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Avici Losses Increase

Light Reading
News Analysis
Light Reading
10/23/2001

Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) reported third-quarter 2001 earnings this morning (see Avici Announces Q3 Returns). And, like other system companies in the telecommunications and networking industry, its executives offered little assurance that the downturn had hit bottom.

As a result of reduced capital spending by carriers and lengthened sales cycles, Avici announced that its net loss for the third quarter widened. The news came as no real surprise, as the numbers were in line with Avici’s sharply reduced estimates. The company cut its revenue expectations in half back in September when it announced a 14 percent reduction in its head count to reduce costs (see Avici Warns, Wall Street Scorns).

The company reported a net loss of $41.2 million or $0.83 a share, compared to a net loss of $23.6 million or $0.70 a share, for the same quarter a year ago.

Before one-time charges and non-cash, stock-based compensation, Avici said it lost $19.4 million, or $0.39 a share. Analysts polled by First Call expected a loss of about $0.40 per share. Revenues for the third quarter were 10.3 million, compared to $4.3 million a year earlier. Before it warned last month, Avici expected revenues of up to $23.5 million.

The company also took a one-time charge of $18.3 million, of which $17.2 million was for excess and obsolete inventory. The remaining $1.1 million was associated with restructuring and last month's headcount reductions. Since June, Avici has reduced its work force to 340 employees from 407.

Avici President and CEO Steve Kaufman said he expects revenues to remain flat over the next quarter and through the first half of 2002, with growth expected in the second half of next year. And he told analysts on the call that the current capital spending conditions have reduced visibility.

“We are not providing guidance at this time,” Kaufman told analysts on the conference call this morning. “But we expect core routing conditions to be flat for the remainder of 2001. Carriers are pushing spending decisions out, but we remain confident in the IP market and expect momentum to pick up in the second half of next year.”

While Kaufman also said that carriers are seeing Internet growth rates of 80 percent to 100 percent, the big issue on analysts’ minds was Avici’s customer base (see Avici's Quarter Is All AT&T). This quarter, the company realized revenue from five customers, with over 50 percent of its revenue coming from three of them: AT&T Corp. (NYSE: T), Enron Corp. (NYSE: ENE), and the United States Government (no Website). Of these three customers, AT&T is the only one to have deployed the flagship TSR scaleable routers in live deployments. The other four customers are not yet fully deployed. The company also said that it is currently in 13 trials.

Kaufman blamed the losses this quarter mainly on the reduction in carrier spending, which has resulted in lengthened carrier evaluations and delayed ordering. Specifically, he said that sales to Enron were a disappointment and he doesn’t expect them to pick up significantly over the next quarter. But he also said that buildouts at AT&T continue to look healthy in Q4 and beyond.

The company also introduced its second product this past quarter. The SSR stackable switch is expected to double Avici’s $1 billion to $1.5 billion market opportunity next year (see Avici Intros Tiny TSR). The new router is essentially a TSR cut in half. This smaller footprint will allow it to be deployed in smaller, regional points of presence and in ISPs, said Kaufman.

Avici shares were trading up 0.10 (3.64%) at 2.85 this morning. — Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com

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PantomineHorse
PantomineHorse
12/4/2012 | 7:41:23 PM
re: Avici Losses Increase
Hope AVCI is not banking on much w/Enron. It's starting to look scandalous over at Enron, w/SEC snooping and all. My guess is that Enron made a bunch of bad bets on the energy (and telecomm) futures market, plus other paper scams.

WSJ excerpt...

"Analysts also voiced concerns Monday about possible other bad news lurking amid Enron's vast and extremely complex operations. The company has dealings with a number of related entities. Under certain circumstances, if Enron's credit rating and stock price fall far enough, the company would be obligated to issue tens of millions of additional shares to these entities, diluting the holdings of current shareholders."

Count on dilution.

The notion that CapEx will pick up 2H2002 is overused by all these companies. Someone should ask,"any evidence to suggest this as a remote possibility (aside from wishful thinking)"?
cfaller
cfaller
12/4/2012 | 7:41:19 PM
re: Avici Losses Increase
PantomineHorse wrote:

"The notion that capex will pick up 2H2002 is overused by all these companies. Someone should ask, 'any evidence to suggest this as a remote possibility (aside from wishful thinking)?'"
__________________

There isn't any evidence, period. That doesn't stop fans of CORV and AVCI from trying to clap their hands and click their heels, though (I group the two companies together because they're both focused on providing a product to address massive upgrades in network cores).

It's funny how the fairweather fans all disappear when the s**t hits the fan. skeptic, ivehadit, sparxe, et all, where are you now?
skeptic
skeptic
12/4/2012 | 7:41:13 PM
re: Avici Losses Increase
It's funny how the fairweather fans all disappear when the s**t hits the fan. skeptic, ivehadit, sparxe, et all, where are you now?
----------

Your misrepresentations aside, I've never been
very positive about Avici. What I have
repeatedly said to you is that:

1. There is a market for large devices. The
days of forklift upgrades and the disposable
router with a one-year lifetime are coming
to an end. The days of just throwing tons
of routers/switches at a problem are at an
end.



2. Internet traffic is still growing. Your
weird ideas that "dot-coms" were the only
thing creating traffic growth on the internet
is not even worth responding to (again).

3. As traffic volumes grow, the networks have to
grow to meet the traffic. That means more
equipment has to eventually be purchased even
if those purchases are put off.

4. Avici has specific problems that kept it
from being acquired by Nortel and are keeping
it from getting new customers.


cfaller
cfaller
12/4/2012 | 7:41:08 PM
re: Avici Losses Increase
skeptic:

To me, it is obvious that carriers have cut back on capex because demand has fallen way below their projections. It's apparent that that notion is very disconcerting to not only you, but a lot of people on these message boards. Nobody wants to hear that customers won't be buying for another 9-12 months, so everyone just keeps believing in a turnaround that is juuuuust around the corner.

I agree that Internet traffic is growing, but our differences lie in the numbers- do you still believe internet backbones are growing in the triple digits? I don't think I'm way out of line when I say that bandwidth growth is and will be in the 15-20% range. Quite honestly, after seeing some more numbers come out, even that may seem a bit high.

Without that triple digit growth in demand, there isn't much need for a massively scalable router in the core- forklift upgrades are much more tolerable if you have to do it once every 2.5-3 years, versus every six months to a year.

Just like that, the problem that Avici's product solved has disappeared. By the way, this scalability problem was not the original need that Avici was going after- if you recall, Avici's whole schtick was based on having more bandwidth capability, and being the only terabit router on the market. Only when it became apparent that no one needed a terabit router did they change their tune to be a 'massively scalable' router.

Avici has seen these problems better than you. Avici saw their market vanishing and created a smaller router. All well and good, but being third to market won't help in this environment.

If you honestly believe there is a market for huge routers in the core, then who is addressing that need right now? Juniper and Cisco have had huge dropoffs in their business too, so it can't be them. Who do you think it is?

This gets back to my original doubts about Avici's product viability. It is a solution in search of a problem. Avici has tried twice to identify a problem (large bandwidth routing & scalability), to no avail. This is my first time predicting this, but I now believe Avici will fail- they may go bankrupt or get acquired by somebody, but either way Avici will not make it on its own...
skeptic
skeptic
12/4/2012 | 7:41:02 PM
re: Avici Losses Increase
To me, it is obvious that carriers have cut back on capex because demand has fallen way below their projections. It's apparent that that notion is very disconcerting to not only you, but a lot of people on these message boards.
----------
Its not "disconcerting", its dull having this
dicussion because you are wrong. As has been
explained several times in the past to you,
there is a problem at the carriers called
"revenue". The bandwidth demands are growing,
but the revenue is not growing proportional
to the bandwidth growth.

---------
I agree that Internet traffic is growing, but our differences lie in the numbers- do you still believe internet backbones are growing in the triple digits?
---------
Yes. It is still growing at higher than two
digits. I dont know anyone with direct contacts
who thinks it isn't growing at that rate.

--------
Avici has seen these problems better than you. Avici saw their market vanishing and created a smaller router. All well and good, but being third to market won't help in this environment.
---------

What Avici has found out is that if you treat
customers rotten and fight with everyone inside
and outside the company, you are not going to
get any customers.

The smaller router put out by Avici is more
desperation because they will be going into
a new sales cycle with competition based on
products several years younger and better than
theirs.
They are desperate because the financial community
is starting to write them off based on the fact
that they will likely not be competitive when
procket/caspian/etc start releasing products.

----------

If you honestly believe there is a market for huge routers in the core, then who is addressing that need right now? Juniper and Cisco have had huge dropoffs in their business too, so it can't be them. Who do you think it is?
----------

If you go talk to carriers what you find is:

1. They HATE juniper's roadmap. They didn't
like having to upgrade to the M160 and
then be presented with forklift upgrade
opportunities for the next two years.

2. Cisco doesn't care what they want. That
goes for both software and platforms. There
is an immense frustration in dealing with
cisco. And cisco does have a large router
in development, its just a matter than none
of their customers particularlly like what
they are designing.

-------
This gets back to my original doubts about Avici's product viability. It is a solution in search of a problem. Avici has tried twice to identify a problem (large bandwidth routing & scalability), to no avail. This is my first time predicting this, but I now believe Avici will fail- they may go bankrupt or get acquired by somebody, but either way Avici will not make it on its own...
-------------
I agree in part. Avici should have been acquired
by nortel rather than going IPO. But they could
not get along with nortel any better than
they could get along with customers. But its
wrong to make conclusions about the whole market
based on Avici because they have a whole set
of unique problems in that company.

There is a whole lot of dissatisfaction with
both cisco and juniper. And a whole lot of
motivation to get away from small routers in
the core of the network. Fewer routers is
one of the ways that the cost of operations
of larger providers can be cut.





















PantomineHorse
PantomineHorse
12/4/2012 | 7:40:59 PM
re: Avici Losses Increase
Horse said 10/23:

"Analysts also voiced concerns Monday about possible other bad news lurking amid Enron's vast and extremely complex operations. The company has dealings with a number of related entities. Under certain circumstances, if Enron's credit rating and stock price fall far enough, the company would be obligated to issue tens of millions of additional shares to these entities, diluting the holdings of current shareholders."

Count on dilution. <<<< 10/24 : Hoped you folks shorted ENE yesterday.

cfaller
cfaller
12/4/2012 | 7:40:55 PM
re: Avici Losses Increase
A long time ago, I stated that the market for Avici's router appeared to be a small handful of companies. AT&T, WorldCom, maybe Qwest, maybe some foreign carriers like BT or NTT. After that, what you observe is what you've already noted- carriers who may not be completely satisfied with Juniper or Cisco, but who also have neither the need nor the resources to buy a terabit router. You pointed out that Cisco's working on a core router- gee, what a coincidence, carriers aren't interested.

The question remains: if there is such a pressing need for a large router in the core, who is providing that right now?

With regards to bandwidth demand, let's say you're right. Let's say that bandwidth demand is still growing in the triple digits, and revenue is growing in the single digits (I can back this up if you want me to). Without getting into how ridiculous that situation sounds, doesn't that still mean that the market for core routers, large and small, is going to be terribly soft? Doesn't that still mean that the market for equipment won't be turning around for another year?

You've been debating with me on points, but reality proves out the bigger picture- carriers aren't buying, and won't be buying for another 6-12 months. Furthermore, when they do start buying again, they won't spend enough to support 5, 6, 7, etc. different equipment companies. The telecom industry will move to a horizontally integrated structure, much like the PC industry. Any boxmaker that's not ready for this change will get killed.

In the meantime, a lot of equipment makers (Avici included) and a lot of product lines will be shut down. I'm not sure why that's so hard to believe or accept...
PantomineHorse
PantomineHorse
12/4/2012 | 7:39:38 PM
re: Avici Losses Increase
Looks hope that Enron is only a "potential" disaster. The fear is, if ENE goes down, it could take a lot of stuff down with it.

Enron is not only an energy trader, but a lot of partners (incl. financial firms) are tied to its successful operation. Enron, in combo with Argentina's problem, is not good news for the financial markets. The derivatives exposure (who knows exactly what the exposure is since the company is "New Era, Financial Engineering") is the concern. Could losses dwarf the losses experienced in the telecomm industry the past couple years? Who the hell knows? I hope someone was paying attention.

Enron was also "active" in what was thought to be an upcoming market in "telecomm bandwidth trading". They've just done a yank job (across the pond), retrenching to get back to their core business, in order to survive.
PantomineHorse
PantomineHorse
12/4/2012 | 7:39:25 PM
re: Avici Losses Increase
ENE cratering again today, in some really heavy volume (top o' leader board, my man). ENE pfds are also getting knocked around and rather rudely.

If you utility trades thru Enron, you may want to check to see whether they are heavily on the "buy side" of some far flung transaction (that some far distant counterparty might reneg on), else it will be a "lights out, or a cold winter".

Realistically, this problem you shouldn't worry about 'cause the fed would never let this happen with more fresh currency off the presses to ensure liquidity in this "New Economy, bizarre financial market".

What might this do to bond prices, such as the upcoming corp telecomm bond auctions (eg. to ensure AT&T can function & get back to the way things used to be)? Who the f-k knows.

Financial scammers everywhere and now the public gets to pay the dues.
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