Avanex Slips on Tepid Outlook

Shares of Avanex Corp. (Nasdaq: AVNX) plummeted today after an earnings miss and a disappointing forecast.

In the company's earnings call Monday night, CEO Jo Major said the company still has some restructuring to undergo, opening the prospect of more layoffs. Avanex also forecasted revenues to be flat this quarter compared with last quarter.

Overall, Major described an optical components industry still in flux. "On a quarter-to-quarter basis, visibility is limited," he said.

Investors didn't like the sound of that, apparently. The stock fell by as much as 46 cents (20%) to $1.86 this morning. By midday it was down 36 cents (16%) at $1.96.

For its second quarter, which ended Dec. 31, Avanex reported losses of $24.4 million, or 17 cents per share, on revenues of $41.9 million. Avanex's first-quarter results showed losses of $22.3 million, or 16 cents per share, on revenues of $35.8 million.

For its second quarter a year ago, Avanex reported losses of $33.5 million, or 25 cents per share, on revenues of $26.9 million.

Avanex's pro forma losses, which exclude items such as inventory writeoffs, were 11 cents per share -- a shade worse than analysts' consensus forecast of 10 cents, according to Reuters Research.

Avanex also disappointed with its forecast of flat revenues for the third quarter.

Major noted that the industry typically sees price renegotiations in January, making the March quarter inherently weak -- and that price competition remains tough. "We're going to see real robust competition on the price line for some time," he said, although he added that the pricing situation isn't necessarily worse than in the recent past. "I don't see any trend that says it's getting easier out there or any harder."

Avanex also had some customers rush their orders at year's end, which shifted some would-be January business into the December quarter. That helped increase second-quarter revenues but ultimately will take away from third-quarter results.

Avanex's ongoing restructuring included layoffs of 210 North American employees in December, and more cost-cutting plans are in the works. Major noted that it should take "two to four quarters" for Avanex to see the benefits of any cuts.

On the plus side -- barely -- gross margins crossed into positive territory, at 3 percent on a pro forma basis, for the first time in two years. (Gross margins calculated by generally accepted accounting principles were negative 6 percent.)

But 3 percent isn't much to cheer about; that figure is just "a stepping stone" and "not where we want the business to be," Major said. By contrast JDS Uniphase Corp.'s (Nasdaq: JDSU; Toronto: JDU) gross margin fell to 16 percent last quarter, and Cisco Systems Inc. (Nasdaq: CSCO) investors are worried that gross margins have dropped to 67 percent.

But how to improve margins? One area Major intends to investigate is research and development. "We're asking the team here to really look at our R&D programs. We want to make sure that investment is going wisely."

But Major doesn't intend to gut research, which represented 19 percent of revenues last quarter. R&D teams that don't make the cut will simply be moved to more lucrative projects. "We're going to remain a company that invests strongly in R&D."

Analysts seemed unfazed by Avanex's troubles. "We continue to believe that Avanex is a solid play on rebounding optical spending," wrote analyst Eric Zamkoff of IRG Research in a note issued this morning. Zamkoff noted that Avanex is getting pieces of the U.S. government's GIG-BE next-generation network and an Air Force RFP, and he likes the company's prospects in submarine deployments and telco fiber-to-the-premises (FTTP) buildouts.

And the flat March quarter might not be as disappointing as it seems. "Some annual, one-time, and currency effects are embedded in the expense guidance, masking incremental progress," analyst John Harmon of Needham & Co. said in his research note.

— Craig Matsumoto, Senior Editor, Light Reading

dmw_qqqq 12/5/2012 | 3:28:06 AM
re: Avanex Slips on Tepid Outlook The analysts' reports sound funny to me...let's wait and see what they have to say when next report of AVNX comes out.

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