Avici Downsizes to Survive
It's not difficult to see why CEO Bill Leighton is doing this: Avici this morning announced an annual loss of $24.7 million, or $1.91 per share, for 2005 from revenues of $37.2 million, which was worse than expected. On average, analysts had expected a 2005 loss of $1.74 per share. (See Avici Reports Q4 Loss.)
Avici's share price lost 31 cents, more than 7 percent, to $3.88 in early trading.
"We are aligning our costs with our achievable revenues and evaluating longer-term strategic alternatives" with the help of Morgan Stanley and Bowen Advisors , Leighton told a conference call today. Those alternatives include a trade sale, a merger, or further restructuring.
He said Avici had, in the past, allocated a disproportionate level of resources into efforts that had generated a small portion of revenues. Put another way, Avici's partnerships with Huawei Technologies Co. Ltd. and Nortel Networks Ltd. did not "work out as anticipated." (See Avici, Nortel Get 'Strategic' and Huawei Partnership Boosts Avici .)
Avici CFO Paul Brauneis noted that the Huawei arrangement had expired about a year ago, something he failed to note during the third-quarter conference call, and that the Nortel relationship "did not produce the level of top-line traction we had anticipated. That relationship proved to be disappointing." (See Avici Swings & Misses in Q3.)
Avici is not the first Nortel vendor to voice such disappointments recently. It's also not the only company to have found the core router market incredibly tough. (See ECI: Nortel Didn't Deliver and No Tomorrow for Chiaro.)
The majority of the job cuts, which will happen across all parts of the company, are happening now, and, the Avici team believes, should help cut costs from the current $12.5 million per quarter to about $7.5 million. That will, in turn, bring down the vendor's break-even point to $9 million in revenues per quarter, or $36 million per year, which is the level Avici expects to achieve in 2006.
While the new strategy is drawn up, Avici plans to hunker down and concentrate on delivering to its existing customers, most particularly AT&T Inc. (NYSE: T), which accounts for a large, but unspecified, proportion of its current revenues. Leighton admitted there are no new carrier trials underway or new customer announcements to make, but is confident that the relationship with AT&T will be maintained. "We're having meetings with the new team there, and they're very pleased with the performance of our technology," stated the CEO, a former AT&T executive. (See SBC Becomes AT&T, SBC Brass Dominates the New AT&T , and Leighton Beds Down at Avici.)
Avici has about $50 million in cash and no debt, which the company believes is enough to carry it through to break-even.
Scott Clavenna, chief analyst at Heavy Reading reckons Avici's approach is "pointless. Treading water isn't how you make it in the telecom business."
And he struggles to see where Avici might find an interested buyer: "Avici has never proven it can increase its market share against Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (NYSE: JNPR). The question for anyone considering buying Avici is, where is the growth? The critical thing to note is how well Cisco's CRS-1 has been performing in the market during the past few months. It's leaving about a zero opportunity for Avici to take any market share." (See Cisco CRS-1 Wins in China, Shanghai Telecom Uses CRS-1, Comcast Picks Cisco's CRS-1, China Telecom Selects Cisco, and Telstra Unveils Switch to IP.)
— Ray Le Maistre, International News Editor, Light Reading