Tekelec: Strong Signals in Q1

Tekelec Inc.'s (Nasdaq: TKLC) first-quarter profits rose 13.8 percent from a year ago, fueled by high margins in its core signaling business (see Tekelec Buys Time in Q4).

Tekelec earned a first-quarter profit of $6.7 million, or 10 cents per diluted share, on revenues of $119.4 million, compared with earnings of $5.8 million, or 9 cents per diluted share, on revenues of $78.9 million during the year-ago quarter.

The Calabasas, Calif.-based signaling and softswitching company missed analysts' earnings expectations of 12 cents per share, but outperformed analysts' revenue expectations of $116.1 million.

Tekelec’s core signaling business brought in record-high quarterly revenues of $74.4 million, up 24 percent from the first quarter last year (see Tekelec Wins SBC Signaling Deal and Valley Telecom Uses Tekelec's Eagle ). William Everett, Tekelec’s new CFO, says margins in the signaling business held at above 70 percent in the quarter (see Tekelec Appoints CFO, Moves HQ and Tekelec Announces Q4 Results).

“The bottom line growth is coming from the sustainability of the margins in the signaling business,” says analyst Reginal King of W.R. Hambrecht & Co..

“Many analysts have been looking for signaling to show declining growth for a number of years now, but Tekelec keeps finding new arenas to grow in,” King says. “It’s almost like that saying -- ‘the rumors of my demise have been greatly exaggerated.’”

Those new arenas are increasingly outside North America. CEO Fred Lax says 24 percent of the company’s first-quarter sales came from outside the U.S.

Lax says his company received $121.3 million in bookings for the quarter -- 40 percent more than the $86.1 million of orders received during the first quarter in 2004.

WR Hambrecht’s King says Tekelec’s top-line revenue numbers got an unexpected boost from the company’s softswitching business, which contributed 28.4 million in the March quarter -- a growth of 288 percent over the year ago quarter (see Tekelec Names Softswitch Customers). The unit contributed $20.4 million in the fourth quarter of 2004.

Of the first quarter’s softswitch revenue, Tekelec’s Santera products continued to contribute the lion’s share -- $19.8 million -- while Vocal Data products contributed $1.8 million (see Tekelec Connects With VocalData).

The Taqua T7000 switch continues to underperform with $3.2 million in sales for the quarter (see Taqua Buy Comes Into Focus). “Needless to say, the top line is not as strong as we had envisioned but we continue to believe in it,” Lax says.

Tekelec says it will move all production of the Taqua switch to its facility in Plano, Texas -- a move it believes will reduce operating expenses.

Analyst concerns persist over the profitability and future prospects of the Santera media gateway product. Light Reading has reported that Alcatel's (NYSE: ALA; Paris: CGEP:PA) Spatial Wireless division -- the Tekelec trading partner responsible for the majority of Santera sales -- is actively developing and/or acquiring a wireless media gateway of its own (see Alcatel Gateway Troubles Tekelec).

During an earnings call Tuesday, Lax took pains to assure analysts that Tekelec's relationship with Alcatel remains productive and profitable.

“We believe we are benefiting from the relationship,” Lax said. “Our market share continues to grow and we are looking for ways to support our relationship with Alcatel and Spatial.”

“We continue to get positive feedback from our wireless customers, and we believe that our media gateway product is the best on the market,” Lax said. “We are not opposed to developing other OEM relationships with others.”

Tekelec’s Everett says he expects second-quarter earnings in the range of 6 cents to 9 cents per diluted share on revenues of between $128 million and $132 million. Analysts expect the company to earn 15 cents per diluted share (excluding items) on revenues of $124.6 million.

Tekelec's stock traded up slightly on Tuesday, climbing 37 cents (2.70%) to $14.08.

— Mark Sullivan, Reporter, Light Reading