C&W, Tellium Rework Contract

In another case pointing to just how crazy (and largely meaningless) the multimillion-dollar telecom contracts of the bubble years were, Cable & Wireless (NYSE: CWP) has gotten off the hook for the $350 million contract it signed with optical switch maker Tellium Inc. (Nasdaq: TELM) in August of 2000 (see Tellium, C&W Amend Contract).

The two companies announced today that the contract has been amended. The new contract requires Cable & Wireless to buy an undisclosed amount of Tellium equipment during the first and second quarters of 2003. Once that commitment has been satisfied, Cable & Wireless may, but wouldn’t be obligated to, purchase the rest of the $350 million of Tellium's Aurora switching products by the original August 2005 deadline (see Tellium's Big Score ).

Deployments were expected to begin in the first quarter of 2001, but never materialized. Late last year, the carrier officially put the deployments indefinitely on hold.

It’s no surprise that the deal would have to be amended, given the financial trouble that Cable & Wireless is in these days. The carrier has recently announced it’s slashing its global workforce by a third and shutting down roughly half of its data centers (see C&W Preparing to Sell US Network?). Its debt rating has also plummeted to below investment grade, restricting its access to new capital (see C&W Still on Watch Negative).

This isn’t the first big contract that Tellium has had to amend. Last December, it announced that it had renegotiated a deal with Qwest Communications International Inc. (NYSE: Q). That contract, also signed late in the summer of 2000, was for $300 million to be spent within three years (see Qwest and Tellium Revise Contract). In May 2001, the agreement was extended for another $100 million, to be spent between 2003 and 2005. According to the revised contract, Qwest only had to spend a total of $100 million worth of equipment by mid-2002.

The amended contract does not come as a huge surprise. In the short term, the new deal with Cable & Wireless may actually be a good thing, because it brings in some much needed cash for at least the first two quarters of next year. Many analysts hadn’t expected much, if any, revenue from Cable & Wireless next year. In the third quarter of 2002, Tellium’s revenues fell roughly 39 percent sequentially to $1.9 million, with a net loss of $114 million.

But over the long term, it's clear that Tellium will have to find new customers. The company has essentially run out of contracts and has been unable to win new ones. Although Dynegy Inc. (NYSE: DYN) is obligated to buy Tellium gear until November of 2003, the carrier has already built out most of its network. Qwest has also fulfilled its obligation. Last year Tellium was rumored to be close to a deal with Deutsche Telekom AG (NYSE: DT), but that too seems to have fizzled (see Tellium Looks to Make Its Marks). For the most part, the company seems to be subsisting on small deals with the U.S. Federal government (see Tellium's Time Warp).

The company noted its customer situation as a major risk factor in its most recent quarterly filing with the Securities and Exchange Commission (SEC):

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

The company’s stock, which now trades on the Nasdaq SmallCap Market, was trading up $0.07 (11.48%) to $0.68 (see Tellium Transfers to Smallcap). Company spokespeople did not return calls by press time.

— Marguerite Reardon, Senior Editor, Light Reading
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