The issue comes up because AT&T is Avici's only substantial customer. Avici routers are used in the core of AT&T's IP backbone, a contract signed in 2000 and recently extended (see Avici Expands AT&T's IP Backbone).
But some analysts believe Avici's survival depends not on AT&T -- which represents most of Avici's revenues -- but on reseller partnerships with Huawei Technologies Co. Ltd. and Nortel Networks Ltd. (NYSE/Toronto: NT). The Nortel alliance racked up $2.5 million in deferred revenues last quarter -- part of it from a deal with Swedish service provider IP-Only Telecommunication AB announced this week (see Avici Wins in Sweden).
The reseller relationships give Avici a "binary" future, says analyst Samuel Wilson of JMP Securities. If the partnerships sink, so does Avici.
Avici's core routers compete with upgraded offerings from Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR). (See Cisco Unveils the HFR and Juniper Unveils the TX.) Avici has never been profitable, and its revenues last year were down from 2003.
Table 1: Avici's Earnings
|Net loss ($M)||(35.4)||(37.0)||(64.8)||(95.5)||(84.7)||(47.8)|
|Source: SEC filings|
Complicating the picture this year is SBC's $16 billion bid to acquire AT&T. The deal won't be finalized for a while, but some analysts believe AT&T's vendor base -- Avici included -- could be in trouble as SBC takes the reins (see SBC/AT&T: Possible Winners & Losers).
Avici claims to be unfazed by the possibility. Avici CEO William Leighton -- a former AT&T executive -- says SBC isn't likely to meddle with the AT&T network right away. "They're going to have a lot of issues integrating those two companies. I don't think they're going to run around fixing things that aren't broken," Leighton says.
Indeed, AT&T's Internet Protocol (IP) core network is something SBC lacks. One theory, then, says the AT&T network would therefore remain intact under the merger, with SBC allowing the old AT&T to call the shots regarding upgrades and expansion.
Avici says SBC's broadband initiatives such as Project Lightspeed could pour more traffic onto the AT&T core, eventually forcing core upgrades.
Well, maybe. It's worth noting, though, that AT&T's backbone includes capacity built for AT&T Broadband, the cable unit sold to Comcast Corp. (Nasdaq: CMCSA, CMCSK) in 2001. With Broadband gone, "it's hard to see how they [SBC and AT&T] will have enough traffic to fill the network," says one analyst (see AT&T Cable Deal: Good for Gearmakers?).
Also, it's possible SBC could slow down Project Lightspeed as it diverts resources to integrating the AT&T network, according to analyst Tal Liani of Merrill Lynch & Co. Inc.
Clock Is Ticking
Avici's near-term survival plan is "all about gaining customers," Leighton says. In this area, Leighton could be Avici's ace in the hole. Back at AT&T, he was the guy who picked Avici for the IP core. After retiring from AT&T, he joined Avici's board last year and was named CEO in November (see Avici Adds to Its Board and Avici Cans Kaufman, Leans on Leighton).
Leighton says he can coach Avici in reading the carriers. "[Our sales force] will say we lost that deal because we didn't have Feature X -- but that's not why we lost it," he says. "If [a carrier] has a vendor that's not in the top two or three, you get rid of them by saying they don't have Feature X."
To land these new customers, Avici will have to lean on its resellers, analysts say. Huawei and Nortel have each gotten Avici into contracts, but the deals are sporadic and the revenues inconsistent (see Avici Target out of Reach ).
SURFnet was the first customer enlisted by Nortel, and yesterday [Wednesday] Avici announced Swedish customer IP-Only as the second to be produced by the Nortel partnership (see SURFnet Picks Nortel, Avici, Telindus). IP-Only will be installing Avici's QSR routers in four points of presence. The two combined for $2.5 million in sales during Avici's fourth quarter, which ended Dec. 31 -- but that money won't be reported until future quarters. With IP-Only, the delay is due to a shipping issue; with SURFnet, the revenue must wait for Avici to "deliver a particular feature we had contracted for," Leighton says.
Huawei, meanwhile, got Avici's foot in the door for some China Telecommunications Corp. (NYSE: CHA) business (see Huawei Partnership Boosts Avici ). But for the moment, Nortel is the more active of the partnerships. "We're trying to figure out what other opportunities might exist through Huawei," Leighton says. "We're under discussions with them about what to do next."
Among the complications with Huawei is the fact that the vendor is marketing its own core router, the NE5000E (not to be confused with the plain NE5000, which is Huawei's name for Avici's routers). But most analysts -- and Leighton -- don't expect it to gain enough momentum to erase Avici's usefulness as a Huawei partner (see Huawei Goes Hard Core).
Leighton wants to expand the features in Avici's products to make them stand out against the growing competition. This step would involve absorbing "functions in the carrier network that are done with appliances scattered all over the network." The strategy mirrors what Cisco is doing on the enterprise side with its Integrated Service Routers (see Cisco Takes Apps on Board).
But for now, the important goal for Avici is to beef up the customer roster by closing some of the deals it says its resellers are working. "You'll know in the next six months whether they're going anywhere or not," JMP's Wilson says.
— Craig Matsumoto, Senior Editor, Light Reading
For more on this topic, check out:
- The Heavy Reading reports:
— Next-Generation Routers: A Comprehensive Product Analysis
— Telecom Recovery Leaders and Laggards
For further education, visit the archives of related Light Reading Webinars: