Telco Systems Makes Critical Buy

While much of the telecom world's focus is on the mega-mergers of the Tier 1 vendors and carriers, some of the industry's minnows are making hay, buying companies and moving into profitable territory. (See Investors Say Oui to Alcatel/Lucent.)

One such company is Telco Systems (BATM) , an Israeli vendor that's listed in London, and which has been fortifying its access portfolio with some small but strategic acquisitions in the past few months.

The company, also known as BATM Advanced Communications Ltd. (London: BVC), shelled out $7 million to buy Metrobility Optical Systems in June, supplementing its Ethernet access portfolio. (See BATM Snaps Up Metrobility.)

Now it has bought Critical Telecom Corp. , a Canadian startup that has had a rollercoaster ride since it set up in Ottowa and raised $12.7 million in 2003 to make remote IP DSLAMs that sit between the central office and the carrier's customers. (See BATM Buys Critical, Critical Telecom Gets $12.7M, and Critical Telecom Debuts Remote DSLAM.)

The company picked up about 10 North American operator customers with its hearty outside plant product, and looked as if it had struck startup gold with a January 2005 reseller relationship with Ericsson AB (Nasdaq: ERIC). (See Ericsson Forms Critical Partnership .)

Critical's luck turned, though, when Ericsson acquired Marconi in October 2005. According to an industry source, Critical's investors decided against further backing, and the company, which hadn't managed to pick up any Tier 1 carrier wins despite some interest, struggled to grow and has revenues in the region of about $1 million. (See Ericsson Buys Bulk of Marconi.)

Telco Systems hasn't said how much it has paid for Critical, but our source suggests a low figure, "probably less than $5 million," and believes that only about half of the 13 or so staff left at Critical will join the BATM company.

Critical's CEO Nancy Macartney says she can't divulge any financials, or comment on speculation regarding the acquisition price. On headcount, she says only that "not all the staff are making the transition, but the team in Ottowa will remain."

She also says that Critical is still working with Ericsson, and has "an active engagement with a major service provider" in partnership with the Swedish giant.

Telco Systems couldn't be reached today in Israel and hadn't responded to calls to its North American base as this article was published.

So while it doesn't look as if Critical will be adding a lot to the Telco Systems bottom line immediately, it does give the company what our source describes as "a pretty unique product for outside plant problems" that carriers encounter in harsh climates, such as in Russia, Eastern Europe, and in the northern regions of North America.

Over time that could generate supportive incremental revenues for Telco Systems, which has just reported a net profit for the first six months of 2006.

The company made a pre-tax profit of $4.7 million from revenues of $34.1 million, compared with a loss of $1.7 million from revenues of $26.2 million a year earlier. The company reported a loss of nearly $3 million from revenues of $56.5 million in the full year 2005.

The company has been making much of its OEM relationships in the past year, and noted in its half-year report that "we are signing OEM agreements and have started doing business with new partners. We are optimistic that this trend of expanding business relationships will continue into the second half of 2006 as well as for 2007 and beyond." (See BATM's Secret Slips Out and BATM Rises On Major Deal.)

— Ray Le Maistre, International News Editor, Light Reading

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