July 31, 2003
Conference Call Notes and Observations
6 Months ended July 31, 2003
please see Disclaimer at bottom of report
This report was last amended on July 31, 2003.
From point-to-point links to all-optical networks to transoceanic systems, Corvis Corporation delivers innovative optical network solutions that deliver the lowest total cost of ownership in the industry. Headquartered in Columbia, MD, Corvis provides service providers and government agencies worldwide with scalable optical networking solutions and services that dramatically reduce the overall expenses associated with building and operating networks. Customers deploying Corvis’ optical network solutions can quickly provision new wavelength-based services and tailor dynamic service-level agreements. Corvis is also the majority investor in C III Communications which recently acquired most of the assets of Broadwing Communications. Broadwing, a consolidated subsidiary of Corvis, is an optical network services company based in Austin, TX.
Notes From Conference Call
David Huber, President :
1. Mentioned that a lot has happened since last conference call. Corvis continues to make progress with both current and potential customers with the equipment business. They have been actively responding to the US Government with the RFP for GIG- BE for a next generation all optical network.
2. First revenues were recorded during the 2nd quarter from the US Government. This quarter Corvis has received additional purchase orders from the US Government for the Optical Convergent Switch (OCS) ( Corvis’ newest product.) During 2nd quarter, Corvis also continued to work closely with major North American Service Providers. He claims the Corvis product suite gives the ability for carriers to reduce network costs.
3. During the 2nd quarter , continues to see benefits of previously announced restructurings.
4. Corvis has decided to close French facility, and expects to be substantially completed by the end of the 3rd quarter.
5. Cash burn has been reduced. Expects quarterly cash burn of equipment business to be $15 to $20 million per quarter.
6. Broadwing network is coast to coast with 137 cities and almost 19,000 miles of fiber.
7. Broadwing sells data, voice and video transport to major service providers, as well as complex data and network applications to enterprise customers. Claims Broadwing offers the highest quality and the most technologically advanced solutions.
Claims that the network is a low cost and the only existing all optical network. It is a flexible network, which converts to lower costs and quicker implementation (provisioning.) Network requires significantly less equipment, which relates to lower costs.
8. Broadwing team is focused on achieving cash flow positive as soon as possible. Hoping for mid year 2004. Mentions that Broadwing is focused on revenue growth which could be generated by complementary market opportunities. These “complementary opportunities” include media broadcasting and new Government communications services. Huber believes that the Broadwing capabilities support high performance solutions via an all optical network. Huber claims that this is a new era, which requires revolutionary thinking and offers a unique opportunity.
Lynn Anderson – Chief Financial Officer
1. Equipment revenues were $ 365 thousand . Most of the revenues were from Broadwing prior to the closing. Corvis also recognized equipment revenues from France Telecom and the US Government.
2. Gross Margins increased ( pro forma basis) due to product mix.
3. Continued reduction has been seen in Research and Development. This reduction is attributed and continues since projects are generally available and ready for deployment and workforce has been reduced. They are now refining the 2nd generation of existing products, while competitors are still working on 1st generation products.
4. Headcount was 369. When reflecting France closing, headcount will be 294. This is below prior guidance.
5. Customers of Broadwing include Bank of America, Mazda and CNN.
6. Broadwing sells limited services to 80 % of the market players.
7. IRU’s will not be significant in future revenues, nor will non cash revenue recognition, since the transaction was recorded as an asset purchase. This was reported differently by old Broadwing.
8. New Broadwing will not have relevant year over year comparative revenues. This is due to various phase outs, IRU’s and other implementations before and since purchase.
9. Looking to grow top line in complementary areas, such as Cable, media broadcasting and Government contracts. Claims the current customer list is solid, diverse and proven.
10. Because of the lack of visibility and the uncertainty of the telecom industry, guidance will not be given going forward. With that said, Corvis expects that operating costs for equipment business( excluding lab and field trials) in Q3’03 will be below that of this quarter. Expects year end cash and equivalents to be between $200M to $275M dollars.
11. Mr. Anderson claimed that “winning a contract from the US Government will require temporary work and capital investments, in inventory and accounts receivable in the early phases of any of these potential opportunities.”
12. Mr. Anderson mentioned, “If Corvis does decide to seek additional funding for the investment and operational commitments of Broadwing, it could have a significant impact on Corvis’ year end balances.”
13. Mr. Anderson mentioned, with the current information at hand, they currently expect year end cash balances to be between $200M and $275M. This reflects required spending for all parts of the Corvis business.
Question and Answers
1. Merrill Lynch questioned about the potential and reasons for market share gains in the Broadwing investment. Corvis feels that the network is the most technologically and cost efficient network ( mentioned revenue per headcount). Corvis feels large enterprise market will lead to market share gains. Corvis claims this has been evident with revenue momentum. Corvis mentioned that speed of service and quick provisioning will give Broadwing an advantage.
2. 10Q and 8K will give a historical perspective to better understand the Broadwing business. Corvis is targeting cash breakeven by mid 2004. This goal is hoped to be achieved via Top line Revenue growth and future cost reductions.
3. David Huber discussed that both Broadwing and CIII is quite active with the ongoing operations. Dr. Huber discussed that he is also quite involved in the operations.
4. OCS ( Optical Convergence Switch) recognized revenue for the first time this quarter. Corvis has some purchase orders in hand for OCS, and they claim they are exited about that.
5. Dr. Huber was asked if the award of Gig-Be would an inflection point of consolidation for the equipment space. Dr. Huber would not comment or speculate. He did mention that if you observed the competition phase of Gig-Be, one could make their own conclusion. Dr. Huber indicated that Corvis is committed to keeping the Corvis Optical Network ( ON ) product line as a viable and its important to Corvis. Dr. Huber believes that Corvis is still way ahead of the competition in performance of their equipment. He claims he is pleased with the momentum and the opportunity, that Corvis has in the equipment business and the carrier space.
Some “ back of the envelope” observations
Based on the lack of comparative information, including the forthcoming 10-Q and 8K, and the lack of guidance , we will hold off on making financial observations at this time. There are a few items we will identify below.
1. Upon a further listen of the conference call, we noticed on several occasions that Corvis may have been indicating that the Gig-Be contract may be expected. We do not like to speculate on tone or possible hints during discussions. We also understand that our interpretation could be totally incorrect. We ask that any reader not use this item in particular in any type of investment decision.
2. On the same token, we are wondering if Mr. Anderson was hinting to a round of funding for Broadwing. Mr. Anderson mentioned, “If Corvis does decide to seek additional funding for the investment and operational commitments of Broadwing, it could have a significant impact on Corvis’ year end balances.” Of course funding could create either dilution or debt to Corvis.
3. We heard no mention of Dorsal.
4. On February 15, 2003 we noted that Corvis was in OCS trials with Broadwing. From a historic perspective this is interesting, as OCS has only recognized revenue from the Government so far. During the Q&A Corvis mentioned that there are some OCS Purchase orders in hand. Corvis called this an exciting trend and claims the product is “ripe.”
5. On November 13, 2002 we discussed Gig-Be. You might find it useful to scroll down to this link.
6. We reviewed our Q4’02 conference call notes and noticed that Huber mentioned that Gig-Be opportunity for Corvis was in the $200M to $400M range over a couple of years.
If you are a client of ours, and if you have questions regarding Corvis, please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading this report, we urge you to do your own research. We will not be responsible for any person making an investment decision based on this report. This report is a “by-product” of our research. We are not responsible for the accuracy of this report. We are not responsible for errors that may occur in this report. Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate Corvis from our portfolios. This report may undergo revisions starting on July 31, 2003. We will not notify readers of future revisions. We are not responsible to keep readers of this report updated for changes or material errors or for any reason whatsoever. This report is dated July 31, 2003; it is possible that by August 1, 2003 we could have eliminated our entire Corvis position without giving notice to any reader of this report. We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have Corvis Corporation in their portfolios. There could be various reasons for this. Again, if you would like to discuss Corvis Corporation, please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).
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