AFC Chomps on Competitors

Advanced Fibre Communications Inc. (AFC)'s (Nasdaq: AFCI) third-quarter revenues rose 8 percent from a year ago, thanks to continued wins against competitors, the company said Thursday (see AFC Reports Q3, Amends Results). The company's profits, however, were noticeably lower because of a changing product mix and lower carrier capital spending.

AFC's revenues for the quarter ended September 28 were $91.8 million, compared to $84.7 million for the year-ago period. The company's pro forma earnings, which exclude certain charges, were 9 cents a share, or $7.8 million. Analysts were expecting the company to report earnings of 4 cents a share on revenues of $91.9 million.

Including one-time items, AFC earned $9.6 million or 11 cents a share. During its year-ago quarter, the company earned $15.58 million or 18 cents a share.

"We are a strong, viable company; we're well positioned to endure the current downturn in our sector," says John Schofield, AFC's chairman, president, and CEO.

Carrier spending concerns, however, overshadowed AFC's optimism. "I think we likely will hear of more capex cuts," says Schofield. He also says AFC's 2003 revenues will be "about the same" as those for 2002.

For the fourth quarter, AFC expects to earn 4 or 5 cents a share and forecasts revenue growth of about five percent.

"The [capex] cuts in the DLC [digital loop carrier] market were deeper than we had expected," Schofield says. "In spite of this, we have grown our business by gaining market share."

Indeed, much of AFC's gains came at the expense of its competitors. Marconi plc (Nasdaq/London: MONI) is no longer focused on access, Nortel Networks Corp. (NYSE/Toronto: NT) sold its DLC business to Zhone Technologies Inc., and Lucent Technologies Inc. (NYSE: LU) may soon be "de-emphasizing its access business as it struggles to break even in the next 12 months," writes Lehman Brothers analyst Steve Levy in a research note this week.

"We believe that additional legacy vendors will exit the [DLC] market like Nortel," Schofield says.

AFC's headcount grew to 886 from 843 at the beginning of the year, the company says. The company ended the quarter with $965 million in cash and marketable securities.

Purchases from Alltel Communications Products Inc. (NYSE: AT), Sprint Corp. (NYSE: FON), and Verizon Communications Inc. (NYSE: VZ) accounted for 53 percent of AFC's quarterly revenues, the company says.

AFC's two newest products, both developed by startups, will likely account for about 10 percent of the company's total revenues in 2003, Schofield says (see AFC Stokes Up Startups).

AFC also announced a one-time charge of $1.7 million related to a lease that it should have been recorded in the fourth quarter of 2001. The company will restate earnings for the first two quarters of 2002 but says the adjustment won't affect revenues or cash flows for the adjusted periods.

— Phil Harvey, Senior Editor, Light Reading
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