Avici restructures, weighs ‘strategic alternatives’

Avici Systems announced a restructuring of its company today aimed at lowering the optical equipment vendor’s break-even point as it begins to evaluate strategic alternatives including a sale of the company.

Having found that it was applying a disproportionate amount of resources to win relatively unrewarding contracts, Avici will narrow its focus. Rather than try to tailor product features and functions for the individual needs of lesser carriers, the company will apply its traditional strengths of reliable, scalable core routers to the needs of “large, mainstream” carriers.

“Going forward, if it’s not on the truck, we’ll not commit incremental resources to develop or market low- or no-margin one-off requirements,” said Chief Executive Officer Bill Leighton during the company’s fourth-quarter earnings call today. In the fourth quarter, four of Avici’s customers deferred a total of $14 million in revenue.

The plan should reduce the amount of revenue needed to break even to $9 million per quarter, Avici said. The company reported $6.1 million in revenue for the fourth quarter of 2005 and $37.2 million for the entire year, for an average per-quarter revenue of $9.3 million. The company expects to report similar revenues in 2006.

Part of the company’s restructuring plan includes slashing its workforce by 45%, most of that immediately. At the end of last year, the company employed about 300 people.

Avici also hopes the plan will reduce the amount of cash it spends on operations by as much as $20 million annually starting in 2007. The restructuring itself should cost the company about $6 million, it said, $4.3 million of which will be cash.

Named interim CEO in late 2004 and CEO in April 2005, Leighton instituted a strategy wherein the company would seek to obtain smaller contract wins to supplement support from its biggest customer, AT&T. “Playing for singles rather than homeruns,” is how Leighton described it.

Although the company had some success with that strategy, he said today, “We realized that our current cost structure cannot continue to be supported by the number of singles and doubles we were able to achieve.”

The company’s woes were partly caused by disappointing results from its channel distribution partners, Huawei Technologies and Nortel Networks. The Huawei partnership ended in the spring of 2005. And help from Nortel was hurt by that vendor’s shift in emphasis from wireline to wireless infrastructure, Avici said.

“Our distribution channels aren’t working,” Leighton said. “And direct sales is simply not a profitable alternative.”

Direct sales in Europe and Asia in particular were made more difficult by changes in the way carriers choose equipment vendors, he said.

“Carriers no longer have the resources necessary to take best-in-class component approaches to build their networks,” he said. “Instead they seek a complete solution that can be delivered as part of an overall system integration project.”

The company reported a net loss of $8.6 million (or $0.67 per share) for the fourth quarter, an 11% improvement from a year earlier. It has no debt.

Avici has retained Morgan Stanley to advise it in the pursuit of “strategic alternatives,” including a sale of the company.