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Financial

Tellium Hits the Road

The market for optical IPOs may be as dry as the dust in a mummy's tomb, but Tellium's still looking to make a run for the public markets (see IPO Window Shuts Tighter).

This week the optical switch equipment maker kicked off its IPO investment road show and again trimmed the size of its potential IPO from $141 mllion to $112 million. Road shows, formal tours in which managers give presentations to drum up investment interest, usually happen about a month prior to the day a company becomes public. Several sources confirmed that Tellium had embarked on a road show. The company's PR department offered an official "no comment" in response to Light Reading’s inquiry as to its executives' whereabouts.

In the road show, the company must convince large mutual funds and other institutional investors to support the IPO. Tellium changed the size of its offering in an attempt to make its shares more attractive to investors. The optical switch maker raised its offering price to $13-$15 a share from the $8-$10 a share previously set. However, it cut the number of shares offered from 15 million to 7.5 million.

The price change appears to be cosmetic and might be most important to institutional investors, since many fund managers can't buy stocks that are approaching the low single digits. Had Tellium's shares gone public at $8 and then dropped, it might have scared off some big checkbooks.

The most important metric here is that the possible proceeds from the offering have dropped to $112.5 million from about $141 million, a 25 percent plunge in the offering's value.

It's hardly surprising that the firm's now trying to tap less money from the public markets, analysts say. "Tellium's got plenty of revenues, but their losses are quite high," says George Nichols, an analyst at Morningstar.com. "I doubt investors will be throwing dollar bills at them."

In the most recent SEC filing, Tellium reported that as of March 31, 2001, the company had approximately $166.8 million in cash and cash equivalents. The number of employees had increased from 156 to 493. Also as of March 31, the company reported an accumulated deficit of approximately $206.0 million.

The company's sales are still concentrated in a small number of customers. For example, in the most recent filing, Dynegy Inc. (NYSE: DYN) accounted for approximately 70 percent of Tellium's revenues for the three months ended March 31, 2001, and Qwest Communications International Corp. (NYSE: Q) accounted for about 30 percent of its revenues for the same period.

Tellium also counts Cable and Wireless (NYSE: CWP) Global Networks Ltd. as a customer. That agreement says C&W will buy a minimum of $350 million worth of gear by August 7, 2005. But C&W has the right to reduce its commitment to $200 million.

This is the third time Tellium has lowered the total size of its IPO. In March, Tellium reduced the price range on its offering to $8-10 per share from $13-15. At that time, it not only dropped the price of the offering, but the number of shares offered also decreased to 15 million from 17.5 million. The offering's possible proceeds after that update plunged to below $150 million from the more than $260 million originally envisioned (see Tellium Lowers Its IPO Ambitions).

March was also the month Light Reading first reported that Tellium had switched lead bankers from Goldman Sachs & Co. (NYSE: GS) to Morgan Stanley Dean Witter, which was not previously involved in the offering (see Tellium Switches IPO Bankers). Thomas Weisel Partners is still the co-lead on the offering, supported by UBS Warburg, CIBC World Markets, and Wit Soundview (Nasdaq: WITC).

-- Phil Harvey, Senior Editor, Light Reading http://www.lightreading.com
manoflalambda 12/4/2012 | 8:27:30 PM
re: Tellium Hits the Road Hmm, this adds up funny. Who are SAIC (1)? Are Roper and Smith p/o SAIC (same share percentages)...

Do the shares owned by Extant, Qwest, C&W and such show up here? Or different sort of shares?

Salute,
Manoflalambda
lite_boy 12/4/2012 | 8:27:42 PM
re: Tellium Hits the Road

Percent
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Name and Address of Beneficial Owner Owned Offering Offering
------------------------------------ ------------ -------- --------
Science Applications International Corpora-
tion(1)
10260 Campus Point Drive
San Diego, CA 92121............................ 17,347,366 17.1% 15.9%

Lucent Technologies Inc.(2)
2015 West Chestnut Street
Alhambra, CA 91803............................. 8,320,049 8.2 7.6

Entities affiliated with Oak Investment Part-
ners(3)
One Gorham Island
Westport, CT 06880............................. 7,480,996 7.4 6.9

Entities affiliated with Accel V L.P.(4)
428 University Avenue
Palo Alto, CA 94301............................ 4,755,314 4.7 4.4

Entities affiliated with Thomas Weisel Capital
Partners LLC(5)
One Montgomery Street,
Suite 3700
San Francisco, CA 94104........................ 8,436,276 8.3 7.8

Harry J. Carr(6)................................ 6,352,750 6.3 5.8

Richard W. Barcus(7)............................ 1,495,000 1.4 1.3

Krishna Bala(8)................................. 1,394,250 1.4 1.3

William B. Bunting(9)(5)........................ 8,451,276 8.3 7.8
Michael M. Connors(10).......................... 381,665 * *
Jeffrey A. Feldman(11).......................... 2,465,819 2.4 2.3

Edward F. Glassmeyer(3)......................... 7,495,996 7.4 6.9

William A. Roper, Jr.(1)........................ 17,362,366 17.1 16.0

Richard C. Smith, Jr. (1)....................... 17,362,366 17.1 16.0

Anthony J. DeMambro(12)......................... 900,000 * *

Nicholas P. DeVito(13).......................... 900,000 * *
Executive officers and directors as a group (18
persons)....................................... 50,262,872 49.6 46.2



lite_boy 12/4/2012 | 8:27:46 PM
re: Tellium Hits the Road IPO Critic: Tellium's long journey is just beginning
By Stephen Lacey
Red Herring
May 4, 2001

By all indications, Tellium (proposed Nasdaq: TELM) is like a fish swimming upstream. For starters, telecommunications carriers are slashing cap-ex budgets. In light of that, Tellium management admits that the company's huge net losses will continue. Furthermore, the markets are having a tough time digesting already public optical networking companies -- they'll be hard pressed to absorb another.

Yet after a March move to switch lead underwriters to Morgan Stanley from Goldman Sachs, Tellium CEO Harry J. Carr is on a cross-country roadshow to drum up support for the company's $105 million IPO. Despite Mr. Carr's pedigree -- the former AT&T executive was at the helm at Yurie Systems when Lucent Technologies (NYSE: LU) acquired the switch manufacturer for $1 billion in 1998 -- his latest venture could be his greatest challenge.

After luring Mr. Carr away from Lucent in December 1999 with options to buy 13.2 million shares -- 7 percent of the company -- for $1.07 per share, the Oceanport, New Jersey-based company had little trouble raising $222 million in September 2000. There were 57 institutions that bought in at levels comparable to the company's original $2.9 billion IPO valuation.

But September was a long time ago. After a reverse two-for-one stock split in April and after burning through $60 million since the last infusion, Tellium is now marketing itself to investors at a $1.5 billion market capitalization. Joint book managers Morgan Stanley and Thomas Weisel Partners are looking to price 7.5 million shares at $13 to $15 per share the week of May 14.

The decision to go forward with the IPO screams of desperation similar to that of Agere Systems (NYSE: AGR.A), another Morgan client that was forced to slash its IPO price to $6 per share, a 60 percent discount to what Lucent originally had sought for the unit. The buy-side can smell blood and will likely take advantage of Tellium at its pricing date.

So why would Tellium management elect to go forward with the offering when it still has $166 million in the bank? One possible explanation could come from the nature of the September private round. As part of the original financing agreement, these Series E preferred stockholders will be made whole, regardless of where the company prices its IPO. At $14 per share, the midpoint of the offering price, their original investment is convertible into the same 15.6 million shares despite the reverse two-for-one split, essentially doubling their ownership stake to 14.3 percent.

THE LONG HAUL
The real answer, however, may lie in Tellium's focus on optical switch products for long-haul networks. The second generation of its Aurora optical switch, which began shipping in the third quarter of 2000, uses software that enables carriers to upgrade their networks more rapidly between the major hubs that connect cities. By intentionally ignoring the switching of optical signals in the DS-1 (1.5 Mbps) and DS-3 (45 Mbps) levels used within metropolitan networks, Tellium has become a leader in the OC-48 (2.5 Gbps) switch market.

"As you look into the future, these types of switches have a place in the market because of the huge amount of data that's being carried," says Sam Greenholtz, a senior optical networking analyst with Communication Industry Researchers, a Charlottesville, Virginia, optical industry consulting firm. But because its switches can't groom signals down to lower speeds, where many carriers are concentrating their expenditures, the long-term strategy has cost it over the short term.

The problem is that Tellium hasn't been able to attract many buyers for its long-haul switches. Dynegy Connect, a Dynegy (NYSE: DYN) subsidiary, accounted for 70 percent of the $15.6 million in sales the company generated in the first quarter, while Qwest Communications (NYSE: Q) accounted for the remaining 30 percent. In September 1999, Dynegy Connect agreed to purchase $250 million in Tellium gear over the next five years, while Qwest signed a three-year contract in September 2000 to purchase $300 million in equipment. Cable & Wireless (NYSE: CWP), Tellium's only other customer, also inked a $350 million, five-year purchase agreement in September, but those sales have yet to start coming in the door.

While the $900 million of the three contracts is surely a lot of money over the next five years, current income hasn't stemmed the company's short-term bleeding. In the first quarter ended March 31, 2001, Tellium had an operating loss of $52.5 million after a pro-forma 2000 operating loss of $151.3 million.

Tellium's inability to attract other big-name customers -- there's no mention of any company other than Cable & Wireless conducting tests with Tellium switches -- gives other companies such as Sycamore Networks (Nasdaq: SCMR), Nortel Networks (NYSE: NT), and Tellabs (Nasdaq: TLAB) time to refine their optical offerings. Privately held Calient Networks, which also is focusing exclusively on the long-haul optical switch market, may already have usurped some of the momentum that Tellium enjoyed in its September round of financing. In January, the San Jose, California-based company raised $225 million.

At first glance, the IPO is as expensive as they come. With just $27.8 million in trailing 12-month sales, Tellium would originally price at 53.9 times those sales. That compares to just 7.8 and 16.4 times sales for Sycamore and Ciena (Nasdaq: CIEN), two other optical switch manufacturers.

But Wall Street always prefers the promise of the future to the reality of the past. On that basis, Tellium would price at roughly 6.8 times the sales that its existing contracts imply for this year, compared to 7.8 and 9.1 for Sycamore and Ciena, respectively. And it could get better: the company may be forced to reduce the asking price further to compensate new investors for their patience.

That said, despite the fact that Tellium may have the products that will be used in next-generation networks, Mr. Carr & Co. will likely still have a difficult time convincing public investors that the company will be a long-term survivor. Its trip into the public markets will only be the beginning, akin to the return journey of a salmon to its breeding grounds. On average, out of every 1,000 eggs laid, one survives to return and spawn. Tellium's chances are much higher than that, but we'll wait until they're a little farther upstream.

tokyoyoyo 12/4/2012 | 8:28:07 PM
re: Tellium Hits the Road After reading the TELM S1 I have some misgivings. First is their cash on hand and a projected 12 month total burn even if the IPO nets $14. Next is their dependence on Selectron and finally their Aurora products.Is TELM barely 40 gbit/s in a 2.4 Tb/s world? If TELM is worth $13 - $15....CORV in the $8's is a steal.
mydogbleu 12/4/2012 | 8:28:16 PM
re: Tellium Hits the Road Dirty Splice-
You're a wise person. I was wondering the same thing. He's in the Management section of the amended S-1 (dated 3/7/2001) as the Sr VP of Worldwide Sales!!! I wonder what happened to him? My $0.02...
dirty splice 12/4/2012 | 8:28:17 PM
re: Tellium Hits the Road I noticed from the Tellium web page: http://www.tellium.com/ no listing was provided for the VP of Sales. Is this a new development???
gea 12/4/2012 | 8:28:53 PM
re: Tellium Hits the Road I agree with Netmaniac.
Non-grooming Core-oriented OXCs are for cross connecting giant POS (packet-over-SONET) pipes (and perhaps 10GbE pipes soon). Grooming is needed out at the edge, but Juniper has demonstrated how willing carriers are to generate OC-192c POS pipes for the core.
Tellium fits the need for routing and managing POS wavelengths in the core, so I still believe they'll do pretty good.
gea 12/4/2012 | 8:28:54 PM
re: Tellium Hits the Road Well, Luxcore may have done just what they claim, but if they're using SOAs, then this must be very expensive per channel. This kind of thing has been done for years in research, but commercializing it has been a challenge.
In any event, like I said originally, it will probably be a few years before this approach knocks out a Tellium-based approach.

But it is possible that the time for non-grooming "optical" cross connects with an electronic core may come and go quickly, but right now I don't think so. Electronic chipsets capable of supporting HUGE numbers of cross connections seem to emerge regularly, so perhaps we'll see Tellium-like OXCs survive side-by-side with true OXCs for a long time. Remember, it took a couple of centuries for the cannon to displace the trebuchet (aka counter-weighted catapult).
optinuts 12/4/2012 | 8:28:54 PM
re: Tellium Hits the Road harley,
i remember you saying tellium does sts-1 grooming. is this message board missing a key piece of information?
netmaniac 12/4/2012 | 8:28:55 PM
re: Tellium Hits the Road Iprsvp,
I agree with your assessment in terms of size of the switch. If TELM is going to stop at the 512 then they will be dead.

The rest of your post, I respectfully disagree. From where I sit in a Network Architecture role, TELM does indeed have a grooming switch. The grooming requirement for the edge of the network (CIEN, SCMR, etc.) are VERY different from the requirements in the core of the network (TELM, Altamar, etc.)

In the core of the network, I don't want to be dealing with tens of thousands of STS-1s especially in a meshed network. I want to be able to groom and fill 10G pipes at nothing less than 2.5G granularity. I want to have the ability to manipulate the lambdas between channels in the DWDM. Finally, I want the 3R capability that an electric fabric provides. (I have too much of the old DWDM gear in my network to ignor)

On the edge of the network I want a box that can perform the STS-1 grooming function to fill up the 2.5 and 10G pipes in the core. This box acts as the transition point between my metro network where DS3s and OC3/12 traffic enters the core of my network.

y2k 12/4/2012 | 8:28:58 PM
re: Tellium Hits the Road Iprsvp:

I have been more wrong than right in my life and I have been humbled. I am willing to let the customers who is the only and final judge speak for themselves.

The market has gone from Irrational Exuberance to Uniform Indifference and as a result, everyone has suffered. I would like to see Tellium succeed inspite of my own personal opinion (see below). Thanks.

http://www.lightreading.com/bo...


--y2k--
iprsvp 12/4/2012 | 8:29:01 PM
re: Tellium Hits the Road Y2k,
I don't know why you loved netmaniac's post but
the reality is that TLM is going to hit wall sooner than you expect if THEY DON'T HAVE ANYTHING
ELSE BUT A NON-GROOMING SWITCH OF size 512 which is very easy to build with MEMS switch.

I leave the final decision to you...
let the light speak for itself..

netmaniac 12/4/2012 | 8:29:10 PM
re: Tellium Hits the Road My comment to Luxcore is the same as my comment to the NT switch, I'm from the "Show Me State." I did see their demo at OFC and agree that it APPEARS to be some great technology but we all know that trade show demos are for the most part un-tested in the real world and are meant to garner a lot of attention.

What everyone seems to be forgetting is that the target market for an all optical switch is incredibly small. I suspect that, there are fewer than 20 carriers around the world that could justify such a switch, and even then in only a few high demand sections of their network. In other words, until optical channels become a commodity, the demand set for an OEO switch on my network will be here for a long time to come.
opticaltoys 12/4/2012 | 8:29:11 PM
re: Tellium Hits the Road "The logic for a product like Tellium's goes like this....

1) All-optical wavelength conversion is not commercially viable yet, and won't be for several years."

In view of your logic, Can you comment on Luxcore,
http://www.lightreading.com/do...
??
Thanks, OT

y2k 12/4/2012 | 8:29:13 PM
re: Tellium Hits the Road Netmaniac, that was a great post. Thanks.

http://www.lightreading.com/bo...


Tellium allegedly has a tremendous backlog and if that turns out to be true, this will be a very strong IPO.

In God we trust, all else must have customers.

The customers will now speak. The rest of us should just watch.


--y2k--
sanddune 12/4/2012 | 8:29:21 PM
re: Tellium Hits the Road you are confusing the capability for
all optical wavlength conversion with
scalability, the former was demonstrated.
The metrics and problems for scaling such a
system should not be any different then those
for an OEO vendor.
Tough they still have some way to go
before translating the capability to actual
commercial product.
netmaniac 12/4/2012 | 8:29:24 PM
re: Tellium Hits the Road Luxcore's product is a looooong way from being commercially viable. What they showed at OFC was either a 2x2 or 4x4 matrix, I can't remember. In order for this to sit in the core of the network, they need to figure out how to scale it up SIGNIFICANTLY.
dmason 12/4/2012 | 8:29:26 PM
re: Tellium Hits the Road How many network managers in their right mind will install brand new technology, all optical switchs, in the core of his network until it is proven and ultra stable . . . . . not one !
myresearch 12/4/2012 | 8:29:26 PM
re: Tellium Hits the Road I dont remember the exact number but
it was around 200m shares which will
vaule the company around $3B (with the old
price).

-MR
sanddune 12/4/2012 | 8:29:31 PM
re: Tellium Hits the Road >1) All-optical wavelength conversion is not commercially viable yet, and won't be for several years.


That argument is no longer true. there was
commercially viable all-optical wavelength conversion demonstrated
at OFC by luxcore.
Titanic Optics 12/4/2012 | 8:29:33 PM
re: Tellium Hits the Road Let's hope all goes well. They'll get the IPO out, and then the price will slowly fall off, little by little.

But it will be real interesting to hear what the instutitional investors that will need to buy this think of Tellium. Will the roadshow be a hostile one? Wish I could be a fly on the wall.

If they are negative, it doesn't bode well for the 500-800 startups out there that all think they are going public in the next two years.
optinuts 12/4/2012 | 8:29:33 PM
re: Tellium Hits the Road gea,

"The vast majority of wavelengths..."

there aren't that many pure wavelengths that need switching to justify another layer in the network. tellium's approach is just a little ahead of its time.
manoflalambda 12/4/2012 | 8:29:34 PM
re: Tellium Hits the Road Hey all,

How many shares exist outside of the IPO bunch? Or what percentage of shares is the IPO? I was curious as to how much Lucent's 10% might be worth...

Salute,
Manoflalambda

psOOO = LambdaRouter
kraken 12/4/2012 | 8:29:35 PM
re: Tellium Hits the Road what about the altamar switch that got a bunch of hype at OFC?
asilverman 12/4/2012 | 8:29:35 PM
re: Tellium Hits the Road check out Network Photonics for OOO
netmaniac 12/4/2012 | 8:29:38 PM
re: Tellium Hits the Road iprsvp

You obviously work for one of the other switch vendors or a carrier that doesn't understand core long haul transmission networks.

"Tellium doesn't really have a grooming switch so it can't compete with CIEN." From my view, TELM and CIEN don't have competitive products but rather complimentary products. TELM works in the core of the transmission network providing protection and management at the lambda level while CIEN sits at the edge of the core grooming the STS-1s as required.

Cisco's 15900 is/was the only real competitive product to TELM and I really wish they could have held in there. The real problem, is that they are a bunch of data guys that were trying to develop a transmission product.

As to the OOO switches, I have seen a lot of sales pitches from a lot of vendors and have yet to be convinced that the OOO switch will be ready for prime time in less than 24 months. In my opinion, the vendor that comes out with an integrated OOO/OEO will be the winner. This would then allow me to remain at the optical level for pass through traffic or drop traffic into the electrical fabric that needs regeneration or convert from one optical channel to another.

You also referred to NT, what switch are you referring to? The DX? HDX? If DX, it's nothing but a beefed up ADM. If HDX, I'm from the "Show Me State."

SYCM - Can't scale beyond 64x64 and are hamstrung by components availability.

CORV - Great hype and mystique, but where's the beef?

BTW - I am not a current TELM customer and I don't accept stock options from the equipment vendors.

gea 12/4/2012 | 8:29:39 PM
re: Tellium Hits the Road The logic for a product like Tellium's goes like this....

1) All-optical wavelength conversion is not commercially viable yet, and won't be for several years.

2) PM via Overhead-awareness and avoiding Blocking in optical networks are important enough so that O/E wavelength conversion is strongly desirable (for reasons of inventory as well). In addition, many signals will need regeneration.

3) The vast majority of wavelengths needing cross-connection are OC-48 and OC-192, so a high degree if transparency is not super useful right now.

4) If an "optical" cross-connect performs O/E on incoming signals prior to cross connection, then most of the time it won't matter if the XC matrix is actually optical, or electronic.

Thus, I believe that the full potential of a truly optical cross connect may not be realized for several years, until all-optical wavelength conversion can become mature.

As a result, Tellium's current product probably will fill an important niche in the interim, but eventually the scalability and transparency of a truly optical cross connects will win out. But Tellium has been hiring lots of the big MEMs guns, so it looks like they'll be at the dance. They're also right on with GMPLS and MPLambdaS, so I actually think they're prospects are pretty good in the long run.
little_birdy 12/4/2012 | 8:29:41 PM
re: Tellium Hits the Road All optical is the panacea that some people make it out to be -- out-of-band management isn't likely to fly architecturally for path protection, meaning either OEOEO or splitters for power monitoring (which still doesn't get you assured data integrity), both of which add at least a year for deployable systems. And in the end the price points are in the same range as OEO systems.

Grooming down to itty-bitty data streams is pointless. When you ask the data customers if they want to provision long circuits in small increments, they say, "Ok, sure, I guess so," until you tell them how much it will cost, in which case they'd rather sublease a piece of someone else's OC48.
myresearch 12/4/2012 | 8:29:44 PM
re: Tellium Hits the Road Some Interesting facts:

1) Tellium is a OC48 cross connect. Cisco
just killed a product like that after spending
$500m and another 1.5 years working on it.
It is clear by now that you need STS-1 grooming
to stay in the competition. Ciena's CoreDirector
will rule. Three are startups like Calient and Brightlink working on big STS-1 boxes.

2) There are a lot of backdoor deals, all
customers are stock holders. Many officers
of the customers were given stocks personally.
In other industries, this kind of deals may
land you in jail. Giving stocks to officers
of customers should be banned - what is the
difference of giving them money!

Also see NYTimes article below.

-MR

January 22, 2001, Monday
THE MARKETS: Market Place; A Question Of Conflict Amid a Web Of Interests By ALEX BERENSON
Source: The New York Times
Section: Business/Financial Desk
1414 words

Abstract
Ethical questions raised by Tellium chairman and chief executive Harry J Carr's
activities as Yurie Systems and Lucent Technologies official discussed in light of
Tellium's planned initial public offering; Carr holds such equity sweetners and
related-party transactions are common in information technology industry, as are
executives who make personal investments in their companies' suppliers and
customers; analyst Jack Ciesielski warns investors should be wary of sales
between related companies (M)
lite_boy 12/4/2012 | 8:29:49 PM
re: Tellium Hits the Road Does the reduction of their IPO mean
reverse split ?
iprsvp 12/4/2012 | 8:29:49 PM
re: Tellium Hits the Road I am not sure why Tellium is confident about going
for an IPO. But fundamentally it is very weak when compared to other optical switch makers like
CIEN, NT,Sycamore or CORV. CIEN(both in switch and metro) and NT (In metro) proved their stuff..
CORV and sycamore are hanging in their with whatever stuff they got. But Tellium doesn't really have grooming switch so it can't compete with CIEN. Lack of metro/edge product ties it's hands to compete with NT/Sycamore/CORV. Unless otherwise they have something cooking they wouldn't be so confident about this IPO phase.

Don't tell me that their ALL OPTICAL SWITCH works. I strongly believe that it's going be atlease 1 yr before we see a real all optical switch ( ofcourse I am ignoring CORV pseudo switch as we are not talking about transport switches here) in a action.


Either they are working on of the following products metro/edge/grooming switchs or they are planning for some M&A's after IPO like sycamore did.

Otherwise who is going to buy their non-grooming
switch which are soon going to replaced by
All optical MEMS switches.

Only Krishana Bala would know the answer for this..

Any thoughts??

dlharding 12/4/2012 | 8:29:50 PM
re: Tellium Hits the Road Best of luck folks...the clock is ticking, the Fat Lady is clearing her throat and people are heading for the exits....

These guys are a year too late....

Maybe they should go and see Tony Soprano for some financing....
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