Corvis: Time to Come Clean?
A week or so ago, the share price of Corvis Corp. (Nasdaq: CORV)
went into free fall after rumors circulated that Corvis was being dumped by one of its customers (see Corvis Stock Tanks). The scuttlebutt at the time was that Qwest Communications International Corp. (NYSE:Q) was planning to scrap its $150 million contract with Corvis in favor of ordering more gear from Ciena Corp. (Nasdaq: CIEN).
Whether this is true or not is hard to determine, as are many things associated with Corvis. "Every time I hear anything about Corvis it’s all rumor and hearsay," says Scott Clavenna, president of PointEast Research and director of research at Light Reading. And that is a fundamental problem. Investor confidence in the company is fragile because so little is known about it.
Right from the beginning, Corvis’s founder, president, and CEO, David Huber, has refused to explain the technology underpinning his developments and has gotten away with it because of who he is – the person who founded Ciena and thus has enormous credibility in the financial community.
Huber has also sought to control the telecom carriers who are assessing the technology. The three that have agreed to buy Corvis equipment have received hefty incentives in the form of opportunities to buy Corvis stock at a discount. As a result, their value as customer references is muddied.
“There’s not a lot of proof points when it comes to weighing up the value against the hype,” acknowledges Chris Nicoll, director of infrastructure analysis at Current Analysis, who says, nonetheless, he’s a big believer in Corvis. “It doesn’t give investors a whole lot to hold on to.”
Corvis itself doesn’t perceive this as a problem. "I have not had one complaint [about non-disclosure] from our investors," Shyam Jha, vice president of marketing, told Light Reading at the NFOEC show in late August. More recently, Corvis has declined to comment on the record for Light Reading.
Financial analysts don’t seem too worried about the lack of information on Corvis’s technology, saying that they’re not in a position to assess it anyhow.
The IPO was sold on the basis of Huber’s background, according to an analyst at a big fund management company, who asked not to be identified. In Corvis's road show prior to its IPO, Huber’s presentation was “I’m David Huber and I’m wonderful,” says the analyst. “There was very little meat in it."
In fact, the company received one of the most astronomical valuations ever given to a pre-revenue company -- it attained a $28 billion dollar market capitalization on the day it went public in July.
But now that Corvis shares have slumped to $27 from a high of more than $114, the Huber hype is losing some its power, and analysts are looking for customer contracts to prove that Corvis really does have the breakthrough technology it claims.
Unfortunately, it’s hard to separate fact from fiction on this front, mainly because Corvis and its customers don’t have a simple seller-buyer relationship. On occasion, in fact, they appear to be working together to make it tough to figure out what’s really going on.
The company has a $200 million contract with Broadwing Communications (NYSE: BRW), a $200 million contract with Williams Communications Group (NYSE: WCG), and a $150 million contract with Qwest. In general, the value of such contracts isn't cast in stone; there are plenty of ways for carriers to pull out.
“I wish they would announce more customers,” says Nicoll of Current Analysis. He thinks Corvis has more customers but can’t identify them. Corvis denies this, although in his latest earnings call with analysts, Huber said other customers would be announced this quarter (see Corvis Shows Upside Surprise).
A source with links to Corvis says that Qwest is planning to cancel its contract and buy more gear from Ciena. On the other hand, Broadwing is planning on buying a lot more Corvis equipment, possibly as much as $1 billion worth, the source adds. Corvis and Broadwing say they won't comment on rumors.
In any case, Broadwing appears to be furthest ahead in actually deploying Corvis equipment. In last month's earnings call, Huber said that all of Corvis's revenues to date had come from Broadwing and that field trials with Williams were "progressing as scheduled." Revenues from Qwest weren't expected until the first half of next year.
It may just be coincidence, but this state of affairs seems to reflect each of these carriers’ shareholding, or potential shareholding, in Corvis.
Some of this came out when Corvis registered its plans to stage an IPO with the Securities and Exchange Commission. Its S-1 filings disclosed that Broadwing had stock that converted to 4,470,396 common shares at the time of Corvis's IPO. Williams had the equivalent of 1,490,124 common shares. Each company also had the opportunity to buy a further $5 million worth of common stock at the offer price of $36 (see Corvis Closes in on IPO ). Qwest is listed in an S-1 amendment as having warrants to buy an unspecified amount of Corvis stock.
Soon after Corvis’s IPO, on Aug 4, Broadwing issued a statement saying that it had exercised options to buy a total of 8 million shares in Corvis over the previous three months. It had paid a total of $44 million, it said, an average of $5.50 per share.
At that time Corvis’s shares had been trading at $92, meaning that Broadwing’s holding in Corvis was worth $736 million. Even now, Broadwing’s holding is worth $216 million, still slightly more than the value of its contract with Corvis.
Under these circumstances, it’s tempting to view Broadwing’s announcements of successful trials with Corvis equipment as little more than joint marketing exercises.
Broadwing and Corvis’s most recent announcement on this score was on August 21, when Broadwing declared that it had succeeded in transmitting 10 Gbit/s over a distance of 4,000 kilometers using Corvis’s ultralong-haul DWDM (dense wavelength-division multiplexing) equipment (see Corvis Drives 4,000 Kilometers...).
Since then, Light Reading has been told by a Corvis competitor with connections in Broadwing that this distance record was achieved over a single channel. The other DWDM channels weren’t in use. If this is the case, then the trial wouldn’t mean very much.
The same source also alleges that Broadwing didn’t have any 10 Gbit/s test equipment at the time it conducted its trial, which raises questions over how its success was established.
Corvis and Broadwing couldn’t find anybody to comment on these rumors.
At any rate, there are still plenty of questions to be answered, and until they are, investors will continue to confront a conundrum. Millions of insider shares have yet to be unlocked since the IPO, meaning that customers, venture capital investors, and company executives such as Huber have not been able to sell their shares on the open market. Williams has already announced its intention to sell some of those shares when the lockup period expires, which is expected to be in January.
-- Peter Heywood, international editor, Light Reading http://www.lightreading.com