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DT Delays Hit ECI Revenues

Light Reading
News Analysis
Light Reading
10/26/2006

Israeli vendor ECI Telecom Ltd. continues to suffer from delays in carriers’ next-generation network buildouts, reporting flat sequential revenues and cutting its revenue guidance for the fourth quarter.

The company posted a 14 percent increase in third-quarter net income to $7.1 million, or $0.06 per share, on revenues of $170 million, up 5 percent year on year. That was just shy of analysts’ expectations of $170.40 million in revenues.

ECI’s net income was affected by historical adjustments in the financials of Veraz Networks Inc. (Nasdaq: VRAZ), in which it holds a 40 percent stake. Veraz filed for an IPO on Friday and adjusted its statements to reflect a higher than expected net loss. (See Veraz Files for $115M IPO.)

ECI says the majority of its business is coming from the optical networking division, where it's seeing increasing demand for mobile cellular backhaul gear in emerging markets. It counts Bharti Airtel Ltd. (Mumbai: BHARTIARTL) and Tata Teleservices Ltd. in India, Kyivstar GSM in Ukraine, and Vimpel-Communications (NYSE: VIP) in Russia among its customers.

But those gains were offset by lower revenues from its broadband access business, a trend that has carried over from the second quarter. (See ECI Drops Despite VDSL2 Coup .) Revenues from broadband equipment declined to $57 million, compared with $68 million in the third quarter last year and $66 million in the previous quarter.

On the company’s earnings call, president and CEO Rafi Maor noted that "the broadband market is in transition as carriers take a long hard look" at the next-generation products being launched and in the meantime reduce their orders for legacy equipment.

The decline in revenues is down to the vendor’s high-profile NGN accounts at Deutsche Telekom AG (NYSE: DT) and Orange (NYSE: FTE), both of which are experiencing delays in their network rollouts -- partly due to regulatory issues in the case of DT. (See Achtung! Regulators Force DT to Share.)

CFO Giora Bitan said ECI is "not banking on a very large amount" in revenues from VDSL as the uncertainty plays itself out, and expects additional revenues from those contracts will be pushed out into the first half of 2007. On top of that, Maor said Deutsche Telekom has advised the company to expect lower revenues from legacy ATM equipment orders as well.

Executives remain upbeat about the broadband division, emphasizing that they expect the decline to be transitory and indicating the company is pursuing contracts with other Tier 1 European carriers, as well as taking the opportunity to sell broadband equipment to its optical customers in emerging markets such as Hungary and Russia.

The company now expects a sequential decline of between 8 percent and 12 percent in consolidated revenues next quarter. Analysts had expected fourth quarter revenues to reach $177.15 million. Executives said net income will be closer to third quarter levels, held up by the optical division and improvement gross margins.

ECI’s stock was down $0.60 (8.29%) to 7.52 in afternoon trading on the Nasdaq.

— Nicole Willing, Reporter, Light Reading

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