Tekelec Taqua Saga Drags On

Tekelec takes a $51.3M charge reflecting the falling value of its softswitch division; Taqua's end may be near

February 22, 2006

4 Min Read
Tekelec Taqua Saga Drags On

Tekelec announced Tuesday it will take $51.3 million in charges related to the poor outlook for its Taqua softswitching business. And Wall Street sees the move as the first step toward the discontinuation of the business. (See Tekelec Takes Its Time.)

Investors weren't happy with the news. Tekelec's stock fell $1.46 (9.79%) to $13.45 in normal trading on Wednesday. After hours, the stock fell another $0.25 (1.86%) to $13.20.

In a press release, Tekelec stated that about $22.7 million of the charges against earnings it is taking relate to the write-off of "Taqua purchased technology," and about $28.6 million of the charges relate to "the impairment of the goodwill associated with the Taqua reporting unit."

The company’s management says revenue and orders for Taqua were far below expectations for the fourth quarter of 2005 and the first part of 2006. The Taqua business has been generating only $2 million to $3 million in revenue in recent quarters, Jefferies & Co. Inc. analyst George Notter estimates.

Janney Montgomery Scott LLC analyst Bill Gildea believes Taqua revenues would have to reach $7 million to $8 million per quarter to hit break-even.

“It’s all relative to how well we anticipated the business would do when we bought it -- those original projections are how you calculate the goodwill of the company," Tekelec CFO Bill Everett tells Light Reading. "So if you don’t achieve those, you end up having to take the impairment charge.”

While continuing to support the product line and customers, Tekelec says it will take steps to reduce the Taqua unit’s operating expenses. CE Unterberg Towbin analysts estimate the division was costing Tekelec between 4 and 5 cents per share in earnings every quarter.

A Tekelec spokesman declined to say whether Taqua engineers or salespeople would be let go as part of the cost containment efforts.

Still, the net result of Tekelec’s actions could be the appearance that the Taqua business appears to have been placed in “maintenance mode.” Prospective customers aren’t likely to throw in with a technology platform with no clear and well funded development path.

Tekelec purchased Taqua in February 2004 for approximately $85 million cash, plus the assumption of Taqua’s outstanding options. (See Tekelec Announces Taqua Purchase.)

The Taqua product is a small Class 5 integrated softswitch and media gateway that is targeted mainly at the IOC market. There, it competes with the likes of CopperCom and Metaswitch Networks .

“If you look at Tekelec’s Taqua revenues, it’s pretty clear we don’t lose very often to them,” says MetaSwitch marketing VP Andy Randall. “The Taqua platform was built for what the ILECs were looking at five years ago.”

Randall says the Taqua product is “still a TDM switch at heart” in a carrier market that has realized the need for true “next-generation” switches. Such devices, Randall says, play nicely in IMS environments, and they separate call session control functionality and media gateway functionality at the hardware level. (See Tekelec Buys IMS Know-How.)

“If you haven’t built that from the beginning it is very hard re-architect," Randall says.

Randall isn’t the only one who believes the Taqua product's time has passed. “In our view, it's more strategic to buy a FTTX-capable access platform and run voice-over-broadband rather than deploy a more traditional voice switch,” Notter writes. “In the end, we think the decision to effectively shut down Taqua is the right one."

Taqua was one of three switching companies purchased by Tekelec as part of a bid to become a next-generation switching company. The others are Santera and VocalData. (See Tekelec Buys out Santera .) A discontinuation of the Taqua business would be a painful blow to the company’s strategy. (See Tekelec Takes a Hit on Cingular.)

“I think Tekelec’s whole adventure into the switching space was a misadventure,” says consultant Kermit Ross of Millennium Marketing. Ross was VP of marketing at Taqua in the late 1990s. (See Alcatel Gateway Troubles Tekelec.)

“I think that’s one of the reasons that Fred Lax, who was the CEO of Tekelec that did all this, left awhile back,” Ross says. “I think he saw there was a little leak in the keel of the ship and he went for the lifeboats.” (See Tekelec CEO Resigns .)

— Mark Sullivan, Reporter, Light Reading

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