BMO Downgrades Xtera Communications On Liquidity Concerns

BMO Capital Markets has downgraded Xtera Communications Inc XCOM to Market Perform from Outperform after the company reported a weak quarter due to balance sheet issues.

Disappointing Q2

Xtera's second-quarter revenues, gross margins, operating margins and EPS were lower than expected, as cash constraints limited its ability to ship orders and caused the revenue shortfall.

"Given the balance sheet issues and imminent need for a capital raise, visibility is limited. While the pipeline offers promise and we appreciate the technological advantages of Xtera's offerings, the capital issues add considerable risk," analyst Tim Long wrote in a note.

"If management is able to raise enough capital in an efficient way in the next month or so, our model for FY2017 could be very conservative," added Long, who believes the stock will remain within trading range "until there is more visibility into the capital raise."

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It's Not All Negative

On the positive side, the company grew backlog by 17 percent sequentially to $94.5 million and sees $120 million in won-but-yet-unsigned deals, which implies over $200 million of "real revenue opportunity."

However, liquidity concerns offset these gains as the company defaulted on some debt covenants, and despite getting some extensions, Xtera didn't provide guidance given the uncertainty.

At the end of the March quarter, the company had $6.4 million in gross cash after having burnt $4.1 million in the quarter.

"A capital raise will likely be dilutive, but would enable Xtera to fully capture the revenues that are in its backlog and to potentially win new business. However, without a capital raise, we believe the company will need to explore strategic alternatives," Long noted.

Looking Forward, Stock On The Move

As a result, Long cut his revenue and EPS estimates for FY16 and FY17 to $69 million/($1.60) and $100 million/($0.98) from $115 million/($0.75) and $168 million/$0.03, respectively.

The analyst also cut his price target on the stock to $2.50 from $6.

Shares of Xtera touched a new 52-week low of $1.49 on Wednesday and closed Wednesday's regular trading session down 11.35 percent to $1.64.