Drip Portfolio Corvis Holds a Wild Card

Corvis Corporation was the hot IPO of the summer of 2000, before falling at the whim of the stock market. The Drip Port takes a look at what the company is doing well, despite its recent stock performance, and the fierce competition that it faces in the optical networking sector.

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By Vince Hanks
January 11, 2001

As sleek and nifty as fiber optic networks are today, they are not without inefficiencies. Rather than one continuous pathway, most fiber optic networks are subdivided into three circuits, known as "rings." The rings are built in tiers, representing local, regional, and long-distance zones. The transmission management technology, known as SONET (synchronous optical network), enables carriers to allocate the capacity of each ring to support the multitude of connections that link various places.

Configuring the rings and their connections is a complicated process. Also, using SONET, the beams of light traveling along the network are converted to electrical signals at points where traffic enters and exits the network. This is done at what is called an Add Drop Multiplexer (ADM). The conversion of light to energy and back to light is called regeneration, which is a less-than-ideal process involving significant cost and time-consumption. More efficient methods of managing transmissions are presently being sought by carriers.

Enter Corvis Corporation
Much excitement was generated when Corvis Corporation (Nasdaq: CORV) began testing its all-optical backbone networks in July 2000. In a trial with Williams Communications Group (NYSE: WCG), Corvis transmitted pulses of light a distance of 3,200 kilometers without a need for regeneration. With current networks, signals must be regenerated roughly every 300 to 600 kilometers. So, the trial showed that it could reduce the number of transmitters and receivers needed in the network by up to a factor of eight. More recently, Corvis has successfully transmitted light over distances greater than 4,000 kilometers without the aid of regeneration.

In theory, carriers implementing Corvis' all-optical networks will be able to significantly reduce costs, increase network capacity, and more readily provide new services to customers.

While other optical networking suppliers are still considering what switching solutions will best fit their plans, Corvis appears to be already shipping all-optical switching solutions to at least three carriers: Broadwing (NYSE: BRW), Williams, and a recently disclosed contract with Qwest Communications (NYSE: Q), which is expected to contribute to revenues in the second half of 2001.

Corvis does face stiff competition, though, from the likes of Corning (NYSE: GLW), Nortel Networks (NYSE: NT), Ciena (Nasdaq: CIEN), Sycamore Networks (Nasdaq: SCMR), and even Cisco Systems (Nasdaq: CSCO).

Whatever happens, certainly these aren't the last advances in this rapidly changing arena by any of these players, and only time will tell which companies will be best-positioned to fend off the fierce competition. Even the Fool's Industry Focus 2001 could only take a good stab at naming a lasting leader in optical networking.

Corvis vital facts
As we summarized last week, Corvis Corporation was formed when David Huber divorced himself from Linthicum, Maryland-based Ciena Corporation, a company he had founded five years earlier, and created a direct rival just 14 short miles down the road in Columbia.

Corvis designs, manufactures, and markets products that allow communications traffic transmission, switching, and management entirely in an optical domain. The company's products include ultra-long-distance optical signal transmission, reception and amplification equipment, all-optical switching equipment, and software that enables the creation of all-optical backbone networks that support transmission over long distances.

The company has a reported 758 employees, a market value based on recent share prices of around $8 billion, and is currently 91% owned by insiders. Institutions own roughly 50% of the public shares.

For the nine months ended September 2000, revenue totaled $22.9 million. Net loss totaled $193.9 million, or $72.3 million on a pro forma basis. The company expects to reach profitability in FY 2002 and has an estimated five-year annual earnings growth rate of 46%.

The company does not pay a dividend, nor does it have a Drip. Drip investors would need to buy it through a pseudo-Drip or very inexpensive discount broker.

To discuss Corvis and the Drip Port fiber optic study (see the related links above for more), visit us on the Drip Companies board.

--Vince Hanks, TMF Elwood on the Fool discussion boards