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Optical/IP

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
http://www.lightreading.com
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2cents 12/4/2012 | 7:48:47 PM
re: ONI Shares Fall Sharply After Warning "...and guess who owns metro DWDM segment? ONI."

Guess again. Nortel has a larger market share in Metro DWDM (with their OPTera Metro M5200) than ONI. Nortel's metro DWDM revenues have been flat or increasing, even in the terrible market we have had for the past months.

noitall 12/4/2012 | 7:48:44 PM
re: ONI Shares Fall Sharply After Warning this is good comedy. rahulak, you must be a ceo yourself. you make good points here but at the end of the day, ceos are over-paid in cash. their upside should be in stock for obvious reason. if they enrich employees and shareholders, they should enrich themselves. and when times are tough, they should feel the pinch as does everyone else.

boards that sign off on very high cash salaries are weak and stupid, and aren't doing anyone any favors (other than the ceo who is likely to return the favor with board perks). truth is, the scam of senior executive compensation needs to be re-thought!
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