ECI Posts 26 Percent Growth

An upbeat ECI Telecom Ltd. (Nasdaq: ECIL) management team reported impressive third-quarter revenue growth today and allayed analyst concerns about the impact of this year's Laurel Networks acquisition. (See ECI Reports Q3 and ECI to Buy Laurel for $88M.)

Third-quarter revenues totaled $162 million -- up 26 percent from a year earlier and higher than the $158 million expected by analysts -- while net income was $6.2 million, or 5 cents per share. Excluding some specific costs, such as stock compensation, net income was $8 million, or 7 cents per share, 1 cent better than analysts had expected.

The vendor also stated that fourth-quarter revenues and earnings were set to rise sequentially, and that 2006 revenue growth is set to be higher than the industry average of anywhere between 4 percent to 10 percent growth.

The numbers and outlook sent ECI's share price up by 38 cents, more than 5 percent, to $7.94 in morning trading.

ECI's net income would have been even higher if it weren't for the impact of the Laurel edge router business acquired in May this year. The Laurel business, now referred to as the Data Networking division, generated $2 million in revenues and suffered a $7.7 million operating loss in the third quarter. This reflected "the intensive R&D efforts currently underway in the Division," noted ECI in its earnings release.

Outgoing president and CEO Doron Inbar admitted that the revenues "are not where we want them to be," and that it was still early days for the integration of the Laurel sales team. He added that 2006 would see a significant increase in the division's contribution, and ECI expects it to break even in the second half of next year. Breakeven quarterly revenues are in the mid to high teens in millions of dollars. (See ECI Names President.)

More important, said Inbar, is the anticipated impact of these intensive R&D efforts. He said more engineers would be added to the Data Networking division this quarter and during 2006, and that it would "take a very capable platform and develop it for use across all of our divisions." He added that the resulting technology would become the IP platform deployed in ECI's future optical and broadband access products.

And Light Reading understands that part of the product work being undertaken by the Laurel team involves the development of a policy management system. That's an increasingly hot area as the range of services being offered across broadband connections, and the number of network elements involved, grows. ECI isn't providing details at present but said recently that an announcement is due in the next few months. (See Alcatel Launches Service Manager and Tazz Welcomes May in June.)

Meanwhile, the optical and access divisions are doing well with their existing product lines. Optical sales in the third quarter were $85 million, up 23 percent year-on-year, while the broadband access division contributed $68 million, up 26 percent from a year earlier.

ECI relies on three major customers for its access gear revenues -- France Telecom SA (NYSE: FTE) and Deutsche Telekom AG (NYSE: DT) contributed one third of access revenues each, or about $23 million apiece, while Taiwan's Chunghwa Telecom Co. Ltd. accounted for $18 million.

Inbar said FT and DT would continue to be significant customers in 2006, especially as the carriers roll out new broadband services, particularly IPTV. He referred to "two of our principal customers," one of which is already using ECI's DSLAMs exclusively for the delivery of IPTV services. That carrier is known to be France Telecom.

The CEO also said ECI is "heavily involved in a broadband network that is set to supply high-definition TV services in 2006. We have been given indications that we will provide a significant portion of the equipment for the initiative."

Without mentioning any names, it's clear that it's probably going to be either FT or DT, both of which are planning HDTV services. FT has trialed the service using ADSL2+ and VDSL2 technology, while its German counterpart is planning to offer HDTV services via its new fiber-to-the-curb broadband access network, which is already under construction in 10 German cities. (See France Telecom Tests VDSL2 and DT Flings Billions at Fiber Access.)

Mindful that the access business is heavily reliant on just three customers, Inbar added that ECI expects to sign up other significant access equipment customers in 2006, though he shared no details.

ECI has also been focused on its costs recently, and plans to shift more of its R&D to "low-cost geographies," namely, China and India. The company acquired a Chinese vendor earlier this year, which is now making and shipping a low-cost multiservice provisioning platform to emerging markets, while more staff are set to be added to the company's new facility in India. (See ECI Buys Optical Biz in China.)

— Ray Le Maistre, International News Editor, Light Reading

flush_meat 12/5/2012 | 2:55:12 AM
re: ECI Posts 26 Percent Growth Whatever may the strategy, they can't meet the goals with Atul around. Mr. Doron, there is one simple formula you need to use. Go ahead and revisit Laurel's management team especially Atul and his brother-in-law. Get rid off these bottlenecks before you move forward.

Not convinced? You will realise later if you don't to do this, I am serious.

reoptic 12/5/2012 | 2:55:11 AM
re: ECI Posts 26 Percent Growth What ECI must be finding with Laurel/Chiaro is how large a black hole these router developments represent to keep up with features, compatibility and performance. The expenses are so great you need massive revenues to break even to shot at those kind of revenues for routers...it is doubtful. Other than Cisco and Juniper not clear anyone making money in routers, even Huawei and Alcatel probably burning cash in this money pit. Might be cheaper to start an auto company.
flush_meat 12/5/2012 | 2:55:08 AM
re: ECI Posts 26 Percent Growth Well said. I sort of agree with you. In my mind, Doron needs to cleanup the management staff first before going forward. Laurel has plenty of management overhead (or useless management staff). One S/W director doesn't even know whom to promote. It is funny, he promotes a guy who leaves to a business school. And that guy comes at 10 AM in the morning, keeps chatting and does nothing. He gets promoted when deserved guys are not. No need to say about Atul, who has no idea about routers space. I still wonder how he climbed up the stack. It got unnoticed for a long time. It is never late... Time to cleanup the mess before expecting some revenues.
drop_zone 12/5/2012 | 2:55:03 AM
re: ECI Posts 26 Percent Growth The management group of Laurel have somehow convinced yet more people to dump their money in a good product. However with this divisions management team running the R&D efforts, it will never come to fruition.
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