Corvis's Qwest Deal Reduced by $138M
The newly amended contract specifies a minimum purchase of $12 million worth of DWDM transport and/or switching gear from Corvis within the next two years, a paltry fraction of the original $150M deal. According to the 8K form Qwest filed today with the Securities and Exchange Commission (SEC), $7 million must be purchased by the end of this year and the other $5 million must be purchased by the end of 2003. The contract explicitly states that Qwest will not be obligated to purchase any equipment beyond the $12 million.
"Because of the rapid pace of change in technology in the area of telecommunications equipment and the uncertainty as to the exact nature of Qwest's future system needs, it is agreed that, notwithstanding any other provision of this Agreement, Qwest shall have no binding obligation to purchase Corvis Equipment beyond the specified amount," reads the 8K.
The original contract between Qwest and Corvis, which was announced in June of 2000, called for Qwest to purchase $150 million of equipment within two years. So far, Qwest has not purchased any gear from Corvis. Back in February, the carrier cancelled a $110 million purchase order from Corvis (see Corvis: How Low Can It Go?).
Despite the drastically reduced terms of the deal, some analysts tried to stay optimistic, saying that any deal in this environment is better than nothing.
"It’s really a mixed bag," says Simon Leopold, an analyst with Merrill Lynch & Co. Inc.. "It’s positive that they still have the Qwest contract, but the minimum purchase is less than people had hoped."
Even for Corvis, which is only expected to announce a total of $7 million in revenue for this quarter, $12 million isn't much to write home about. But analysts say that the revamped contract is important because it is a validation that carriers are serious about the Corvis technology.
"From a financial standpoint this doesn’t mean a ton yet," says Rick Schafer, an equities analyst with CIBC World Markets. "It’s really a technology validation." (CIBC has done investment banking for Corvis).
Along with the purchase requirements, the contract was also amended to possibly include the purchase of the new OCS switch, an optical grooming switch. Qwest is still in the evaluation stage, but the fact that it is willing to test the OCS is significant. Broadwing Inc. (NYSE: BRW), which has deployed Corvis's transport gear and non-grooming optical switches, has also indicated that it will test the OCS (see Broadwing to Test Corvis Switch). What’s interesting to note here is that both Broadwing and Qwest have been using the CoreDirector from Ciena Corp. (Nasdaq: CIEN) as its grooming switch. CoreDirector and the OCS are positioned directly against each other.
"This reinforces our view that Ciena's CoreDirector faces increased competition this year," writes Leopold in a research note sent out to investors today. "It also provides a data point hinting at a potential recovery for Corvis."
Corvis will report its earnings after the market closes tomorrow. Today it's stock closed slightly up $0.009 (0.72%) to $1.259.
— Marguerite Reardon, Senior Editor, Light Reading