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THE DAY AHEAD: Corvis IPO set to soar on promising products

When a company's address resides on Albert Einstein Drive, you know someone will think its IPO is a smart investment.

That is the case with Columbia, Md.-based Corvis Corp., which resides on 7015 Albert Einstein Drive. Corvis (Nasdaq: CORV), which was founded by the Ciena founder, is the latest entry in the fiber-optic race and should see one whopper of an IPO. In fact, Corvis will hit the market with an $11.8 billion market capitalization before it records any revenue.

Corvis' products, which just began shipping, enable long-haul communication networks to transmit and manage data traffic entirely as optical signals. Corvis offers optical gateways, amplifiers, multiplexers and switches.

When you look at Corvis' revenue -- there isn't any -- you have to wonder what all the hubbub is about. Rest assured there's a lot of chatter about this IPO, which should be the headliner of the week. The company raised the price range for its 27.5 million-share IPO to $28 to $30 a share from $13 to $15. CS First Boston is the lead underwriter.

Shares priced at $36, indicating that there's a lot of demand for the company. Why?

The buzz

Like many of its fellow fiber-optic companies, Corvis can go from an idea to strong revenue to profits very quickly. Wall Street knows the quick ramp well and has driven the IPOs of Sycamore Networks (Nasdaq: SCMR), ONI Systems (Nasdaq: ONIS) and New Focus (Nasdaq: NUFO) through the roof.

As for the management, Corvis CEO David R. Huber, Ph.D., was chief scientist for Ciena. Other top managers have experience at Nortel and Alcatel. Although Corvis is the development stage company, the executive team has lots of experience.

Corvis' products could change the game for long distance, fiber-optic communication networks and backbone networks. These networks currently run on the "ring architecture," meaning there are rings of transmission points. Corvis would make things much more efficient with its gear, which can transmit optical signals up to 3,200 kilometers, compared with 400 to 600 kilometers for traditional equipment.

Big network providers are apparently impressed after giving Corvis products a trial run. Broadwing Communications (NYSE: BRW), Williams Communications (NYSE: WCG) and Qwest Communications (NYSE: Q) are all on board to buy products. Those three customers account for much of the buzz surrounding Corvis.

Corvis, which completed field trials with Broadwing in July, said Broadwing will buy $200 million of its products and services over a two-year period. Williams also will purchase $200 million over two years once its field trials are complete in the second half. Broadwing and Williams will also be shareholders.

As for Qwest, it will buy $150 million of Corvis gear over two years as long as the company is price competitive and can meet technical requirements by the end of 2001.

Sure Corvis only has three big customers, but it's rare a company can go from zero to a possible $550 million in sales in two years.

The risks

Although Corvis has a great concept behind it, there are a few prickly issues you should know about. For starters, its products have barely left the lab. The company also faces stiff competition, loses lots of cash and recently acquired two companies that (you guessed it) have no revenue.

In regulatory filings, Corvis, which was hatched in 1997, said it won't post a profit until "at least 2002." The company lost more than $71 million for the year ending Jan. 1. For the three months ending April 1, Corvis lost $26.8 million.

In addition, any hiccup in the Corvis field trials will be overblown. The company is being valued based on the idea that it will succeed with its products.

"Because our products have only been tested in our laboratory and in two of our customers' laboratories and we have successfully completed only one field trial, the likelihood of their success is difficult to predict," the company said. "Even if our products prove to be commercially viable, we face intense competition from a number of competitors."

The competition is the usual cast of characters, including Alcatel (NYSE: ALA), Ciena (Nasdaq: CIEN), Cisco Systems (Nasdaq: CSCO), Lucent Technologies (NYSE: LU), NEC and Nortel Networks (NYSE: NT). Ciena is also duking it out with Corvis in court. Ciena recently filed a lawsuit alleging that Corvis is infringing on three of its patents.

The Ciena suit, filed this month, isn't too surprising. Corvis is led by the Ciena co-founder and many managers are Ciena alumni.

Bottom line

If you're an individual investor, you might want to wait till the first-day smoke clears. Corvis could have a huge run-up, and first day buyers often get burned.

If Corvis can land its customers and grow sales the way it's expected to, it could turn out to be a good investment. However, one slip and investors aren't going to be happy. We've seen a lot of valuation schemes tried on Wall Street, but an $11.8 billion market cap on no revenue pushes things a bit.

Another scenario is the company could be acquired by one of its well-heeled rivals. Nortel, Cisco and Lucent certainly haven't been shy about acquisitions. TDAIN