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Alcatel Gateway Hurts Tekelec

Tekelec Inc.’s (Nasdaq: TKLC) SanteraOne Media Gateway is living on borrowed time inside one of its OEM partner's solutions.

Spatial Wireless, now owned by Alcatel (NYSE: ALA; Paris: CGEP:PA), has been using the Tekelec Santera gateway as part of its Spatial Atrium, a next-generation, wireless, distributed, mobile switching solution (see Alcatel Lands Spatial for $250M).

But Alcatel is building its own gateway and, within a year, it could push out the Tekelec Santera product, Light Reading has heard from sources at both companies. This scenario, in fact, was predicted by Light Reading all the way back in September 2004 (see Tekelec Connects With VocalData).

And the Spatial Wireless connection is no small thing to Tekelec. Sources close to Tekelec say the OEM relationship is responsible for the vast majority of Tekelec's media gateway revenues. Tekelec will not disclose the actual percentage, but says Spatial Wireless contributed somewhere around 50 percent of its full-year 2004 Santera sales.

And Santera media gateway sales are keeping Tekelec’s softswitching business in the black. Of the $20.4 million in non-signaling business Tekelec reported in the last quarter of 2004, $16.8 million of it came from its Santera product sales (see Tekelec Buys Time in Q4). But the Santera business unit has yet to hit profitability, and analysts have expressed concern over the company’s operational burn rate and its negative pull on margins. Its operating losses increased to $11.8 million in the fourth quarter of 2004 from $11.3 million in the third quarter.

ThinkEquity Partners analyst Troy Jensen believes the Spatial Wireless partnership "is most likely a majority of Santera revenues, given all the Tier 1 deals they have won together -- T-Mobile USA, Cingular Wireless, Orange, and the trial at SFR."

Tekelec, for its part, isn't contesting Alcatel's decision. “I would say that it is the right strategy for Alcatel,” says Tekelec’s wireless media gateway product manager, Payam Maveddat. “To own that part of the equation makes strategic sense for them to do.”

The Santera and Spatial Wireless duo has been a very successful one, but their parent companies compete in other product areas, and Alcatel, naturally, is aiming to keep the media gateway profits in the family.

Alcatel says its upcoming media gateway won’t be available until early next year, but a former Tekelec executive says Alcatel is pushing the product toward general availability this year. The source says Alcatel is reworking its European media gateway product for use in the Spatial Wireless solution.

Tekelec appears to have hopes that it won't be bounced out of Alcatel/Spatial right away. Maveddat believes Alcatel will be targeting smaller Tier 2 and Tier 3 carriers with its media gateway, not the Tier 1 carriers for which the Santera product was designed. “My view, and what they [Alcatel] are telling me, is that the market they are trying to go after with this is different than the one we are collaborating with them on to capture.”

Asked if Alcatel might continue to use the Santera media gateway for new Tier 1 customers, Maveddat replied: “This very much depends on Alcatel.”

And, just in case, Tekelec is preparing to meet Alcatel head-on in the Tier 2 and Tier 3 media gateway market.

The current Santera media gateway is very dense and feature-rich, but it also costs $200,000 per box and up, depending on configuration. So Maveddat says Tekelec is now in development with a lower-cost, lower-density Santera media gateway that will target Tier 2 and Tier 3 players. The product will be ready in mid-2006, Maveddat says.

This development is a tough knock for Tekelec, but how tough depends on whom you ask. ThinkEquity's Jensen says even if the Spatial Wireless business went away at the end of the second quarter, Tekelec would very likely continue selling media gateways into Spatial's standing accounts: “Clearly, current customers like Cingular are not going to kick them out if Alcatel develops a new media gateway, but it locks them out of any new business."

Meanwhile, investors seem a bit nervous about Tekelec this week. The company’s stock has lost 10 percent of its value since opening the week at $17.20 per share. Tekelec stock was trading at $15.50 in afternoon trading Friday.

— Mark Sullivan, Reporter, Light Reading

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