Corvis: How Low Can It Go?

Corvis Corp. (Nasdaq: CORV) shares fell further this morning as investors reacted to news of the company’s fourth-quarter 2001 earnings (see Corvis Losses Up From Last Year). The company’s stock was down $0.13 (8.07%) to $1.48.

The company has significantly cut its burn rate and eliminated all of its debt – good indications for the future. But the short-term outlook is dark and dismal, as the company struggles to win new customers.

The crowning blow was the announcement that Qwest Communications International Inc. (NYSE: Q), which was originally expected to start generating revenue late in Q4, has officially canceled its initial purchase order.

“We are continuing testing in the Qwest lab, and we are in the process of modifying the terms of the Qwest contract,” said David Huber, CEO of Corvis, on the call with analysts. “In light of this discussion, the original Qwest purchase order has been canceled. We are continuing to work with them, and we look forward to a long relationship.”

Late last year, Qwest announced that it would be cutting back on its spending and stopping work on new network buildouts (see What's Behind Qwest's Numbers?). So it is no surprise that plans for its next-generation Q3 network would be pushed back. What chiefly concerns Corvis trackers is that now the entire contract is up for grabs. Huber acknowledged on the call that Qwest was still deciding on suppliers to the Q3 network, including its transport vendors.

Excluding charges, Corvis reported a loss of $39.9 million, or $0.11 a share, for the fourth quarter. This was in line with analyst expectations, according to First Call. Its net loss was $374.8 million, or $1.05 a share, compared with a net loss of $89.7 million, or a loss of $0.27 a share, a year ago.

Revenues for the fourth quarter totaled $15.2 million, down 67 percent from $46 million a year earlier. Huber said he expects revenue for Q1 of 2002 to be flat to down and he would not give guidance beyond that.

Since last Monday, the stock has dipped $0.65 (28.76%) to close at $1.61 on Thursday. The shares have lost 90 percent of their value over the past 52 weeks.

The bottom line for some investors may be this: The company, which still had 982 employees at last count, is generating only $15 million in revenue per quarter and is still losing money.

The long-term question is whether business will turn around for Corvis before it burns through its existing cash. The company has $660.8 million in cash and no debt (seeCorvis Dorsal Deal: A Huber Spin-In?). It cut its burn rate this quarter to $55 million per quarter, $20 million ahead of expectations.

Rick Schafer, an analyst with CIBC World Markets is optimistic that the Qwest deal will still happen and that the company is managing its finances to make it to the next upturn in the telecom sector.

“Even if you assume they don’t make any money at all, they still have enough cash to last them three years,” says Schafer. “If they continue to manage their cash well, they could be in good shape in 12 months when the market is better. ”

CSchafer has reiterated a Buy rating on the stock. Another firm, U.S. Bancorp Piper Jaffray, downgraded the stock this morning to Market Perform from Out-Perform.

The main issue facing Corvis, of course, is a lack of customers. So far, the company has only announced four: Broadwing Inc. (NYSE: BRW), Williams Communications Group (NYSE: WCG), Telefònica, and Qwest. Broadwing and Williams are the only two that contributed to fourth-quarter revenues.

As for future guidance, Huber only gave a murky short-term view. He said he expects revenue to remain flat or down in Q1 2002. And he indicated that in addition to Williams and Broadwing, he expects two international customers to contribute to Q1. These customers likely include Telefonica and an unnamed PTT. Analysts are almost certain the unnamed international carrier is France Telecom SA (see Corvis's French Connection). Williams and Broadwing will likely not contribute much of anything to the quarter. Again, this isn’t a surprise, given that Williams is struggling with mounting debt levels (see Williams Winding Down?) and Broadwing is nearing the end of its network build.

— Marguerite Reardon, Senior Editor, Light Reading

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