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To: Logain Ablar who wrote (2302)	4/27/2001 4:15:33 PM
From: John Pitera	Respond to of 2850

Corvis Corporation (CORV) CORV: STRONG QUARTER, WEAKENING 2S (Outperform, Speculative) OUTLOOK--CUTTING RATING TO OUTPERFORM Mkt Cap: $2,535.4 mil. April 26, 2001 SUMMARY * Downgrading rating on CORV to Outperform. TELECOMMUNICATIONS * Cutting full year revenue estimate and increasing loss EQUIPMENT estimates. Alex Henderson * Corvis reported 1Q revenues sharply ahead of forecast but was unable to bring down any new contracts other than a finalization and expansion of the Qwest deal. Timothy Anderson Management is now indicating it does not expect to be able to announce any new contracts before 2H 01. * Pricing pressure building in the long haul market due to aggressive tactics out of Nortel and Lucent resulting in lowered gross margin outlook. * We still believe Corvis has superb technology and is positioned to win in the transition to the "all optical" long haul backbone. * The long haul market build out is slowing sharply and is becoming more competitive as IXC cut spending and shift toward metro deployments. FUNDAMENTALS P/E (12/01E) NA P/E (12/02E) NA TEV/EBITDA (12/01E) NA TEV/EBITDA (12/02E) NA Book Value/Share (12/01E) $7.29 Price/Book Value 1.1x Dividend/Yield (12/01E) $0.00/0.0% Revenue (12/01E) $294.0 mil. Proj. Long-Term EPS Growth 60% ROE (12/01E) NA Long-Term Debt to Capital(a) NA (a) Data as of most recent quarter SHARE DATA RECOMMENDATION Price (4/25/01) $8.34 Current Rating 2S 52-Week Range $108.06-$5.00 Prior Rating 1S Shares Outstanding(a) 304.0 mil. Current Target Price $10.00 Convertible No Previous Target Price $12.00 EARNINGS PER SHARE FY ends 1Q 2Q 3Q 4Q Full Year 12/00A Actual ($0.10)A ($0.07)A ($0.07)A ($0.07)A ($0.31)A 12/01E Current ($0.07)A ($0.08)E ($0.06)E ($0.04)E ($0.25)E Previous ($0.06)E ($0.06)E ($0.06)E ($0.04)E ($0.21)E 12/02E Current ($0.04)E ($0.04)E ($0.03)E ($0.03)E ($0.15)E Previous ($0.01)E $0.00E $0.02E $0.03E $0.05E 12/03E Current NA NA NA NA NA Previous NA NA NA NA NA First Call Consensus EPS: 12/01E ($0.23); 12/02E $0.03; 12/03E NA CUTTING RATING TO OUTPERFORM 2S FROM 1S--LOWERING REVENUE FORECASTS AND INCREASING ESTIMATED LOSSES We continue to believe Corvis has strong technology and is driving a leadership position in the ultra long haul "all optical" backbone. However, we are lowering our rating on CORV to 2S from 1S. We think the company is caught in a difficult position as the end markets have become increasingly difficult, spending is shifting away from long haul to metro and the company is struggling to bring down new contract wins. Futhermore, the large network buildouts of the Broadwing (BRW, 1M rated by Jack Grubman--$23.92) and Williams (WCG#, 1S rated by Jack Grubman--$4.22) backbones are nearing completion and will likely result in diminished revenues from these key customers over the second half of the year. While Corvis has expanded their relationship with Qwest (Q, 1M rated by Jack Grubman--$38.90) and is poised to start the network ramp for them, we think it will be difficult for them to offset the declining business with Williams and Broadwing in the second half. We also think the continuing delays on winning new contracts are pushing new customers further into the future. Cutting Revenues Despite A Positive Revenue Result In 1Q. Corvis reported revenues of $84 million in 1Q compared to our forecast of $60 million. Despite this positive 1Q result, we are lowering our 2Q forecast modestly to $60 million from $65 million, well below the reported $84 million in 1Q. Management offered guidance of $50-$70 million. Our 2Q revenue forecast reduction is based on the Broadwing spending which is likely to decline from roughly $65 million in 1Q to roughly $20 million in 2Q and the ramp of the Qwest contract is not likely until 2H. We expect a moderate increase in Williams revenues in 2Q. In 2H, we are also lowering our revenue forecast from $80 million in 3Q to $70 million and for 4Q to $80 million from $110 million. These revenue reduction put our full year forecast at $294 million down from $315 million. Management has not lowered its official guidance of $310-$325 million, however, they are now describing it as potentially achievable. We think this leaves no upside and too much downside risk. Moreover, we think its predicated on bringing down new contracts in a timely fashion which we think will be difficult. For 2002, we are cutting our revenue forecast to $411 million from $$678 million. Management has not offered any guidance on these numbers, but the much lower 4Q base suggests this is a prudent reduction. From Sharp Sequential Revenue Growth To Sharp Sequential Cost Cuts. Going into the quarter Corvis was on a trajectory of strong revenue growth and breakneck infrastructure buildouts. During the call, management articulated a program to sharply reduce operating expenses going forward. We are cutting our forecast for R&D from $154 million to $133 million with R&D spending declining sequentially in each of the remaining quarter of 2001. We are cutting our forecasting for SG&A expenses for the full year to $90 million down from our previous forecast of $110 million. Additionally, due to the erosion in the cash position we are cutting our estimate of the interest income for the year from $54 million to $40 million. Pricing And Gross Margins Are Critical Issue. The long haul market has become sharply more competitive. The massive decline in Nortel's long haul business from $2.5 billion in 4Q to only $998 million in 1Q combined with a more aggressive Lucent which is finally getting some product into the field and actually had up optical revenues quarter to quarter with the bitter capital constraints at the service providers is making for exceptionally difficult conditions. Corvis cut its gross margin guidance sharply implying gross margins could dip to the 30% vicinity over the next several quarters. We had 42%-45% gross margins in our prior model and we are now using 32% for 2Q, 30% in 3Q and 31% in 4Q. We have also lowered our 2002 forecast to 35.4% from 50%. Delays And Deferrals. When Corvis came public, the indication was it would have two new solid contracts by year end. In October, the expectation was it would have one in 4Q and 1 in 1Q. By January the expectation was 2 contracts by mid year. Management is now saying: "it won't have any new contracts until the second half" at the earliest. We think its become exceptionally difficult to win new business even with the best technology. Service providers are sharply cutting spending and are looking for deals and know they have enormous buying leverage. Even if deals are won the contracts are at sharply reduced margins. Nortel (NT, 1H--$15.16) and Lucent (LU#, 2H-- $10.20) appear to be very aggressive on pricing.

To: Logain Ablar who wrote (2302)	4/27/2001 5:03:24 PM
From: John Pitera	Read Replies (1) \| Respond to of 2850

Corvis Corporation (CORV) CORV: Grooming Switch Is Not Likely To Have An 1S (Buy, Speculative) Impact On 2001 Results Mkt Cap: $2,052.0 mil. April 16, 2001 SUMMARY * Light Reading detailed Corvis' progress on its TELECOMMUNICATIONS O-E-O switch derived from technology obtained from EQUIPMENT its BayLight Networks acquisition. B. Alexander Henderson * The proposed product would compete most directly with Ciena's CoreDirector product, providing a high density switch with STS-1 grooming capabilities. Timothy Anderson * Strategically, the product makes sense as it increases Corvis' addressable market and provides an entry point for initiating new customer relationships to whom they can sell their other optical products. * While we think this development effort is interesting, it is unlikely to have any impact on financial results until 1H 2002 at the earliest. * The biggest hurdle that this product faces is time, itself, as CoreDirector momentum threatens to take away a sizable portion of the market before Corvis can market a finished product. FUNDAMENTALS P/E (12/01E) NA P/E (12/02E) 135.0x TEV/EBITDA (12/01E) 15.6x TEV/EBITDA (12/02E) NA Book Value/Share (12/01E) $7.29 Price/Book Value 0.9x Dividend/Yield (12/01E) $0.00/0.0% Revenue (12/01E) $315.0 mil. Proj. Long-Term EPS Growth 60% ROE (12/01E) NA Long-Term Debt to Capital(a) NA (a) Data as of most recent quarter SHARE DATA RECOMMENDATION Price (4/16/01) $6.75 Current Rating 1S 52-Week Range $108.06-$5.00 Prior Rating 1S Shares Outstanding(a) 304.0 mil. Current Target Price $12.00 Convertible No Previous Target Price $12.00 EARNINGS PER SHARE FY ends 1Q 2Q 3Q 4Q Full Year 12/00A Actual ($0.10)A ($0.07)A ($0.07)A ($0.07)A ($0.31)A 12/01E Current ($0.06)E ($0.06)E ($0.06)E ($0.04)E ($0.21)E Previous ($0.06)E ($0.06)E ($0.06)E ($0.04)E ($0.21)E 12/02E Current ($0.01)E $0.00E $0.02E $0.03E $0.05E Previous ($0.01)E $0.00E $0.02E $0.03E $0.05E 12/03E Current NA NA NA NA NA Previous NA NA NA NA NA First Call Consensus EPS: 12/01E ($0.23); 12/02E $0.03; 12/03E NA OPINION On April 12th on Light Reading, there was an article posted on Corvis' progress on developing a product to go head-to-head with Ciena's CoreDirector. This O-E-O switch is the product of technology of technology obtained from Corvis' acquisition of Baylight Networks in 2000. Strategically, we think this move makes sense from Corvis' perspective. First, its complementary to the vendor's existing portfolio as this switch feeds traffic into Corvis' existing portfolio of core products. As a result, the vendor can now offer a more comprehensive solution to customers spanning from the core of the core to the edge of the core. Secondly, Corvis can use the new switch as an entry point of initiating new customer relationships, a key challenge the company has struggled to overcome in recent quarters. At the Optical Fiber Communications Conference, we had an opportunity to spend a great deal of time with the Chief Operating Officer of Baylight, Geoffrey Dive. We think the product is interesting given that its allows service providers to move express traffic optically at the edge while performing grooming only when needed, improving network performance and lowering cost. Our take from our discussion, however, is the product is likely to remain in development throughout the end of the year. As a result, we view this product launch as a 2002 story at the earliest and hopefully we will receive additional updates either during Corvis' upcoming earnings conference call or other upcoming industry conferences such as SuperComm. We are impressed with the positioning of this product. It is designed to incorporate two switch fabrics one for O-O-O traffic in an "express lane" and one for grooming of O-E-O traffic. In essence, the device can provide the functionality of the Corvis gateway and provide a continuation of the all- optical backbone through traffic across the edge of the long haul network and into the metro core. This greatly improves throughput and lowers provisioning costs while also providing added network flexibility