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IS CORVIS (NASDAQ:CORV - News) getting a bum deal?
Shares of the Columbia, Md., provider of communications equipment plummeted 26% to $1.47 after a Web site covering the telecom industry reported that Corvis lost out on a Defense Department contract that could've resurrected the company's fortunes. The report, published Friday and attributed to unnamed sources, said the military instead awarded the contract to help build an optical network called the Global Information Grid Bandwidth Expansion project, known as GIG-BE, to Ciena (NASDAQ:CIEN - News).
Sycamore Networks (NASDAQ:SCMR - News), which was reported to also have won a contract, saw its stock soar 26% to $5.20 following the Web site's report, which was later widely distributed by Dow Jones Newswires and Reuters. There's only one problem: The Pentagon flatly denies that a final decision on any awards has been reached.
"No contract has been awarded for the GIG-BE equipment acquisition," Defense Department spokesman Lt. Col. Kenneth McClellan told SmartMoney.com on Friday. "The Defense Information Systems Agency (DISA) has authorized Science Applications International Corp. to move forward to the next phase of the GIG-BE equipment-evaluation process. A small number of equipment suites will be provided to facilitate further testing.
"During the next phase of the program, the proposed equipment solution will be tested and evaluated for security, interoperability and operational integrity. The equipment must successfully complete this test phase before a final hardware determination is made by the end of December 2003. Vendors' names will not be released since the equipment acquisition still remains in evaluation pending source selection." Science Applications International is a privately held government contractor.
There's no question that the companies selected have much to gain from the GIG-BE contracts, which are expected to total between $800 million and $900 million. In May, Lehman Brothers analyst Steven Levy called the effort "the largest telecom/data networking project that we know of today." The companies selected to do the work will develop a secure, high-speed optical network linking military bases around the world. DISA's plans call for connecting about 90 intelligence, command and operational sites. Around $500 million is expected to go toward fiber and capacity, with the remaining $400 million for equipment.
Corvis and Ciena, neither of which returned phone calls seeking comment, were on the shortlist competing for $150 million of the contract to build the optical-transport system, says Hasan Imam, an analyst at Thomas Wiesel Partners. Imam says if Corvis won the contract it would have a huge impact on the company.
Wall Street's speculation on the lucrative Pentagon contracts heated up around 8 a.m. Friday, when Lightreading.com reported that Ciena, Cisco Systems (CSCO), Juniper Networks (NASDAQ:JNPR - News) and Sycamore would be awarded contracts to build GIG-BE. It said it had corroborated the information from two credible sources: one vendor involved in the GIG-BE bidding and one federal equipment consultant. Dow Jones Newswires soon reported that sources confirmed the story and said Corvis had been considered the favorite to win the contract. (SmartMoney.com is a joint venture of Dow Jones (NYSE:DJ - News) and Hearst.)
"Since we've run the story, we've had multiple confirmations of the story, and no one has said we're wrong," says Scott Raynovich, the U.S. editor of Lightreading.com. Raynovich says employees of Lightreading.com aren't allowed to own shares of stocks they cover.
One analyst, who requested anonymity, told SmartMoney.com that Corvis might have had a better product than Ciena, but it's been burning a lot of cash — and that worried the government, which didn't want to take a chance with a company whose future may be in doubt. According to Lightreading.com, Corvis might have been done in by releasing a statement on July 29 saying it had been invited to participate in the testing phase for a portion of the GIG-BE project.
"I can't think that was a good thing considering the secrecy the DOD likes," says Raynovich. "I hear they signed nondisclosure agreements, and it's not even clear when the Defense Department will let them talk about this."
"Every company in the bidding is in strict nondisclosure from the government — they won't tell you much," agrees Imam, who says Corvis has "enough cash on the balance sheet." The company recently bought service provider Broadwing, which accounted for virtually all of Corvis's second-quarter revenue of $27 million. Just $300,000 came from telecom-equipment sales. The quarterly loss was $45.8 million, or 11 cents a share. Imam says telecom equipment is only generating $4 million annually. "That's bad. You can't run a business with just that."
Imam adds that if Corvis does ultimately lose the GIG-BE deal, then the 25% dive in its stock price is about right. "The Broadwing assets are worth $1.40 in our view," he says.
Quote:
"[If the report was wrong] that would mean on Monday Corvis goes up and Sycamore goes down," says Thomas Wiesel's Imam. "This is a pretty well-publicized process, but the names are secret." (Imam doesn't own shares of Corvis; Thomas Wiesel doesn't have an investment-banking relationship with the company.)
IS CORVIS (NASDAQ:CORV - News) getting a bum deal?
Shares of the Columbia, Md., provider of communications equipment plummeted 26% to $1.47 after a Web site covering the telecom industry reported that Corvis lost out on a Defense Department contract that could've resurrected the company's fortunes. The report, published Friday and attributed to unnamed sources, said the military instead awarded the contract to help build an optical network called the Global Information Grid Bandwidth Expansion project, known as GIG-BE, to Ciena (NASDAQ:CIEN - News).
Sycamore Networks (NASDAQ:SCMR - News), which was reported to also have won a contract, saw its stock soar 26% to $5.20 following the Web site's report, which was later widely distributed by Dow Jones Newswires and Reuters. There's only one problem: The Pentagon flatly denies that a final decision on any awards has been reached.
"No contract has been awarded for the GIG-BE equipment acquisition," Defense Department spokesman Lt. Col. Kenneth McClellan told SmartMoney.com on Friday. "The Defense Information Systems Agency (DISA) has authorized Science Applications International Corp. to move forward to the next phase of the GIG-BE equipment-evaluation process. A small number of equipment suites will be provided to facilitate further testing.
"During the next phase of the program, the proposed equipment solution will be tested and evaluated for security, interoperability and operational integrity. The equipment must successfully complete this test phase before a final hardware determination is made by the end of December 2003. Vendors' names will not be released since the equipment acquisition still remains in evaluation pending source selection." Science Applications International is a privately held government contractor.
There's no question that the companies selected have much to gain from the GIG-BE contracts, which are expected to total between $800 million and $900 million. In May, Lehman Brothers analyst Steven Levy called the effort "the largest telecom/data networking project that we know of today." The companies selected to do the work will develop a secure, high-speed optical network linking military bases around the world. DISA's plans call for connecting about 90 intelligence, command and operational sites. Around $500 million is expected to go toward fiber and capacity, with the remaining $400 million for equipment.
Corvis and Ciena, neither of which returned phone calls seeking comment, were on the shortlist competing for $150 million of the contract to build the optical-transport system, says Hasan Imam, an analyst at Thomas Wiesel Partners. Imam says if Corvis won the contract it would have a huge impact on the company.
Wall Street's speculation on the lucrative Pentagon contracts heated up around 8 a.m. Friday, when Lightreading.com reported that Ciena, Cisco Systems (CSCO), Juniper Networks (NASDAQ:JNPR - News) and Sycamore would be awarded contracts to build GIG-BE. It said it had corroborated the information from two credible sources: one vendor involved in the GIG-BE bidding and one federal equipment consultant. Dow Jones Newswires soon reported that sources confirmed the story and said Corvis had been considered the favorite to win the contract. (SmartMoney.com is a joint venture of Dow Jones (NYSE:DJ - News) and Hearst.)
"Since we've run the story, we've had multiple confirmations of the story, and no one has said we're wrong," says Scott Raynovich, the U.S. editor of Lightreading.com. Raynovich says employees of Lightreading.com aren't allowed to own shares of stocks they cover.
One analyst, who requested anonymity, told SmartMoney.com that Corvis might have had a better product than Ciena, but it's been burning a lot of cash — and that worried the government, which didn't want to take a chance with a company whose future may be in doubt. According to Lightreading.com, Corvis might have been done in by releasing a statement on July 29 saying it had been invited to participate in the testing phase for a portion of the GIG-BE project.
"I can't think that was a good thing considering the secrecy the DOD likes," says Raynovich. "I hear they signed nondisclosure agreements, and it's not even clear when the Defense Department will let them talk about this."
"Every company in the bidding is in strict nondisclosure from the government — they won't tell you much," agrees Imam, who says Corvis has "enough cash on the balance sheet." The company recently bought service provider Broadwing, which accounted for virtually all of Corvis's second-quarter revenue of $27 million. Just $300,000 came from telecom-equipment sales. The quarterly loss was $45.8 million, or 11 cents a share. Imam says telecom equipment is only generating $4 million annually. "That's bad. You can't run a business with just that."
Imam adds that if Corvis does ultimately lose the GIG-BE deal, then the 25% dive in its stock price is about right. "The Broadwing assets are worth $1.40 in our view," he says.
Quote:
"[If the report was wrong] that would mean on Monday Corvis goes up and Sycamore goes down," says Thomas Wiesel's Imam. "This is a pretty well-publicized process, but the names are secret." (Imam doesn't own shares of Corvis; Thomas Wiesel doesn't have an investment-banking relationship with the company.)
