Another good TSC/Petrie article on Tekelec [ASND references]
[Key sentence: "Lucent has little to offer in the way of SS7."]
thestreet.com
Top Stories: Tekelec's Strong Signals
By Kevin Petrie
Staff Reporter
8/13/98 3:42 PM ET
Here's a technology mania that might bear fruit: It's installed,
it works and it helps small supplier Tekelec (TKLC:Nasdaq)
land new business even if the much-hyped Internet
telephony takes a while to materialize.
Wall Street has lumped the technology under the name
Signaling System 7, the language spoken by the traffic
controllers that overlay ordinary voice networks. Tekelec is
arguably the best builder of SS7 products, which makes it a
well-positioned arms dealer or even a takeover candidate.
Tekelec's stock has been resilient amid the recent Nasdaq
troubles. Its shares have gained about 25% since reports
first surfaced that Internet builder Ascend (ASND:NYSE)
would purchase SS7 supplier Stratus Computer
(SRA:NYSE) -- a deal that was confirmed Aug. 3. Although
the initial rumors hurt Ascend's stock, they helped add 55%
to shares of Stratus. Stratus and Tekelec make different
kinds of SS7 products.
"When you see Stratus getting bought, and you see Tekelec
[stock] going up, that means the market realizes that SS7
processing is going to be really hot," says Tom Nolle,
president of CIMI, a consulting firm based in Voorhees, N.J.
Tekelec is not a CIMI client.
Tekelec already stands strong. It is growing revenue at a
71% annual clip with its plumbing for ordinary telephone
service. Now, a clamor is building about the notion of running
phone service over the Internet -- a distant prospect that will
take a lot of work. Large suppliers like Cisco
(CSCO:Nasdaq) and Ascend are taking the intermediate
steps of using conventional SS7 equipment to split data
messages from overloaded phone networks and ship them
over the Internet. In time, SS7 might even help Internet
telephony take shape.
"Tekelec is one of the premier suppliers of SS7 switching,"
says analyst Brian Modoff with BT Alex.Brown, a Tekelec
banker. Modoff says Tekelec's versatile units perform more
functions than Stratus' technology, affording Tekelec a
long-term advantage. "The company stands to benefit
significantly from this convergence" of phone networks with
the Internet, he says. [Which raises the question of why ASND didn't buy Tekelec...]
"We believe investors should increasingly see Tekelec's
position at the center of the SS7 network as similar to
Ascend's in frame relay and ATM," or asynchronous transfer
mode, adds analyst Tim Savageaux with Volpe Brown
Whelan, also an underwriter for the thinly followed stock.
Tekelec rigs carrier networks for the future in other ways.
One established line of products enables customers to
retain their phone number when changing phone companies
-- a growing necessity in the U.S. and Europe with the onset
of competition. Tekelec also has products that diagnose
problems on networks.
For over a year, Tekelec has sold SS7 and other products to
Bell Atlantic (BEL:NYSE) and its predecessor Nynex --
sales that resulted from extensive testing. Bell Atlantic
constituted 15% of Tekelec's revenue in the first quarter. The
Bell Atlantic contract is a sign that Tekelec likely is stealing
SS7 market share from its rival DSC Communications
(DIGI:Nasdaq). While Bell Atlantic marks a coup, it's unclear
when more Baby Bells might pick Tekelec as the bulls
expect. A Tekelec official declined to say whether more local
phone company customers are on the way.
SS7 has turned powerful heads. Cisco acquired Lightspeed
in December for its SS7 tricks and is buying other phone
suppliers such as Summa Four (SUMA:Nasdaq), whose
products perform different tasks than Tekelec.
"I think [Tekelec] would be a great acquisition for Lucent
[LU:NYSE]," says research director Jane Snorek with
Oberweis Funds, although she's unsure whether the
company's executives would sell. Her firm invested in the
stock one year ago and still is buying shares.
"I'd be surprised if they're not bought by the end of the year,"
Nolle says. And he thinks a takeout is the best strategy:
"Their value is going to sharply diminish" as a group of SS7
startups primp themselves to be acquired at cut-rate prices.
To date, Cisco has shipped no products that do what
Tekelec does, and Lucent has little to offer in the way of
SS7. Cisco declined to comment on takeover speculation,
Tekelec's technology or its own SS7 plans. A Lucent official
didn't return calls for comment. Tekelec declined to
comment on the takeover speculation.
Some investors could care less about a buyout. "We're
certainly happy owning the stock regardless of any
short-term or long-term buyout possibilities," says Michael
Prouting, an analyst with Insight Capital.
Tekelec is valued at $1.2 billion, or 33 times trailing earnings
and eight times revenue. Its broad-based rival DSC
Communications, about to be acquired by Alcatel
(ALA:NYSE), trades at $3.4 billion, or 144 times earnings
(excluding charges) and two times revenue.
With numbers like those, Tekelec represents a relatively
cheap growth play to some investors. "You're paying a little
better than 30 times [earnings] for a company that's been
beating the numbers," says Charles McCurdy, research
director with Veredus Asset Management, a longtime
shareholder that is buying more Tekelec shares along with
other proven performers amid the market turmoil. Tekelec
has beaten profit estimates every quarter since 1996.
In the second quarter, Tekelec's net income jumped 148% to
$8.4 million, or 14 cents per share, from $3.4 million, or 6
cents per share, one year earlier. Revenue hopped 71% to
$42.9 million from $25.1 million in the year-ago period.
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