Avici Downsizes to Survive

Core IP router vendor Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) is cutting 45 percent of its 300 full-time and contract staff positions, or 135 jobs, and reviewing its strategy in an effort to reduce its annual costs by $20 million, the firm announced this morning. (See Avici Plans Changes.)

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

DCITDave 12/5/2012 | 4:05:54 AM
re: Avici Downsizes to Survive re: " Treading water isn't how you make it in the telecom business."

Guess today is wear a white flag to work day at Avici.

Anyone have a line on what'll happen to them now?
blackdiamond 12/5/2012 | 4:05:53 AM
re: Avici Downsizes to Survive What do you think that most people have been doing now for most of the past 5 years but treading water?
opticalwatcher 12/5/2012 | 4:05:53 AM
re: Avici Downsizes to Survive Considering Avici's expertese in core routing protocols (something that is much harder that you think), I would think that one of these upstart terabit IP router companies that is trying to get into the core would consider purchacing Avici.

Of course, maybe they'll just grab the employees.
turing 12/5/2012 | 4:05:52 AM
re: Avici Downsizes to Survive I would think that one of these upstart terabit IP router companies that is trying to get into the core would consider purchacing Avici

you're kidding right? Is ure hope there aren't any "upstart terabit IP router companies" for their sake. You must be joking. dry humor is good. :->
opticalwatcher 12/5/2012 | 4:05:50 AM
re: Avici Downsizes to Survive Force 10 and Foundry both have systems that they claim can route a terabit of data traffic. I'm sure there will be more in the future. Of course this is a long way from saying you can handle the core--which is why an Avici purchace might look interesting.

My understanding is that one of the reasons Cisco bought Procket is to keep Foundry from buying them.

Maybe the best approach is to wait until Avici's value gets even lower, then buy it. It is kind of like a Dutch auction. How low do you let the value go?
roybean 12/5/2012 | 4:05:43 AM
re: Avici Downsizes to Survive I see alot of upper level bonus's from that $50 million kitty in the next few months.

Drawing salaries; nothing wrong with that.
telco1158 12/5/2012 | 4:05:41 AM
re: Avici Downsizes to Survive Another startup bites the bullet hard because key partnerships/business models/personalities vaporize. Sounds like a Luminous in the makings.

$50 million greenbacks without a sold business plan isn't going to last them long. I feel for the employee rank and fileGǪ those leaving and those staying on board.
startup_shutup 12/5/2012 | 4:05:38 AM
re: Avici Downsizes to Survive >> Another startup bites the bullet

The more the merrier ... can't stand all these waste of capital.

When it would dawn on VCs that ASIA is the grow startups...
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