Corvis, Qwest reach new deal

$12 million in equipment over 2 years in package

analysts differ on impact

April 25, 2002|By Stacey Hirsh | Stacey Hirsh,SUN STAFF

Analysts drew different conclusions about a new deal that Columbia-based Corvis Corp. said yesterday it struck with customer Qwest Communications International Inc.

The two companies reached an agreement that Qwest would buy $12 million worth of Corvis' equipment - $7 million by the end of this year and another $5 million by the end of next year, according to documents filed yesterday with the U.S. Securities and Exchange Commission. The deal is a renegotiated $150 million contract announced in 2000 between Corvis and the struggling telecommunications carrier.

"It's somewhat a mixed blessing," said Simon Leopold, a telecommunications equipment analyst and a vice president for Merrill Lynch & Co. in New York. "Having a $12 million commitment over two years is infinitely better than not having it, but it's not a lot of money."

At its discretion, Qwest may also buy up to another $138 million of Corvis equipment as part of the deal, according to the SEC documents.

While analysts said the numbers in the new deal were low, they viewed the contract as a validation of Corvis' technology.

"Monetarily, it's not huge up front," said Rick Schafer, a research analyst for CIBC World Markets in Denver. "The potential's big, but it's really about the technology validation."

"From that standpoint, obviously it's still a big win for Corvis because it gets them into a large carrier," said David Gross, senior analyst at Communications Industry Researchers Inc. "It is an important win from a marketing standpoint."

But Gross said that with Qwest cutting capital spending and slashing jobs, it seemed unlikely that the carrier would start spending a lot on Corvis' all-optical equipment if it wasn't necessary.

"They've amended what they had," Gross said. "Ninety-two percent of it is optional. ... What incentive are they going to have right now to go out and buy a lot of [Corvis'] hardware?"

Analysts said this month that with the Qwest deal up in the air and the telecommunications industry struggling, there was concern about Corvis' future. But Corvis maintained that the company was well-positioned..

"We are extremely pleased to have reached an agreement to amend our existing contract with Qwest," Corvis spokeswoman Keira Shein said.

"We look forward to a long-term relationship with them as we help them meet their next-generation network requirements."

While it is good that Corvis salvaged a deal with Qwest, the local company needs more large carriers and bigger deals to be positioned as a long-term survivor, Gross said.

Shares of Corvis closed at $1.259 yesterday, up .009 cents. The company is expected to release its first-quarter earnings today after the close of the market.

Corvis also said yesterday that Broadwing Inc. would start laboratory tests on one of Corvis' products, an optical convergence switch. Broadwing and Williams Communications Group are the only two customers that Corvis received revenue from last year.

Leopold, the Merrill Lynch analyst, said in a note released yesterday that the lab test shows that the comparable switch made by Corvis rival Ciena Corp. of Linthicum faces more competition. Broadwing now buys Ciena's product, he said in the note.

Of the Qwest deal, Leopold said in an interview that it was a modest positive in terms of the dollar amount, but more so as an endorsement of the Corvis technology. Corvis has gotten its foot in the door, he said, but it still must do work to earn business beyond the $12 million minimum.

"It's too early to declare victory," Leopold said. "There's still work to be done."

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