Bookham Soars on Nortel News
Bookham stock traded up $1.47 (90%) at $3.09 late this afternoon. Yes, that's ninety percent. Trading volume exceeded 5 million shares, more than 10 times Bookham's daily average.
After the U.S. markets closed yesterday, Bookham announced that Nortel had committed to buying $50 million in discontinued products during the next 12 months. Those products are being halted as Bookham moves its manufacturing to Shenzhen, China, from the U.K. (see Bookham, Nortel Extend Agreement).
A "significant portion" of money appears to be "incremental" to estimates -- meaning it's an unexpected bonus for Bookham, writes analyst John Harmon of Needham & Co. in a note issued this morning.
The $50 million is the equivalent of an extra quarter's worth of sales. For its second quarter ended Jan. 1, Bookham reported losses of $41.1 million, or $1.23 per share, on revenues of $45.8 million. And with Nortel representing 44 percent of Bookham's business that quarter, any continued support is welcome news with investors.
Bookham's release was packed with other good news. The company expects Nortel to make a similar commitment to purchase some current product lines, and it's also renegotiated its debts with Nortel. But perhaps most important, Bookham's release said the company and Nortel "have agreed to product pricing increases and amended payment terms for a 12-month period."
Pricing is crucial, because stubbornly low product prices have helped contribute to an agonizing year in optical components. Low prices have kept Bookham out of profitability, along with components compatriots Avanex Corp. (Nasdaq: AVNX) and JDS Uniphase Corp. (Nasdaq: JDSU; Toronto: JDU).
Bookham CEO Georgio Anania railed on the pricing issue at the recent OFC/NFOEC tradeshow, noting that prices are "30 to 40 percent lower" than they should be (see Components Competition Is Killing).
"Purchase commitments from Nortel over the next 12 months, along with price increases and improved payment terms, are a step forward towards reducing liquidity concerns," Harmon writes. Bookham burned $24.7 million in cash during its second quarter and held $78 million in cash and investments at the end of the quarter.
Some of Bookham's cash burn is tied to the shifting of manufacturing to China. Anania refers to the problem as "triple billing." China and the U.K. have to run overlapping lines for a while, and transfer costs stack up in the meantime. When it's all done, Bookham will have a low-cost manufacturing base and the product differentiation that comes from owning its own fab, he pledges (see Bookham Still Bleeding ).
Bookham stock climbed as high as $3.19 today, a gain of 97 percent. That's still far from the stock's 52-week high of $8.25, however.
The Nortel-Bookham connection stems from the fact that Bookham acquired Nortel's optical components division in 2002 (see Bookham Buys Nortel's Components Biz).
— Craig Matsumoto, Senior Editor, Light Reading