Avici Slips on Soapstone Shift

Shares plunge on a move to get out of the router business.
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Avici

(AVCI)

shares plunged 28% as the company quit the hardware business so it can take a stab at software.

The North Billerica, Mass., networking gearmaker says it will issue a special $2-a-share dividend to investors and stake its future on Soapstone, a network management software venture with no products or revenue.

Shareholders, stunned by the sudden strategic shift for the business, hit the exits. They took the stock down $3.99 to $9.55 Thursday.

Avici effectively has one customer --

AT&T

(T) - Get Report

-- for its core routers, which are large Internet traffic sorting devices used by the telco at major junction points in its network. But Avici faced an end to sales of new gear at AT&T as the big telco switched to other suppliers, presumably

Cisco

(CSCO) - Get Report

and

Juniper

(JNPR) - Get Report

.

Avici had said last year that it was considering strategic alternatives and the possibility of getting purchased by another equipment maker. Those efforts failed. So the company created its Soapstone unit to develop network monitoring applications.

The company says it expects to have a Soapstone product for phone companies to test later this year and potentially start booking sales next year.

The news comes as the company reported adjusted earnings of $6.6 million, or 46 cents a share, for the first quarter. Those numbers compare with a pro forma profit of $2 million, or 15 cents a share, in the year-ago period. Sales for the quarter were $20.5 million compared with $21.4 million last year.

The company says it has about $70 million in cash on its books as of last month.

Some analysts on an earnings conference call questioned why the company blindsided investors with the dramatic direction change for the business.

CEO Bill Leighton said the company has been planning for the day when the AT&T order would dry up. "We are at the point now where it didn't make sense to continue investing in the router business going forward given that environment," Leighton said on the call.

"You don't have a commercial product yet, and you are asking shareholders to look at this from a two-year to five-year perspective where you guys could be losing a lot of cash," analyst Vince Tranh said.

Leighton said the company has planned its financing adequately.

"We've carefully modeled the cash generation of this business," Leighton said on the call. "We are comfortable with the cash position we will be in."

Were other alternatives available? Tranh persisted.

"Given your history of destroying shareholder value, why isn't it more prudent to liquidate the company instead of going to this multiyear product that you guys have yet to have a product?" he asked.

Leighton disputed the assertion.

"Destroying shareholder value has not been our track record, my track record leading this team," Leighton said. "We've turned this company profitable," he added. "We see a huge opportunity with the Soapstone product."

Apparently not all Avici's shareholders agree.