Tekelec Suffers Q1 Slump
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