Avici Swings & Misses in Q3

Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) keeps racking up singles and doubles, but the "small ball" strategy fell short on the scoreboard in the last inning.

For the non-baseball fans, that means Avici missed earnings expectations by a whopping 11 cents as it struggles with revenue recognition from a couple of smaller customers.

For its third quarter, which ended Sept. 30, Avici reported GAAP losses of $7.8 million, or 60 cents per share, on revenues of $8.7 million. (See Avici Reports Q3.)

Avici's non-GAAP losses totaled $7.2 million, or 56 cents per share. Analysts had expected Avici to report revenues of $12 million and non-GAAP losses of 45 cents per share, according to Thomson First Call.

The figures mean Avici sales were down from its second quarter, which saw losses of $9.8 million on revenues of $11.6 million. For its third quarter in 2004, Avici reported non-GAAP losses of 77 cents per share on revenues of $3.7 million.

Avici's stock fell 34 cents (7.2%) to $4.40 in early trading today.

The quarter represents a setback in revenues, even though the company has announced new customers including IP-Only Telecommunication AB, Limelight Networks LLC, SURFnet, and -- just this morning -- Turk Telekomunikasyon A.S. (See Avici Wins in Sweden, Avici Storms Supercomm, SURFnet Picks Nortel, Avici, Telindus, and Turk Selects Avici .)

Some of the decline came from a "leveling-out" of revenues from (NYSE: T), Avici's dominant customer, Avici CEO William Leighton told analysts in a conference call this morning. (IP Only is the only other customer that contributed to third-quarter revenue.) But Avici also saw delays in revenues from its other deals.

Limelight, announced in June, is still negotiating its maintenance and service agreement with Avici -- a factor that prevents Avici from recording revenue, Leighton said. SURFnet, being a research network, had some complicated feature requests that slowed down the sales process.

SURFnet apparently could have given Avici the extra $2.9 million and change that would have provided revenue growth in the third quarter. "Without specifically saying what that dollar amount of revenue is, I think had we brought that into the quarter, we would have achieved that goal," CFO Paul Brauneis said on the call.

The Turk Telecom deal involves a combination of Avici's TSR core router and 's (NYSE: ALA; Paris: CGEP:PA) 7750 multiservice edge router. This doesn't mean the companies are getting into a formal partnership, though.

"We had Turk Telekom on our screen for a while and looked at several potential partners there. The best fit was with Alcatel, so we sort of opportunistically formed a partnership for this particular gig," Leighton said.

Reseller deals with Huawei Technologies Co. Ltd. and (NYSE/Toronto: NT) remain crucial to Avici's future, but they've also steered Avici into what Leighton calls the "singles" strategy. Nortel, for example, helped Avici score the IP Only and SURFnet deals, but doesn't seem likely to produce any home-run customers. (See Avici Faces 'Binary' Future, Avici, Nortel Get 'Strategic', and Avici Joins Huawei for China Push.)

"What we may have expected when we went into the arrangement a year and a half ago hasn't happened, but we have seen a lot of these smaller opportunities," Brauneis said.

The reseller deal with Huawei has been quiet as well, and Brauneis admitted Avici will be disappointed if that can't bear fruit in 2006. The agreement has led to some deployments in China but overall "hasn't been all that we had hoped for."

As usual, Avici gave no guidance for the following quarter. The company's business is too unpredictable for that, given its dependence on AT&T and lack of information from that company. "They don't give us very concrete forecasts simply as a matter of policy," Leighton said on the call. "They don't give it to any vendor."

— Craig Matsumoto, Senior Editor, Light Reading

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