Corvis: No New Customers
Corvis Corp. (Nasdaq: CORV) blew the doors off revenue expectations yesterday, but with no new customers announced, analysts are less than thrilled with the news.
The company reported revenue of $84.1 million, well above analyst expectations of $64.9 million (see Corvis Announces Q1 Results). On the surface this news looks terrific, with revenues increasing over 80 percent compared with last quarter’s revenues of $46.0 million. But future quarters will be difficult for the company due to pricing pressures, according to David Huber, chairman and CEO, who acknowledged that Corvis is not immune to the current market conditons.
Currently, Corvis only has three announced customers: Broadwing Communications (NYSE: BRW), Williams Communications Group (NYSE: WCG), and Qwest Communications International Corp. (NYSE: Q). Rumors have been circulating over the past several weeks that the company is poised to announce two new customers by mid-year (see Corvis Closing in on New Customers). But on the call yesterday Huber told analysts that no new customers are expected be announced until the end of the year.
“We are aggressively continuing to look for new customers,” he said. “But the current environment is making sales cycles even longer. All I can tell you is conversations with potential customers are positive. But we can’t talk about potential customers without talking about tighter access to capital and delays in finalizing capital budgets.”
What’s more, only Broadwing and Williams actually generated revenue this quarter, with $65 million of the $84 million coming from the Broadwing contract. And Broadwing, which was contracted to spend $200 million, has essentially completed the build-out of its network.
While Williams is expected to continue generating revenue, Corvis executives said the Qwest contract wouldn’t generate revenue until the second half of the year (see Qwest to Build National Net With Corvis). This has some analysts wondering how Corvis will hit its $315 million revenue guidance at the end of the year.
“Whatever they plan to get from Williams and Qwest doesn’t look like it will add up to $315 million in revenue,” said Alex Henderson, an analyst with Salomon Smith Barney. “The way it looks now, new customers won’t be generating revenue this year at all.” In his research note issued to investors this morning, Henderson downgraded Corvis from Outperform from Buy.
Company executives also mentioned that pricing pressure from competitors has hurt gross margins. Huber explained that even though Corvis’s all-optical switches offer better price performance than its competitors' OEO (optical-to-electrical-to-optical) switches, competitors are dropping the price of their products down so low that cash-constrained carriers can’t resist going with their products.
This talk about the relative economics of all-optical and OEO switches may be a bit of a red herring. Corvis's all-optical switches get a lot of press, but most of its revenues are thought to come from transmission equipment -- and that's where Corvis faces direct competition.
“Our competitors are reducing their prices to retain market share,” said Huber. These pressures have pushed gross margins down to 37 percent this quarter and could force them down even lower over the next few quarters, said Anne Stuart, senior vice president and chief financial officer.
But some analysts don’t see this argument adding up, considering that Ciena Corp. (Nasdaq: CIEN), a direct Corvis competitor, reported gross margins of about 45.5 percent during its last earnings call. And those margins are expected to increase over the next quarter.
“Huber said that Corvis gear offers better price performance,” said one analyst who had been on the call. “But that’s a blatant lie. If that were true their margins would be better than Ciena’s and they wouldn’t be going down, they’d be coming up.”
Corvis executives also stated that inventory grew this quarter to $231 million. Analysts noted that this is up from $219 million last quarter. The growing inventory concerns some, who caution that if Corvis doesn’t find new customers soon it will be forced to write off the inventory. This is the situation that Cisco Systems Inc. (Nasdaq: CSCO) found itself in when it was forced to write off about $2.5 billion worth of inventory (see Ripples Spread From Cisco Write-Off ).
“Based on the way they are ramping up their inventory levels,” says Seth Spalding, an analyst with Epoch Partners, “they are highly dependent on customer wins to avoid some significant writeoffs.”
Research and development costs increased from $30 million to $41 million this quarter. Corvis executives attributed much of this increase to internal test beds established for customer trials. The company’s head count also increased from about 1400 to more than 1600 this quarter.
Corvis was down only slightly in after-hours trading, only 20 cents off its close of $7.89 a share.
-- Marguerite Reardon, senior editor, Light Reading http://www.lightreading.com