Corvis' woes point to larger optical networking worries

The boom based on the promise of fiber-optic networks and gear has, at least for the moment, turned into a bust on Wall Street.

4 min read
The boom based on the promise of fiber-optic networks and gear has, at least for the moment, turned into a bust on Wall Street.

Several companies, such as Corvis, Nortel Networks and Sycamore Networks, are feeling the brunt of a telecommunications industry in flux, resulting in several cases of plummeting stock prices for gear makers.

But the future still looks bright. The optical equipment market is expected to generate $45 billion in sales for equipment makers by 2004, according to market researcher RHK. Wall Street analysts are similarly bullish.

However, even the most optimistic executives have called some of the recent hype surrounding the equipment industry on a whole "ga-ga land," with many telecommunications veterans assuming a downturn will come to burst what at one time was a dot-com-like bubble.

Nowhere is this more apparent than with the stock of Corvis. When the company, a fiber-optic switching equipment maker, went public in July, it had no paying customers and a secretive set of optical equipment that had not been seen outside the labs of a few select testing sites.

Investors nonetheless leaped at the chance to get in early on a new optical networking entrant with tons of potential. After all, several new communications networks were being built to meet the incredible demand for Internet and data services.

Corvis shares were buoyed recently by word that Broadwing Communications would begin paying for the company's gear, while Williams Communications and Qwest Communications International continued to test it.

But now rumors are swirling on Wall Street that Corvis could lose a major customer. A Corvis spokeswoman declined to comment.

"I know there's some rumors running around that they've (Corvis) lost a customer. It's not true," said Paul Johnson, a networking equity analyst at Roberston Stephens. "We've certainly done checks and we've gotten great feedback from Broadwing, who absolutely loves these guys. Qwest loves these guys. And Williams said yesterday that they're using Corvis...I just think the whole rumor is nonsense."

Concern over Corvis recalls the early days of Ciena--the company Corvis founder David Huber started before his latest venture. Lacking a breadth of customers, Ciena relied on a few large contracts to grow at the outset. As a result, the company's stock was pummeled when AT&T said it would not use Ciena's equipment several years ago, resulting in the cancellation of Ciena's merger with Tellabs, another equipment maker.

Wall Street woes
As a result, optical networking shares--as well as other communications equipment stocks--are well off of their highs, and many are setting or flirting with 52-week lows.

Stock in most of the optical networking companies has been hammered of late, but many investors and analysts are sure to consider this recent skid as a buying opportunity. Most experts believe that communications equipment and optical gear is a sound and tangible business, unlike many of the consumer e-commerce companies that have been pounded equally as hard recently.

Corvis shares plunged nearly 18 percent Thursday to close at $39, a new 52-week low. Shares were down another 14 percent Friday to nearly $34. Battling Goliath

Similarly, shares of Nortel dipped below a 52-week low in midday trading Friday while stock in Sycamore Networks, JDS Uniphase and Lucent Technologies also slipped. Although they also are down, other optical players such as Ciena and Corning have remained more solid.

In Corvis' case, the company's lone source of current revenue said its use of the technology is on track.

"We are still well on our way to deploying the first all-optical network. We're going to do it by the early part of the first quarter of next year," said Tom Osha, vice president of corporate affairs for Broadwing Communications, which has committed to buying $200 million in Corvis gear this year.

"We continue to take shipment of and install Corvis equipment," Osha said. "So if there's a rumor that they're going to lose a customer, I can tell you it is not Broadwing. Nothing has changed about our relationship."

Larger issues
The concerns about customers feed into the larger issue of an overall telecommunications downturn, afflicting network operators and the equipment providers that feed the technology to them. see story: Telecom players spend big, but win little

Major service providers, including AT&T, WorldCom and others, as well as smaller competitors and equipment makers, all have been hurt by a domino-like effect of declining profits, slower-than-expected demand, and a tightening capital investment market.

The situation has been most dire for some competitive local exchange carriers (CLECs) and broadband Internet access companies. It has also raised questions about the ability of carriers to recoup their network investments.

In some cases, bad company-financed equipment loans have also come into play.