3SOF

The following analysis was written on September 28th:

Quote from: Terliso on September 10, 2007, 10:35:36 PM
How about AVCI, looks like a good one for long-term hold.

1. Profile

Avici Systems, Inc. (AVCI) provides high-speed data networking equipment that enables networking service providers to transmit data, voice, and video across their networks in North America and Europe. Its primary routing product family consists of three chassis platforms and various line cards. The company provides three equipment configurations, such as the Terabit Switch Router product for the stresses of carrier core routing in large Internet protocol (IP) networks; Stackable Switch Router, a rack-mountable scalable router for service providers with smaller core networks; and Quarter-rack Scalable Router. Its routers are designed to provide high performance across large IP-based core networks; stability and interoperability; and in-service modular scalability to enable non-disruptive incremental capacity additions to the network. The company's products provide these benefits through its proprietary technologies, including its application specific integrated circuits, Velociti switch fabric and distributed system design, IPriori system software, Composite Links, and Non Stop Routing technologies. In addition, it offers support and maintenance, as well as installation and service. The company was founded in 1996 and is headquartered in North Billerica, Massachusetts.

2. Stock Price History



The long term chart above could suggest the existence of heavy dilution, but the small numbers in blue below the price line, which tell you the number of shares outstanding (in millions), shows that wasn't the case.

AVCI's problem was of another nature: heavy losses over the years. But, after losing $425 M between 1997 and 2005, the company posted its first ever positive net income number in 2006, which makes this stock quite an interesting case.

Let's study the last couple of years in some more detail.

3. 2006 and 2007 history



Wow, so many brutal gaps. Let me try to find out what happened in those gap days.

1 - In April 20, 2006, the stock rose 84% in one day, with 10.8 million shares changing hands. The company reported 1st quarter earnings on that day:

«"Strong first quarter order volume coupled with the initial positive affects experienced from our business restructuring and cost structure re-alignment have resulted in Avici's highest quarterly revenue since mid-2001 and produced our first ever positive bottom line result, before special charges," said Bill Leighton, Chief Executive Officer.»

Non gap EPS was $0.15, which made people think $0.60 for a full year and made the stock close at $8.02 for a 13.4 earnings multiple.

After this big news the stock came off on low volume, almost to the initial point before the news.

2 - Then on July 21st, 2006, second quarter results were out, and again, AVCI opened with a blast, rising 34% at the open. The news was:

«"Due to a surge and acceleration in demand this quarter's revenue and bottom line results have far exceeded our expectations and resulted in the company turning cash flow positive. We expect to continue to see strong revenue and bottom line results in 2006, but caution that the business conditions driving this increased demand can change significantly. As we have previously announced, we have restructured our business to be profitable at what we believe is a reasonable going forward revenue baseline over the near term in a multi-vendor environment, even though we expect that 2006 will substantially exceed those levels," said Bill Leighton, Chief Executive Officer.»

These results were much better than the 1st quarter, with GAAP EPS of $0.58 for the quarter. But the stock rose less, initially, because people were burned from buying this stock on a very big gap up. The stock didn't change much until February 2nd, 2007, when ...

3 - There were reports of an institutional investor, Dimensional Fund Advisors, was holding 661,706 shares of the company, or 4.78%.

This piece of information moved the stock from $7.54 to a high of $13.96, when ...

4 - There was a 33% fall at the open, due to the following news:

• Avici Slips on Soapstone Shift
at TheStreet.com (Thu, Apr 19)

This is very interesting, the company changed its business model completely, because management saw router orders from AT&T drying in the near future (this probably explains the recurrent low earnings multiple). Those orders presumably would go to Cisco or Juniper. AVCI had $70 M in cash and management said they move the company to the software business.

Let's see what we have over the next few chapters.

5 - Point 5 isn't on the chart, but you can see the gap down between points 4 and 6. This happened as a response to the following news:

Strange, I can't find any news to explain this sudden 26% decline. Ah, ok, I found it later, it was because of the ex-dividend date of a $2 cash dividend.

6 - AVCI rose 35% on the following news release:

• Avici Systems Reports Second Quarter 2007 Results
Business Wire (Thu, Jul 19)

Earnings for the quarter were spectacular, but because they came from discontinued operations, the stock fell back down to close the gap and then some. AVCI paid a $28 M cash dividend and still had $61 M in cash at this point.

4. What do we have now?

We now have a $151 M market cap company with $61 M in cash entering a new business. The past isn't any guide for the future in this case, because a few quarters from now AVCI will be an entirely new business (SoapStone Networks will be the new name).

So, the issue is, how much is SoapStone worth? More or less than $151 M - $61 M = $90 M?

I've read some press releases about SoapStone and the company's website at www.soapstonenetworks.com and unfortunately I don't understand the product very well and can't judge its market potential.

As Buffet says, "invest only in businesses you understand". This clearly isn't my case with AVCI. Perhaps one of you guys is a telecommunications engineer and knows something about the need for this SoapStone product.

5. Conclusion

AVCI's old business is ending and the market currently values its new business at $90 M. I don't know if that's a lot or if it's well below fair value, because I don't understand and can't judge the product, its price, or its market potential. An investment in AVCI shares would be a complete shot in the dark for me. My opinion is neutral.

Bought in at $8.46 this morning.
---------------------------------------------
Press Release Source: Avici Systems Inc.


Avici Systems Reports Fourth Quarter and Full Year 2007 Results
Thursday February 28, 7:00 am ET


BILLERICA, MA--(MARKET WIRE)--Feb 28, 2008 -- Avici Systems Inc. (NasdaqGM:AVCI - News) today reported results for its fourth quarter and full year ended December 31, 2007.
ADVERTISEMENT






Gross revenue for the three and twelve months ended December 31, 2007 was $44.9 million and $124.3 million, respectively, compared to $15.9 million and $82.8 million, respectively for the three and twelve months ended December 31, 2006.

"This year marks an exciting turning point for the Company as we change our name to Soapstone Networks and deliver a revolutionary product that will help accelerate the adoption of Carrier Ethernet technology and automate the entire service lifecycle," said Bill Leighton, Chief Executive Officer, Avici Systems. "I am very pleased with the progress we have made in developing and marketing the Soapstone PNC(TM) solution, which we believe will significantly accelerate innovation in the delivery of new network services."

GAAP net income for the fourth quarter ended December 31, 2007 was $29.2 million, or $1.90 per share, compared to a GAAP net income of $3.0 million, or $0.21 per share, in the prior year's fourth quarter. GAAP net income in the 2007 period includes $0.6 million of non-cash equity based charges associated with Financial Accounting Standards Board Statement No. 123R ("SFAS 123R"). GAAP net income for the 2006 period includes $0.5 million of non-cash equity based charges associated with SFAS 123R.

GAAP net income for the twelve months ended December 31, 2007 was $62.3 million, or $4.16 per share, compared to a GAAP net income of $8.3 million, or $0.60 per share, for the twelve months ended December 31, 2006. GAAP net income in the 2007 period includes $2.3 million of non-cash equity based charges associated with SFAS 123R, $0.3 million of special charges associated with the 2006 restructuring and $0.2 million of certain inventory credits. GAAP net income for the 2006 period includes $10.7 million of special charges associated with the 2006 restructuring, $0.8 million of non-cash equity based charges associated with SFAS 123R, $0.5 million of non-cash common stock warrant discount charge and $0.2 million of certain inventory credits.

Non-GAAP net income (GAAP net income excluding charges for restructuring, certain stock based compensation, common stock warrant discount and inventory credits) for the fourth quarter ended December 31, 2007 was $29.8 million, or $1.93 per share compared to non-GAAP net income of $4.0 million, or $0.28 per share in the fourth quarter of 2006. Non-GAAP net income for the twelve months ended December 31, 2007 was $64.7 million, or $4.31 per share, compared to non-GAAP net income of $20.1 million or $1.47 per share for the prior year twelve month period ended December 31, 2006.

Cash, cash equivalents and short and long-term marketable securities totaled $103.0 million at December 31, 2007.

Avici will discuss these quarterly results as well as future business and financial expectations in an investor conference on February 28, 2008 at 8:30 AM eastern standard time. The conference telephone number is (800) 230-1093. A replay of the conference call will be available after 11:15 AM. Replay information will be available at (800) 475-6701 (USA) access code: 909097. Replay of this call is also available on Avici's Web site, www.avici.com, along with a copy of this release.

Avici is a trademark of Avici Systems Inc.

This release contains information about Avici's future expectations, plans, and prospects, including Avici's expectations for annual gross revenues, profitability and the growth opportunity for Soapstone Networks, that constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated. Statements made with regard to interim results are not necessarily indicative of results that may be expected for future interim periods or for the full year. When used in this press release, the word "will," "expected" and other similar expressions are intended to identify such forward-looking statements. Such risks and uncertainties include, but are not limited to, Avici's ability to manage the transition of its core router business, the early stage of Soapstone Networks, market acceptance of our products, services and enhancements, dependence on our major customer, customer purchasing patterns and commitments, development of the market place, product development and enhancement, intensity of competition of other vendors, technological changes, reliance on technology and distribution partners, and other risks set forth in Avici's filings with the Securities and Exchange Commission. Avici does not undertake any duty to update forward-looking statements.

About Avici Systems

Avici Systems Inc., headquartered in Billerica, Mass., has provided purpose-built carrier-class routing solutions for the Internet. The company's routing systems provide IP solutions to some of the world's leading service providers. www.avici.com

About Soapstone Networks

Soapstone Networks is at the forefront of the movement to Carrier Ethernet by delivering resource control systems that realize NGN software-provisioned services in the new Carrier Ethernet transport network. Soapstone's common control framework decouples services from underlying network technologies. The Soapstone solution dynamically provisions precise, SLA-quality services, continuously optimizing utilization of network resources to bring orderly, predictable business-driven behavior to service provider networks. The future of Carrier Ethernet -- www.soapstonenetworks.com



                           AVICI SYSTEMS INC.
                 CONSOLIDATED STATEMENTS OF OPERATIONS
          (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
                              (Unaudited)


                              Three Months Ended      Twelve Months Ended
                                 December 31,            December 31,
                            ----------------------  ----------------------
                               2007        2006        2007        2006
                            ----------  ----------  ----------  ----------
Revenue:
   Product                  $   42,137  $   13,992  $  114,388  $   76,371
   Service                       2,737       1,904       9,912       6,392
                            ----------  ----------  ----------  ----------
     Total gross revenue        44,874      15,896     124,300      82,763
Less - Common stock warrant
discount - Product                 --          --          --        (527)
                            ----------  ----------  ----------  ----------
     Net revenue                44,874      15,896     124,300      82,236
                            ----------  ----------  ----------  ----------

Cost of revenue - Product
(1)                             8,029       3,924      27,462      26,328
Cost of revenue - Service          264         393       1,434       1,795
                            ----------  ----------  ----------  ----------
     Total cost of revenue       8,293       4,317      28,896      28,123
                            ----------  ----------  ----------  ----------

     Gross margin               36,581      11,579      95,404      54,113
                            ----------  ----------  ----------  ----------

Operating expenses:
   Research and development
    (2)                          5,284       5,877      25,010      30,154
   Sales and marketing (2)         820         949       2,762       4,077
   General and
    administrative (2)           1,397       1,505       5,773       5,562
   Stock-based compensation        579         492       2,323         819
   Restructuring expenses           --         495         100       7,617
                            ----------  ----------  ----------  ----------
     Total operating expenses    8,080       9,318      35,968      48,229
                            ----------  ----------  ----------  ----------

Income from operations          28,501       2,261      59,436       5,884
Interest income, net             1,045         897       3,771       2,571
Other Income                       163          --         244          --
Provision for income tax          (504)       (170)     (1,174)       (170)
                            ----------  ----------  ----------  ----------

Net income                  $   29,205  $    2,988  $   62,277  $    8,285
                            ==========  ==========  ==========  ==========

Net earnings per diluted
share                      $     1.90  $     0.21  $     4.16  $     0.60
                            ==========  ==========  ==========  ==========

Weighted average common
shares used in computing
diluted net income per
share                      15,403,673  14,075,017  14,984,454  13,706,889
                            ==========  ==========  ==========  ==========

   (1) Includes inventory
    charge and (credits), as
    follows:
      Inventory and
       Inventory related
       charge               $       --  $       --  $      175  $    3,094
                            ==========  ==========  ==========  ==========
      Credits from
       utilization of
       inventory previously
       written off in 2006
       and 2001             $       --  $       --  $     (218) $     (215)
                            ==========  ==========  ==========  ==========
   (2) Excludes certain
    non-cash, stock-based
    compensation, as follows:
        Research and
         development        $      311  $      265  $    1,307  $      440
        Sales and marketing         95          83         205         151
        General and
         administration            173         144         811         228
                            ----------  ----------  ----------  ----------
                            $      579  $      492  $    2,323  $      819
                            ==========  ==========  ==========  ==========



                             AVICI SYSTEMS INC.
             NON-GAAP CONSOLIDATED STATEMENTS OF OPERATIONS
           (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
                               (Unaudited)
                                  Note 1


                              Three Months Ended     Twelve Months Ended
                                 December 31,            December 31,
                               2007        2006        2007        2006
                            ----------  ----------  ----------  ----------
Revenue:
   Product                  $   42,137  $   13,992  $  114,388  $   76,371
   Service                       2,737       1,904       9,912       6,392
                            ----------  ----------  ----------  ----------
     Total gross revenue        44,874      15,896     124,300      82,763

Cost of revenue - Product        8,029       3,924      27,505      23,449
Cost of revenue - Service          264         393       1,434       1,795
                            ----------  ----------  ----------  ----------
   Total cost of revenue         8,293       4,317      28,939      25,244
                            ----------  ----------  ----------  ----------

     Gross margin               36,581      11,579      95,361      57,519
                            ----------  ----------  ----------  ----------

Operating expenses:
   Research and development      5,284       5,877      25,010      30,154
   Sales and marketing             820         949       2,762       4,077
   General and
    administrative               1,397       1,505       5,773       5,562
                            ----------  ----------  ----------  ----------
     Total operating
      expenses                   7,501       8,331      33,545      39,793
                            ----------  ----------  ----------  ----------

Income from operations          29,080       3,248      61,816      17,726
Interest income, net             1,045         897       3,771       2,571
Other Income                       163          --         244          --
Provision for income tax          (504)       (170)     (1,174)       (170)
                            ----------  ----------  ----------  ----------

Non-GAAP net income         $   29,784  $    3,975  $   64,657  $   20,127
                            ==========  ==========  ==========  ==========

Non-GAAP earnings per
diluted share              $     1.93  $     0.28  $     4.31  $     1.47
                            ==========  ==========  ==========  ==========

Weighted average common
shares used in computing
diluted net income per
share                      15,403,673  14,075,017  14,984,454  13,706,889
                            ==========  ==========  ==========  ==========

Note 1 - The above non-GAAP consolidated statements of operations for the
three and twelve months ended December 31, 2007 and 2006 are not presented
in accordance with generally accepted accounting principles (GAAP) and are
presented for informational purposes only.  These statements exclude the
impact of restructuring expenses, non-cash charges related to common stock
warrant discount and certain stock based compensation as well as charges
and credits related to inventory and related items as presented in the
following reconciliation for the applicable periods.  The Company believes
that this presentation of non-GAAP results provides helpful information to
both management and investors in assessing our core operating performance.
Such information should not be considered superior to, in isolation from,
or as a substitute for results presented in accordance with generally
accepted accounting principles.

                              Three Months Ended     Twelve Months Ended
                                 December 31,            December 31,

                               2007        2006        2007        2006
                            ----------  ----------  ----------  ----------
Non-GAAP net income         $   29,784  $    3,975  $   64,657  $   20,127
Common stock warrant
discount                           --          --          --        (527)
Restructuring expenses              --        (495)       (100)     (7,617)
Certain non-cash stock
based compensation               (579)       (492)     (2,323)       (819)
Inventory and inventory
related charge                     --          --        (175)     (3,094)
Utilization of inventory
previously written-off             --          --         218         215
                            ----------  ----------  ----------  ----------
GAAP net income             $   29,205  $    2,988  $   62,277  $    8,285
                            ==========  ==========  ==========  ==========





                              AVICI SYSTEMS INC.
                   CONDENSED CONSOLIDATED BALANCE SHEETS
                               (IN THOUSANDS)
                                 (Unaudited)

                                                  December 31, December 31,
                                                  ------------ ------------
                                                      2007         2006
                                                  ------------ ------------

Assets
   Cash, Cash equivalents and
    marketable securities                         $     99,988 $     60,095
   Inventories                                              --        5,438
   Trade accounts receivable, net                       11,769        3,583
   Restricted cash                                          --        1,243
   Other current assets                                    790          890
                                                  ------------ ------------

     Total current assets                              112,547       71,249

   Long-term marketable securities                       3,000        8,504
   Property and equipment, net                           3,306        4,937
                                                  ------------ ------------

     Total assets                                 $    118,853 $     84,690
                                                  ============ ============

Liabilities and Stockholders' Equity
   Accounts payable and accrued expenses          $      9,002 $      8,914
   Deferred revenue                                      2,343        9,592
   Stockholders' equity                                107,508       66,184
                                                  ------------ ------------

   Total liabilities and stockholders' equity     $    118,853 $     84,690
                                                  ============ ============


  December 31, 2006 amounts are derived
   from audited financial statements.
-------------------------------------------

QuoteBought in at $8.46 this morning.

Thanks for highlighting AVCI BigSully1, it has an interesting story, as one can read above in my initial analysis.

4th quarter results were outstanding ...

• Avici Systems Reports Fourth Quarter and Full Year 2007 Results
Marketwire (Thu, Feb 28)

... showing management executed perfectly on its strategy, leaving $0 of inventory from discontinued operations.

When I saw the $1.9 EPS for the quarter I hoped that at least a part of it came from the new SoapStone business, but after listening to the conference call I see it all came from the discontinued router business.

AVCI will change its ticker symbol to SOAP in March 18th, 2008, reflecting the change in its business.

In my initial analysis I wrote the following conclusion:

Quote4. What do we have now?

We now have a $151 M market cap company with $61 M in cash entering a new business. The past isn't any guide for the future in this case, because a few quarters from now AVCI will be an entirely new business (SoapStone Networks will be the new name).

So, the issue is, how much is SoapStone worth? More or less than $151 M - $61 M = $90 M?

I've read some press releases about SoapStone and the company's website at www.soapstonenetworks.com and unfortunately I don't understand the product very well and can't judge its market potential.

As Buffet says, "invest only in businesses you understand". This clearly isn't my case with AVCI. Perhaps one of you guys is a telecommunications engineer and knows something about the need for this SoapStone product.

5. Conclusion

AVCI's old business is ending and the market currently values its new business at $90 M. I don't know if that's a lot or if it's well below fair value, because I don't understand and can't judge the product, its price, or its market potential. An investment in AVCI shares would be a complete shot in the dark for me. My opinion is neutral.

The situation now is that AVCI's market cap is $117.8 M and the company has $103 M in cash and equivalents, with $9 M in total liabilities. So now the market is valuing SoapStone at just $117.8 M - $103 M + $9 M = $23.8 M, which is considerably less than the $90 M in November 26th, 2007.

So, the stock is definitely more attractive now.

However, at the conference call, the company's CEO gave a few more details about how 2008 will be in terms of financial results. He said he expects the first sales of their SoapStone products just in the second half of 2008. Also said he expects costs of $30 M - $35 M for the full year and net income coming from maintenance services to AT&T of about $4 M for the year. There will also be $4 M - $5 M of capital expenditures in 2008.

So, this tells me that AVCI (SOAP in a couple of weeks), will lose about $8 M in each of the next couple of quarters, because it won't have any revenues coming from continuing operations.

Unfortunately I continue to be ignorant in respect to SoapStone's products potential. I guess that later in the year we'll get some more clues.

I guess BigSully1 buying now is buying cheap, but there can be some more downside between now and the second half of 08, as the next two quarters will show heavy losses.

I prefer to remain on the sidelines for the time being, but it is possible that I invest in the future, perhaps at a higher price.

Good luck BigSully1

(well, maybe you sold already due to the market reaction to the earnings news)