Corvis Corporation
Conference Call and Earnings Release Notes
September 30, 2001
1. “Positioning ourselves to build a solid long term business with excellent prospects.” Claimed this is a major accomplishment considering the telecom environment as well as the tragedies of September 11th. Lowered Cash burn to $57 million, down from 147 mil in Q1’01 and 106 mil in q2’01. Priorities are new customers and expand continued strong relationships with existing customers. Hopes to bring new and innovative optical products to market. Expects to end year with $640 mil in cash.

2. Economic and political uncertainty leads to non-guidance. Corvis wants to focus on things they can control, such as on their provided solutions and rapidly deployed networks. No customer financing commitments. Corvis is financially flexible as they can adjust spending at their own rate. They can accelerate or decelerate by customer demand. They are pleased that they can navigate in a difficult operating environment. They believe “long term prospects are excellent “

3. Strengths

A. Strong customer relations. Focused on customer relationships. Making progress with new customers. During quarter announced Telefonica and more recently announced France Telecom R & D. Corvis is hearing that carriers are looking to change business models into areas where Corvis models are ready to address. Corvis is seeing competitors adapt their non-legacy philosophies. Corvis claims they have the only existing all optical switching and terrestrial Raman Amplifiers. Broadwing’s rapid provisioning sets new industry standard for useable bandwidth.Williams Communications is making progress on national network deployment. Corvis ability to deploy new circuits in under 48 hours is a clear competitive advantage. This accelerates time to revenue. Expect to ship to unnamed global carrier in Q1’02. (I expect that this unnamed customer is not France Telecom since they were mentioned twice already during call). EPIK field trial to begin in Q1’02 Corvis is aligning itself with customers with strong financial strength and strong business models. These customers have staying power according to David Huber.

B. 2nd strength is the quality of products. New products are being developed which will broaden product portfolio. One example is the increased flexibility of the all-optical switch.

C. Financial position is their 3rd strength. Will also continue the workforce reduction; while at the same time keep up efforts to retain key personnel. Continue to streamline and consolidate. Whatever actions they take will not reduce the quality of Corvis products or deployment. Prioritize R&D initiatives. Actions they are taking will position Corvis to win in the market place.

4. Financial Discussion

A. No customer financing. Key focus to maintain strong balance sheet.
B. Streamlined production capacity via consolidation of certain facilities, eliminating discretionary expenses and strategic workforce reduction. Will reduce cash burn rate. Will promote cost efficiency.
C. Revenue was generated 70 % to Broadwing and 30 % to Williams. This revenue was 45 % transport and 55 % switching products. Qwest commercial deployment is either late Q4’01 or Q1’02, first needs to meet technical prerequisites. Gross margins were in line with objectives. Costs were contained via R&D, G&A, Sales and Marketing. All costs were reduced as intended.
D. Workforce was 1270 employees at end of quarter, net decrease of 5 % from Q2’01.
E. DSO was 95 days, calculated on rolling 12-month basis.
F. Inventory was 65 % raw materials; balance was split evenly between WIP and FG.
G. Cash burn will increase slightly in Q4’01 due mainly to restructuring charge.
H. Guidance for financial projections.

1. Total revenues for F2001 projected 190 M to 210 M. This is down from previous guidance. Previous guidance was around 315 m to 325 M. This changed due to push outs of purchase orders. Corvis is on track to meet all conditions of future deployments. Expects Q4’01 revenue of 15 mil to 35 mil. Gross margins from low 20 % to mid 30 %. All expenses to be at or below Q3’01. Full fiscal operation expenses to be at 235 to 245 million. Further facility consolidation and workforce reduction.
2. Guidance only to be given for total operating expenses 165 – 185 million (decrease of 25 % YOY). These include implemented and pending initiatives. Cash Burn to be 125 –150 million for F2002. Should have cash at end of F2002 between 499 to 551 million.
3. Breakeven conservatively estimated after F2002.

Question and Answer Session

1. Rick Schaefer CIBC said hearing positive things from carriers who are requesting RFP’s from Sprint, Qwest and WorldCom regarding Corvis. (My note… it is important for us to remember to keep an eye out for future reports from CIBC, looking for consistency or deviations from this comment). Corvis said they have substantial purchase orders from Qwest, but first Corvis needs certification. All going well. Certification required before recognition.
2. Credit Suisse asked about delays due to certification process. Huber has been out to Qwest, certification process expected to be completed this year. Huber is pleased with progress and this is a short time since start to near completion.
3. Market in Asia was discussed. Huber mentioned that they have been looking at Asian RFP’s. Evaluation a sales team possibility in Asia. Discussed that carriers are looking for products that will help in opex. This helps the transition in voice revenue to data revenue. Huber is happy with rapid deployments and customer satisfaction.
4. Question from JPMorgan if Telefonica and France Telecom if new revenues can be generated. Huber indicated that they are working with them to introduce other products. Yet no answer was given.
5. Merrill Lynch asked to provide insight in revenue recognition policies. What are gates to meet specifically for France Telecom, Qwest and Telefonica? Corvis follows industry practice, yet CFO is seeing that more stringent requirements need to be satisfied before revenue is recognized.
6. Question if Williams contract has been renegotiated. Corvis said no. The final orders for Williams maybe delayed to either Q4’01 or Q1’02. Corvis mentioned that breakeven levels would be around 400 million.
7. Accounts receivable went down from 67 mil to 57 mil. DSO’s have trended up over last few quarters. That trend has been used in cash burn projections. There was a customer request for payment extension, this request was accommodated. Most of the Accounts Receivable was current and 40 % was received subsequent to quarter end. Lehman asked for clarification that the current portion was current based on contract and perhaps greater than 90 days. Corvis confirmed this.
8. Carriers are recognizing that vibrant business models do not include SONET rings. Dr. Huber is seeing a strong demand for services. Demand for services is there but capex is not there. Huber feels that capex will have to be increased, as architecture of system requires more equipment. Services can only go so far. One large carrier is no longer able to use the balance sheet to build out network. Hence, Huber is seeing a strong interest in opex issues, whereas there was little interest in the past on that. (My notes…. this is what Gilder discussed in GTR October 2001 as a shift from capex to opex). Huber feels this is excellent for Next Gen companies (such as Corvis). All competitors, without exception have moved to Raman products and next generation equipment.
9. Huber said field and lab trials in Q1’02 for OCS products that are the most advanced product of its type in the market place. Product should open substantial new addressable markets. Most efficient and strongest of the new core switching cross connects ( I missed this).