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
http://www.lightreading.com