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Technology Stocks : DSC Communications -- Ignore unavailable to you. Want to Upgrade?

To: Yeadon who wrote (3807)	3/12/1998 11:08:00 PM
From: david wolf	Read Replies (1) \| Respond to of 4429

Posted from ONtheStreet.com ... "Top Stories: DSC Product Snafu Could Boost Rival Tekelec" A company called Illuminet took the heat late last month when callers in several parts of the country suddenly found themselves without phone service, but buried within the company's elaborate signaling system was the real problem -- components made by DSC Communications (DIGI:Nasdaq), according to people familiar with the matter. DSC's snafu, meanwhile, could provide a boost for rivals such as Tekelec (TKLC:Nasdaq), already a key competitor. In addition, there are several other competitors, including Northern Telecom (NT:NYSE) and Ericsson (ERICY:Nasdaq), both of which build signaling transfer point, or STP, technology that allows phone carriers to control their networks while preserving bandwidth for phone calls. In this highly competitive yet arcane field of network maintenance, each of these companies is ready to step in when a competitor fails. Since the incident, DSC's stock has fallen about 4%, while Tekelec's has risen 5%. DSC was trading up slightly Thursday at 18 per share; Tekelec's was off 1/8 at 40 3/8. On Feb. 25, both wireless and conventional phone service flickered across parts of the nation for several hours. A fiber-optic outage near Illuminet's Mattoon, Ill., plant triggered the events. But the real problem was that a switch at Illuminet foundered when that outage sent a heavy load of messages its way. Because of a software glitch, the switch was operating at one-sixth capacity and couldn't read all the messages, according to an Illuminet spokeswoman. The spokeswoman declined to say which company built the switch, which uses STP technology. The supplier repaired the problem, she said. But two people familiar with the matter say the faulty product came from DSC. And analyst Nikos Theodosopoulus at UBS Securities explains in research notes issued earlier this month that Illuminet has encountered two snafus with DSC since October 1997. Illuminet says it has had two failures with a vendor in the same time period. Theodosopoulus couldn't be reached for further comment. "The good news for DSC is that it appears they have a software fix," writes Theodosopoulus. "The bad news is that the company is at risk of losing some credibility" with this particular technology in the short term. DSC says it has no problems with its software or hardware and refused to comment on any possible connection with Illuminet's accident. The company says its robust, high-capacity products have claimed a dominant share of the STP business. A DSC official says BellSouth (BLS:NYSE) has renewed an STP contract with DSC, which highlights the supplier's strength in that market. An important feature of STP technology is that phone numbers can become "portable" -- that is, a customer is able to hop to another local phone company without changing numbers. The demand for portability is high because deregulation is prompting more customers to move. Tekelec, whose profits have grown robustly in recent quarters, is one rival that could get a boost from the DSC incident. Illuminet has one pair of DSC STP switches and two pairs of Tekelec units. An Illuminet spokeswoman declined to say whether Illuminet might change vendors because of the incident. "Tekelec gives us probably the most competition in the wireless area," says DSP Vice President Ron Hilton, who adds that, in certain cases, Tekelec's products are more cost-effective. DSC's alleged foul-up reinforced shareholder Jon Gruber's notion that Tekelec is the strongest player on this field. "I'm very positive on the stock," says Gruber. His Gruber & McBaine investment firm owned 332,000 shares of Tekelec on Dec. 31, according to Technimetrics. "They have been winning almost every battle" with DSC, says analyst Amar Senan at Volpe Brown Whelan. His firm has done underwriting work for Tekelec; he doesn't cover DSC. He rates Tekelec stock a strong buy. Senan says Tekelec worked for three years to win business with Bell Atlantic (BEL:NYSE), a stamp of approval that now might pay off. "I think they will have more business with telcos," says analyst Eric Zimits at Hambrecht & Quist, which has not participated in any underwriting projects for Tekelec. He rates the stock a buy. In the fourth quarter, the company grew net income to $8.9 million, or 31 cents per diluted share, compared with $2.6 million, or 10 cents per diluted share, one year earlier. Revenue climbed 81% to $43.4 million from $24 million in the year-ago period. The company has topped First Call's consensus EPS estimates by a nickel or more for the last three quarters. One drawback, however, is that Tekelec already looks expensive. With a market capitalization of $1 billion, Tekelec trades at 39.8 times trailing earnings and 8.4 times sales. Tekelec also is prone to sharp swings. Shares dipped to 28 in late January from about 47 in late October, partly on worries that 11% of the company's revenue came from Asia in the last reported quarter ended Sept. 30. Shares close Wednesday at 40 5/8. DSC is priced at 44 times earnings and only 1.4 times sales.