New Tekelec President Signals Optimism for Calabasas Firm

Only 18 months ago, Philip Black was riding in high technology’s fast lane.

At 31, Black had built Tekelec, a Calabasas-based maker of communications test equipment, into a $15 million business and he had just taken Tekelec public. Black sold some of his shares for $557,000, but still held 5% of the company’s stock worth $2.5 million and planned to keep it growing.

But getting into the fast lane and staying there are two different things.

Ever since Tekelec went public, it’s been one problem after another: Big losses, abandoned product lines and a stock whose value has dropped by half.

So Black recently decided there was only one thing to do. Hire someone else to do his job.

“Pride comes before the fall, so I said, ‘Let’s get that guy in here,’ ” Black said recently, referring to his successor as president, Peter Vicars, 40, a South African native with 15 years of management experience at several high-technology firms, including serving as head of operations for Micropolis, the Chatsworth maker of computer disk drives.

“There comes a point where you say, ‘We’re getting too big for my talent’ ” as a manager, Black said.

Actually, that point was slow in coming, said Black, a British native.

“There wasn’t a single event or day,” he said. “It took a lot of reflection and thought. ‘Am I really the right man to manage a company this size?’ I think two years ago, I was definitely the right person, and now I’m pretty sure there are people better than me to run a company this size.”

Most Lack Management Depth

The problem at Tekelec is almost a casebook example of what can happen at fast-growing companies. “Most of these small companies have a single problem: Lack of management depth. Because of that lack of depth, they’re going to run into problems,” said Boniface Zaino, managing director of one of the mutual funds operated by Trust Co. of the West, a Los Angeles firm that owns more than 115,000 Tekelec shares.

But Zaino likes the decision to bring in Vicars and recently he’s been buying more Tekelec stock.

One of Vicars’ former bosses, Micropolis President Stuart Mabon, said Vicars is “a very emphatic and very direct leader” who can provide the management discipline Tekelec needs. “Pete is the kind of individual who can, in the midst of uncertainty, decide which way to row.”

Black, in his new position as vice chairman, will devote his time to planning Tekelec’s long-term strategy, while Vicars tends to day-to-day operations.

For all the company’s recent problems, Vicars likes its potential. “I’m by nature a workaholic. I saw a situation at Tekelec where the company needed to change,” he said. “I’ve been involved in growing companies. I saw an opportunity to really use my skills with growing companies to do it again at Tekelec.”

One thing in his favor is that Tekelec’s balance sheet is cash-rich and debt-poor, which will give him an opportunity to restore order. He notes that the company has $7 million in cash, which gives him a chance to either go shopping for another company or strike licensing deals for new products.

A Return of Profits

Vicars expects the company to be profitable again in the next few quarters. For beleaguered Tekelec stockholders, that won’t be too soon.

The company’s stock closed Monday at $6.25 a share in over-the-counter trading. Tekelec went public in May, 1986, at an initial offering price of $12.25 a share, in the process raising $10.2 million. But that initial price was a lofty 30 times Tekelec’s per-share earnings in 1986. Did E. F. Hutton, the lead underwriter in bringing Tekelec public, price the stock too high? Black won’t comment.

But at the time of the stock sale, who was to say that Tekelec’s sizzling growth of the previous three years wouldn’t continue?

In 1978, Black founded Tekelec with Jean-Claude Asscher, who provided the $40,000 in start-up money and who today remains Tekelec’s chairman and biggest stockholder with control of a 53% stake. At first the company distributed test equipment made by Tekelec-Airtronic, a French company also headed by Asscher, before manufacturing its own goods in 1982.

Tekelec’s machines are portable devices, usually about the size of a personal computer and costing between $4,000 and $70,000. They test the communications channels through which data is shipped from one computer to another.

The devices also test voice signals that move between telephones. Telephone signals sent via microwaves can be affected by temperature or other environmental factors, causing the signals to fade. A Tekelec tester can find the problem and restore the signals to full strength.

Sharing a ‘Protocol’

Another Tekelec device tests the communication channels that link computers in a network. Computers made by different manufacturers must use the same method, or “protocol,” in order to share data, and the Tekelec machine helps make sure all the computers on the network conform to the same protocol.

With customers that included American Telephone & Telegraph, MCI and International Business Machines, Tekelec was selling to the high-technology elite. Sales doubled in 1984, doubled again in 1985, then jumped 44% last year to $14 million.

Profit wasn’t far behind, surging 76% in 1984, then doubling in 1985. Last year, Tekelec’s earnings rose only 12%, to $1.4 million, but that still produced a respectable profit margin of 10 cents per sales dollar.

The financial problems began this year as its first-quarter profit plunged 73% from a year earlier, mainly because of a slowdown in orders from the telecommunications industry. Then in June, Tekelec announced it dropped two struggling product lines, requiring a $381,000 writeoff. As a result, in the second quarter, the company lost $178,000. For the first half of the year, the company lost $87,000 on sales of $7.6 million.

One of the abandoned products tested the transfer of data between computers and robots used in so-called “automated factories.” But the high cost of automation and the uncertain cost benefits have stalled sales.

A Mistake to Avoid

But Tekelec blames only itself for the failure of its other product, which was to help link computers and other office equipment along a “local area network,” or LAN. “The LAN product was a mistake we should have avoided,” Black said, because Tekelec did not have the marketing and technical expertise to compete effectively with its bigger rivals.

But Vicars and Black believe that demand for the company’s mainstay testing products will remain strong, despite a downturn in orders early this year.

Tekelec has drawn an additional vote of confidence this year from giant British Telecommunications when the company enlisted Tekelec to market two of its testing products in the United States and Canada.

Vicars’ goal is for the company to grow from $15 million to $50 million a year in sales while maintaining 10% profit margins.

No one wants to see the company’s stock get healthy more than Black, who owns about 180,000 shares, now worth about $1.1 million.

“I want my shares to do well,” Black said, “and if I can find somebody who can take better care of my shares than I am, I’m going to make more money.”

TEKELEC AT A GLANCE Tekelec makes equipment to test computer/telecommunications products. Founded nine years ago, the company is headquartered in Calabasas and has 135 employees.