Tellium Looks to Make Its Marks
During Tellium’s roadshow before its initial public offering last spring, chairman and CEO Harry Carr promised at least one new customer by the end of 2001. For the next two quarters he reiterated that point. But by December, after Cable & Wireless PLC (NYSE: CWP) had pushed back its deployments and Qwest Communications International Inc. (NYSE: Q) had renegotiated its contract, Carr was forced to revise his predictions (see Qwest and Tellium Revise Contract). He told investors that it wasn’t likely that a new customer would be named by the end of 2001.
This could have been very bad news for the company, but instead of taking precautionary measures like lowering estimates, Carr reiterated the company’s $44 million to $49 million guidance for Q4 2001. He also reiterated revenue guidance for 2002, which is expected to come in around $288 million. His continued upbeat manner, suggests to some industry watchers that a deal of some sort is closer at hand than he can actually say.
Even today, when the company was asked for comment on the rumor, a company spokesperson said: “We are not announcing a new customer imminently.” When asked if a deal would be signed that might not necessarily be announced right away, the spokesperson elaborated: “All I can say is, we are not announcing a new customer imminently.”
Specifics of the possible Deutsche Telekom deal are still sketchy, but sources close to both sides speculate that it could be worth about $50 million. This is considerably less than previous predictions, which had estimated the contract between $100 and $200 million. But one hedge fund manager notes that the size of the deal is irrelevant. He says the fact that Tellium has been able to crack such an important account is much more important than the dollar amount:
“Just look at the class 4 and class 5 switch contracts. Those weren’t huge early on, but the carriers had to continue to buy more and more of them, turning even the smallest contracts into cash cows.”
Sources also say the Deutsche Telekom contract was the elusive contract Carr referred to at the end of 2001. But they say Tellium executives rejected the initial contract because it didn't give them the margins they had wanted. In his prepared statement on December 20, Carr alluded to this fact:
"This is disappointing in the short-term, but we prefer to announce a good contract in 2002 rather than make unnecessary concessions now to achieve the end-of-year date. We believe our investors support us in this decision, as our focus is on building long-term shareholder value."
Barring any unforeseen last-minute snafus, sources are confident that the deal will be announced by the end of the current quarter, which ends in March. But most agree it won’t be announced before January 31st, when Tellium releases its Q4 2001 figures.
Still, some sources warn that the deal isn’t signed just yet and it could be delayed yet again. Lucent Technologies Inc. (NYSE: LU), which already supplies Deutsche Telekom with long-haul gear, is rumored to be lobbying to have its all-optical Lambda Router seriously considered. The Lambda Router is being developed at Lucent’s facilities in Germany.
But Deutsche Telekom isn’t the only big contract win on the horizon. Sprint Corp. (NYSE: FON) and WorldCom Inc. (Nasdaq: WCOM) are also rumored to be on the verge of signing contracts with Tellium. Some sources speculate that Sprint is likely the next in line after Deutsche Telekom. These sources believe that Tellium has a leg up on this account, because its product interoperates with long-haul gear from NEC Corp. (Nasdaq: NIPNY), which is installed in parts of Sprint’s network. But Sprint also uses Ciena Corp.'s (Nasdaq: CIEN) long-haul kit and could choose an architecture that uses Ciena’s CoreDirector switches and excludes large OC48 grooming switches like Tellium’s.
Tellium is also supposedly in talks with WorldCom and close to signing a deal. But this contract will likely not happen for at least a couple of quarters, say sources. WorldCom has traditionally bought gear from a wide variety of suppliers. For example, it has contracts for long-haul optical transport gear with Nortel Networks Corp. (NYSE/Toronto: NT), Ciena, Lucent, and Fujitsu Ltd. (KLS: FUJI.KL). As for optical switching, it appears as though it is still evaluating its choices.
Investors seemed to be mulling over the weight of the rumors. On Tuesday, Tellium’s stock was up only 0.03 (0.46%) to 6.56.
— Marguerite Reardon, Senior Editor, Light Reading