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Optical components

Bookham Soars on Nortel News

Bookham Inc. (Nasdaq: BKHM; London: BHM) stock skyrocketed today on news that the company had negotiated some better prices and an extra chunk of business from Nortel Networks Ltd. (NYSE/Toronto: NT).

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

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deauxfaux 12/5/2012 | 3:20:45 AM
re: Bookham Soars on Nortel News Lets assume that the $50M in sales goes straight to the bottom line (i.e. they sell the entire value of their inventory for more than book.....an impossibility). They forstall the doomsday scenario by one quarter, but not much more. Since their Gross Margins are negative, I'll bet the extra $50M will produce less than 30% contribution (variable costs are 70%, and if they were any better, BKHM wouldn't be shutting these products down), resulting in $15M in additional cash. Not much for a company that burns that much cash every month

So what was the value of the price increases 5%?, 10%? Who are these guys kidding. It isn't enough to stop the cash burn.

Most bankruptcies get kicked off by a series of liquidity problems (Not enough cash to pay an suppliers or customers). The creditor sues, (or you can't make payroll & statutory (taxes, severance, etc.)) which forces the company into a Chapter 11 reorganization(in the US), which can be just a speed bump on the way to Chapter 7 (Dissolution).

As of Jan1 '05, BKHM has about $86M in liquid assets (cash & near cash), net of inventories (which they probably can't sell quickly enough to raise cash). Forgetting about the NT debt for a second, they have about $70M in short term obligations (debt). This gives them an "acid test ratio" of about 1.2: clearly showing a liquidity problem on the horizon. If they continue this cash burn ($47M/qtr), they will have an acid test of 0.55 at the end of March '05; and will be on the brink of insolvency. Project the same trend forward a quarter and they are in Chapter 11 some time in the second quarter.

The point here is that the Nortel debt won't push them over the edge: everything else will. So the next question is about the covenants in the NT debt. Usually, there are a series of covenants about liquidity and cash flow that could allow NT to take possession of the pledged assets that it originally "sold" to BKHM. If NT acts aggressively it will probably cause other creditors to look after their own interests.

The last thing that NT wants is to have to take over Bookham's assets. They sold them in the first place because they were a cash drain. It is in NTs best interest to do the absolute minimum to give BKHM a good enough story to get additional financing; their only chance for survival.

This is hardly a parsimonious management team. They already blew through the $25M PIPE in the quarter the closed it, and I can't imagine that anyone with a lick of common sense would lend them money at this point.

Seems quite bleak, in the best case. But then again, I'm not sure that they've ever made a nickel, so none of this is news. Anania and his incompetence may very well be doing the industry a favor.
rocksolid 12/5/2012 | 3:20:42 AM
re: Bookham Soars on Nortel News Financial investors today added about $50M to BKHM's market capitalization. This makes no sense.

First, the extra $50M of revenue Bookham will be getting from Nortel will not come anywhere close to generating $50M of profit.

Second, and I don't know why this is being ignored, but the revenues are for products being DISCONTINUED. It is a ONE TIME order! This means that in fact after this BKHM will be left with an even SMALLER ongoing revenue stream.

Third, BKHM announced that it is negotiating another $50M of purchase commitments with Nortel. Considering that Nortel is a 40% customer, and BKHM's yearly revenues stood at about $180M, this means that Nortel is commiting to LESS than they've been buying in the past.

Sorry, but I'm a complete idiot.

Why is this "good" news?

Why are investors rushing like lemmings to buy this turd?

LightReading - you seem to be just reporting, not analysing, the news? Do you have constraints on doing analysis of companies - in other words going beyond "what is said" to "what it means". I'd love to hear the take from your analysts at HeavyReading on this.
DZED 12/5/2012 | 3:20:42 AM
re: Bookham Soars on Nortel News Bookham 'soars'. a year ago this stock was effectively worth $25, now its $3. Hmmm.
This just shows how dumb people are.

Its very vague whether the $50m is extra business or just a commitment by Nortel to continue buying at about the usual volume. Nortel orders were tailing off anyway, a 'last-time-buy; usually generates a bit of a blip, what happens after that? $50m over 12 months, thats $12.5m per quarter. At negative margin thats not going to help much.

Since Bookham loses money on every product it sells I don't see how its good news.

What it really demonstrates is:

Bookham has failed to get its China operation up to speed in anything like a useful timeframe. Its been going 18 months and they are STILL running double lines? This is the shoddy and inept management Bookham is famous for.

Bookham has an obsolete line up of products only Nortel wants. What is replacing the products Bookham is cutting?
Bookham itself has not brought a single product to market in the last five years. Every single 'new' product has come with the companies it has acquired over the years. The Bookham mgmnt team is incapable of driving product development. In the long run this outfit is doomed.

This is a short term blip, more smoke and mirrors, probably driven by Anania's desire to cash in the reserved stock he gave himself and get out.

lastmile 12/5/2012 | 3:20:40 AM
re: Bookham Soars on Nortel News "Sorry, but I'm a complete idiot."
So am I.
"LightReading - you seem to be just reporting, not analysing, the news"
I do not blame LR for the stock spike because BKHM stock started soaring ever without LR's participation.
There are too many idiots in this world, me included.
Apart from all this nonsense is there a prudent way to analyse this company or is it day to day news that makes it fluctuate +/- 97%.
deauxfaux 12/5/2012 | 3:20:39 AM
re: Bookham Soars on Nortel News New money being invested in BKHM defies logic. I'd rather go to Vegas.

Some of today's volitility could have been caused by short positions being covered, but I haven't looked at it today

DZED 12/5/2012 | 3:20:35 AM
re: Bookham Soars on Nortel News This press release really says nothing new, and raises more difficult questions.

Lets try to look through the hype and see what the real news is.

From Nortel:

"For the nine months ended September 30, 2004, Nortel experienced double-digit percentage drops in revenues for its wireline and optical networks business segments."
http://www.lightreading.com/do...

So Nortel wants more components, and at a higher price? Really?

From Bookham:

"Bookham, Nortel Extend Agreement"

Note the use of 'extend'. Not expand, change etc. This is the same old agreement, just extended since if Nortel called in the loan note now Bookham, being insolvent, would fold, leaving Nortel short of components.

"As part of the agreement, Bookham expects to receive orders from Nortel Networks for shipment over the next twelve months for approximately $50 million of products Bookham is discontinuing as part of its transfer of product assembly production to Shenzhen, China."

Nortel currently buys ~ 40%x$180m = $72m a year from Bookham. So they are agreeing to buy $50m next year, plus a certain amount more to be agreed in the next 15 days.
So is this more or less than last year?

Another way of looking at it, in future years 70% of Bookhams typical Nortel revenue will be discontinued, thats 30% of Bookhams total revenue.
Is that good news?

And what is going into Shenzhen? If 70% of Nortel business is going, what does that leave to transfer?

Its interesting to see the bit "Bookham and Nortel have agreed to product pricing increases and amended payment terms for a 12-month period."

I'm guessing this means Nortel will settle their bills quicker to help Bookham's cash flow.
As Bookham now has as many suppliers as it can on 90 day payment terms it is now surviving courtesy of its suppliers good will. If I were a Bookham supplier I would be getting very nervous.

Please tell me I'm wrong on this.

DZED
waverunner 12/5/2012 | 3:20:35 AM
re: Bookham Soars on Nortel News I am not going to get into a BKHM analysis I think deauxfaux has got it right.

The stock is moving on momentum, on what is obviously spot business. I am short on the stock big time.

w
deauxfaux 12/5/2012 | 3:20:33 AM
re: Bookham Soars on Nortel News DZED

That was an interesting view of the press release. I can't find any assertion that the total amount of the supply agreement is going to be greater than last year's purchases. Bookham implies that this is so, but not strongly.

It will be interesting to see what announcements, if any, they make when the agreement is finalized. The reality is that NT can't easily extricate itself from BKHM, and BKHM is dead without NT. This symbiosis should worry anyone who is looking for objectivity from a joint press release.

Their quarter has ended. Lets see what the numbers say
deer_in_the_light 12/5/2012 | 3:20:29 AM
re: Bookham Soars on Nortel News I have the same read on the PR, deperate joint attempt by BKHM and NT to salvage the stock.
Pretty sad, actually.
DZED 12/5/2012 | 3:20:15 AM
re: Bookham Soars on Nortel News I guess some more questions are:

Why did Nortel and Bookham bother putting out half a press release, nothing is really agreed until its ratified on April 29th.

Is the $50m extra business or just a restatement of business as usual? 12 months is a long time for a 'last-time buy' and Nortel sales of optical systems aren't exactly strong.

Is this just an exercise to prop up the Bookham share price?
If so is there another funding event around the corner, or is it just so the CEO and CTO can flog off their undeserved stock bonus?

The key I guess is without rescheduling the loan note Bookham would otherwise be insolvent.

I will be surprised if total orders from Nortel are significantly higher than last year. The analysts seem to have swallowed this apparent double booking of revenue by Bookham.


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