By August of 2005, it was clear to William Leighton, chief executive of Soapstone Networks Inc. in Billerica, that his company was dying. So he finished it off.
The result was a surge of revenue and profit that catapulted Soapstone, a maker of telecommunications software, to number three on this year's Globe 100. But Soapstone's 2008 performance won't come close to matching last year's. Already, it's posted a first-quarter loss of $3.7 million, after an 87 percent revenue decrease.
And there are more losses to come. "We would expect to get back into a break-even or positive cash flow in 2009," Leighton says.
It's all part of a daring plan to transform Soapstone from an also-ran in the telecommunications hardware business to a leader in telecom software.
Until March, the company was known as Avici Systems. Since 1996, Avici had built "core routers," powerful devices that sort and distribute voice and data packets over communications networks. But Avici could gain no traction against two giant competitors, Cisco Systems Inc. and Juniper Networks Inc.
Avici landed a single big customer, AT&T Inc., but was shut out of the other carriers. In 2005, Leighton realized that Avici was going nowhere.
"We kept spending money on R&D, we kept spending money on sales and marketing, and we weren't getting the results we needed," he says. The company gave up on trying to expand and concentrated on building routers for AT&T. Still, Leighton says, "that's not a long-term sustainable business."
So Leighton decided on more radical surgery. He assigned chief technology officer Larry Dennison to launch an effort to create a company inside Avici. The new firm, called Soapstone, would offer software that would perform vital telecom management functions. But instead of running on custom-made core routers, it would work on off-the-shelf server computers.
In early 2007, Leighton told AT&T his company was bailing out of the hardware business to focus on selling Soapstone software. AT&T responded by stocking up on Avici's remaining inventory. "They were purchasing equipment that they would need in early 2008," Leighton says. "At the same time, the traffic on their network was growing enormously. The two things put together led to a huge increase in revenue."
Today, as Soapstone, the company is free of the high cost of hardware manufacturing but also the resulting revenue. Contracts to service AT&T's Avici hardware are the only source of income these days. The new software is still in trial mode and isn't due to generate cash until the second half of the year.
"It's going to be difficult for them to survive for all that long," says David Vorhaus, telecom industry analyst at Yankee Group in Boston. "Either they're not successful and that's the end of it, or they are successful and a lot of large companies or specialty players come in and eat their lunch."
But with $104 million in cash and no debt, Leighton can afford to wait and see if his gamble pays off.
Hiawatha Bray can be reached at email@example.com.