Corvis's Future Brightens

Corvis Corp. (Nasdaq: CORV) executives offered investors a glimmer of hope on yesterday’s quarterly conference call. The news was well received, boosting the company's $3.20-a-share stock up 0.50 (15.29%) to 3.77 in midday trading, while the rest of the sector suffered from the huge loss reported by component powerhouse, JDS Uniphase Inc. (Nasdaq: JDSU).

Corvis met analyst expectations for Q2 of 2001 (see Corvis Reports on Q2). But the big news of the day was the announcement of two new customers, along with its reiteration that it plans to cut spending and focus on profitability (see Corvis Wins Spanish Deployment).

”I said on the last conference call in April that new customer additions would be difficult,” said David Huber, CEO of Corvis. “Conditions haven’t improved that much, yet Corvis has made significant progress.” Analysts were pleased with the news.

“I’m happy the company has reduced its cash burn rate,” says Jim Jungjohann, an analyst with CIBC World Markets. “The stock will still suffer from customer concentration issues for some time going forward, but the key takeaway is they’ve downsized the company to break even by summer 2002.”

Rumors of a new customer have been circulating for well over a month, and Light Reading had fingered France Telecom SA as the likely candidate (see Corvis's French Connection). But just before yesterday’s call, Corvis announced it had signed deals with not one, but two major carriers. Yet, it only provided the name of one of those customers -- Telefònica. Analysts and traders say they are still confident the second unnamed customer is France Telecom.

“Everyone on the Street knows its France Telecom,” says one hedge fund trader. “I’m confident that’s who it is.”

Financial details regarding either contract weren’t given, but the Corvis release noted that Telefònica had agreed to buy the CorWave XF repeaterless link technology, which allows carriers to transmit up to 800 Gbit/s over 350 kilometers without using in-line amplifiers. The system will be deployed in Telefònica's existing core fiber cable system, connecting the island of Mallorca with Telefònica's backbone network in Spain.

Anne Stuart, senior vice president and CFO for Corvis, told analysts on the call that the other unnamed contract was in its early stages, but she expects the relationship to grow and reap bigger benefits in 2002.

Adding new customers is critical for Corvis, which up to this point had only announced three: Williams Communications Group (NYSE: WCG), Broadwing Communications (NYSE: BRW), and Qwest Communications International Corp. (NYSE:Q). During the quarter, Williams accounted for 55 percent of revenue and Broadwing accounted for 45 percent. The company’s contract with Qwest to build its all-optical express network should start generating revenue in the next quarter, says Stuart. In addition, the company also announced it was moving forward on field trials with Florida-based carrier, EPIK Communications.

As for the quarter, Corvis reported pro forma revenues of $65.0 million in Q2, in line with its guidance of revenues between $60 million and $70 million, but way down from the Q1 revenues, which exceeded expectations last quarter by coming in at $84.1 million.

Pro forma net loss for the current quarter was $32.2 million, or $0.09 per share, compared with a pro forma net loss of $22.4 million, or $0.07 per share for the second quarter of 2000. According to its press release, Corvis's net loss was $821.8 million, or $2.36 per share, compared with a net loss of $100.7 million, or $2.51 per share, for the second quarter of 2000.

Restructuring charges totaled $714.6 million and included a $99.2 million write-down of excess and obsolete materials, excess purchase commitments, and discontinuance of product lines. It also accounted for the one-time write-down of goodwill associated with the Algety Telecom acquisition and an $18.4 million charge for staff reductions.

Despite this big loss, Huber and Stuart reiterated the company’s commitment to working toward profitability by mid 2002.

“We have made a pro forma break-even goal by Q2 2002 a top priority,” said CFO Stuart. “The restructuring charges are key to getting this done.”

Stuart outlined drastic spending cuts and reported that the company had already reduced its burn rate by 28 percent in Q2 from Q1. Earlier in the quarter the company announced a voluntary layoff plan, which has cut the work force by 286 employees to 1,339 (see Corvis Cuts Back).

Moving forward, the company remained focused on providing guidance through 2001 without much insight into 2002. Stuart said that in the second half of this year she expects the company to generate between $165 million and $175 million in revenue from four of the five customers. Corvis is already on track to deliver about 75 percent of orders already booked. The company also expects pricing pressure to continue, with gross margins holding at around 20 to 30 percent.

“I don’t think the market conditions have changed much,” said Huber. “I’m not predicting a turnaround anytime soon, especially with the current capital markets still quite slow. But I am pleased with our results to date.”

- Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com