts a little pressure on AVNX.

So the theory is that it's better for AVNX to get this over with -- have Corning sell its entire stake (which they were restricted from doing, until now) rather than needle AVNX with a trickle of quarterly selloffs:


As for the low price -- it's been assumed for some time that Corning wants to sell their shares regardless of the price; they're just not a portfolio-holding kind of company. So, again... better to get it over with, so the theory goes.
Diogene 12/5/2012 | 2:57:16 AM
re: Avanex Concerns Continue -> Who benefits most by AVNX's bankruptcy?

The Market, The Industry, Avanex Competitors.
Everybody needs the consolidation of this industry. Everyone in this industry is burning cash: it's not normal... Normal is, in this situation, a collapse of the weaker.

Balet 12/5/2012 | 2:57:13 AM
re: Avanex Concerns Continue Usually when someone supplies a component/module to a system house, he/she needs to have at least a second, sometime third, source.
Large OEM system suppliers usually don't deal with smaller component vendors (even there are not too many left by now). They asked them to partner with JDSU, AVNX or BKHM, so "big guys" will secure the source.

If AVNX and BKHM are gone and JDSU is the first source, what would Cisco/Nortel/Lucent,etc. do?
It looks like they have to keep those two guys floating from this point of view.

Any ideas?
Diogene 12/5/2012 | 2:57:12 AM
re: Avanex Concerns Continue JDSU, AVNX or BKHM aren't the only trusted suppliers from vendors. There are many: Finisar, Fujitsu, Furukawa, MRV (Luminent), NEC, NEL, OpNext, Sumitomo, and they will grow with the new market space.

Moreover, without AVNX, BKHM will have better chances in surviving. Someone will buy something from the dying company: product lines (and customers), IP...

I think there are still too many players in this industry.
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