Led by Founder, Chairman and CEO David Huber, the Maryland-based company adopted an unorthodox strategy by morphing into a telecommunications provider through the acquisition of Broadwing Communications last year.
Now, Corvis is poised to gobble another telco in a $210 million pact that will expand the company’s offering to include local phone service.
With the acquisition of Focal Communications Corp., Corvis is projected to generate about $930 million in revenue based on last year’s run rate for both companies. That’s a hefty chunk of change compared to its equipment days. For fiscal year 2002, Corvis reported a net loss of $507.8 million on $20.2 million in revenue.
“We believe Focal transforms [Corvis] into an end-to-end solutions provider for the enterprise market that can be less reliant on the ILECs for last-mile circuits and local connectivity,” Needham & Co. analyst Vik Grover writes in a report. “As Focal adds to [Corvis’] addressable market and strategic positioning, both as a stand-alone company and as an acquisition candidate itself, we see significant upside to the stock near-term.”
To understand the modern vision of Corvis, it helps to revisit the Corvis of old. A manufacturer of optical gear, the company developed equipment capable of transmitting optical signals up to 3,200 kilometers or more without requiring regeneration, says Corvis spokesman Andy Backman. He says this technology represented a great advantage over legacy technology, for which optical signals had to be converted to electrical signals every 200 to 400 kilometers and there was a requirement to amplify the signal roughly every 60 kilometers.
Backman says Broadwing spent $200 million on Corvis gear to build an all-optical network — the first of its kind. In July 2000, Corvis raised approximately $1.1 billion in an IPO, but a few months later the telecom equipment market began to show signs that something was awry. We all know the rest of the story.
Telcos put on hold their ambitious plans to build networks blanketing every corner of the globe, and the industry soon became the poster child for bankruptcy. The equipment market was still suffering a year and a half ago, and Corvis was a victim. That is when Corvis learned its flagship customer — Broadwing Communications — was for sale.
“It became apparent that Cincinnati Bell was looking to divest the Broadwing asset.We obviously knew the asset extremely well,” Backman says. “We thought it was undervalued with upside potential.” Corvis acquired Broadwing for about $80 million in cash.
Backman says that was a steal; Cincinnati Bell, he says, paid IXC Communications $3.2 billion for the network, plus assumed another $2 billion in liability.
Of course, the vendor was venturing into virgin territory: it had suddenly become a carrier’s carrier, competing with the same companies to which it marketed its network equipment.
“A lot of people were somewhat perplexed, but I think when you step back ... it was a tremendous decision for David,” Backman says of the company’s founder. “We have seen a very favorable reaction relative to where we were from Wall Street.”
In August 2003, two months after closing the Broadwing acquisition, Corvis announced raising $77.4 million in a private equity placement at a price of $1.15 per share. Six months later, Corvis announced closing a private placement of $225 million of senior unsecured convertible notes through institutional investors. Backman says Corvis can draw another $75 million in the late fall.
Shares of Corvis have tripled since Broadwing announced it was being sold. Still, its stock price is modest. On May 6, Corvis shares on the NASDAQ were trading at $1.44.
Backman says Corvis has not abandoned the equipment space, but the company is clearly concentrating on its service provider business. Corvis still sells gear to the U.S. government. In the fourth quarter, Corvis generated $140.2 million through Broadwing, the remaining $2.1 million in revenue through equipment contracts with the federal government.
“We have sized the equipment business to how we see the market realities,” Backman says. “If that market turns around, we will be ready,” but “we don’t see that happening for a while.”
Meanwhile, Corvis has made Broadwing less reliant on sales to other service providers.
Broadwing books about two thirds of revenue through enterprises, the remainder of sales through larger carriers. A few years ago, it was just the opposite.
Broadwing generates two-thirds of revenue through sales of data services, but that also will change with the Focal acquisition. According to Backman, Focal books most of its sales through voice services.
Needham & Co. analyst Grover says one thing that will help Broadwing is a program Corvis designed to save the company $3 million to $6 million in access costs per month.
Corvis is regrooming the network in 200 cities, acquiring fiber closer to buildings to lower the heavy costs it pays other carriers including the regional Bells. Corvis also expects to realize $20 million to $30 million in cost savings through the acquisition of Focal.
