Since the bubble years, network equipment makers, particularly fiber optic equipment makers, have been struggling with severely declining revenues, overcapacity, and plummeting margins. Many of these companies have been far from profitability for a long time (or have never earned a profit), but they've been able to stay in business because of the huge stores of cash they accumulated during their IPOs. One company for which the cash hoard is dwindling is Avanex
Avanex builds fiber optic network components, such as optical amplifiers, multiplexers, and optical switches. Although this may sound like a sexy business, Avanex is in the position of having to sell its products for less than it costs to build them. Even though business has been rising a bit lately for telecom equipment providers, the upturn has not been big enough at Avanex to drive it to profitability -- or even to achieve positive gross margins. As a result, during the nine months ending March 31, 2005, cash and short-term investments decreased from about $89 million to just $41 million.
Compounding Avanex's woes were several acquisitions. During fiscal 2004, Avanex acquired optical components businesses from Alcatel
So, how are these businesses doing? This sentence from the latest 10-K says it all: "The combined operations of Avanex and the optical components businesses of Alcatel and Corning substantially increased the rate at which we utilized our cash resources." Either this isn't the outcome the management at Avanex envisioned or the CEO is trying to accelerate his retirement.
One last sign that is less then savory is that Corning has been aggressively selling its shares of Avanex on the open market. In the Corning March 2005 10-Q, they state, "We do not expect the market value of the Avanex shares to recover" by the time sales are done in early 2006.
With very uncertain prospects and a rapidly deteriorating balance sheet, Avanex still can't be considered cheap, even at its current price of around a dollar per share. While there is a chance here for a large gain, the risk of a total loss, in my opinion, is too great.
For more on the industry, check out Forget Oil. Buy Telecom! And if you want to share your opinions with other Fools, head on over to our Corning, Vitesse Semiconductor, and Alcatel discussion boards.
Dan Bloom has no financial interest in any company mentioned in this article. He thinks Avanex gadgets are much more interesting than its stock.