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

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iprsvp 12/4/2012 | 8:30:34 PM
re: Corvis: No New Customers "Corvis executives also stated that inventory grew this quarter to $231 million. Analysts noted that this is up from $219 million last quarter"
If I am a share holder of CORV that would make me dump all of my CORV shares!!
iprsvp 12/4/2012 | 8:30:33 PM
re: Corvis: No New Customers As of today
1. total inventory $231M.

2. Head Count # 1600.

3. No New Customers

4. Qwest contract wouldnGÇÖt generate revenue until the second half of the year.

5. "Huber explained that even though CorvisGÇÖs 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 canGÇÖt resist going with their products"--

6. CEO, who acknowledged that Corvis is not immune to the current market conditons

WOW!!! for me it is better a warning to dump all my corv stocks.
netskeptic 12/4/2012 | 8:30:32 PM
re: Corvis: No New Customers I am wondering, if shareholder value is the primary goal, then how long it will take for these guys to move into asset management mode: lay off everybody, free office space, put money into high interest accounts and keep going this way intil the situation improves ?

For example, another network company (Cosine, stock symbol COSN) reported recently, it seems like the bulk of their income is a simply interest on cach they have. I am not sure but it seems to me that Sycamore is in somewhat similar situation.


cfaller 12/4/2012 | 8:30:28 PM
re: Corvis: No New Customers Where are all those CORV stockholders that praised LR for their "unbiased" coverage on the rumor of new customers?

It now turns out that the article, which showed "journalistic integrity", was wrong. It was based on rumor, but since they were good rumors about CORV, the stockholders loved it.

How do you people like LR now?
Xcited01 12/4/2012 | 8:30:28 PM
re: Corvis: No New Customers Folks:

While the analyst community may not be bright enough to see it (nor did Corvis do a real good job announcing it) Qwest is a new customer.

The original contract with Qwest was for Corvis Algety OC-768 product. This was a development contract that created revenue in late 2001/02.

The announcement for the Qwest All-Optical Network is for Corvis AON products - The same products going into the Broadwing and Williams networks. This is a National Overbuild of the Nortel 1600LH product line.

Therefore, be down on Corvis if you want, but this company will be very successful overbuilding legacy networks built with Nortel and Lucent gear.

Mark my words - Xcited01 -
optera 12/4/2012 | 8:30:26 PM
re: Corvis: No New Customers If you think Nortel's next generation product is a legacy product, think again. Nortel's Long Haul Optical Line Systems are the next generation backbone solutions. With unprecedented flexibility the 40Gbps/80Gbps are the industryGÇÖs first integrated systems with the most cost effective solutions.

Only the strong will survive. Live long and see

(Optical Survivor series....)
lightsource 12/4/2012 | 8:30:22 PM
re: Corvis: No New Customers frankly speaking, at this price stock seems really attractive :) and with around $3 in cash, there's very little to lose.
John Honovich 12/4/2012 | 8:30:15 PM
re: Corvis: No New Customers this is just terrific

we get to see corvis' and nortel's marketing people make their pitches on the message board
Sparxe 12/4/2012 | 8:30:13 PM
re: Corvis: No New Customers i like LR fine. My only beef is that sometimes news is not posted fast enough. In addition I would like to see them connect the dots a little better. Last nite they should have linked the stories about Qwest, Microsoft and Corvis together in a feature article.

By the way, reliable sources say there are two excellent cutomers in the wings. I made good money with Corvis in the $80 range. At < $10 its a no brainer.
Sparxe 12/4/2012 | 8:30:13 PM
re: Corvis: No New Customers I often wonder who comes on these boards. I expect to see savvy long term Investors and Daytraders. More often its people who are so pessimistic, I wonder how they can trade.

Xcited01 is giving people some good advice, The smart money will listen to him. Not only is Qwest a GREAT customer, but almost every stupid ass analyst did not realize that Qwest expanded their contract with Corvis at the same time they took over a large portion of the Microsoft Network's MSN business in at least 14 states. Word on the street is that the CORV technology was what Joe Naccio (CEO, Qwest) sold MS with. Qwest, MSN and Corvis are probably up to more then they announced too. This is the cream of the crop in customers. If you noticed ALL of CORV customers are solid financialy.

At $6.48 CORV still has $3.50 in cash on hand. Their technology is going to have less competition, because IPO's are not coming back in 2001. CORV is barely moved in to its new facilities and their aquisitions are not in full production. What CORV is doing is using this downturn to become a force majure when the tech bell goes off again. CORV did not put the Oil Barrons in the White House. Until they get their way to go pump Texas-T in Alaska... Tech is their prisoner of war. Gas heading for 3 bucks a gallon is still the fear EVERY American and business is living with.

Xcited01 is right to note that CORV did a poor job of announcing their progress. Watch out, I think that is done with a purpose. CORV is loathe to tip off their competitors. Lowball system pricing will hurt Corvis in the short run. However, sooner or later it will bite the sellers and buyers of it in the butt. They will not make enough profit and the buyers will be stuck with antiques. Anyone who would be selling their CORV shares now due the bullcrap downgrades heard today is making a big mistake. Anyone who has the cash should be buying. For a long term Investor $10k on CORV Monday, will buy you a house in less then 24 months. And you can mark my words too.

Sparxe Nj
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