Tellium Shares Sink After Earnings

Core optical switch maker Tellium Inc. (Nasdaq: TELM) didn't announce any new customers on Thursday, as some on had hoped, but it did offer a pleasant surprise by reporting rising revenues and a pro forma profit during its fourth-quarter 2001 earnings conference call.

But pro forma numbers only tell one side of a story -- and investors may have been looking at the other side. Indeed, Tellium shares were down $0.61 (11.25%) to $4.81 in late morning trading on Friday, largely due to some concerns related to Tellium's overall business and whether it really has accomplished something other than creative accounting.

Excluding one-time charges, Tellium reported a fourth-quarter profit of $1.7 million, or a penny a share, compared to a pro forma net loss of $7.4 million, or six cents a share, for the previous quarter.

Analysts were expecting Tellium to report a loss of 4 cents a share for the quarter, so the pro forma profit came as a surprise.

Its gross margins rose to $23.1 million, or 46 percent of revenues, in the fourth quarter, compared to $17.7 million, or 44 percent of revenues, in the third quarter of 2001.

Tellium's revenues rose to $50.2 million during the quarter, an increase of 25 percent over the company's third-quarter 2001 revenues of $40.1 million. For the year, Tellium's revenues totaled $136.4 million, versus $15.6 million in 2000.

One issue with some investors, however, is the treatment of numerous special charges in Tellium's results, some of which relate to special stock warrants that Tellium has issued to its customers. Several hedge-fund managers, declining to be named for this article, said the accounting treatment has raised some eyebrows on Wall Street.

With all one-time charges added in, Tellium's net loss for the quarter was $61.5 million. That included a one-time non-cash charge of $19.2 million because of the cancellation of warrants for 1.375 million shares in connection with its amended contract with Qwest Communications International Inc. (NYSE: Q) (see Qwest and Tellium Revise Contract).

Some analysts are choosing to take a conservative approach to the numbers by discounting the value of the stock warrants that Tellium had given his customers.

But taking into account charges related to those warrants, the company only had $15 million in revenues, according to Optical Oracle research analyst Chris Bulkey. "If you figure these charges into cost of goods sold, their gross profit is a negative $15.6 million, which means they had a negative gross margin, not the 46 percent reported."

Tellium officials argued that the charges for the stock warrants issued to customers are inconsequential.

"The reality is that we're going to collect $50.2 million real dollars," says Tellium CEO Harry Carr, who was not amused with Bulkey's analysis. "The warrants charges is a creation of accountants that only accountants can understand... Not only does [backing out warrant-related revenue] misrepresent the revenue picture, but when customers exercise their warrants we'll collect even more cash from that transaction."

Tellium also cut research and development spending by about 26 percent in Q4. "Had R&D expenses even been kept flat quarter to quarter, this would have cost Tellium at least 3 to 4 cents a share," Bulkey says. Carr says the R&D cuts reflected a change in the technology demand for the upcoming full-spectrum, all-optical switch. He says a more efficient use of staff and not having to spend as much money "in non-people costs" to build future products is what led to the current quarter numbers.

During the Thursday conference call, Carr said the company would not give guidance as to when it plans to announce new customers. This comes after rumors of a new customer in Deutsche Telekom AG (NYSE: DT) and past promises by Carr that Tellium would announce a new customer by the end of 2001 (see Tellium Looks to Make Its Marks).

"We do not discuss where we are with potential customers, nor do we think it is wise to announce customer test activity," he says. "In the meantime, I intend to stay out of the prediction business of the specific timing of those opportunities."

Carr says that during the fourth quarter, Qwest and Dynegy Inc. (NYSE: DYN) each made up more than 10 percent of Tellium's revenues. For 2002, Carr says he expects about two-thirds of Tellium's revenues to come from those carriers, with the remainder -- $96 million -- coming from new customers.

"In order to recognize revenue from a new customer by the third quarter 2002, we believe Tellium would most likely have to finalize customer agreements in the next 8 weeks," writes Morgan Stanley Dean Witter & Co. analyst David Jackson, in a report sent to clients on Friday.

Tellium said it expects revenues to be in the range of $52 million to $55 million for the first quarter of 2002. In addition, the company continues to believe revenues in 2002 will be approximately $288 million.

Tellium's managers can sell their shares beginning in February, ending an extended lockup period that followed the company's May 2001 initial public offering (see Tellium Execs Lengthen Their Locks). The management team holds roughly 14.7 million shares of Tellium stock. "I am confident that we will not see much activity [in management stock sales] and certainly nothing significant," says Carr.

— Phil Harvey, Senior Editor, Light Reading

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
gea 12/4/2012 | 11:00:05 PM
re: Tellium Shares Sink After Earnings Well I'll be dipped!

As I have said before on these pages, the Tellium switch is in some ways not directly comparable to the Core Director (for instance) in that it really belongs in a network of big, fatass packet pipes (OC-48c/192c). The Core director has one foot squarely in the circuit-switched world (at least on paper!). Because of this, the time for rapid expansion of Tellium's customer base and sales is probably a little off still. Tellium's key to long term success (and I believe eventual wide-scale success) is clearly holding on long enough for the "Next Generation Networks" to come around.

Looks like they may know this. If the $$$-folks at Tellium are half as smart as their best engineers and PhDs, then Tellium's going o be a major player in the long run. They sure have come a long way since the Farouq days!
Latitude 12/4/2012 | 11:00:04 PM
re: Tellium Shares Sink After Earnings Amen.
freethinker 12/4/2012 | 10:59:48 PM
re: Tellium Shares Sink After Earnings Tellium's "pro forma" results are without "one-time charges." Yet there were several recurring aspects of the GAAP income statement that were not included in the pro forma results.

While the $35 million of revenue offsets (that's right, $35 million out of $50 million gross) are likely to get smaller, they will continue. The amortization of goodwill will end with FASB 142, but depreciation will continue (and what a joke to take depreciation of equipment out of the income statement). And the option-based compensation costs will continue.

Mgmt stated that they were reporting "cash income" and described their accounting as conservative. If it's important for people to understand what's happening to cash (and it is), that's what the cash flow statements are for.

And the accounting is hardly conservative. In fact, it's as misleading as anything this side of Enron.
twistedcopper 12/4/2012 | 10:59:41 PM
re: Tellium Shares Sink After Earnings freethinker-
don't try to confuse the message boards with your accounting mumbo-jumbo. the fact is tellium has managed to grow revenue every quarter. i'm no financial genius, but i'd be happier with two customers that pay me more every quarter than 10 who spend less each quarter. i listened to the call and harry carr said that tellium did "exceptionally well" this quarter and that we should expect them to grow market share this year. i don't think he'd say that if qwest and dynegy didn't plan on spending more and more every quarter from here on out. just my $.02.
HarveyMudd 12/4/2012 | 10:59:34 PM
re: Tellium Shares Sink After Earnings There does not seem to me much need for the optical products in the market place. This situation is not likely to change in the next two or three years. The future of Tellium does not appear to be very bright.
bb55 12/4/2012 | 10:59:24 PM
re: Tellium Shares Sink After Earnings Do you wanna bet a bit more then $.02 and simply buy shares?
Remember that one of the promissing customers of Tellium was C&W.
On the other hand, rumor says Deutche Tel. is interesting in Tellium. Any news on this one?
solver 12/4/2012 | 10:59:12 PM
re: Tellium Shares Sink After Earnings "i don't think he'd say that if qwest and dynegy didn't plan on spending more and more every quarter from here on out."

Would Ken Lay tell his employees that Enron is in great shape, and that the stock is worth 10 fold merely 2 months before declaring bankrupcy?

"accounting mumbo-jumbo" ? It's the absolutely most important control measure we got against crooked management. I wish more people would focus on it than the hot air that CEOs are so full of.
That's my 2 cents
Lafite 12/4/2012 | 10:58:20 PM
re: Tellium Shares Sink After Earnings As someone in the field of technology, start-ups
and more particularly finance with the above, I
find it mind boggling that folks do not look at
numbers such as those posted by Tellium and
simply realize that what it boils down to is
revenue for warrants, which essentially amounts
to dilution for shareholders. The question
everyone should be asking is, would these
buyer buy Tellium gear if they DIDN'T have
warrants/equity interest in them? When they
start to post significant revenues from
carriers sans any equity interest in the company
will be the moment when Tellium has arrived.

My $.02...
jamesoid 12/4/2012 | 10:57:52 PM
re: Tellium Shares Sink After Earnings "The question everyone should be asking is, would these buyer buy Tellium gear if they DIDN'T have
warrants/equity interest in them?"

Where are the customers who own equity and therefore feel obligated to purchase?
Check out the Roster
>Insider Trade Data >Roster
See any customer names?
Corning? Are they a customer?
Tellabs? What about them? What are you talking about?

-+ Insider and 5%+ Owners: 92%
-+ Over the last 6 months:
-+ 2 insider sells; 1.54M shares
(1.5% of insider shares)
-+ Institutional: 30% (392% of float)
(174 institutions)
-+ Net Inst. Buying: 13.9M shares (+29.26%)
(prior quarter to latest quarter)

Market Capitalization $358.5M
Shares Outstanding 112.4M
Float 8.60M

"Would Ken Lay tell his employees that Enron is in great shape, and that the stock is worth 10 fold merely 2 months before declaring bankrupcy?"

Yeah, Telliums' clearly another Enron.
Give me a break!
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