Avici Systems is exiting the core router business upon which it was founded more than ten years ago to focus on software, the company announced today.

Avici expects to cease shipping its core routers before the end of this year but will continue servicing the gear in accordance with existing contracts.

“We do not believe our focus on core routers and our position as the number three supplier in this market to be a sustainable growth business for the company,” said Avici chief executive officer Bill Leighton in a statement released by the company late Wednesday. “While we were successful in bringing the company to profitability in 2006 and continued to do so in the first quarter of 2007, we recognize that the routing market is under tremendous pressure from alternative technologies such as Ethernet switching.”

Going forward, the company will focus on its latest initiative, Soapstone Networks, a unit it unveiled in February. Soapstone sells software that creates an “abstraction layer” between services and network infrastructure, providing technology-neutral interfaces that allow applications to broker the network resources they need. Soapstone’s “virtual control plane” is designed as an alternative to G-MPLS.

Avici, which employs 162 people, has long searched for ways to broaden its business beyond selling core routers primarily to one customer, AT&T, which contributed more than 90% of Avici’s revenue last year.

Avici's exit from the router space creates an attractive opportunity for rival core router vendors such as Cisco Systems and Juniper Networks to pursue more business with AT&T going forward.

One analyst on this morning’s first-quarter earnings conference call asked whether liquidating the company would have been a better move than embarking on the early stages of a risky new venture. “You don’t even have a commercial product yet,” the analyst said. “You’re asking shareholders to look at this from a two- to five-year perspective where you guys could be losing a lot of cash.”

Avici expects to begin beta-testing the Soapstone product in the second half of this year and see revenue from it ramp next year. Because the first version of the product involves Provider Backbone Transport technology, it is likely to pursue British Telecom in particular, a leading proponent of PBT. “That would be a very logical one [to pursue],” said Bill Stuart, Avici’s chief financial officer.

Also surprising to analysts was Avici’s decision, announced late Wednesday, to give shareholders a cash dividend of $2 per share in June. In March, Avici had more than 14 million outstanding shares of common stock. With the company in the early stages of a new business (especially one whose customers demand financial stability in their suppliers), one analyst asked why Avici didn’t keep the cash “for a rainy day.” Stuart said the company wanted to reward shareholders for their loyalty and had determined that, even with the dividend, it has enough cash to fund its operations for the foreseeable future. Avici had more than $70 million in cash and investments at the end of the first quarter.