ECI Makes Hay in Taiwan, Europe

ECI Telecom Ltd. (Nasdaq/NM: ECIL) is on a roll. Its first-quarter revenues and profits, announced today, were better than analysts had expected, and the company says its top and bottom line numbers will continue to grow for the rest of the year (see ECI Reports Q1 Profit).

Revenues were $145 million, up sequentially and year on year, and slightly better than the $142 million analysts had, on average, estimated. Its net income of $10.4 million, compared with a loss of $1.2 million a year earlier, delivered an EPS (earnings per share) of 9 cents, again slightly better than the 8 cents analysts had anticipated.

Those numbers, added to CEO Doron Inbar's confirmation that revenues and earnings are expected to rise sequentially for the rest of 2005, sent the firm's share price up by 24 cents, more than 3 percent, to $7.47 at the end of trading.

Some of that anticipated growth is coming from an existing customer, Taiwanese incumbent Chunghwa Telecom Co. Ltd., which accounted for $4 million of ECI's broadband access equipment revenues in the first quarter. The company told analysts today that orders in the current (second) quarter are expected to be stronger, to the point where the gross margins of the Broadband Access Division might be hit. The carrier is using ECI's Hi-Focus multiservice access gateway as part of its triple-play service rollout.

Inbar says he is confident that other near-term prospects will develop into contracts, and that business will build further from the broadband division's two main customers, France Telecom SA (NYSE: FTE) and Deutsche Telekom AG (NYSE: DT), which jointly delivered 66 percent of the division's $63 million revenues.

In fact, Europe is clearly ECI's stronghold. The region accounted for 65 percent of total revenues, while the Americas accounted for just 5 percent.

The CEO also said the company's access products were in trials with other Tier 1 European carriers, and that these engagements could lead to new business this year. He also talked up trials of the vendor's recently launched VOIP-over-DSLAM technology, saying that France Telecom was putting the technology through its paces (see ECI Does Broadband Voice).

Still in Europe, Inbar added that trials of the firm's FTTP equipment at BT Group plc (NYSE: BT; London: BTA) are now at "an advanced stage. We're expecting a decision from BT in the next few months." He also said he was disappointed that ECI had not been named as one of BT's primary vendor partners for its 21CN project (see BT Unveils 21CN Suppliers and ECI's FTTP Goes Live in BT Trial).

Despite the bullish outlook, the firm realizes it needs to expand its product set, particularly to support carrier needs for converged IP networks, if it is to compete with larger players such as Alcatel (NYSE: ALA; Paris: CGEP:PA), Cisco Systems Inc. (Nasdaq: CSCO), and Huawei Technologies Co. Ltd.

But although Inbar referred extensively to the company's potential to spend some of its $290 million cash pile buying other companies, he wouldn't commit to any specifics (see ECI Lines Up Acquisitions). ECI has the option to follow up its investment in core router vendor Chiaro Networks Inc. with a full takeover, and such a move would fit the CEO's ambition to acquire "IP-related building blocks. We're aiming to position ourselves as the leading solutions provider for NGN [next-generation network] IP." (See Chiaro Lands ECI Investment and Chiaro Scores in Tiscali's Core.)

ECI is already acting as though it owns Chiaro. When Tiscali announced it was to use Chiaro's router, ECI issued a press release entitled "Tiscali International Network Chooses ECI Telecom's Enstara Platform for Pan-European IP/MPLS Network Upgrade."

But it's not just Chiaro that's under consideration. Inbar hinted during the earnings call that there are a number of potential takeover targets. "We have targets, and we're not a long way from making decisions and finalizing something," he said.

— Ray Le Maistre, International News Editor, Light Reading