Is IPO Lockup Expiration the Cause of ONI Systems Slide?

There are two common lockup release scenarios: Robert Downey Jr. getting out of jail, and stock shares being released from pre-IPO holding agreements. In both cases, one gets the sense that nothing good can come from it. ONI Systems(ONIS) may be feeling some pain from the latter this week.

The ONI Systems File

Operations

Business: makes optical networking equipment to prevent bottlenecks

1999 Revenue: $3 million

1999 Earnings: -$46.6 million

Stock Snapshot

52-Week Range: $50.06 - 142

Percentage Change from June 1 IPO: -37.1%

Market Cap: $6.8 billion

P/E Multiple: N/A (Price-to-Sales Multiple: 218)

Shares Outstanding: 131.8 million

Source: Baseline

ONI made its initial public offering on June 1, and inside investors were bound to hold all shares until the close of the market Monday. Lockup expirations are typically seen as a trying time for a stock, as insiders may flood the market with previously illiquid shares, spurring a drop in price. Given that ONI, which makes optical-networking equipment, has retreated 37% since its stratospheric debut in June, the expiration could have been cause for more selling.

But it could have been worse, as Michael Falbo noted in his piece a couple of weeks ago. What may have helped ONI in this instance was the relatively small number of shares that were part of the float. In this case, just over 3% of shares were released -- 4.1 million out of 131.7 million outstanding -- meaning that the market wasn't overly flooded with too many newly liquid shares.

The stock finished Wednesday trading off 9.1% at $46.38. This is a company in a hot segment with a growing customer base, so why the decline? That's the focus of today's Stock in the Spotlight.

5 Day

6 month

With a price-to-sales ratio of a stratospheric 218, according to Morningstar, the stock is still priced for just about perfection. Revenue is growing in leaps and bounds, but we're still talking small numbers. After posting revenue of $3 million in 1999, the company is expected to post revenue of $46.7 million in 2000 and $170.6 million in 2001, according to Thomson Financial/First Call. In its third-quarter earnings report, the company posted a smaller-than-expected loss of 14 cents a share and said it expects to break even in the fourth quarter of 2001.

At its IPO, ONI surged 230% by market close, gaining $57.56. Peaking later that month, the stock has dropped 62% since its high in mid-June, and over 38% since the close of its first day of trading.

ONI's products focus on increasing efficiency and speed of networking capabilities. This places the company in competitive leagues with Corvis (CORV) and JDS Uniphase(JDSU). While the company only went public last June, it has been developing and producing in the private sector for several years, and even received Industry Week's "Growing Company Award" in mid-November for one of the 25 most successful manufacturers in North America.

Success may stem from its growing client list. ONI's client base reached 13 by the start of November, up from only five in May. The list now includes major clientele such as Qwest(Q) and Williams Communications(WCG). Recent developing relationships include a multiyear strategic deal with Applied Micro Circuits Corp.(AMCC) and with Japan's Todentsu Corp., an agreement that will spread ONI systems across Japan.

Few funds have accumulated a large percentage of their assets in ONI, but the ones listed below are feeling it today.

Funds With the Biggest Stake in ONI Systems
Fund	Percentage of Assets in ONIS	1-Week Return	YTD Return
(M$-BDJH)Duncan- Hurst Technology R	2.8%	N/A	N/A
(TIWCX)Turner Wireless and Communication	2.5	-2.5%	N/A
(SRMGX)Liberty Midcap Growth S	1.9	-1.2	-13.7
(GIFAX)AIM Global Infrastructure A	1.8	-1.0	-10.6
(STECX)STI Classic E-Commerce Opportunity	1.6	-1.2	-10.6
(DTYAX)Delaware Technology and Innovation A	1.2	-4.9	-16.3
(DPAGX)Delaware Pooled Mid-Cap Growth Equity	1.0	0.1	-4.9
Source: Morningstar. Performance through Nov. 28.

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