[tollGrade Comm]
Charlie --
TollGrade was featured in the IBD New America column a year ago:
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In a shootout, the best place to be is on the sidelines - selling ammunition.
Tollgrade Communications Inc., which sells products to help phone companies test network lines, thinks it's found the perfect spot in the telecom showdown.
''It's like Dodge City out there,'' said Chairman Craig Allison. ''And we're selling bullets.''
The bullets, in this case, are Tollgrade's metallic channel units, or MCU products. They're used to test phone networks that have both copper and fiber-optic lines. They are in hot demand as phone firms install digital loop carrier systems, which add fiber-optic lines and new capacity to phone networks.
For the first nine months of 1996, Tollgrade's sales were $27.1 million, up 62% from the same period in '95. For the year, sales should be $36.9 million, a jump of 65%, and earnings are expected to rise 59% to 89 cents, says Monish Bahl of Parker/Hunter Inc.
Through the third quarter, most sales went to clients such as Bell South Corp., Nynex Corp., U S West Communications and Bell Atlantic Corp.
Tollgrade's sales depend on the growth of digital loop carrier systems - and the spread of telecom competition. Today, some 20% of the nation's 175 million phone access lines have been converted to these systems. Demand is growing about 20% a year, Bahl says, because it's new technology. That rate of growth - which varies widely by company - is expected to slow in the long term to match the 5% annual growth of new phone lines.
But for the moment, the Baby Bells and other phone firms need digital loop carrier systems to add more capacity -such as high-speed data links -through fiber-optics. ''People want more bandwidth,'' Bahl said. ''Try to get on America On-Line these days.''
About half the time companies add lines and build these systems, they buy products from Tollgrade to test them, Bahl says. The phone firms can also turn to rivals such as Teradyne Inc., which sell older testing products called remote measurement units, or RMUs.
But Tollgrade dominates the testing market, Allison says, thanks to better technology: ''We're not cheaper. But we are better value.''
As long-distance carriers such as AT&T Corp. enter markets now in the hands of the Baby Bells - and vice versa - demand for the company's products should continue to grow, analysts say. But this growth will largely reflect the speed of deregulation.
This pace has recently slowed as the phone firms fight over proposed rates for the use of each other's lines and services. ''We thought AT&T, MCI Communications Corp. and Sprint Corp. would be big clients by the end of last year,'' said Chandan Sarkar of SoundView Financial Group. ''But deregulation is being delayed in court. So though there are some sales to these firms, there won't be any big upside until the last part of this year.''
Tollgrade says this is just what it expected. ''It's a long, slow process,'' Allison said. ''We're not hanging our hat on the floodgates to open.''
Sales to national long-distance firms could be 10% of this year's revenue at most, Sarkar says. That means the bulk of sales will be to the Baby Bells.
Stock prices of some other phone equipment makers, like Teltrend Inc., have fallen off sharply because of weakening sales to Baby Bells. That's also a risk for Tollgrade. However, the company's products can help the regional phone companies ensure high quality in the face of new rivals, Sarkar says, and hence should see steady demand.
Tollgrade is trying to change its client mix. ''The company is progressing nicely on sales'' to Ameritech Corp., Pacific Bell and other firms,'' said Ted Moreau of Robert W. Baird & Co. ''There's no question they are moving ahead to broaden their customer base.''
In recent months, the company's been working with Advance Fibre Communications Corp. on a new product. The device lets one central unit talk to up to 15 other units in a network, making it cheaper for phone firms to test smaller networks. ''It's good for rural systems and firms looking for more flexibility,'' Allison said.
Sales to Advance Fibre could be roughly 10% of this year's revenue, Sarkar says. This venture could also give Tollgrade a foothold in Europe. The company, analysts say, is developing products for this market, and a move there is expected soon.
In the third quarter ended Sept. 30, net income rose 189% to $1.4 million from $484,000 a year before. Earnings per share were up 109% to 23 cents a share from 11 cents on 33% more shares outstanding. Sales jumped 91% to $10.1 million from $5.3 million.
The stock, which trades by TLGD, is priced near 29 1/2.
Transmitted: 02/12/97 01:59 (r1achf7s)
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