FOOL ON THE HILL
Many industries are taking a hit, but few companies have it worse than the fiber optic components, subsystems, and systems manufacturers that sell to telecom and cable firms. Upturn? Who knows! A look at cash burn and cash on hand is the starting point for investors who want to know whether a hurtin' fiber optic company will survive to play another day.
 |
|
|||||
|
||||||
|
||||||
By
We all know it's a good idea to have a rainy day fund, but do your companies' managers? Did their mothers not tell them, "Into each life, some rain must fall"? (What, doesn't everyone quote Longfellow at the dinner table?) If your stocks have anything to do with telecommunications, the rain has been positively torrential. Hurricanal. Diluvian. Drenching the heads of managers of fiber optic components, subsystems, and systems companies. The fiber optic companies were the broadband darlings, the bearers of Brave New Broadband Infrastructure that would speed the Internet to us intravenously. Or close. Futurist George Gilder anointed JDS Uniphase (Nasdaq: JDSU) the "Intel of the Telecosm" -- this new world -- and that company's shares rocketed to $131.19. Today, they sit in the single digits, prompting this fiber optic wag-wannabe to say that companies in this space are all at sixes and sevens. Perhaps you are thinking to profit if and when these companies rebound. Any recovery for these innovative fiber firms depends on the health of their large telecommunications and cable company customers who buy their products to build, upgrade, or expand high-speed, high-capacity data services -- and these days, they ain't buyin' as much as before. They're busy dealing with mountainous debt, at least $600 billion to $1,000 billion of which is estimated to be worthless. The Financial Times recently told the sorry debt accumulation story of the telecom crash (registration required). The debt overhang is why it's hard to predict if or when the market for fiber optic components, systems, and subsystems will turn around. Many of our own writers, such as Bill Mann, have written about it (most recently covering Ciena). Others, such as Duquesne Capital Management's Ravi Suria, posit that the customers' debt won't work itself off for at least two years. The Financial Times series says longer: two to three years, with telecom bankruptcies increasing. If commentators are predicting anywhere from 18 months to three years, then investors should consider whether their fiber optic networking investments have enough cash to survive at least that long and customers -- AT&T (NYSE: T), Qwest (NYSE: Q), Verizon (NYSE: VZ), SBC (NYSE: SBC), WorldCom (Nasdaq: WCOM), the European biggies, and others -- can afford to pick up their spending significantly. Survival of the fittest I took a simple look at a bunch of companies in the space, examining their cash burn for the latest quarter, and multiplying those numbers to get annualized figures. I then compared annual cash burn to the company's cash and short-term investments, to see how long the money would last with no change in revenues, expenses, new financing, and so on. This is a rough-and-ready approach, because when you comb the financial statements and notes, you may find that there are particular considerations for your company's business that make the cash burn better or worse. The results: (Dollar figures in millions.) Cash lets you determine your destiny But with a cash cushion, a company can make smarter moves. It can keep highly-trained employees, such as optics engineers, rather than lose them and have to spend more later to attract new ones. It can avoid having to dilute current shares with new offerings, or issuing debt on unfavorable terms and weighing down the balance sheet. If it has enough cash, it can snap up other ailing competitors at fire-sale prices. "Survival Term" is an arbitrary name for the period "How Long a Company Can Survive Before it Has to Give Up Directing its Own Destiny." Other phrases will do, such as "Day of Doom," "Day of Reckoning" or "When the Marshmallow Fluff Hits the Fan." Or, the trend of the last several quarters may show you that management's responses are working and the survival term lengthening. JDS Uniphase says it believes expense reductions will allow it to break even at $350 million in quarterly revenues. Avanex says $22 million. Watch the progress. Also ask whether a company's product line is diversified, and whether it's spending consistently on research and development even in the downturn. Technological advances (and competition) do not stop just because business slows. From the list, it appears that unless things get worse, Avanex, JDS Uniphase, Ciena, and Sycamore are best-positioned to survive a downturn. The rest are likely going to need some help, and soon. The only optical networking Tom Jacobs (TMF Tom9) does is watch TV. At press time, he owned shares in JDS Uniphase and Avanex. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
But if you think telecoms will continue to spend at some rate and eventually accelerate again -- if you believe that the bandwidth glut is hogwash and that demand will grow again -- you first observe an immutable law of the business jungle: When business is bad, companies lower expenses, guard cash, watch lesser opponents fail (and buy them or their assets), and come out stronger and more dominant on the other end. Can your fiber optic company do this? How do you know?
Cash Survival
Company and Ticker Cash* Burn** Term
Avanex (Nasdaq: AVNX) $ 214 $ -34 6.29 years
Ciena (Nasdaq: Ciena) 1398 -128 10.92
Corning (NYSE: GLW)*** 1311 -930 1.41
Harmonic (Nasdaq: HLIT) 52 -86 0.60
JDS Uniphase 1973 -363 5.44
Lucent (NYSE: LU)*** 2285 -5383 0.42
Nortel (NYSE: NT)*** 1929 -2738 0.69
New Focus (Nasdaq: NUFO) 337 -146 2.30
ONI Systems Nasdaq: ONIS) 572 -226 2.52
Sycamore (Nasdaq: SCMR) 742 -183 4.05*Cash, equivalents, short-term investments (from the latest 10-Q balance sheet).
**Net cash from operating activities + capital expenditures, annualized (from the latest 10-Q cash flow statement).
***Lucent, Corning, and Nortel carry significant long-term debt.
Why do we care how long a company can survive on its current cash? Because that's how long it can determine its own destiny. When a company first faces declining revenues, management tries to cut expenses. If there is no cash cushion, the company must simply slash and burn desperately to stay afloat. It may be able to raise capital through new stock issuance or debt offerings, but chances are good that a company in extremis will find its stock a poor currency or debt terms usurious. (One example is Lucent's recent convertible debt offering at 8%, higher than the 5% or so better-off companies can obtain.) As things get worse a company may be forced to sell itself for peanuts.
Scrutinize the next quarter's cash burn, too. Keep in mind what I tend to forget: You have to look at two quarterly cash flow statements in a row to determine the most recent cash burn, because companies report cash flow cumulatively. (The Q1 10-Q will have three-month numbers, the Q2 six-month numbers, and so on, without breaking out the most recent quarter separately.) The reason for noting the most recent quarter's burn is that the continuing collapse in the telecom world may mean burn is accelerating and the survival term decreasing.
RSS Headlines
Fool UK
