Optical/IP Networks

OSS Decline Hurts Spirent

Spirent plc (NYSE: SPM; London: SPT) saw its value fall by a quarter this morning following its first-quarter trading update, with weakness in the firm's service assurance division the root of its ills (see Spirent Provides Q1 Trading Update).

The company said total revenues were £109.6 million (US$209 million), with service assurance contributing just £9 million ($17.2 million), less than half of the £19.8 million ($37.8 million) in sales in the same period in 2004. The division generated an operating loss of £5.4 million ($10.3 million) and is set to report an operating loss of about £10 million ($19.1 million) for the first half of 2005.

This slump will mean Spirent's first-half operating profits will be well below previous expectations, although the company didn't provide further details. Investors didn't like the news, and Spirent's share price dropped 14.5 pence, nearly 26 percent, to 41.75 pence ($0.80) on the London Stock Exchange.

CEO Anders Gustafsson told analysts on an early morning conference call that while Spirent had highlighted some weaknesses in the service assurance unit of Spirent Communications when the company reported its 2004 results, "the decline has been significantly greater than expected."

He blamed that decline on merger activity in the U.S. market, which was delaying spending on network monitoring systems, and a faster than expected shift towards next-generation systems.

Spirent's existing OSS products are designed to work with traditional DSL and leased-line networks, a shrinking market as "customers are shifting their investments towards next-generation networks and IP service deployments, including their FTTx projects," said Gustafsson. "We remain focused on transitioning the service assurance business towards the IP service monitoring sector."

That will take some time, though, and Spirent doesn't expect to see revenues from IP service assurance products ramp up until 2006. Still, Gustafsson is confident of winning business from the RBOCs and from European incumbent operators.

"We expect some FTTx service assurance RFPs from the RBOCs in the next few months, and from BT Group plc towards the end of the summer. We have good relationships with those customers, and understand their thinking. And when it comes to IP, we have a good knowledge base from our performance analysis division that will enable us to attack this market" (see BT Still Locked in 21CN Talks ).

In the meantime the service assurance division is running at a loss, and is set to do so for the rest of 2005, despite cost-cutting measures. About 90 staff, 15 percent of the division's 600 employees, were made redundant in February, mostly in the U.S., and the company is revising its supply chain strategy.

Even after these measures, the service assurance division will still need quarterly revenues of £16 million ($30.5 million) to break even. Finance director Eric Hutchinson said it should rebound in the second half of the year, thanks to a backlog of orders, and register only a small loss during that period.

Hutchinson also noted that Spirent will likely record a goodwill impairment charge against the service assurance division at the end of the second quarter, but couldn't give any further details, other than to say the current value of goodwill linked to the division is £45 million ($85.8 million).

The news was much better from Spirent's performance analysis division, which recorded sales of £40.2 million ($76.7 million), up 6 percent year on year, though this was slightly below expectations, the CEO noted. The division, which provides test equipment for use in vendor and carrier labs, has recently renewed a key deal with Alcatel (NYSE: ALA; Paris: CGEP:PA). (See Spirent Extends Alcatel Deal.)

But a slowdown in spending by North American carriers and the U.S. Government means this business is likely to miss previous financial targets for the first half of the year, though Hutchinson confirmed that Spirent still views the division as a 10 to 12 percent growth business beyond 2005.

Spirent's Network Products division -- "a developer and manufacturer of innovative solutions for fastening, identification, protection and connectivity in electrical and communications networks" -- and the Systems group -- "power control systems for specialist electrical vehicles" -- delivered the expected revenues of £51.4 million ($98 million) and £9.0 million ($17.2 million), respectively.

— Ray Le Maistre, International News Editor, Light Reading

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