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ONI Bucks the Trend

Light Reading
News Analysis
Light Reading
10/31/2000

After a wave of bad news from optical big shots like Nortel Networks Corp. (NYSE/Toronto: NT) and Lucent Technologies Inc. (NYSE: LU) last week, ONI Systems Inc. (Nasdaq: ONIS) reported positive results for its third quarter, after the market closed today.

Investors anticipated the good news, pushing ONI's stock up 15 percent during the day to $81 a share. After the earnings call, some of this gain was clawed back in after-hours trading, leaving it at just over $78 on Instinet.

Here are the numbers. Net loss decreased to $16.2 million, or 14 cents a share, a nickel better than analysts expected. Revenues increased to $16.4 million, up 73 percent over Q2 revenues. Gross margin as a percentage of revenue also increased from 27.6 percent in the second quarter to 32.1 percent this quarter.

Going forward, the company expects sequential revenue to grow 25 percent in the fourth quarter and increase to 35 percent in the first and second quarters of fiscal 2001. Additionally, executives say they expect to break even in the fourth quarter of fiscal 2001. Analysts currently expect a loss of three cents.

ONI attributes the positive results to a high demand for products from current customers and the addition of several new customers. Some of the deals announced this past quarter include, Sphera Optical Networks Inc., EPIK Communications (worth approximately $4 million), Internet Initiative Japan Inc. (Nasdaq: IIJI) (worth $30 million over two years), and a multi-year deal with Qwest Communications International Corp. (NYSE:Q).

Despite the addition of several new customers, trouble could be lingering down the road. On the call with analysts, executives said that six of the company’s 13 customers are competitive local exchange carriers (CLECs). This could prove to be a problem as the capital market for CLECs becomes more constrained, leaving many service providers without cash to finish building out their networks. Some vendors have already fallen victim to the CLEC plight, and analysts warn that metropolitan vendors could be the most vulnerable to the squeeze (see Analyst Report Defends Optical).

But ONI executives said on the call that they are not worried. “We see a growing demand for our products,” said Hugh Martin, CEO of ONI. “We haven’t seen a slowdown in capital spending at all.”

On the positive side, at least one incumbent local exchange carrier (ILEC) was added to the list of customers along with three interexchange carriers, said Martin. But he did acknowledge that the incumbents would be slow to deploy new optical gear and he doesn’t anticipate a significant revenue stream from ILECs until 2002.

The company also expects to leverage its interoperability partnerships with companies like Juniper Networks Inc. (Nasdaq: JNPR) to win more significant customers in the coming quarters.

ONI increased inventory for the quarter roughly 25 percent from $38.5 million last quarter to $51.3 million this quarter in anticipation of a component shortage.

But executives reassured analysts that because the components in inventory have little chance of becoming obsolete before they are used, an increased inventory has worked to the company’s benefit.

“We have to carry more inventory to meet the needs of our customers,” said Martin. “I would hate to lose customers because we couldn’t fill an order.”

-- Marguerite Reardon, senior editor, Light Reading, http://www.lightreading.com

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