The long-awaited initial public offering (IPO) of optical networking start-up Corvis (Nasdaq: CORV) hit the streets this morning and is expected to catch fire.
The company, which makes cutting-edge optical equipment that enables signals to be sent long distances at lower cost, sold 31.6 million shares at $36 a piece, giving it a market value in the $11.8 billion range.
Corvis raised $1.1 billion through the offering, almost triple the $400 million it expected to raise, according to its initial filing with the Securities and Exchange Commission. The money ought to come in handy since Corvis doesn't expect to generate net income before at least 2002. It lost $71.3 million for the year ended January 1, 2000.
Corvis isn't making its debut alone. Today's second-hottest IPO is high-speed router manufacturer Avici Systems (Nasdaq: AVCI), which sold 7 million shares at $31 a piece, raising $217 million for the company's coffers.
What's the big deal about Corvis?
But financiers have eagerly awaited the Corvis debut. If its products work as well as officials say, Corvis makes some impressive gear that's been tested in real-world circumstances. In a July field test with Williams Communications (NYSE: WCG), Corvis sent pulses of light 3,200 kilometers without needing to regenerate the signals -- a costly, time-consuming process that involves converting the signal from light to electricity and back again. With current technology, signals have to be regenerated every 400 to 600 kilometers, according the Corvis filing.
In addition, Corvis has a pedigree. Its founder and CEO, David Huber, started rival Ciena (Nasdaq: CIEN) in 1992. Networking giant Cisco (Nasdaq: CSCO) and celebrity venture capital firm Kleiner Perkins have a stake in the company. In addition, it has signed multiyear customer agreements with long-haul carriers Broadwing (NYSE: BRW), Qwest (NYSE: Q), and Williams.
These agreements are contingent on successful trials, so it's too soon for Corvis investors to start counting on all of the deals for revenue. Also, the deals with Williams and Broadwing grabbed some negative publicity recently since both companies were issued shares of Corvis stock in advance of the IPO. This isn't unusual for start-ups, but it raises questions about a conflict of interest. (Check out a related story in Fortune.) In spite of this, Corvis is regarded as a very promising company with exciting technology.
The times, they are a changin'
In the interest of tempering market mania however -- and it's worth doing so because IPOs are basically a game of supply and demand that's played so well by underwriters and institutional investors -- individuals should see how much the public markets have changed in just two years.
Ciena went public in February 1997, selling 5.7 million shares at $23. This raised $122 million for the Linthicum, Maryland company and gave it a market value in the $2.2 billion range. However, it had $54 million in revenue in Q1 1997, and was profitable, reporting net income of $13.1 million and positive cash flow of $18 million.
Corvis is not only unprofitable but has no revenue. It's worth keeping this in mind, especially when an issue comes out of the gate as fast as Corvis. There's a lot more to building a business with a sustainable competitive advantage than great technology: Just look at Apple (Nasdaq: APPL) and Intel (Nasdaq: INTC) for a view of both sides of the street.
If Corvis is a good company now -- and it certainly has a solid foundation -- it will be a good company nine months from now and a year from now, well after the IPO dynamics are just a speck in the rearview mirror and its contracts with carriers are producing bookable revenues. Take the time to do some research and read the prospectus.
Also, keep in mind the company isn't the only fish in the long-haul pond. Nortel's (Nasdaq: NT) Qtera division in March announced the introduction of a long-haul system that sends signals 4,000 kilometers. Nortel expects to start shipping the products this quarter.
Your Turn:
Post your thoughts on Corvis, Qtera, and long-haul transmission on our Nortel discussion board.
Suggested Links:
Optical Networks: An Overview, Fool's Den, 5/31/00
Lucent Corrals Chromatis, Fool News, 5/31/00
