CSFB: STRONG BUY on CORV, tgt $75
Corvis Delivers Solid Q4 Results; Boosting Estimates
Summary
CORV posted Q4:00 sales of $46M, above our official estimate of $35M and our
previewed range of $37-41M; earnings loss per share equaled $(0.07), in line
with our ($0.07) forecast and consensus estimates; Modestly raising 2001
revenue projection to $320M from $305M and EPS to $(0.23) from $(0.24).
Highlights include commercial deployments at Broadwing (100% of rev in qtr),
successful field trial at Williams (revenue recognition to occur in Q1:01),
and initial revenue recognition on CORV all-optical switch.
CORV has made significant strides in new product initiatives including OC-192(
c) connectivity support on its systems for H1:01 (on-track), commercial
availability of optical protector platform, and a scheduled alpha release of
a new multi-Terabit edge switch by year-end 2001; moreover, despite delays in
finalizing capital spending budgets and ongoing capital markets issues, CORV
on-track to secure 1-2 additional customers in H1:01.
Balance sheet strong with $1.0B in cash and cash equivalents; accounts
receivables DSOs were 32 days; Although inventory advanced by $95 million
sequentially, the increase was primarily raw materials required to ensure
CORV's ability to meet customer requirements.
Although recent lock-up release (76% of shares outstanding) could create some
near-term selling pressure, we view current price as attractive at 24.1x 2001
sales estimates; rate shares Strong Buy.
Corvis Corporation, based in Columbia, Maryland, designs, develops, and
manufactures a next generation end-to-end all optical system targeted to ultra
-long haul network applications. The company's products span optical
transport, optical switching and network management.Investment Summary
Corvis Corporation posted strong Q4:00 results of $46 million in sales and an
earnings per share $(0.07). These results outpace our $37-41 million
previewed revenue range and our official top-line estimate of $35 million.
Gross profit margin and expenses were in-line, while CORV's balance sheet
performance reflected management's strategy to build significant component
stockpiles (raw materials and work in process accounted for 80% of the $219
million inventory position) to ensure the company can meet customer commitments.
We were encouraged by management's comments regarding Corvis' progress in new
product development as well as customer opportunities. Although Corvis' CEO,
Dr. David Huber, acknowledged a lengthening of the selling cycle owing to
capital markets issues and delays by service providers to finalize capital
spending budgets, the company remains on track to secure one to two
additional customers during H1:01. We estimate the magnitude of the
opportunity with each potential customer tracks the company's experience with
its current service provider base of Broadwing, Williams and Qwest. From a
product perspective, these opportunities include both the company's CorWave
transport and switching systems. We would assign the highest probability to
new customer announcements occurring in the March-May 2001 time period. The
most important new product initiatives discussed on the conference call
include the company's multi-Terabit edge switch (alpha release planned by year
-end 2001), progress in introducing OC-192(c) connectivity on its CorWave
system and the successful installation of multiple optical switch platforms
by Broadwing. We continue to believe that Corvis boasts a best-in-class
position in ultra long haul transport systems and next-generation optical
switching.
At current price levels, we view CORV shares as attractive for long-term
growth-oriented investors. CORV shares are currently trading at 24.1x our
2001 sales estimate of $320 million. The stock is likely to be under some
pressure during the coming weeks, owing to the share lock-up release that
occurred on January 23, 2001 (76% of shares outstanding or 255 million). We
would view this level as an attractive entry point for investors desiring
exposure to the fast-growing next-generation optical systems market.
Demand For All-Optical Networking Drives Top Line Upside
Corvis' top-line out-performance was driven by the demand for next generation
all-optical networking equipment. As anticipated, Broadwing Communications
accounted for 100% of the sales in the quarter, in support of the company's
commercial installation of Corvis' all-optical transport and switching systems
. Corvis expects to recognize revenues from Broadwing in all four quarters of
2001. We estimate the revenue contribution will average $25-30 million per
quarter, with the potential for sales to be front-end loaded. Corvis
highlighted the successful completion of its trial with Williams
Communications, which was announced on January 16th. Revenues from the field
trial (approximately $18 million) will be recognized in Q1:01. Commercial
deployment is also slated to begin in the current quarter. Williams expanded
the size of its contract to $300 million over five years, up from $200
million over two years. We believe that the final negotiations for the new
contract terms were the reason that the announcement was delayed from the
original target of December 2000. We believe progress at Qwest is on track,
with commercial deployment targeted in the later half of 2001. Corvis is
designing a high-capacity 10G transport product using its Soliton technology;
management emphasized that it demonstrated 1.6 Tbps in the C-band at Qwest,
the highest spectral density to date. We believe Corvis will announce one to
two additional customers in H1:01.
Corvis Achieves Milestones In Optical Product Developments
Corvis continues to push the boundaries of density and capacity through its
optical product developments. Highlights in the quarter include Corvis'
successful demonstration of OC-192(c) interoperability with Juniper Networks
. The trial demonstrated the routing of OC-192 transmission stream to 3,200
km on one channel over Juniper's M160 core router and Corvis' transport
equipment, with zero packet loss. Corvis management indicated it is on track
for H1:01 delivery of its CorWave OC-192(c) product, which will transparently
transmit OC-192(c) through Corvis' all-optical switch and will enable the
rapid provisioning of 10G services. Corvis announced the commercial
availability of its all-optical protector during the quarter; its fifth
hardware product offers end-to-end optical protection and restoration to
ensure network reliability against major failures such as fiber cuts. On
another product development front, the multi-Terabit edge switch will
redefine network flexibility and density via its capability to manage data at
multiple bit rates, as well as provide integration to a DWDM backbone. The
system is scalable from STS-1 to OC-192(c). Alpha release of this product is
scheduled to be available by year-end 2001. We expect further updates as the
company continues to achieve greater distances and capacities, including an
announcement related to an ultra-high capacity repeaterless product in the
coming quarters.CREDIT SUISSE FIRST BOSTON CORPORATIONEquity ResearchAmericas
STRONG BUYLARGE CAPCorvis Corporation (CORV)
Corvis Delivers Solid Q4 Results; Boosting EstimatesQ4:00 Quarterly Review
Corvis delivered Q4:00 earnings per share of $(0.07), in-line with our
estimate and the First Call consensus. Revenues of $46 million were 31%
higher than our official $35 million estimate and well above our previewed
range of $37-41 million. We are raising our Q1:01 revenue projection to $60
million from $45 million and revising our EPS estimate to $(0.07) to reflect
a penny improvement over our previous $(0.08) projection. For the full year,
our 2001 EPS forecast of a loss of $(0.23) improves slightly from our
previous $(0.24) estimate, on higher revenues of $320 million (up from $305
million). Corvis recorded revenues in Q4:00 from commercial deployment of
both all-optical switching and core long haul network equipment to Broadwing
Communications. Gross profit margins of 38.2% reflected improvement over Q3:
00's 36.7% profit margin, but were 80 basis points below our 39% our estimate
for the quarter. We expect gross margins will increase over the course of
2001 to exit the year at 46.5%, as the company begins to reap the benefits of
the manufacturing strategy to support its steep sales growth. The primary
catalyst will be higher production volumes resulting in improved
manufacturing efficiencies as well as additional outsourcing of non-core
mechanical and electrical assemblies. The significant sequential increase in
operating expenses reflected the company's efforts to build the
infrastructure and sales force required to scale and compete against much
larger optical networking systems suppliers. G&A expenses equaled $13.0
million, above our $8.0 million forecast. Research and development
expenditures of $30.3 million were higher than our projected $29.7 million,
but at 65.8% of sales, were lower than our projection of 85%. Sales and
marketing expenses of $12.4 million were above our $10.5 million estimate,
but represented a smaller percent of revenues (26.9% of revenue versus our
expected 30%). Employees totaled 1,452 at the end of the quarter, up from 1,116
in the end of Q3:00, with roughly half involved in manufacturing, operations and
customer support.Balance Sheet Strong
Corvis completed the quarter with cash and cash equivalents of $1.0 billion,
reflecting a large portion of cash from the sale of equity in Corvis' public
offering in July 2000. In terms of working capital management, Corvis
recorded accounts receivable of $16.1 million. According to our calculations
, accounts receivable days sales outstanding totaled 32 days. |
