Optical/IP Networks

Avici's Quarter Is All AT&T

Both in technological and financial terms, Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) continues to be "bleeding edge." That is, the company continues to bleed red ink while in search of new customers in the slowly developing terabit router market.

Avici today announced a second-quarter pro forma loss of $11 million, or 23 cents a share, on $21 million revenues, representing its sixth consecutive quarter of revenue growth. The numbers were slightly above analyst consensus predictions of a $0.24 per share loss on $19 million revenues. And the results compare favorably with last year’s second-quarter pro forma loss of $18 million, or 48 cents a share, on $2.2 million revenues (see Avici 'Pleased' With Q2).

Avici’s second-quarter net loss was 32 cents a share. Although the figure looks considerably better than last year’s $5.11 net loss, the numbers are distorted because Avici had not yet gone public in the second quarter and there were far fewer shares used to calculate the loss. Gross profit margins for the quarter were 45 percent, compared with a year-ago figure of 15 percent.

Avici burned $63 million cash between December 31 and June 30. Although the company still has $167 million in the bank, some analysts wonder whether it will need to raise more money before becoming cash-flow positive. Although Avici officials expect the company to burn more than $20 million in the third quarter, they have a “goal of profitability over the next year or so.”

CEO Steve Kaufman says he expects third-quarter revenue to grow between 5 percent and 10 percent over the second quarter. But due to the hazy market conditions, he is unable to predict growth beyond that.

The cloud of uncertainty is a heavy burden. “The biggest concerns are the slowdown in traffic and excess capacity,” says analyst Christin Armacost of SG Cowen Securities. “There’s not much demand yet for terabit routers.” She notes that the category accounts for only about 5 percent of the overall router market.

Regarding the concentration of revenue among a small number of customers, company officials noted without elaboration that 75 percent of revenue came from customers who account for at least 10 percent of revenue each. Although AT&T Corp. (NYSE: T) still is the only customer that has moved beyond testing to commercial deployment, Avici officials said another customer is very close to that stage.

Avici still has very little competition in the terabit space. Pluris Inc. is the only other vendor with a terabit product in field tests, but analysts say the privately held concern is trailing Avici in generating customers. Several other vendors, however, say they have field trials planned for terabit products before year-end.

Armacost has a Neutral rating on Avici. For Avici executives to solve the company’s sagging woes, she says, “They need to move their trial customers to commercial deployment.”

Meanwhile, Avici is also being distracted by several shareholder lawsuits, which often plague companies whose high-flying stock crashes (not exactly uncommon in the current optical environment). When the company went public a year ago, Avici’s stock zoomed to a first-day close of $96.75 before peaking at $174 a week later. The stock now languishes just a tad above a low of $5.04 when the stock bottomed out in June.

The plaintiffs’ lawyers in Avici's shareholder suits claim underwriters Morgan Stanley Dean Witter & Co. and Lehman Brothers solicited and received "excessive and undisclosed" commissions from investors in exchange for large blocks of Avici shares. The suits also claim the underwriters required those who bought IPO shares to purchase additional shares at predetermined prices that were above the IPO price (see AMCC, Avici Face Lawsuits).

Avici’s stock was at $5.79 in early Friday trading.

- Tom Davey, special to Light Reading
http://www.lightreading.com Movers and shakers from more than 100 companies – including Avici – will be speaking at Opticon 2001, Light Reading’s annual conference, being held in San Jose, California, August 13-16. Check it out at Opticon2001.

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