Knobias ClipReport (7-27-2007)

Submitted from Knobias ClipReport

The market’s action on Thursday was something that has been expected for some time: a cooling in the overall economy. Debt markets were overburdened, subprime was spilling out into other areas, energy prices were skyrocketing, and earnings were being overlooked as it seemed the market finally decided to price in some of the things its been living with for the past 5 months.

With any continuation of the downslide, investors should look for names that are cheap and lie in wait till the next big run-up. One name that might be considered cheap is Avici Systems Inc. (AVCI).

The Company is a provider of purpose-built carrier-class routing solutions for the Internet. Avici's family of routers is designed to meet carrier requirements for the highest scalability, reliability and network availability, while lowering the total cost of building and operating their networks. The company's routing systems provide new IP solutions to some of the world's leading service providers.

A maturing Internet has placed new demands on routers. As IP is increasingly used to support more diverse and demanding applications, carriers require routing platforms purpose built for the carrier network. Carriers recognize that they cannot cost effectively support multiple networks with one for landline voice, another for IP traffic, another for wireless, and many more for separate data networks. Carriers envision a converged IP network where voice, data, video and wireless services are supported over a single reliable and cost effective network. This vision requires upgrading existing best effort IP networks to a new-real time IP network powered by carrier-grade IP routers to improve the economics of the IP network.

This is where the Company is attempting to make their market and has some pretty large customers. The largest is AT&T who the Company has an agreement with no minimum purchase commitment level through 2009. AT&T accounted for 94%, 94% and 60% of their gross revenue in 2006, 2005 and 2004 respectively. In 2004, Huawei and Nortel accounted for 27% and 12%, respectively, of their gross revenue.

In February, the Company announced the launch of a new product initiative, Soapstone Networks. The Soapstone software-based solution they developing is designed to manage the complexities between carrier service offerings and applications, and the underlying transport equipment and technologies. Soapstone’s mission is to enable carriers to bring orderly, predicable, business-driven behavior to their IP networks, regardless of vendor or technology composition.

The Soapstone solution is based on key industry standards such as service-oriented architecture (SOA), telemanagement forum (TMF), international telecommunications union (ITU) and next generation networks (NGN) among others, and utilizes open application programming interfaces (APIs) between the network and operational support systems (OSS). It maps the abstract service needs expressed by the business plane into a simple configuration command set that can be applied to an array of technologies and equipment.

The Company recently released earnings which displayed their largest revenue quarter. Revenue for the three and six months was $29.6 million and $50.2 million, respectively, compared to $25.3 million and $46.7 million, respectively. GAAP EPS was also reported at 82c a share compared to 58c. Non-GAAP was 86c a share compared to 62c per share the year before.

While the Company is transitioning out of the router business, the development of the Soapstone is key for the name in the future. With the continuation of their router business providing the cash needed to develop the new product line, the Company could be one to follow considering their cheap valuations and lowered P/E ratios. Investors would be wise to watch.


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