Is Tellium Ready for an IPO?

With fresh customer contracts under its belt, all signs are pointing to an IPO in the near future for Tellium Inc.

On Wednesday, the optical switch startup announced a three-year contract with Qwest Communications International Corp. (NYSE:Q). No dollar amount was specified, but Harry Carr, Tellium's chairman and CEO, said the contract is for “hundreds of millions of dollars.” This follows another contract announced last week with Cable & Wireless (NYSE: CWP) worth a minimum of $350 million (see Tellium Gets $350M C&W Deal). And two weeks ago, Tellium announced the first shipment of its 512-port Aurora Optical Switch to Extant Inc., which was recently bought by Dynegy Inc. (NYSE: DYN) (see Tellium Ups the Ante). “I said a couple of weeks ago that they needed to get some bigger customers before they could consider an IPO,” says Tim Savageaux, senior analyst with W.R. Hambrecht & Co.. “And then they announced Cable & Wireless and now they’ve announced another one. The timing seems right.”

So far, Tellium has been very tightlipped about any such news. Company officials offered a “no comment” when asked about an upcoming IPO.

The maturity of the product also puts the company in the running as a possible acquisition. Potential acquirers would include Cisco Systems Inc. (Nasdaq: CSCO) and Lucent Technologies Inc. (NYSE: LU), say analysts. Both are investors in the company, and Lucent has reseller agreements and has offered carrier financing arrangements for Tellium products. Lucent's sagging share price, however, may mean it's not in a position to buy Tellium.

Cisco would be a less likely prospect, because the Aurora Optical Switch from Tellium competes directly with the product Cisco acquired in its buy-out of Monterey. It seems unlikely it would dish out a lot of cash to buy a competing startup, even though the Monterey equipment has still not shipped (see Cisco Beats Street, Cries 'Optical' ).

Tellium is most likely to take the road to IPO riches. Other optical networking companies such as ONI Systems Inc. (Nasdaq: ONIS) and Corvis Corp. (Nasdaq: CORV) entertained acquisition talks but opted to go public, where they achieved market valuations of $10 and $30 billion, respectively.

If in fact the company is preparing for an IPO, the next logical question is when?

“If I were going to guess, I’d give them another month to file and then they’d probably be ready to go out sometime in February," said Gina Sockolow, analyst with Brean Murray & Co. Inc.

-- Marguerite Reardon, senior editor, Light Reading http://www.lightreading.com