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Optical/IP

AT&T Props Up Avici

Core router vendor Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) managed its second consecutive quarter of double-digit revenues today, announcing second-quarter sales of $11.6 million, beating analysts' average expectation of $10.25 million (see Avici Reports Q2 and Avici Reports Q1).

The vendor's net loss was $2.7 million, or 21 cents per share, considerably better than the 49 cents per share anticipated by analysts. On the early conference call this morning, CEO Bill Leighton said the quarter's net loss and gross margins, at 68 percent, were better than in any other quarter in the company's history.

As a result, the firm's stock rose $0.21 (4%) to $4.86 in early morning trading, valuing the firm at $63 million.

Even with that share price boost, Avici's capitalization is still only a sliver above the company's "cash, marketable securities and long-term investments" (as of June 30) of $62.3 million.

Why? Because although the company has good control over its costs and has enough cash to last it well into 2007, its sales are still dependent on a very small number of companies, and its quarterly sales are very unpredictable.

Leighton acknowledged this when he said how pleased he was to have two quarters of revenues higher than $10 million "after a couple of disappointing quarters in 2004" -- quite the understatement (see Avici Losses Continue in Q4 and Avici Reports Q3 Results). At least the company has no debt.

The CEO also noted that the quarter's hardware revenues of $10.5 million were "almost entirely from AT&T Corp. as it continues to increase the capacity of its network," while the service revenues of $1.2 million came from six customers (see Avici Expands AT&T's IP Backbone).

Those AT&T sales were the cause of the higher than expected margins, noted the CEO, as the sales were mostly linecards, rather than chassis sales that deliver lower margins, and the sales were direct rather than through a channel partner. He added that it is still too early to determine what sort of impact AT&T's acquisition by SBC Communications Inc. (NYSE: SBC) might have on future sales (see SBC/AT&T: How Painful for Vendors?).

AT&T has long been the foundation of Avici's revenues, though the company has managed a number of small deals, some through partner Nortel Networks Ltd. (NYSE/Toronto: NT), and one significant deal at China Telecommunications Corp. (NYSE: CHA) through its other major partner, Huawei Technologies Co. Ltd. (See Huawei Partnership Boosts Avici , SURFnet Picks Nortel, Avici, Telindus, Avici Wins in Sweden, and Telecom Italia Tests With Avici.)

Now, though, Huawei has its own core router, and the market competition has intensified with the arrival of Cisco Systems Inc.'s (Nasdaq: CSCO) CRS-1 router and the support Chiaro Networks Inc. is getting from ECI Telecom Ltd. (Nasdaq: ECIL). (See Cisco's CRS-1 Gets Edgy, Huawei Goes Hard Core, Avici Not in on China Deal, and Chiaro Lands ECI Investment.)

Leighton admitted that the one key area where Avici had "fallen short" in the past quarter was in "new customer traction." He noted that a new customer, announced in June -- Limelight Networks LLC -- would not deliver any revenues until some time in the third or fourth quarter of this year, but added that there were "pipeline opportunities in Europe and Asia," and that Nortel was delivering "various opportunities that should close in the third or fourth quarter." (See Avici Storms Supercomm.)

He added: "We have pretty good visibility into the next quarter at the moment. We have a good idea about what's happening." The company is focusing on smaller opportunities that its sales team can close more quickly, said the CEO, who believes revenues will continue to grow during the second half of the year.

Avici is still some ways off from profitability, though. Leighton says the vendor would need to hit revenues in the "mid twenties, perhaps even a bit higher" to achieve positive net income.

— Ray Le Maistre, International News Editor, Light Reading

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