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New Focus falls after warning

    New Focus shares dropped over 11 percent Tuesday just after yesterday's revenue warning. Analysts cut their estimates but remained bullish longer-term.

    The company's stock fell $2.50 to $18.25 in pre-session trading on the Island ECN electronic trading network. New Focus (Nasdaq: NUFO) makes fiber amplifiers, wavelength management equipment and optoelectronics intended to improve the capacity and speed of fiber-optic networks.

    After market close Monday, the San Jose, Calif.-based company cut its revenue outlook for fiscal 2001 and said its first-quarter top line would be short of analyst expectations. Company officials cited order cancellations and push-outs caused by a slowing U.S. economy and the telecom sector as the cause.

    New Focus now expects fiscal 2001 revenue of between $170 million and $190 million, down from the $240 million previously anticipated. First Call analysts' consensus is for revenue of $228 million for the period.

    First-quarter revenue is now expected to be $38 million to $41 million, compared with the consensus estimate of $46.9 million.

    The company also said it will lay off about 22 percent of its workforce in China and 8 percent of its U.S. workers.

    Analysts reacted to the news by slashing estimates and lowering price targets, although most agreed that the company remains a good bet in the long term.

    At Credit Suisse First Boston, analyst James Parmelee reduced first-quarter and fiscal year 2001 revenue targets, and cut both revenue and earnings numbers for fiscal 2002.

    In a research note, Parmelee said that though the company is scaling back production and slashing expenses, the anticipated lower sales level will push back operating profitability from the third quarter of 2001 to the first half of 2002.

    The analyst also noted that he sees positive sequential growth resuming in the third quarter of 2001.

    Parmelee dropped New Focus' price target to $38 from $65, but maintained a "buy" rating on the stock based upon favorable valuation and the positive long-term demand for optical components.

    Jim Jungjohann at CIBC Oppenheimer took a similar approach. Noting that he believed the bulk of New Focus' revenue woes are coming from two customers--Corning (NYSE: GLW) and Nortel Networks (NYSE: NT)--the analyst cut estimates for the first quarter and fiscal year 2001.

    The analyst also said that he believed a rebound would come in the second half of 2001, as the company's customers worked through excess inventory.

    Jungjohann reduced the company's 18-month price target to $25 from $100, but kept a "buy" rating on New Focus shares, stating that he remained bullish on the long term outlook for the component sector.