ONI Shares Fall Sharply After Warning

ONI Systems Inc. (Nasdaq: ONIS) says its business has slowed down significantly in recent weeks and will continue to be slower than previously expected for at least the next six months (see ONI Lowers Guidance).

Investors predictably took their cue and started heading for the exits. ONI shares plunged $3.78 (45.16%) to $4.59 in morning trading on Friday. ONI's stock began the week trading at more than $10 a share.

The metropolitan optical equipment maker now expects it will see revenues in the range of $40 to $50 million for the third quarter ending September 30, 2001, down from its previous revenue guidance of $75 to $80 million. The company expects its pro forma net loss for the third quarter to be in the range of 17 to 21 cents a share.

It also predicts that its fourth quarter would be much worse than it had said during a July conference call. Revenue might be in the range of $40 to $50 million, much lower than the previously expected range of $85 to $90 million.

ONI also says it now expects its total customer count at year's end to be 28 to 30 customers versus the earlier estimate of 32 to 34 (see ONI Meets Estimates, Boosts Guidance).

The company says it will take a restructuring charge of about $50 to $60 million during the third and fourth quarters. Hinting at layoffs in its press release, ONI says that the charges "consist of near term actions to resize the business and reduce excess expenses."

Despite the grim news, some analysts still view ONI as the frontrunner in the metro optical market. In a note sent to clients on Friday morning, Salomon Smith Barney analyst Alex Henderson wrote, "ONI is one of the best companies in the sector." He and other analysts said that the metro would soon fall victim to the ongoing weakness in the long-haul sectors.

But the company isn't just a victim of a slowing sector, it's also a victim of a weaker customer base. Like many equipment makers, it started out targeting a group of startup carriers who have been whipped by the incumbent carriers because they couldn't find the funding nor the customers to support their businesses. At an investor conference in New York two weeks ago, ONI managers said that about half their current customers are competitive local exchange carriers (CLECs), many of which have not been faring well in the current financial climate.

The company has also acknowledged its missteps and has spent the past few months working to complete Telcordia's OSMINE certification process, a necessary, time-consuming, and expensive hurdle for companies that want to sell to incumbent carriers (see Telcordia's Osmine Goldmine).

"Before [9 months ago] we were focused on CLECs and we could ignore OSMINE," said Rusty Cumpston, ONI's chief operating officer, at an investor conference earlier this month. "If a carrier wanted to use our product, they'd have to change their management. That was how we thought. But the bullishness of last year has changed. I've been to New Jersey and bowed before the Telcordia gods. We'll be OSMINE certified in the fourth quarter."

- Phil Harvey and Marguerite Reardon, senior editors, Light Reading
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Belzebutt 12/4/2012 | 7:49:35 PM
re: ONI Shares Fall Sharply After Warning Metro was shown to be the only optical sector that was still healthy or growing. Is this a sign that metro is in just as bad shape as long haul now?

Drop of 45% in one day, holy mac...
lightmaster 12/4/2012 | 7:49:34 PM
re: ONI Shares Fall Sharply After Warning I think its mostly a sign that the future of the metro market is not in CLECs.

We'll have to see if it is an industry wide trend.
let-there-be-light 12/4/2012 | 7:49:33 PM
re: ONI Shares Fall Sharply After Warning Metro and Metro WDM are NOT the same thing, even though many "leading experts" seem to think so. These guys just never bothered to ask the people who design and implment networks to support telecom services in metropolitan areas.

They wrote off SONET/SDH many years ago as "clumsy", "inefficient", "inflexible", "legacy" and many other insulting (and fashionable) words I can't remember, but the fact is, those damn things are still selling, and the "old age", "backward", "legacy" companies still "crazy" enough to buy them are doing quite well. Guess who's smiling now??

Bad news for metro WDM, yes. Bad news for metro, maybe not.
optical 12/4/2012 | 7:49:33 PM
re: ONI Shares Fall Sharply After Warning Right on "let-there-be-light". You have hit the nail on the head. Metro deployment will be strong. WDM in the metro is dead though.
loosemoose 12/4/2012 | 7:49:32 PM
re: ONI Shares Fall Sharply After Warning Metro WDM isn't dead - it's just taking a while to hit it's strides. Dead would be like -100% growth.

Even if this year shows some contraction, WDM will eventually find it's place in the metro market. Just give it time.

rahulak 12/4/2012 | 7:49:26 PM
re: ONI Shares Fall Sharply After Warning What does the SONET/SDH equipment offer that WDM does not offer? plus in these tough market conditions, isn't it the carriers' top priority to reduce operating and scaling cost, precisely what WDM offers?

I disagree that ONI's recent warning has anything to do with the appropriateness of the WDM technology as a whole. Its just that ONI is a very small company compared to Nortel and Lucent. So when NT and LU lose $20 million of revenues a quarter, its less than 1% of their quarterly revenues. It doesn't even attract public attention, due to much more pressing issues confronting these giants. But the same $20 million represent 50% of ONI's revenues. So it is really the age old law of big numbers Vs. small numbers. Don't extrapolate ONI's warning to the doom of WDM. WDM will be the technology of the future. Its just that it findes itself in an unfortunate and unprecedented economic climate. Let's hope America comes with with great valor and things improve for the better even after the abonible black Tuesday!!
lightfax 12/4/2012 | 7:49:26 PM
re: ONI Shares Fall Sharply After Warning I really don't understand the difference between Metro and Metro WDM. Can anyone help me on this issue? What are other technologies prevailing in Metro?


Fred Snarff 12/4/2012 | 7:49:24 PM
re: ONI Shares Fall Sharply After Warning yes, short term. bad news for metro or metro DWDM? nope. you are an idiot if you think that ONIs announcement, the last one of all the optical companies in existence, of a slowdown somehow means bad things for metro DWDM. pull your head out. every optical company, actually every COMPANY in telecomm is experiencing a slowdown. it's amazing that they haven't announced prior. will certainly be the subject of many shareholders lawsuits against ONI for not doing so sooner in the face of overwhelming evidence of a recession.

has nothing to do with metro DWDM itself. the RBOCs will be the largest purchasers of this equipment, very shortly. once that happens, initial deployments in the past year by the dying CLECs/IXCs will look like peanuts.

why do you think it still takes 60, 90, 120+ days to provision a short haul DS3, OC-3, OC-12...? why is every other street in the city still being ripped up? just look around. metro is and will continue to be the fastest growing segment of optical, with metro DWDM leading the growth. think about the idiots who said that about long haul DWDM 6 years ago. basically same argument. look how wrong that was. and guess who owns metro DWDM segment? ONI.

I'd look for CSCO to start making offers again.

HarveyMudd 12/4/2012 | 7:49:01 PM
re: ONI Shares Fall Sharply After Warning Some people at ONI Systems received very special treatment in terms of salary, bonuses and other benefits. One special that has been often mentioned is the VP of Marketing. It has lead to low morale within the company.
rahulak 12/4/2012 | 7:48:58 PM
re: ONI Shares Fall Sharply After Warning After reading most of the messages on this article, I am convinced that the easiest thing to do in this troubled economic environment is to become a CEO and hit a fortune. Jack Welch, Bill Gates, Scott McNilley, Larry Ellison and even Warren Buffet really appear to me plain luckey to have 'hard working' people who brought their respective companies to their present laurels, obviating any contribution from these do-nothing guys.

So most of us should be doing what is really so obvious. Getting financing is so easy with many 'ignorant' VCs just finding an excuse to throw money at us. Managing investor relations and Wall Street analysts again is a cake walk as they too 'don't-know-anything'. Sales and profits will be taken care of by 'hard working employees who deliver the goods'. In any case, if something goes wrong, you can always fire the 'innocent' employees and continue to 'fleece' the companies! In conclusion, CEO's is an armchair job with fat salaries!


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