Ethernet equipment

Avici Profits Rise, Stock Falls

Shares of Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) have fallen nearly 20 percent today despite the fact that the company reported strong third-quarter earnings. (See Avici Reports Q3.)

For the third quarter of 2007, Avici reported profits of $15 million, or $0.97 per share, on revenues of $29.3 million. In the same quarter last year, earnings were $2.7 million, or $0.20 per share on revenues of $20.2 million.

The 455 percent jump in earnings is mostly due to the fact that Avici is exiting the core router business and has given a final notice to customers like AT&T Inc. (NYSE: T), which are gobbling up its gear while it's still available. Avici expects to make final shipments of routers in the fourth quarter of this year.

Avici CEO Bill Leighton also noted during the earnings conference call that the company has eliminated most of its R&D spending on core routing and shifted it to its new software venture, Soapstone Networks Inc. (Nasdaq: SOAP).

It's the uncertainty over Soapstone that has caused investors to dump Avici's stock. "The revenue streams for Soapstone are very uncertain," says Vijay Sarathi, an analyst with Thomas Weisel Partners . "They won't be providing guidance on Soapstone until early next year, and revenues aren't really expected to ramp up until later than that."

Sarathi notes, though, that after this morning's 20 percent drop in Avici's stock, the shares "are fairly valued at the current price of about $9."

While the financial world is worried about the transition to Soapstone, Avici was feeling good about it during Light Reading's Ethernet Expo in New York this week. (See Avici Amped Up for Soapstone Launch.)

"The transition needed to occur," said Larry Dennison, CTO of Soapstone, at the Expo. "The whole industry has caught up to the whole carrier Ethernet thing. If you look at what our product is doing, we're removing an obstacle for PBT deployment."

That has drawn interest from many Tier 1 carriers, according to the company. Whether it draws attention from investors, only time -- and a little revenue guidance -- will tell.

— Raymond McConville, Reporter, Light Reading

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