Tellium's Growing Pains

The September quarter is just days away from closing, and Tellium Inc. (Nasdaq: TELM) looks like it can make its numbers. But some analysts following the company are cautious about what the future holds.

Nikos Theodosopoulos, an analyst with UBS Warburg, today published a note on Tellium after meeting with the company’s management team. Even though he lowered his price target from $25 to $17.50 per share, he was optimistic about the company’s ability to meet its 2001 revenue estimate of between $125 million and $135 million (see Tellium Feels Alright ). He also maintained his "Buy" rating on the stock.

"While capital spending cutbacks by the telecom industry pose a risk, management indicated that business with existing customers and bidding activity with potential new customers remains robust," writes Theodosopoulos. "We believe optical switching and bandwidth management continues to be one of the few bright spots for the telecom industry."

Others aren't so optimistic.

"Let’s just say I have a positive rating on the company now, but I’m scared to death that I’m going to get whacked in the face," says one analyst, who didn’t want his name used. "Maybe it won’t be this quarter, but it’s coming."

In fact, one might look to the recent cases of several successful optical networking companies to gain perspective. Earlier this year, both Ciena Corp. (Nasdaq: CIEN)and ONI Systems Inc. (Nasdaq: ONIS) bucked the capital spending trend and seemed to be gaining customer momentum as many other optical networking companies experienced drastic cutbacks. Executives at Ciena and ONI boosted revenue projections and assured investors there was no need to worry. Then, both companies ended up lowering those forecasts--and their stocks got clobbered. It proved that nobody was immune to the greater forces in the market.

The biggest lingering concern for Tellium is its lack of customers. Currently, the company has only three: Dynegy Inc. (NYSE: DYN), Qwest Communications International Corp. (NYSE: Q) and Cable and Wireless (NYSE: CWP). Not even recent rumors that Tellium is about to sign a fourth customer, a small, privately-held systems integrator called Telicent, have quelled the skepticism.

"Don’t get me wrong, a customer win is always good," says Kevin Slocum, an analyst with Wit Soundview, "but they know that we analysts don’t care about some small, hard-to-describe company. We want to see a big, name-brand player coming into the fold."

Qwest Communications International Corp. (NYSE: Q) and Dynegy Inc. (NYSE: DYN) are the only two customers providing revenue for Tellium. Qwest’s $2 billion cut in its capital spending estimates for 2002 has also worried some analysts. However, Theodosopoulos says the indication from Tellium management is that Qwest remains committed to its deployment of the Tellium optical switches in both the near and long term. He also says that those contracts are coming in strong and even ahead of schedule for this year.

But it’s the contract with Cable and Wireless, which hasn’t yet started generating revenue for Tellium, that has analysts most concerned.

“Cable & Wireless seems to be dragging their feet,” says another analyst, who also wanted to remain anonymous. “Tellium might be fine on their revenue estimates this year on the contract, but I doubt they will get the $50 million they expect from that contract next year.”

The stock is also expected to come under further pressure when its an 180-day lock up period on 75 to 80 million insiders shares of the company's stock expires on November 21. This will likely put pressure on the company’s stock price as some early investors dump shares on the open market.

Tellium officials did not return phone calls by press time.

Tellium’s stock was trading at $5.70 up 0.55 (10.68%) today in mid-day trading.

- Marguerite Reardon, Senior Editor, Light Reading

wyningus 12/4/2012 | 7:48:45 PM
re: Tellium's Growing Pains not a bad stab. Attributed analysts to anonymous analyst sources is 2:2. Even though the ratio is balanced, it doesn't make for a clean story. Use anonymous sources to steer your research, not our perception. Slocum and Theodosopoulos have the cajones to make public statements. WeGÇÖre sure these sources seem credible to you, but donGÇÖt spit them out to us without attribution.
Rockhead 12/4/2012 | 7:48:44 PM
re: Tellium's Growing Pains tellium mgmt tells nikos they expect to make their numbers (which seems to be the "event" that triggered this article). LR titles its article "growing pains." i wonder what it would have been called if they were missing their numbers like the rest of the industry.
opticaltalent 12/4/2012 | 7:48:40 PM
re: Tellium's Growing Pains
The market was excited about the technology which Tellium's product is founded on...two years ago. The market will by pass the technology Tellium uses and I seriously doubt Tellium will be a long term player.

Anybody disagree???
Physical_Layer 12/4/2012 | 7:48:23 PM
re: Tellium's Growing Pains Anyone figure that Tellium is already at the drawing board trying to get a full STS-1 grooming switch to market? They claim there is a market for OC-48 to 192 grooming but I doubt it. The guys who do STS-1 grooming use an extra chipset which doesn't add much in the way of cost, so what advantage can TELM have?
opticalwatcher 12/4/2012 | 7:48:22 PM
re: Tellium's Growing Pains I hear what your saying, but I have to ask the question. Who cares about grooming? I dont see, or hear, the providers screaming about grooming and tellium is still selling switches. Also, grooming sounds good in the articles, but it doenst sound good in reality. I also hear that trying to make a long haul box groom down to STS-1 is like trying to make an elephant behave like a cheatah. Sounds more like a god box, or an all-in-one box that ends up being a jack-of-all-trades, master of none. I keep hearing service providers say they are looking for best in breed. That would lead one to believe in telliums approach, match a great long haul switch with a great edge. If this process wins out, who cares about a long haul switch grooming down to STS-1? Ciena has an interesting perspective, but I dont think they can deliver all that they promise. Time will tell I guess. Hopeyfully in less than two years before the technology becomes uninteresting (smile) and nobody wants it anymore.
opticalwatcher 12/4/2012 | 7:48:22 PM
re: Tellium's Growing Pains Listen to what your saying. "Excited about the technology two years ago"? Two years ago? I know tech changes quickly, but this particular industry, no matter what the article writers, pundits, and analyst want to try and brainwash people with, will never change so much as to make an exciting techology, a techology with real longterm promise, become uninteresting in two years. In fact, this is just the begining of this type of techology. Think about it, what type of equipment still dominates the telecom providers backbone? I can tell you the answer to that question - very old, very tried, and very tired technology. Only to be replaced at a snails pace, piece by piece, leg by leg. What companies like telm and others are doing is just starting to break into the providers back door. Once there, once the providers start believing in this tech, then this entire segment will truely take off.

Look people, so many providers arent even using this equipment to carry "LIVE" traffic. Yes, they've bought it, yes they use it, but their using it in "testing" mode (as a general rule).

Exciting tech two years ago? Sorry sir, your a fool if you really believe that. You've bitten onto one of the biggest lies of the 1990's. What lie? Of course you would ask, because you obvioulsy dont see it yet. The lie is this. Everyone wants something new, everyone will run out and buy it, and the sky is the limit when it comes to new technology. Get real. The only things that are changing that fast are brokers and bankers new cars. Everything else is still tied to the economics of reality - "Good things take time".

Havent you read enough about this industry to understand that it takes between 1 and 3 years for a provider to identify a path (regarding their network), identify vendors (such as tellium), be introduced to the equipment, get the equipment into their labs, test, test, and test, deploy in test mode, then, and only then, actually put the equipment into use. Uninteresting in two years? Wow, you people amaze me.

Telliums future? who knows. Many companies die painful deaths that have good products. Manangement, money, and some luck will be required if tellium is to survive. Good luck all!
Rockhead 12/4/2012 | 7:48:16 PM
re: Tellium's Growing Pains i wonder, does opticaltalent think MEMS is going to take over the earth? methinks those schedules (and worse, any demand for such products) are sliding right a good bit faster than the calendar. we will see quite a few shutdowns amongst the "all-optical switching" startups in '02, sadly.
LightCycle 12/4/2012 | 7:48:15 PM
re: Tellium's Growing Pains > I hear what your saying, but I have to ask the
> question. Who cares about grooming? I dont see,
> or hear, the providers screaming about grooming

Are you kidding us!?!? I suspect you sit around reading magazines all day as opposed to actually being our there talking to real Carriers.

EVERYONE needs grooming. The question is - to what granularity, and at which point in the network. Simple as that.

Right now, granularity to STS-1/VC3 are a must for majority of the carriers where it counts. If you don't know that, you must be hiding behind some rock.

> and tellium is still selling switches.

Yup, they sure are. In ones and twos every 6 months or so.
gea 12/4/2012 | 7:48:11 PM
re: Tellium's Growing Pains Of course grooming is important. And the ability to do grooming in large switch fabrics is getting cheaper and easier, given the proliferation of super-duper grooming chipsets on the market. Look--telecom networks are still telecom networks...they need to groom, plain and simple.

In the future, however, the need for grooming may move towards the edges and possibly largely dissappear in the future. The trend towards OC-48c/192c has come faster than most people ever imagined. Big fat monolithic packet pipes will probably take over, linking giant ter- and peta-bit switches at the edge of the core and the core. In this environment, it probably doesn't pay to do much grooming. AND, if optical costs continue to come down, WDM becomes more attractive than TDM.

In short, the need for a Tellium box will probably be there, and Tellium is smart enough that they will be the vendor of choice.
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