With the growth of its data networking division lagging behind expectations, ECI Telecom vowed to make significant changes to the business it inherited by acquiring Laurel Networks last year.

ECI’s data networking group pulled in $4 million in revenue in the third quarter, up from $3 million in the second quarter and $2 million a year ago. But with spending on research and development still “high” in that group, ECI said, the data business reported a $9 million operating loss for the quarter ($7.5 million on a non-GAAP basis). It was the only one of the company’s three divisions to not report a positive net income for the quarter.

Though ECI once predicted sales of its data networking gear to reach at least the mid-teens by the second half of 2007, it no longer believes it can reach that goal. However, the company isn’t yet offering a revised estimate. As a result, the company is evaluating ways to cut costs in its data division, reducing what it calls the group’s “financial burden” on the company.

The move comes as an unexpected drop in the company’s broadband business led it to predict an 8% to 12% sequential revenue drop in the fourth quarter and growth of 4% to 8% next year.

ECI will include Laurel technology in edge routers and other new products introduced widely next year under the brand name Sequoia, Maor said. However, the release of the Sequoia products will be delayed slightly from its original schedule due to the changes the company expects to make.

ECI is currently showing the Sequoia gear--high-capacity IP edge routing platforms in 400-Gb/s, 800-Gb/s and 1600-Gb/s versions--to large carriers in the U.S. Though most of those customers have already chosen competing gear, ECI hopes they’ll pick Sequoia in the next round of procurement in 18 to 24 months.

Though analysts on this morning’s conference call asked more than once under what circumstances ECI would consider getting out of the data networking business, the company would not speculate.

ECI will make changes to its data division, said Rafi Maor, ECI’s president and chief executive officer, “But we’re not going to destroy the main value this has for us.”

“The main reason for the Laurel acquisition was to accelerate time to market in data and IP as well as migrating that technology to our future or next-generation product lines in the optical and access businesses,” Maor said. “In terms of this, we’re doing a pretty good job.”

One change ECI is making next quarter and throughout next year is a reduction in the size of its workforce. Though the company’s workforce grew 1% sequentially to 3067 people in the third quarter, ECI expects its headcount to shrink by more than 100 (or 3%) in the fourth quarter as it tries to cut costs. “We expect to continue in this direction in the coming year,” the company said.

ECI acquired Laurel for $88 million in cash in May 2005. As part of ECI, the former Laurel research and development team is still based in Pittsburgh, Penn., where they were based as a standalone company. Customers for the gear include Korea Telecom and South Dakota’s SDN Communications.

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