Optical/IP Networks

Avici Warns, Wall Street Scorns

Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) today cut its third-quarter revenue estimates by more than half and fired about 55 employees. The company blamed lower customer orders and market conditions for its actions.

The core router maker expects quarterly revenues to be between $9 million and $10 million, down from its earlier estimates of $22.5 to $23.5 million. The lowered estimate signals the end of Avici's streak of six consecutive quarters of revenue growth.

In July, Avici reported second-quarter pro forma loss of $11 million, or $0.23 cents a share, on $21 million revenues (see Avici's Quarter Is All AT&T).

To trim operating costs Avici is cutting its workforce by about 55 employees, or 14 percent. The company also plans to take a $15 million to $18 million charge against its third quarter earnings related to excess inventory and restructuring costs.

Avici says its pro-forma net loss per share for the three months ending September 30, 2001 will be in the range of $0.40 to $0.42 cents a share. Wall Street analysts expected that Avici would lose $0.23 cents a share during the quarter, according to Thomson Financial/First Call.

The source of Avici's woes is easy to spot. Its customers are spending less on equipment for their networks which means they aren't ordering as many big routers.

About 85 percent of Avici's revenues came from AT&T, Enron, and Qwest during its first fiscal quarter of 2001 (see Crunch Time at Avici? ). Qwest and AT&T made up more than 10 percent of Avici's revenues in the second quarter. That's good company to keep, but Avici's customers, like those of other companies, are struggling to cope with the soft demand for broadband services in a slowing economy.

For example, Enron has cut some 350 jobs from its broadband unit since April. On Monday, Qwest fired 4,000 workers and cut its 2001 capital spending budget by $300 million and its 2002 budget by $2 billion.

"These cuts effect Avici substantially more than they do competitors such as Juniper Networks Inc. (Nasdaq: JNPR) and Cisco Systems Inc. (Nasdaq: CSCO)," says Merrill Lynch & Co. Inc. analyst Sam Wilson, who has been bearish on Avici for months. "Those companies are cash-flow positive while Avici is losing millions each quarter."

But slowing capital spending is not Avici's only worry. With more competitors than ever looking to play in the big router market – including Pluris Inc., Caspian Networks, and Hyperchip Inc. – Avici will have to fight even harder for each sale.

The realization that Avici may be headed for tougher times has taken a toll on its stock price. Avici shares fell $0.72 to $2.06 in early afternoon trading on Monday, bringing the company's market capitalization down to about $101 million.

"I don't see any near-term catalyst to drive the stock price higher," says Wilson.

- Phil Harvey, Senior Editor, Light Reading

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