Is ADVA a diamond in the storage rough? * Big SAN sales * Analysts smell upside * Cash crunch?

June 27, 2001

4 Min Read
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Despite an impressive list of customers, actual revenues, and competitive products in both the storage networking and metro-access market, ADVA AG Optical Networking (Neuer Markt: ADV) still has some hurdles to overcome as it attempts to revive its sagging stock price.

Though public since 1999, the Munich-based company trades on the German Neuer Markt (New Market), which pretty much guarantees anonymity among most U.S. investors. Now trading in the range of 5 to 6 euros (US$4.25-5.10) per share -- down from a high of 145 ($123.50) last fall -- analysts say ADVA could offer some upside, if the company can conquer its current cash crunch and execute well in an increasingly competitive market segment.

ADVA, which builds DWDM (dense wavelength-division multiplexing) gear for high-end enterprise customers, storage-networking providers, and metro-area carriers, has competitors both big and small, including Nortel Networks Corp. (NYSE/Toronto: NT) and ONI Systems Inc. (Nasdaq: ONIS), as well as startup LuxN Inc.. Historically, ADVA has concentrated on enterprise customers and European service providers but is now looking to expand its North American operations.

Douglas Smith, telecom equipment analyst for Credit Suisse First Boston, rates ADVA as a "buy," though without a target price. But at around €5 a share, Smith says, ADVA isn't much of a risk.

"They're currently trading at less than two times [projected] 2001 sales, which is not a very expensive multiple," Smith says. "They're a little underfunded, which is a concern, but they do have a large number of customers and a number of interesting products for storage and metro, markets with good long-term fundamentals."Though ADVA's history contains enough subplots to sustain an optical-networking soap opera (including the tale of how its U.S.-born, Stanford-educated leader moved to Germany to start a company), CEO Brian Protiva says the company is focusing on profits, not intrigue, for its future episodes.

"We'll be cash-flow positive soon," says Protiva, whose company lost €4.5 million ($3.8M) in the first quarter of 2001, on sales of €18 million ($15.3M). Protiva says he's comfortable with analysts' predictions of €110-120 million ($93.5-$102M) in sales this year, an increase from approximately €60 million ($51M) in 2000.

Part of the revenue increase is expected to come from ADVA's newest product, the FSP (Fiber Service Platform) 2000 -- targeted at high-end enterprises and service providers that want to provide direct fiber connections to corporate LANs or storage sites. According to Protiva, SAN installations account for more than half the company's current business.

The FSP 2000 promises to support "all protocols between the range of 10 Mbit/s and 10 Gbit/s." It joins the higher-end FSP 3000 and lower-end FSP 1000 units in ADVA's product line.

Though the products target some of the most attractive telecom markets, storage and metro, ADVA has some historical burdens to overcome. Tops is its cash-poor situation, which leaves the company at a disadvantage to its competitors. Though ADVA recently raised €7 million ($5.95M) in follow-on financing from its investors, it's still shortchanged compared to companies like ONI that were able to reap Nasdaq riches."ADVA doesn't have a huge amount of cash, like its [Nasdaq-listed] competitors," says CSFB's Smith, who notes that increasing sales presence in the North American markets is "an expensive proposition." Smith says he expects ADVA to seek some sort of additional financing.

Protiva, who was named CEO earlier this year, says ADVA is still working on getting its financial house in order, in part to prepare for a possible move to the Nasdaq exchange.

"It's taken us about eight months to get through our [financial] issues," says Protiva, who says the company is adopting the stricter accounting methods required by the U.S. markets. "But all our numbers going forward will be well-rounded."

If the current capital-expenditures slowdown continues, ADVA may be hit hard. Though Protiva says the company's customers are mostly larger service providers, he acknowledges that even the big-wallet companies have been affected by the current market conditions.

"Our big guys are still growing, but maybe not as fast as they hoped," Protiva says. The company also has to dance around some attractive but complicated reseller relationships, which include OEM deals with Cisco Systems Inc. (Nasdaq: CSCO), Siemens AG (NYSE: SI; Frankfurt: SIE), and Alcatel SA (NYSE: ALA; Paris: CGEP:PA), which sometimes compete directly with ADVA for business.Another quirk is the fact that JDS Uniphase Inc. (Nasdaq: JDSU; Toronto: JDU) owns almost 30 percent of ADVA, via its June 2000 acquisition of E-Tek Dynamics (see Inside JDSU's Secret Acquisitions), an early investor in ADVA. Though CSFB's Smith says the JDSU holdings "cause some stock overhang," he says it shouldn't dampen ADVA's potential.

"For their size, [ADVA] has good operating margins and performance," Smith says. "It all comes down to execution -- and getting through the downturn."

- Paul Kapustka, Editor at Large, Light Reading

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