Corvis hopes its future hurries up

Losses are considerable

more jobs may be pared

stock price is way down

All eyes on Qwest contract

April 13, 2002|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

With the telecommunications industry in despair and a multimillion-dollar deal for Columbia-based Corvis Corp. hanging in the balance, some analysts are wondering if the future of the local company may be in jeopardy.

Corvis said last week that it is continuing discussions about amending a contract with Qwest Communications International Inc., which agreed in 2000 to buy $150 million worth of Corvis equipment.

"I think a lot of investors are speculating that Qwest goes away and this company blows up," said Simon Leopold, a telecommunications equipment analyst and a vice president for Merrill Lynch in New York.

"Corvis, in my view, is in a lot of trouble," said Alex Muo, an analyst at Hotovec, Pomeranz & Co. in San Francisco.

No one predicts that Corvis is in imminent danger. Leopold, whose firm has a neutral rating on Corvis' stock, said that even if the Qwest deal disappears, the $660 million Corvis has in the bank would buy the company a lot of time.

And Corvis, which makes fiber-optic equipment, maintains that it is well positioned for the future.

"We have the technology, we have the resources to weather the storm," said Mark Dill, vice president of marketing communications for Corvis. "We are undisputed leaders in all-optical technology, and we believe that's where the market is heading."

But times are tough for many companies in the telecom sector, and Corvis has been no exception.

Its stock price has slid to $1.30, nearly 99 percent below its $108.06 high in August 2000.

The company reported a net loss of $1.4 billion, or $3.94 per share, for 2001. Adjusted net loss for the year was $135.3 million, or 39 cents per share.

Revenue for the year totaled $188.5 million and came from two customers: Broadwing Communications Inc. and Williams Communications Inc., which is considering filing for Chapter 11 bankruptcy protection.

Qwest has canceled a $110 million purchase order with Corvis, and the two companies are renegotiating a deal that could leave room for Qwest to back out under certain circumstances, according to documents filed with the U.S. Securities and Exchange commission. Corvis declined to comment on the Qwest negotiations, except to say this week that they are still under way.

Corvis also cut its staff to 863 from 1,625 about a year ago. Corvis laid off about 300 workers in November, then quietly cut about 120 more in March, according to SEC filings.

And the documents said that more layoffs could come after the company buys undersea optical networking company Dorsal Networks, a deal slated for a shareholder vote at Corvis' annual meeting next month.

Corvis announced in January that it would buy Dorsal for stock then valued at about $90 million. The company's chairman, president and chief executive officer, David Huber, is also chairman of Dorsal and directly and indirectly owns 31 percent of the outstanding stock in the latter company, according to SEC documents.

If the deal is approved, Dorsal President and Chief Executive Officer James Bannantine will become Corvis' president and take over the company's day to day operations, according to SEC filings.

Dorsal has no customers and had a $31.75 million net loss in 2001, according to SEC documents.

Some analysts favor the acquisition, saying it would diversify Corvis' product line and push it into a market that will be ripe to build new networks in a couple of years. But they also say it would put Corvis into a market with tough competition.

The undersea market "has been hurt by the term amount of construction that went on in '99 and 2000," said David Gross, a senior analyst at Communications Industry Researchers Inc.

Dill of Corvis said that after the acquisition, the Columbia company would bring to the undersea market an all-optical network that can feed into Corvis' equipment for land-based networks. "It becomes a new market for our products," he said.

And, despite the huge financial losses that Corvis reported last year, Dill argues that the company has plenty of cash to ride out the storm.

"Where the market is going is toward the capabilities and the technology that we're strong in, and I don't think anybody is doubting that," Dill said. "The question has always been when."

The company's technology is too far ahead of its time, one analyst said, and the market is not ready for the "all-optical" technology on which Corvis is betting its future. "The word is very sexy," said Muo of Hotovec, Pomeranz & Co. "But ... does everybody need all-optical technology? Is the cost low enough?"

While analysts said the company has enough cash to survive for a few more years, some believe that Corvis should start looking at other options.

"This is a more valuable company right now as a liquidation then it is as a going concern," Gross said.

Muo said his firm believes that the Columbia company must either get acquired or see something fundamentally good happen.

But Dana Cooperson, director of optical networking in the Boston office of RHK, said Corvis is taking steps to widen its product line and adjust to the market. "They're making some strategic changes," she said.

Cooperson believes that Corvis' problems are a result of sector-wide hardships and are not specific to the company. Several companies in the industry have laid off hundreds - even tens of thousands - of workers and seen their stock prices tumble.

And contract renegotiations such as Corvis and Qwest are undergoing are not unusual for a telecom company given the state of the industry, she said.

"It's a blow," she said. "But I would say it's certainly not a fatal blow."

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