ONI Plans Solo Act, Profits in 4Q
By Eric C. Fleming
CNBC.com Stocks Reporter
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May 3, 2001 08:00 AM
ONI Systems Corp. {ONIS, News, Boards} has seen highs and lows in its short tenure as a public company. Still, chief executive Hugh Martin is confident of entering the black by the fourth quarter.
The San Jose, Calif.-based company makes optical networking equipment, such as Online9000, for regional and metropolitan networks, competing with other newcomers, such as Sycamore Networks {SCMR, News, Boards}, and giants like Nortel Networks {NT, News, Boards}.
ONI Systems stock performance since IPO
The stock's performance since its IPO in July looks like Mr. Toad's Wild Ride.
ONI Systems Corp. priced its initial public offering of 8 million shares in July 2000 at 25 a share, closing on its first day of trading at 84.56 and thereafter peaked at 142, then ONI slid with the rest of its optical brethren. For the glass half-full crowd, or those not swept up in the optical fiber mania, ONI is up 30 percent from its IPO price (based on a closing price at 35.94 on March 30), and is a doubler from its low at 15.75 in April.
Martin, 46, who serves as chairman and chief executive is no stranger to technology. Martin helped design the first RISC chips, then went to work for Apple Computer Inc. {AAPL, News, Boards}, then 3DO Co., ending up at Kleiner Perkins Caufield & Byers, a private investing firm that owns a 10 percent interest in ONI.
In ONI's first quarter, lost $9.3 million, or 7 cents a share, on sales of $45.1 million, up from the year-ago period when it lost 62 cents a share on sales of $3.6 million. First Call/Thomson Financial consensus pegged it for a loss of 8 cents.
CNBC.com phoned in an interview with Martin about its prospects, competition, a timetable to reaching profitability and, of course, merger speculation.
CNBC.com: Let's start with the basics. What differentiates ONI products from the likes of Lucent and Nortel, just to name two?
Martin: At the top level, we have designed a product for the metropolitan market specifically. Others, like Nortel, are selling systems that are derivative from long-haul networks.
We have transparency, which means our networks can handle gigabit Ethernet, IP [Internet protocol], ATM [asynchronous transfer mode], digital HDTV, any of those things.
We can dynamically route traffic inside a metro area. We can re-route the light waves where you want them to when you want them.
We also have an optical protection system, so when a backhoe accidentally tears through a cable - which happens more often than you'd think - the network is instantly rerouted. In long-haul networks, you don't have to worry about backhoes.
CNBC.com: Since we touched on the competition issue, For breaking up the bottlenecks in big networks, whom do you regard as your closest rivals?
Martin: Nortel would be the most important rival for us. They are a very aggressive competitor, but when there new market emerges, it's difficult for a large company to innovate.
CNBC.com: Now let's talk results for a moment. In ONI's first quarter, lost $9.3 million, or 7 cents a share, on sales of $45.1 million, up from the year-ago period when it lost 62 cents a share on sales of $3.6 million. First Call/Thomson Financial consensus pegged it for a loss of 8 cents. What course did those numbers put you towards being profitable?
Martin: We believe we're going to be profitable in the fourth quarter of this year, we said that a quarter ago, and we haven't changed that. We feel very confident that we're going reach that goal.
CNBC.com: Let's talk customers. With CLECs (competitive local exchange carriers) seemingly dropping like flies and Bells reporting weaker numbers, how has that affected your business - how much exposure do you have to CLECs as customers?
Martin: We have 22 customers, 10 are CLECs and five long-distance, or IXC [independent exchange carriers] customers. Those IXCs generated 49 percent of revenue, 33 percent came from CLECs, utilities were 11 percent. This year, the IXCs have been the big spenders, next year, we think it will be the RBOCs.
(37 percent IXC, CLECs 32 percent, utilities 20 percent in the fourth quarter)
For CLECs, we have to be picky, and see how strong the customers are and choose carefully.
For the first quarter, we had five new customers, three were CLECs and none of them mentioned vendor financing.
CNBC.com: Breadth of customers is also a concern for your sector, with Sycamore Networks as a prime example of having one customer, Williams Communications, which is also an investor and customer of ONI. How many of your customers represent more than 10 percent of total sales in your first quarter?
Martin: Two.
[Martin wouldn't disclose who they were. However, Steve Levy, analyst at Lehman Brothers, was fairly certain that the two were Qwest Communications International Inc. {Q, News, Boards} and Williams Communications Group Inc. {WCG, News, Boards}.]
CNBC.com: How about developments in your main market, the metropolitan optical sector. Do you see the metropolitan optical market becoming a commodity as it has in the long-haul market?
Martin: There's two issues there. The long haul market has become commoditized because the carriers have commoditized them. The only distinguishing feature is cost per bit.
In the metro area, the closer you get to the end user, the more important services are. Look at the margins the Juniper and Cisco get, but because they can get so many value-added services. They provide so many ways for their customers to make revenue.
It will be quite a while before we see the same commoditzation in the metro market. Also, there are not 20 different carriers in a given metro market. And the prices are pretty stable.
CNBC.com: Besides making metro components, ONI also tests and installs network systems - do you view that as part of the core ONI business, or something peripheral?
Martin: That's peripheral. We do everything we can to make sure the system is up and running. It's sophisticated and it needs to be installed correctly.
CNBC.com: What's your revenue guidance for the year?
Martin: We just issued guidance, and analysts are now $245 to $255 million, up from $60 [in 2000].
CNBC.com: What about 2002?
Martin: We haven't issued guidance for 2002.
CNBC.com: With your customers merging or just outright keeling over, would some M&A activity be out of the question for ONI?
Martin: Regarding ourselves, we formed this company because we saw a great opportunity. We are committed to what is in the best interests of the share holders.
We strongly believe that what's best for share holders, and right now we believe that, that means remaining an independent company.
I don't anticipate, though you can never say never, that ONI will be involved in network activity.
As far as ONI acquiring other companies, I think it's a time to be conservative. By waiting, we get to see which ones will have technology that works and how customers receive them. All things point to being cautious. With that said, we have $800 million in cash in the bank.
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