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Optical/IP

Avanex Slips on Bad News

Avanex Corp. (Nasdaq: AVNX) took a hit today after the company announced that it had lowered its guidance for the quarter, which ended June 30th, and would cut another 300 jobs from its workforce (see Avanex Lowers Guidance).

The company, which makes components that increase the capacity of fiber optic networks, didn’t have a conference call for investors but simply stated in a press release that it expects fiscal fourth-quarter sales of about $18 million, lower than its original guidance of $25 million. The company also said it will take a restructuring charge of $26 million to $28 million, larger than the $18 million to $24 million it originally expected. And it expects further charges between $12 million and $14 million for excess inventory and purchase obligations that cannot be canceled.

About 90 percent of the 300 jobs cut will be in manufacturing as the company starts outsourcing, says Tony Florence, vice president of corporate communications for Avanex. This takes the current head count down to about 400 employees, quite a switch from a year ago when the company had about 1,150 workers.

“Our strategy is clear: We are taking strong actions now that will enable us to weather the storm until the fiber optics industry improves. Coupled to our strong cash position, new developments in technology, and new product offerings that we continue to introduce into the marketplace, the restructuring actions we are completing now will put us in the best possible position for growth when the economy improves," said Paul Engle, President and CEO of the company, in a prepared statement.

Like other companies that have pre-announced going into the July earnings season, Avanex says it has fallen victim to a chain reaction caused by a slowdown in carrier spending. Analysts covering the company are not surprised by the announcement, as other optical component companies like JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU), Agere Systems (NYSE: AGR), and Bookham Technology PLC (Nasdaq: BKHM; London: BHM) have all pre-announced disappointing revenue and job cuts (see JDSU Warns of Another Shortfall).

In addition, its customers, Nortel Networks Corp. (NYSE/Toronto: NT), WorldCom Inc. (Nasdaq: WCOM), Alcatel SA (NYSE: ALA; Paris: CGEP:PA), and Fujitsu Ltd. (KLS: FUJI.KL), are also struggling. Nortel, which is one of its largest customers, pre-announced poor quarterly results last month, sending the market reeling (see Nortel's Nuclear Winter). WorldCom, another big customer, didn’t pre-announce earnings, but it has announced significant cutbacks in capital spending. Avenex’s Florence said in a phone interview that the company was seeing a slowdown in its international customers as well, indicating that sales to Alcatel and Fujitsu have also been curbed.

Even though most investors anticipated this bad news, Wall Street still reacted harshly, sending the company’s stock down 1.55 (15.98%) to close at 8.55. This is very different from the investors’ reactions to Agere’s pre-announcement on Friday, which actually sent the company’s stock up (see Agere's Good Bad News).

Tim Anderson, an analyst with of Salomon Smith Barney cites a couple of reasons for this difference. For one, Avanex is a much smaller company with less breadth in its offering.

“The smaller players will struggle more through this period simply because they don’t have the mind share that the larger players do,” says Anderson. “Also, their customer base and product offering is more concentrated, and that increases the risk.”

Secondly, from a valuation perspective, the company is trading at a much higher multiple than Agere, he says. The price-to-revenue ratio for Avanex is about eight, based on 2002 revenues, compared to Agere’s ratio of 2.5. He adds that JDSU is also trading at a high multiple, but because Avanex is a much smaller company, the risk is more concentrated.

Finally, the company is not profitable at the moment. While Avanex still has plenty of cash on hand, about $105 million, Anderson still is extremely cautious about the company and has rated them a Neutral.

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

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