Tellium's Time Warp

Is optical core switch maker Tellium Inc. (Nasdaq: TELM) going back to its roots in business with Uncle Sam?

It's a possibility. Tellium's recent activity yields evidence that it may be trying to tap its connections with Science Applications International Corporation (SAIC), which owns 15 percent of Tellium, to get more government contract business -- which was a big part of Tellium's business before it went public in early 2001 and started going after the telecom carrier market.

In April, Tellium announced a “multi-year, multi-million dollar” contract with Lockheed Martin Corp., the federal government’s number-one subcontractor (see Lockheed Picks Tellium). On the surface, the contract with Lockheed Martin seems rather insignificant, but closer examination reveals intriguing ties between Lockheed and SAIC. One venture-capital source says that SAIC was instrumental in closing the Lockheed Martin deal and that other, similar deals are in the works.

So far, not much is known about the Lockheed Martin contract -- but it is known that SAIC, which owns 17 million shares of Tellium (about 15.4 percent), does contract work for Lockheed Martin at a Department of Energy (DOE) facility in Oak Ridge, Tenn. Is this in any way related to the proposed work for Tellium? That's hard to say. SAIC is contracted to deliver "IT infrastructure and service delivery in support of the three DOE facilities," according to its corporate Website. But Tellium has provided few details on the Lockheed Martin contract or what type of work it involves, and so far no new details have appeared in corporate filings with the Securities and Exchange Commission (SEC).

One Tellium investor emailed Light Reading expressing frustration about finding out more about this relationship, saying that he'd called up Tellium, but the company would not answer his questions.

He wrote: "As a shareholder of Tellium, I find it at least mildly strange that they won't respond. Should I read into this fact? Is Tellium hiding something with either positive or negative implications for the company?"

Tellium declined to comment on this story, and SAIC was not available by press time.

Tellium did issue a press release on the Lockheed contract, but that release did not specify a dollar amount, and the company did not disclose what kind of applications its Aurora Optical switches and StarNet management system would be used for. Most analysts following the company say the deal is for a rather insignificant amount.

“They’ve said it themselves, that this contract with Lockheed Martin isn’t going to be important enough to reaccelerate their existence,” says Kevin Slocum, an analyst with SoundView Technology Group.

Harry Carr, chairman and CEO of Tellium, seemed to downplay the contract during the earnings conference call on April 30th, just six days after the deal was announced.

Why would Carr downplay a new contract? Well, it could present a problem for the marketing strategy. Tellium has made efforts to market itself to big carriers such as Qwest Communications International Inc. (NYSE: Q). Going back to government contract work might not mesh with its carrier-focused message.

During its early days, Tellium was more closely tied to SAIC and did more government work. Tellium was spun out of BellCore, which later became Telcordia Technologies Inc. Telcordia was then bought in 1997 by SAIC, which has been one of the U.S. government's top ten contractors over the past five years. At the time of Tellium's IPO last year, SAIC owned more than 20 percent of the company. SAIC and Telcordia each retain one Tellium board seat.

William A. Roper Jr., executive vice president of SAIC, has been a member of Tellium's board of directors since September 1998. Richard C. Smith Jr., CEO of Telcordia, has been a board member since February 2000.

In Tellium’s S-1, filed with the SEC before it went public last spring, the company disclosed that it spent about $118,000 in consulting expenses billed to Telcordia and bought over $300,000 worth of gear from Telcordia in 1999. More importantly, it also disclosed that in 1999 approximately $1.4 million in revenue was derived from sales to MONET, an affiliate of SAIC and Telcordia Technologies.

For nearly a year before the IPO, Tellium worked hard to market its optical switches to the carrier market, while working equally hard to distance itself from its governmental ties. Government contracts are traditionally not as lucrative as carrier deals.

Tellium has struggled to win new carrier accounts, but, in spite of the new deal with Lockheed Martin, some analysts aren’t convinced that Tellium is migrating back toward government work.

“I don’t think that this is a new direction for them,” says SoundView's Slocum. “Lockheed is a minor deal. It isn’t a Tier 1 carrier, and I think that is where they are focusing their attention right now. Or at least that’s where they should be focusing.”

— Marguerite Reardon, Senior Editor, Light Reading
Two 12/4/2012 | 10:16:07 PM
re: Tellium's Time Warp Ah yes, let's take a journey shall we?...A journey back in time....

The company is Yurie Systems which makes reasonably functional, but unremarkable ATM access gear. Mr. Carr is the President.

Good old LUcy goes shopping and says: "ooh wow, a company with revenues of $80 million." So she goes and parts with $1 billion to buy the company, only to find that Yurie sells 30% of it's gear to a company owned by one of its board members. That ain't all folks: Yurie also has an OEM agreement with Ericsson to sell their product...but guess what? Most of the sales through Ericsson are to this same company!

LUcy gets a very bad deal and ends up writing Yurie off. Meanwhile Carr ends up getting in trouble at Lucent for buying stock in a vendor just before placing a big order...coincidence? I think not.

Carr has a long record for dealing from the bottom of the deck and should be watched closely.

manoflalambda 12/4/2012 | 10:15:56 PM
re: Tellium's Time Warp Hey all,

Hear that a 10-20% staff cut is in the works. Is Tellium hunkering down for the dark ages?

Just a step to the left,
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