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Avanex Shares Stumble

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News Analysis
Light Reading

In midday trading, shares of Avanex Corp. (Nasdaq: AVNX) fell $4.25, or 17.75 percent, to 19.69 after the company lowered previous guidance for its third fiscal quarter (ending March 31, 2001) and for the full year. With this warning, Avanex confirms the validity of the cautionary statements that were echoed by company management and several analysts following the release of second-quarter earnings (see Avanex Slips on Cautious Outlook).

The company announced that it now expects revenues to be approximately $41 million, with pro forma earnings between 2 cents and 3 cents a share. These revised projections compare to year-ago revenues of $10.5 million and a 4-cent loss. Company officials also said that revenues for fiscal 2001 are now expected to be about $169 million versus $41 million in fiscal 2000. For the year, pro forma diluted earnings are expected to be 15 cents to 16 cents a share.

“Investors are not going to reinstate a premium valuation on a company like Avanex until the overall uncertainty in the space improves,” commented Lehman Brothers analyst Steve Levy in a research note on Wednesday morning. Levy cut his rating to Market Perform from Strong Buy and lowered his earnings estimates for 2001 and 2002. For 2001, Levy lowered his earnings estimate to 15 cents a share from 26 cents a share, and trimmed his 2002 forecast to 31 cents a share from 76 cents a share.

Commenting on the quarter, Avanex Chairman and CEO, Walter Alessandrini, said that “orders for our more mature product line -- PowerFilter -- have been temporarily impacted by the lower spending on legacy systems, even though we continue to see significant increases in international orders, in orders for our next-generation products, and in the number of customers we serve.”

Company officials also expect next-generation PowerExchanger and PowerMux products to represent more than 70 percent of its third-quarter sales, as compared to about 45 percent in the second quarter. International sales are expected to grow to over 50 percent of revenues, versus roughly 20 percent in the second quarter. Part of the increased revenue contribution from international operations resulted from Alcatel SA (NYSE: ALA; Paris: CGEP:PA) becoming a new 10 percent customer.

In addition to a lowered rating from Lehman, UBS Warburg and U.S. Bancorp Piper Jaffray also downgraded Avanex shares.

UBS Warburg analyst Joseph Wolf believes that WorldCom Inc. (Nasdaq: WCOM) was mostly to blame for the weak quarter. He notes that Avanex’s largest customer experienced a seasonal inventory buildup, which caused the order deferrals. In lowering his rating to Hold from Buy and dropping his target price to 18 from 100, Wolf noted that even now that it has been reduced to 30 percent of revenue, "WorldCom remains one of the biggest risks to Avanex’s stock."

-- Christopher P. Bulkey, special to Light Reading http://www.lightreading.com

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