Avici Abandons Routing, Targets PBT

Add another tombstone to the IP core router graveyard: Avici Systems Inc. (Nasdaq: AVCI; Frankfurt: BVC7) is throwing in the towel and will stop selling its core router products by the end of this year, the vendor announced as it reported its first-quarter financials. (See Avici Reports Q1 and Avici Quits Routing.)

The company has decided there's no point staying in the core router market, given the competition and the fact it relies on one customer, AT&T Inc. (NYSE: T), for its sales. "The nature of the routing business has changed and is under pressure from other technologies, such as Ethernet switches," said CEO Bill Leighton during today's investor conference call. "Core routing is not a sustainable growth business for us… especially given our reliance on one customer." (See AT&T Boosts Avici's Q4 and AT&T Props Up Avici.)

So instead, Leighton and the other 161 Avici employees are throwing all their efforts behind the vendor's new Soapstone business unit, which is developing new control plane technology that is decoupled from any physical network element and which is being designed to help manage any type of network (routing, Ethernet, optical). (See Avici Forms Business Unit and Soapstone Touts Support.)

The news sent Avici's share price into plunge mode, as it lost $4.10, more than 30 percent, to hit $9.44.

And that drop couldn't be blamed on Avici's numbers, as the company stumped up yet another quarter of profits -- $6 million in net income, or 42 cents per share, from revenues of $20.5 million. Analysts had been expecting earnings of 11 cents per share from revenues of $13.6 million.

The vendor also announced a special dividend of $2 per share, which means it will be returning about $28 million of its $70 million cash reserves to shareholders. (See Avici Declares Cash Dividend.)

What investors don't like, clearly, is Avici management's decision to focus its resources on a technology that is still in the early stages of a three-to-five year development cycle and for which there is no proven market.

But Leighton had his defense prepared for today's conference call. He said Avici has the perfect platform from which to build the Soapstone product, because "we have built the most reliable control plane in the industry," and that can be developed into a software-based solution that sits between the physical network and back office application and IT systems. "When we talk to carriers about Soapstone they are pretty excited."

Avici plans to conduct an interoperability demo at the NXTcomm show (formerly Globalcomm/Supercomm) in Chicago in June and intends to start evaluations and tests with carriers later in the year. The company isn't expecting any meaningful revenues from its new development this year, but sees Soapstone sales "ramping up" in 2008 and intends to provide some sort of guidance at the end of this year.

In the meantime, the first focus of the new business unit is to develop a product called the Provider Backbone Transport (PBT) Controller for the carrier Ethernet market. That could also be seen as rather a niche, as PBT is not yet a standards-based technology and has only been backed in any meaningful way by one carrier, BT Group plc (NYSE: BT; London: BTA). (See Nortel, Siemens Win PBT Deals at BT, BT Pressures Vendors Over PBT, and PBT: New Kid on the Metro Block.)

Leighton described PBT as a technology that "avoids the unpredictability of IP networks," and which "allows lower cost and greater predictability," as well as "greater control of QOS and traffic management than MPLS." He might find he has picked a rather big fight there…

So is Avici taking this concept to BT? Leighton wouldn't commit to any specific carrier engagements but noted that "BT would be a logical carrier to target."

The CEO also said Avici is working with other vendors on this initial Soapstone development. No one at Avici was available to take further questions when we called, and a spokesman for principal PBT vendor Nortel Networks Ltd. said the company didn't have any official comment to make.

However, a source close to PBT market developments has told Light Reading that Avici and Nortel, which have a history together, have held exploratory talks about how they might work together regarding PBT technology developments. (See Avici, Nortel Get 'Strategic'.)

But while Soapstone products are in development, what will happen to Avici's business? The company says it will continue to support its installed base of routers and customers and will continue to generate revenues in the short- and medium-term. In fact it has increased its full-year revenue guidance to $50 million to $60 million, so there's still plenty of income to come from the installed base at AT&T.

But was a decision by AT&T to start sourcing core router technology from an alternative vendor the catalyst for this decision to halt router developments? Leighton says he "can't comment on AT&T's plans," but that Avici had been preparing for a "multi-vendor environment at AT&T" and that "it just doesn't make sense to continue," given that expectation.

Another question asked of Avici by analysts on today's call was whether the company is taking the Soapstone development route because it couldn't find a buyer. CFO Bill Stuart said only that, following the company's strategic review, "no transaction happened."

— Ray Le Maistre, International News Editor, Light Reading

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