February 6, 2003
Conference Call Notes and Observations
12 Months ended December 31, 2002
please see Disclaimer at bottom of report
This report was last amended on February 6, 2003.
Corvis Corporation designs, manufactures and sells high-performance all-optical and electrical/optical communications systems. The Company’s optical products enable a fundamental shift in network design and efficiency by allowing for the transmission, switching and management of communications traffic, entirely in the optical domain. These products include ultra-long-distance optical signal transmission, reception and amplification equipment, all-optical and electrical/optical switching equipment and software that enable the creation of optical backbone networks. By deploying the Company’s products, carriers eliminate the need for expensive and bandwidth-limiting electrical regeneration and switching equipment, significantly reducing costs, increasing network capacity and allowing them to more quickly and efficiently provide new services.
Notes From Conference Call
David Huber, President :
1. Recognized revenue from Qwest in Q4.
2. Made first shipment in 4th Quarter to US Government.
3. Can’t predict an industry spending rebound.
4. Targeted customers are the Global Carriers.
5. Sweet spot of Corvis is to reduce costs to the customer. Total cost of ownership by carriers enables them to reduce costs faster than any other solution.
6. US Government recognizes paradigm shift towards the need for all optical networks. Corvis remains focused on Gig Be and continues in the RFP process.
Lynn Anderson – Chief Financial Officer
2. Cash Burn will be negatively impacted in Q1’03 due to trials with customers and restructurings.
3. Research and Development includes money being spent on prototypes and upcoming customer trials.
4. 5 customers during Fiscal 2002.
5. Essentially no long term debt.
6. Company purchased 5.9 million shares during quarter at a cost of $4.4 Million ( $ 0.746 per share).
7. Headcount as of year end including restructurings is 713. This is expected to be 500 by the end of Q1’03.
8. Total operating expenses for F2003 expected to be below Q4’02 levels.
9. Quarterly cash burn is expected to be at $25 m or below by 2nd half of F2003. Cash burn will be up in first quarter due to customer trial activity.
Question and Answers
1. There was a question as to projected year end 2003 cash balances. Corvis claimed that they were not able to give guidance as to this issue.
2. There was a question as to the GIGBE, Request For Proposal ( RFP) and when decisions were expected to be made. Dr. Huber talked on this issue. He claimed that timing is not known on this issue. According to Dr. Huber, the total opportunity for Corvis, is in the $ 200 to $ 400 million range over a couple of years.
3. According to Dr. Huber, The Corvis Optical Convergence Switch (OCS) and the Dorsal Networks products are in good shape. He claims that focused milestones have been met. Dr. Huber mentioned that he is pleased with the Dorsal field trial. Corvis claimed that there is no sense as to timing of any revenue recognition.
4. Question as to average cost of trial and how many trials are out there. Also asked about the region of customer trials. Mr. Anderson said cost of trials has a varying range. This range is based on location, support and type of trial. The range could be relatively small or millions of dollars. Mr. Anderson did mention that sub sea was one of the trials. This could indicate a Dorsal situation. On the other hand , Corvis did mention in Q1’02 conference call that they recognized revenue for undersea with Telefonica.
5. Qwest revenue recognized from Corvis Optical Network (ON) product line. Huber indicated that Qwest is looking at all optical product line.
Some “ back of the envelope” financial observations
1. Shares outstanding decreased to 408,517 m from 410,323 m at September 30, 2002.
2. GAAP loss for quarter was $ ( 0.47), whereas the ” Pro- Forma Loss ” was $ (0.11).
3. Company burned $ 44,327 M during quarter.
4. Accounts Receivable declined by $4,240 M. Accounts receivable is down to $1,781 M. Of course, impairment is no longer a concern, whereas future revenue sources certainly are the key to the success or failure.
5. Current Ratio (Current Assets / Current Liabilities) is 8.09. One year ago this number was 7.89
6. Inventory decreased by $ 47,981 M during the quarter. On the face, this looks like Corvis is structuring their balance sheet to be lean. If revenues perked up, this would help gross margins to increase on a GAAP basis.
7. Goodwill also decreased by $ 44,628 during the quarter. Again, looks as though balance sheet is much cleaner going forward. Heck, all that is needed now is some customers.
8. Liabilities section looks uneventful. Not to be sarcastic, but balance sheet looks in order. I don’t know if I mentioned this yet, but some good old fashion contract revenues would make the balance sheet look incredibly sweet.
9. Book Value is $ 540,078 or $ 1.32 per share. Corvis price today was $0.70, hence it is trading at 53 % of book value. Cash and equivalents are $504,416 m which is 1.24 per share. Corvis is trading at 57 % of cash and equivalents.
10. Flow Ratio is 0.59. The Flow Ratio is desired to be less than 1.25. Here is the formula : Current Assets = $ 524,644 , Cash = $ 504,416, Current Liabilities = $ 64,801 and Short Term Debt = $ 107.
Flow Ratio = (CA – Cash) / (CL – STD) = 0.59. The ratio was 1.81 on December 31, 2001.
11. Many of the ratios referred to above are somewhat meaningless at this point. Corvis most certainly has a clean balance sheet. Yet , without revenues the balance sheet would waste away. The question remains whether Corvis’ lack of revenue stream is company specific or industry specific. We most certainly have seen the bottom drop out of all optic companies. Look at CIENA , they once had $1.6 billion dollars in annual revenues , whereas they just had $61,918 million in their last reported Quarter . Hence, when looking at current ratio’s , flow ratio’s and other financial ratios, you must be cognizant of the unusual financial environment. The ultimate fact remains that for Corvis to be ultimately successful, they will have to generate greater than breakeven revenues in a period before their money runs out. They also need to prove to carriers that there solutions are viable, efficient and trustworthy, and that they will be around a long time to service the network. On the face, Corvis looks like a buy-out candidate, yet the majority owner and President , Dr. David Huber, has made it clear that he will pursue his vision of an all optical network at all costs.
11. The following are observations as I review some old conference call notes :
A. Workforce was 856 employees on March 31, 2002, 982 at December 31, 2001 and 1270 on September 30, 2001. See above where Corvis intends on having 500 on March 31, 2003.
B. Guidance on April 25, 2002 was to end 2002 with between $ 498,750 m to $ 551,250 m. Corvis ended the year on the low end, but within that guidance. This was also consistent with December 2001 guidance.
C. Guidance on April 25, 2002 expected that Capital Expenditures would come in at around 10 to 15 million for 2002. The actual number was $ 18,740 million.
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 February 6, 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 February 6, 2003; it is possible that by February 7, 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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