In the current environment of telecom woes, local loop equipment provider Advanced Fibre Communications Inc. (Nasdaq: AFCI) provided a glimmer of decent news in last night's earnings call. The company reported better than expected third-quarter revenues and earnings at the high end of analysts’ expectations (see Advanced Fibre Reports).

After Thursday’s market close, AFC reported $85 million revenues, topping the average analyst estimate of $82 million and the highest estimate of $83 million. The company’s $4.2 million in pro forma earnings equated to 5 cents a share, versus the analyst consensus of 4 cents.

In trading Friday morning, AFC shares ticked up 0.26 (1.29%) to 20.38. Meanwhile, the Light Reading Index fell 4.29 (2.42%) to 173.08, fueled by disappointing news from Sycamore Networks Inc. (Nasdaq: SCMR) and Corning Inc. (NYSE: GLW) (see Sycamore Enters Crisis Mode and Corning Slams on the Brakes).

AFC’s net earnings, including an unrealized gain on securities, were $16 million, or 19 cents a share, up 19 percent from the year-ago figure of $13 million, or 16 cents a share. But on a year-to-year basis, revenues plunged 26 percent to $85 million from $114 million, and gross margins were off slightly to 44 percent from 47 percent.

Excluding the one-time gain, pro forma operating earnings were $4.1 million, or 5 cents a share.

CEO John Schofield notes the company is making inroads with big customers. During the quarter, Verizon Communications Inc. (NYSE: VZ)and Sprint Corp. (NYSE: FON) each accounted for more than 10 percent of sales.

But future growth will come at a price. AFC is tightened its purse strings today by cutting 9 percent of its work force, or about 80 jobs. The company expects to take a fourth-quarter charge of “less than $2 million” for the restructuring. Schofield stresses AFC is not cutting back on crucial research and development or sales staffers who service key accounts.

Research firm RHK Inc.reported last month that AFC rose to the number two position among sellers of digital loop equipment in North America, with a 16 percent market share for the first half of this year. Last year, AFC was the fourth biggest player.

It was a tough period for the industry as a whole, however, as equipment sales shrank 35 percent to $703 million, compared with the period last year. One of last year’s dominant suppliers, Nortel Networks Corp. (NYSE/Toronto: NT), dropped out of the market. Alcatel SA (NYSE: ALA; Paris: CGEP:PA)is still the leader with a 40 percent share.

AFC officials say they expect fourth-quarter results to be comparable with the third quarter, with revenue in the $82 million to $86 million range and earnings of 5 to 6 cents a share. They expect modest growth in fiscal 2002 with revenues in the $350 million to $370 million range and earnings of 30 to 35 cents a share. They expect first-quarter revenues to be seasonally down but anticipate sequential quarterly growth the rest of the year.

AFC is sitting on cash and securities worth $11 a share. Among the securities AFC is counting among its urealized gain is stock in Cisco Systems Inc. (Nasdaq: CSCO), which the company acquired when Cisco bought its stake in Cerent through a stock swap in 1999. But AFC had hedged its 10.6 million shares of Cisco stock by using securities options to “collar” the minimum and maximum value on the stock. Although Cisco is now trading at 16.72, AFC is assured a minimum value of $60 a share.

- Tom Davey, special to Light Reading, http://www.lightreading.com