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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Honestly 12/5/2012 | 3:10:09 PM
re: Avici Abandons Routing, Targets PBT Ray, several analysts I speak with feel Juniper will be the primary supplier now that Avici killed the Coke machine. Juniper will not talk, but have you gotten any outside confirmation.? Also Cisco just has not unseated Juniper in the core anywhere, so this seems to be a strong possibility.
xbar 12/5/2012 | 3:10:08 PM
re: Avici Abandons Routing, Targets PBT Did AT&T abandon them?

According to the market response, the analysts believe that the management is intent to direct the company into the ground.

opticalwatcher 12/5/2012 | 3:10:08 PM
re: Avici Abandons Routing, Targets PBT When I say last of the startups, I realize they are a public company, but they were once part of a group of telecom-boom core-router startups. I wonder if they are the last to finally give up.
opticalwatcher 12/5/2012 | 3:10:08 PM
re: Avici Abandons Routing, Targets PBT Is this the last of the core router startups?

Avici giving up routing is like GMC saying they are no longer going to make automobiles.

I guess if you have only one customer, and that customer is looking elsewhere, then this is a pretty brave move.
tsat 12/5/2012 | 3:10:07 PM
re: Avici Abandons Routing, Targets PBT
It would make sense for AT&T to have both Juniper and Cisco in the core.

tsat 12/5/2012 | 3:10:07 PM
re: Avici Abandons Routing, Targets PBT
Probably becuase they just could not engineer a next generation of technology. If you have no roadmap, then it is pretty hard to get or keep customers.

digits 12/5/2012 | 3:10:07 PM
re: Avici Abandons Routing, Targets PBT We are working on 2 follow-up articles:

-- What is AT&T's routing strategy now?

-- Where does this leave the core routing market, and what options do carriers have?

The Avici team had to do SOMETHING, and believe that focusing on Soapstone is a better choice than just withering on the vine or liquidating the company.
And it looks like they couldn't find a buyer, which is not that surprising really.

Diet Coke 12/5/2012 | 3:10:06 PM
re: Avici Abandons Routing, Targets PBT Avici was never able to increase its base in the core mainly due to a lack of vision and arrogant leadership that resulted in the loss of key talent.

When they first came out, they had the largest router on the scene with the rightful claim of being the most scalable.

They failed to realize that the customers did not really care about scalability and were never able to compete with the service offerings that Juniper and Cisco had.

The Avici TSR/SSR/QSR products were a great architecture and a treat to developers. It is sad to see things like this happen. A lot of high quality creativity went into it. I think the Avici engineers do deserve a pat on their backs for doing what they did. They are not to be blamed for the poor management that existed prior to Will Leighton taking over.

Will Leighton inherited a company in a mess. It was a horrible place to work due to a work environment that fostered negativity. From what I heard he tried his best to clean up, but it was just to late.

Maybe its a lesson to other startups/companies out there on how to achieve success. Be more humble and try to accept reality. Your employees are as important as your customers. You may have the best product but there is many a slip between the cup and the lip... :)
MorningWd 12/5/2012 | 3:10:06 PM
re: Avici Abandons Routing, Targets PBT I wonder if ALU might step in here and pick up the core routing from Avici. Their 7750 product isn't really a core play here, but they could leverage that tallent. They also have a tremendous amount of business that they do with AT&T now. Any rumors of this?
standardsarefun 12/5/2012 | 3:10:06 PM
re: Avici Abandons Routing, Targets PBT After all, once you have a good T-MPLS or PBT core and a set of edge routers that can handle a reasonable number of ports why on earth do we still need to have a core router as well?

Maybe Avici understands this?
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