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Cuts for Tellium?

As Tellium struggles with the capex crunch, sources say it's preparing a 20 to 30 percent layoff

June 17, 2002

4 Min Read
Cuts for Tellium?

Tellium Inc. (Nasdaq: TELM), an optical switch maker, is preparing for a major layoff, according to a source close to the company.

The source said that Tellium’s board is meeting on Tuesday to finalize plans to lay off between 20 and 30 percent of the company’s staff.

In hard numbers, this means that the company will likely let go between 107 and 160 people, based on the 534 headcount reported in the company’s latest 10Q filed with the Securities and Exchange Commission (SEC). Tellium did not return calls by press time.

The company alluded to layoffs last week when its CFO Michael Losch presented at the CIBC World Markets telecom investor conference in New York City.

“One of the take-aways from their presentation and the breakout session was that they are actively trying to manage their business,” says Rick Schafer, an equities analyst with CIBC. “This to me sounds like they are looking for ways to cut costs.”

Like other companies in the optical switching market, Tellium is having trouble gauging when carriers will go back to spending on such equipment, which is why it didn’t provide guidance when it last reported earnings in May. And that may soon be reflected in its revenue numbers, according to some analysts. On the company’s first-quarter earnings call, it reported $54 million in revenue (see Tellium Reports Q1). Earnings for the June quarter are expected to only be about $30 million, according to Schafer.

Currently, Tellium has three carrier customers: Dynegy Inc. (NYSE: DYN), Cable & Wireless (NYSE: CWP), and Qwest Communications International Inc. (NYSE: Q). Dynegy, which has been deploying Tellium gear since 2000, is expected to purchase $250 million more worth of equipment, although it is not required to do so under the current contract, according to the 10Q. Cable & Wireless is supposed to purchase $350 million worth of gear, but the carrier hasn’t bought anything from Tellium so far (see Ciena Wins C&W Deal). Tellium has only seen a small percentage of the revenue from its re-negotiated $450 million contract with Qwest (see Qwest and Tellium Revise Contract).

On top of that, the prospect for new business is also looking bleak. Word on Wall Street is that the deal with Deutsche Telekom AG (NYSE: DT) may not come to fruition (see Tellium Looks to Make Its Marks). William Proetta, the company’s COO was supposedly in Germany last Monday trying once again to broker a deal, but nothing substantial has come through, say sources. And with Deutsche Telekom talking about capital spending cuts, analysts don’t expect anything to materialize anytime soon. WorldCom Inc. (Nasdaq: WCOM), another potential customer, is also cutting its capital budget, making the list of potential new customers even smaller (see WorldCom to Cut Capex?).

AT&T Corp. (NYSE: T) could be a logical target since it is already buying DWDM transport gear from Tellium’s partner NEC Corp. (Nasdaq: NIPNY). The two equipment makers recently demonstrated interoperability between their products at the Supercomm tradeshow in Atlanta (see NEC and Tellium Offer Switch). But AT&T currently uses the CoreDirector from Ciena Corp. (Nasdaq: CIEN) in its network. The carrier has explicitly stated both publicly and privately that it needs optical switches that groom down to the STS1 level, something the Tellium switches can’t do.

“We expect that substantially all of our revenues will be generated from a limited number of customers, including Cable & Wireless, Dynegy Connect and Qwest,” says the 10Q filed with the SEC. “The termination or deterioration of our relationship with these customers will have a significant negative impact on our revenue and cause us to continue to incur substantial operating losses.”

Tellium announced a small contract with Lockheed Martin Corp. last month, but analysts don’t expect it to make much of an impact on its bottom line (see Lockheed Picks Tellium and Tellium's Time Warp).

“I just don’t think this deal is anything to compare to a carrier contract,” says Schafer. “They need to just stick to their knitting and see what happens in the market. Cutting staff right now may not be a bad idea.” [Ed. note: Unless, of course, you happen to be part of that staff.]

— Marguerite Reardon, Senior Editor, Light Reading
http://www.lightreading.com

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