Avici Beats Expectations, but Investors Fret Over AT&T Deal's Cost

Earnings Scorecard
Actual	Estimated*	Year-Ago
($0.26)	($0.29)	($0.45)
Figures in parentheses are losses. *Estimates by First Call/Thomson Financial

Updated from 9:09 a.m. ET

Avici Systems (AVCI) beat expectations for the fourth quarter and raised sales guidance for the current quarter and the remainder of the year.

While upbeat in its outlook, the upstart core router maker struck a prudent tone by maintaining its earnings guidance for the year. The company said higher-than-anticipated costs may hurt the bottom line as it beefs up technical support and customer service staff to help smooth the equipment installation process.

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Avici also declined to change its sales and earnings guidance for 2002, citing concerns about the economy and the slowing trends in equipment spending.

"We felt it wasn't prudent to adjust 2002 guidance; it is too early to do that," Surya Panditi, Avici's co-chairman and CEO, said in an interview after the company's conference call. "But our visibility this year is good."

Avici's new guidance calls for revenue this quarter of $14 million, compared with previous guidance of $9.2 million. For the year, it raised revenue guidance to $90 million from $70 million.

Costs

In addition to potential spending slowdowns, investors also are concerned about the cost and implication of Avici's rather cozy exchange of stock and products with AT&T (T). Last month, Avici issued warrants to AT&T for 850,000 shares of its stock, worth $24 million. At roughly the same time, AT&T agreed to buy Avici's core router for its Internet backbone.

Avici says the deals were unrelated. It also defends the warrant grants, saying AT&T's willingness to take a stake in the company is an endorsement of its business just as AT&T's selection of Avici's gear is a vote of confidence in the product.

But in the eyes of the Securities and Exchange Commission, the possible tit-for-tat arrangement must be accounted for on Avici's books. Avici, which already took a $2.4 million charge in the third quarter for 100,000 shares it had previously issued AT&T, says it's taking a charge of $816,000 each quarter over the next 12 quarters, roughly the duration of the contract with AT&T. The charges will appear as a cost of doing business and work against profits.

Avici, which had been up 3% in pre-market trading, has since dropped $1.56, or nearly 4.5%, to $33.38.

Good News

Despite the concern, investors did consider the company's fourth-quarter results encouraging. It posted a narrower-than-expected loss on far higher-than-expected sales.

Avici said losses excluding equity-related charges were $12.5 million, or 26 cents a share, three cents less than the loss of 29 cents a share expected by analysts surveyed by First Call/Thomson Financial. The loss represents a 14% improvement from third-quarter levels.

Fourth-quarter revenue for the North Billerica, Mass.-based company were $8.8 million, double the $4.35 million in the third quarter and far beyond the $6.1 million forecast by analysts.

For the year, Avici posted a loss minus equity-related charges of $58.8 million, or $1.41 a share, on $15.9 million in revenue. Analysts expected revenue for the year to be $13.3 million. Avici went public in July.

Avici added AT&T to its list of customers in the fourth quarter. The list also includes Qwest (Q), Enron (ENE), Williams Communications (WCG) and a division of France Telecom(FTE).

Avici's routers, similar to those of rival Juniper (JNPR), are high-capacity traffic sorters used to open bottlenecks along the Internet. Both Avici and Juniper have been making headway against router king Cisco (CSCO) in the high-capacity core routing market. Cisco expects to have a competing product within the next two months.

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