I knew of [Heisenberg's] theory, of course, but I felt discouraged, not to say repelled, by the methods of transcendental algebra, which appeared difficult to me, and by the lack of visualizability.
I think you've stumbled on the secret of GG's analysis -- transcendental algebra.
He gave us the "The Post Diluvian Paradigm" of Xcelera.com, the "Over the Rainbow" promise of Terayon, and now the "Rocks the Telecosm" claims of Avanex.
Based on the following information culled from Avanex's latest S-8, I predict the only thing they're going to rock is their shareholders' credulity:
$50 million in losses, $10 million in revenues:
We incurred net losses of $1.1 million in the period from our inception on October 24, 1997 through June 30, 1998, $9.2 million in the fiscal year ended June 30, 1999, $7.5 million in the quarter ended October 1, 1999 and $12.3 million in the quarter ended December 31, 1999. As of December 31, 1999, we had an accumulated deficit of $50.2 million. . . . Although our net revenue has grown from zero in the quarter ended March 31, 1999 to $10.9 million in the six months ended December 31, 1999, we cannot be certain that our revenues will continue to grow or that we will ever achieve sufficient revenue levels to achieve profitability. . . .
One product represents 99% of sales:
Sales of our PowerFilter product accounted for 95% of our net revenue in the quarter ended June 30, 1999 and 99% of our net revenue in each of the quarters ended October 1, 1999 and December 31, 1999. We substantially depend on this product for our near-term revenue. . . .Our customer base is highly concentrated. We began recognizing revenues from sales of our products in the quarter ended June 30, 1999. [GG bases his analysis on the PowerMux product, which, if shipping, represents 1% of revenues.]
One customer represents 85% of revenues:
MCI Telecommunications and MCI Worldcom, collectively MCI Worldcom, accounted for 92% of our net revenue in the quarter ended October 1, 1999 and 85% in the quarter ended December 31, 1999 . . . .[In another part of the S-8, it says:]
We began recognizing revenues from sales of our photonic processors in the quarter ended June 30, 1999. In the fiscal year ended June 30, 1999, sales to Osicom, MCI Telecommunications and Hitachi accounted for 33%, 32%, and 29% of net revenue, respectively. In the quarter ended October 1, 1999, sales to MCI WorldCom accounted for 92% of net revenue. We expect that the majority of our revenues will continue to depend on sales of our photonic processors to a small number of customers.
Volume manufacturing faces challenges not seen by "evaluation units":
Customers generally will not purchase any of our products, other than limited numbers of evaluation units, before they qualify our products, approve our manufacturing process and approve our quality system.
Qualification of manufacturing lines not guaranteed:
Our existing manufacturing line, as well as each new manufacturing line, must pass through various levels of approval with our customers. Customers may require that we be registered under international quality standards, such as ISO 9001. Our products may also have to be qualified to specific customer requirements. This customer approval process determines whether the manufacturing line achieves the customers' quality, performance and reliability standards. In order for CMI to manufacture products or discrete components for us in the future, their manufacturing line would also need to be qualified by our customers. Delays in product qualification or ISO 9001 registration may cause a product to be dropped from a long term supply program and result in significant lost revenue opportunity over the term of that program. . . .
Fujitsu license agreement prevents possibility of being acquired:
We license technology from Fujitsu that is critical to our PowerShaper product. The license agreement is subject to termination upon the acquisition of more than a 50% interest in us by certain major communications system suppliers. Thus, if we are acquired by any of these specified companies, we will lose this license. The existence of this license termination provision may have an
anti-takeover effect in that it would discourage those specified companies from making a bid to acquire us. . . .
May 3, 2000 lock-up release (4 trading days away):
As of December 31, 1999, our executive officers, directors and substantially all of our stockholders, who held an aggregate of 55,391,841 shares of our common stock, or over 97.9% of our total outstanding shares, had executed lock-up agreements that prevent them from selling or otherwise disposing of our common stock for a period of 180 days from the date of our initial public offering, or February 3, 2000, without the prior written approval of Morgan Stanley & Co. Incorporated. These lock-up agreements will expire on August 1, 2000, and an aggregate of 46,129,693 shares will be eligible for sale, in some cases subject only to the volume, manner of sale and notice requirements of Rule 144 under the Securities Act.
Notwithstanding the 180-day lock-up period, 25% of the shares, or 13,847,960 shares, subject to these lock-up restrictions, including 3,644,690 shares held by our executive officers and directors, may be released from these
restrictions beginning May 3, 2000. This release will occur if the last reported sale price of our common stock is at least two times the initial public offering price per share for 20 of the 30 trading days preceding the 90th day after February 3, 2000. Of these shares to be released on May 3, 2000, 11,315,945 will be eligible for sale, in some cases subject only to the volume, manner of sale and notice requirements of Rule 144.
Sales of a substantial number of shares of our common stock could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. . . .
Primary customer is also major shareholder:
The 769,230 shares of common stock that we sold to MCI WorldCom Venture Fund and Microsoft concurrently with our initial public offering are "restricted securities" and the one year holding period for these shares will expire one
year from the date of sale. The date of sale was February 9, 2000. However, each of MCI WorldCom Venture Fund and Microsoft may, beginning 180 days after February 3, 2000, exercise their registration rights which will enable them to
sell all of their shares in the open market. . . .
International Sales involves 2 Distributors:
In order to further our international sales objectives, we have established relationships with two distributors in Japan. These distributors have expertise in deploying complex telecommunications equipment in their markets and provide basic support required by our international customers.
Customers Service totals 2 people:
We believe that support services are essential to the successful installation and ongoing support of our products. We deliver these services directly to major customers and indirectly through our international distributors. As of October 1, 1999, we had two people in customer service and support, located in our Fremont, California corporate headquarters.
>>>>>>
I'm no genius when it comes to understanding the telecosm, but I have enough sense to know not to invest in companies with one product going to one customer, especially when that one product has to be manufactured in certified facilities and the one customer has pre-IPO stock and has nothing to lose by placing the first order.
In all fairness, after reading the S-1, I believe the company has products that could eventually lead to success. I also believe they have enormous challenges in getting their products to market as well as formidable competition from companies like JDSU, LU, ETEK, and NT. If they were not hamstrung with the Fujitsu licensing agreement, they would at least be a prime take-over target.
In a market environment that insists on revenues in line with growth potential and in a near-term environment that will see 25% of Avanex's shares unlocked and potentially flooding the market, I find it difficult to applaud Mr. Gilder's decision to tout this company at this period in time.
Pat |
