HERE IS AN INTERESTING STORY. MUST READ ----------
Somebody post this to the info thread (if worthy) -chartman out.
Dow Jones Newswires -- May 22, 1998
SmartMoney Interactive
NEW YORK (Dow Jones)--In a market for well-established products, it's often true that one company's misfortune can lead to another's brilliant success.
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Tekelec (TKLC), another maker of telecom equipment that heads up today's CANSLIM screen for high-growth momentum stocks. Its price has jumped 260% in the last 12 months, to 45 1/2. Last month the company turned in another great quarter, with revenue jumping $14 million, or 70%, and net income increasing by 300%, to $29 million, making the third quarter in a row the company has enjoyed three-digit revenue growth.
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What Tekelec's products do is to process signals that control the way telephone calls are routed from user to user. These signals, known as signaling system seven (or SS7), are a large part of what maintains the bulletproof reliability of the telephone network.
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Since 1995, though, Tekelec has moved onto larger customers, including Bell Atlantic. Tekelec has also established a good name with startups in the hot market for competitive local exchange carriers (or CLECS). However, the main revenue driver will likely be in marketing to the rest of the Baby Bells, and in selling to large domestic long-distance concerns, such as WorldCom Inc. (WCOM), which are building out their networks at a ferocious pace.
---READ THIS PART CAREFULLY---
It is here that an interesting technology challenge faces Tekelec that could have a hand in determining its future growth rate, expected to be 45% over the next three to five years. Aggressive telecommunications firms such as Qwest Communications International Inc. (QWST), WorldCom, and even the Bells themselves, are turning the phone network inside out by running the world's voice traffic over the Internet. Indeed, by most accounts, overall data traffic will outstrip plain old phone calls this year.
But to make those Internet calls work - not to mention future services, such as really reliable email and high quality video - will require a system of controls like SS7 to let the various networks of the world talk to one another. A nice growth market, yes, but it also raises the question of what kind of competition Tekelec will encounter from the networking vendors who control the world of Internet Protocol (or IP). Cisco Systems Inc. (CSCO), which owns most of the market for Internet gear, recently acquired an SS7 firm, Lightspeed International, of Washington, D.C., for about $160 million. The company's goal is no doubt to perform these signaling functions within an Internet data packet, as a transparent function of the Internet infrastructure. Analyst Eric Zimits with Hambrecht & Quist says that it all comes down to what SS7's long-term role will be. "How dumb or how intelligent does the network have to be?" he asks. In other words, will the signals needed to make the Internet reliable be provided by the telcos themselves, or will the phone network embrace the kind of rough and ready, best-effort grade of service that has made the Internet a winner so far and that has made Cisco so very rich? At the end of the day, no one is expecting the world's telecom firms to drop SS7 anytime soon.
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--- Key word in this part is "BUY" ---
One way to put this technology debate into perspective, then, is to ask who should buy the company. Lucent Technologies and Cisco Systems are the mythical combatants in this battle to rewire the telephone system, and the stakes in how IP performs vs. SS7 are about the very survival of these two companies. Both companies have good strategic reasons to buy Tekelec, but Soundview's Slocum discounts the prospect of an acquisition altogether, suggesting that for a hot momentum stock like TKLC, with a great business, there's no point in investors chasing after a chimerical exit strategy.
Meanwhile, Tekelec app arently announced in its most recent earnings conference call that it plans to provide a gateway between IP and SS7, showing that it is already trying to merge the two worlds of the Internet and the telephone. With a foot in both IP and the signals that drive the world's telephone network, it's fair to ask: Who's really more important to the phone company, Cisco or Tekelec?
--- OR MAYBE DGIV?????? --- |
