VoIP Systems

Tekelec Suffers Q1 Slump

Tekelec finally released its delayed first-quarter results late Wednesday, and they went over like a lead balloon. (See Tekelec Reports Q1 and Tekelec Delays Q1.)

Analyst had been expecting earnings of 14 cents per share from revenues of $145 million, but instead got a net loss of 25 cents per share ($16.5 million) on revenues of $107.5 million. Sales were down 23 percent from a year earlier when the company recorded a first-quarter profit of $17.5 million. (See Tekelec: Strong Signals in Q1.)

In early morning trading, shares traded down $1.45 (12.40%) to $10.24.

The news compounds a difficult few months for the company, which has been restructuring in an effort to align costs more closely with revenues. (See Job Cuts Prolong Tekelec's Tech Wreck.)

Tekelec says the lower-than-expected revenues are the result of a shift in accounting practices that affected the timing of revenue recognition for some signaling equipment contracts.

"Although the Company shipped substantially all deliverables under several large orders in the first quarter of 2006, it deferred approximately $21.9 million in revenue relating to these shipments because it did not ship all the products included in the purchase orders," the company noted.

It added that it had orders worth $138.6 million in the first quarter, up 14 percent from a year earlier, and a book-to-bill ratio of 1.29.

However, it also noted that the quarter's numbers were hit by lower revenues from higher-margin signaling products and "a reduction in SSG [switching solutions group] gross margins due primarily to pricing pressure in our Alcatel channel and contract mix."

That channel reference relates to the OEM agreement whereby Alcatel (NYSE: ALA; Paris: CGEP:PA) resells Tekelec's 8000 media gateway as a part of the French giant's Mobile Next Generation Network (NGN) package, which hit a speed bump at major customer Cingular Wireless late in 2005. (See Alcatel, Tekelec Extend Deal and Tekelec Takes a Hit on Cingular.)

In its 10-K filing with the Securities and Exchange Commission (SEC) , Tekelec noted that sales to Alcatel accounted for 14 percent of its total revenues, or just over $15 million.

Other major customers include Verizon Communications Inc. (NYSE: VZ), at 11 percent of revenues, or $11.8 million, and Cingular (including AT&T Wireless business), at a whopping 41 percent, or $44 million.

CEO Frank Plastina stated in the company's release that market conditions mean it's not possible for the company to provide guidance for the second quarter or the rest of 2006, but said "we do not believe that the first quarter results reflect a trend in our revenues, gross margins, operating income or earnings per share or are representative of the performance we expect for the second quarter or second half of 2006. In fact, we currently expect an improvement in each of these periods relative to the first quarter of 2006. We currently estimate that revenues from our Telecom business for the full year 2006 will increase on a year-over-year basis compared to Telecom revenues of $486.5 million in 2005."

But behind that bullish message, Plastina has another problem to deal with, as Tekelec is still snagged up in a legal wrangle with French carrier Bouygues Telecom that first emerged in March 2005, when that operator announced it was claiming damages of $81 million plus punitive damages following a services outage that it blamed on Tekelec gear. (See Bouygues Sues Tekelec Over Outage.)

In its SEC filing, Tekelec notes that, following a to-and-fro process, Bouygues has recently provided a claims summary that increased its damages estimate to between $126.5 million and $179.37 million -- and that's before any punitive damages or legal costs.

The two companies tried a mediation process in late May of this year to sort out their differences, but that came to nothing.

Tekelec noted that "we intend to defend vigorously against the action and believe Bouygues’ claims could not support the damage figures alleged in the amended complaint. At this stage of the litigation, management cannot assess the likely outcome of this matter; however, it is possible that an unfavorable outcome could have a material adverse effect on our consolidated financial position, results of operations or cash flows. We are unable to estimate the potential financial impact this matter could have on the Company."

— Ray Le Maistre, International News Editor, Light Reading

materialgirl 12/5/2012 | 3:48:53 AM
re: Tekelec Suffers Q1 Slump All this re-stating makes SONS look good! Get prepared for more, ala LU, as half-baked IMS promises never really ship due to shifting standards. Confused standards lead to "undeliverable elements of value" that cannot be recognized as revenue. The level of chaos is likely to bring down the whole sector (above L1-2 anyway) since the whole thing becomes a complex moving target. Couldn't happen to a nicer bunch.
slideruler 12/5/2012 | 3:48:52 AM
re: Tekelec Suffers Q1 Slump MG -

When you talk about IMS and also refer to items being "shipped" - what is it that you believe you are referring to?

Just curious...

materialgirl 12/5/2012 | 3:48:52 AM
re: Tekelec Suffers Q1 Slump I am refering to pie in the sky, like the stuff that was supposed to save LU this summer. My observation is that these shifting concepts/ideas and prayers/hopes of the legacy service providers manifest in these wild product ideas that never ship. On these shifting sands, vendors like TKLC or SONS try to ship products. They cannot recognize revenue due to "undelivered elements of value" that keep changing. While I am no fan of TKLC, I just see this as a symptom of a larger underlying disease.
paolo.franzoi 12/5/2012 | 3:48:50 AM
re: Tekelec Suffers Q1 Slump
Revenue recognition issues are for features that were agreed to be delivered and are not yet delivered. If they are not in a contract, then they are not recognition issues.

If a customer requires "acceptance" and the acceptance criteria is not spelled out, then you can certainly get into feature creep/churn. But I can not imagine any business person with any skill at all signing an open ended acceptance.

slideruler 12/5/2012 | 3:48:50 AM
re: Tekelec Suffers Q1 Slump We are talking TKLC here - most likely willing to be overly flexible to grab orders. Contract yields can tend to get pretty ugly in these situations.
slideruler 12/5/2012 | 3:48:50 AM
re: Tekelec Suffers Q1 Slump MG -

I would seriously doubt that the core of LU's (or TKLC's!) problems related to any issues associated with IMS or any other IP services framework (there are several)...core product obsolescence would be a better guess, IMO.

(Unless my spell check is buggy - the only "IMS" that was contained in the TKLC story was the "ims" in the word "claims"....and undelivered sources of value usually means that a contract that was negotiated has not been executed by the SP's Purchasing Dept. as quickly as the contract holder would like --- those $ in limbo that are booked, but can't be billed (revenue)).

Besides, IMS/TISPAN/eTOM/NGOSS/other are only frameworks that define architectural guidelines & interfaces between the Application, Session Mgt. and Network layers...useful for actually being able to deploy multiple services over IP networks (effectively delivering Admission Control, QoS, Session Management requires some skill in this regard).

In actuality, I see more SPs deploying "IMS-like" architectures in AsiaPac and Europe - and indeed, mostly the newer breed of "challenger" carrier - not your evil legacy RBOCs. And they most certainly are not deploying LU gear.

I think you may be misplacing some aggression here.

I don't have any vested interest in IMS or any other framework - they can be useful tools - at times...nothing more. IMS is not a product.

Just my observation.


materialgirl 12/5/2012 | 3:48:39 AM
re: Tekelec Suffers Q1 Slump SR-
Thanks for the post. It was funny too. You are right. I hate these complex service provider plans, under either the IMS or IP-TV umbrella. I see them as unworkable and destroying any ability to invest in the sector as they consume dollars and die a slow death due to unworkable complexity.
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