Tekelec Gets Across the Message It’s a Winner : Investments: The telecommunications company’s stock stood at $8.50 a share at the end of 1989. It hit $21.25 earlier this month.
To say Tekelec is in a complex business is an understatement. The company makes suitcase-sized machines used for testing sophisticated telecommunications networks, everything from long-distance telephone networks to “local area networks” that link phones, computers and other products in an office building.
Just learning Tekelec’s vernacular takes work. The Calabasas-based company, with sales of $42.2 million last year, provides equipment for telecommunications systems that insiders know as ISDN, SS7 and GMS.
But if Wall Street doesn’t understand all of the nuances of Tekelec’s industry, it certainly can read the plain English on Tekelec’s recent financial statements. Sales and profits? Up sharply during the past year. After-tax profit margin? A lofty 12 cents per $1 of sales. Long-term debt? Zip. Cash in the bank? $17 million.
All those are indicators that financial analysts value in a company, especially during a recession, and that’s all the explanation investors have needed to trigger a surge in Tekelec’s stock. The stock, which stood at $8.50 a share at the end of 1989, hit $21.25 earlier this month before dropping back a bit. It closed Friday at $18.875 a share in national over-the-counter trading. (Financial markets were closed Monday in observance of Presidents’ Day.)
At that price, however, Tekelec isn’t exorbitantly overpriced compared with the rest of the stock market. At its present level, the stock is trading at 15 1/2 times the $1.22 a share that Tekelec earned in 1990--well below the 17 1/2 multiple for the Standard & Poor’s 400 industrial index.
To be sure, some of Tekelec’s stock gains reflect the broader market’s rally so far this year. But the stock is largely responding to Tekelec’s earnings growth. The company’s net income last year jumped 45%, to $5.04 million from $3.47 million in 1989, when sales totaled $34.1 million. In the fourth quarter alone, Tekelec’s profit soared 49%, to $1.39 million, as revenue rose 46% to $12.4 million.
From here on, though, investors will be closely watching Tekelec and its president, Peter N. Vicars, to see whether Tekelec’s recent earnings growth is being sustained or whether they’re in for a repeat of 1989, when Tekelec’s profit--and its stock price, for that matter--came crashing down.
One analyst, R. Mark Matheson of the investment firm Cruttenden & Co. in Newport Beach, said today’s market “is feeling more comfortable that this is going to be a sustained earnings rally” at Tekelec.
Why? Because Tekelec, whose machines carry list prices of $7,250 to $42,200 apiece, now has more diversity. In 1988, its earnings soared mainly on the strength of one product--a machine used for testing a system called Integrated Service Digital Network (ISDN), which enables voice signals, data and images to be transmitted over the same telephone line.
During 1989, however, orders for Tekelec’s machine slowed because companies, government agencies and others moved much more slowly than expected in setting up ISDN networks. (Its actual use is still limited to individual office sites, narrow geographic locations and the like, Vicars said. USC has one, for instance.) As Tekelec’s 1989 profit tumbled 35%, its stock lost nearly half of its value to end the year at $8.50 a share.
But today, Tekelec is making test equipment for several types of telecommunications systems, broadening its source of revenue. Also, 51% of its business comes from foreign customers so that Tekelec is not beholden to the cycles of the U. S. economy. Tekelec’s customers include American Telephone & Telegraph, GTE, MCI, Siemens AG of Germany and Japan’s Nippon Telephone & Telegraph.
In addition to ISDN products, Tekelec is considered a leading producer of test equipment for signaling system (SS7) technology. SS7 routes telephone calls and other information flow around the global telecommunications networks. For instance, SS7 would determine whether a telephone call from Los Angeles to New York is routed through a carrier’s switching stations in Denver or through St. Louis.
“It’s SS7 who’s playing traffic cop in the network and balancing the load performance of the network,” Vicars said. And Tekelec’s machines are used for testing existing SS7 systems or new SS7 versions still in the development stage.
Tekelec’s equipment is also being used to test a planned “pan-European” network aimed at smoothly connecting telecommunications throughout Europe, including the cellular systems that make car phones possible.
When all of these improvements in telecommunications gain widespread acceptance isn’t overly critical to Vicars. He figures that the world’s thirst for more information and faster communications is never quenched, and that sooner or later some form of these leading-edge networks will be deployed. In the meantime, Tekelec’s machines are being used to test the prototypes.
“There’s always a concern that markets could slow down,” as happened with ISDN, he said. “But we’re talking about a society that’s information-driven. To say that we’re going to stop moving ahead in that arena is difficult to perceive.”
Tekelec’s rivals feel the same way, including electronics powerhouse Hewlett-Packard Co., whose test-and-measurement business alone accounts for $2 billion in sales. “You’ve got to learn how to compete with H-P,” Vicars said. “You’ve got to have those good customer relationships and bring products to market very quickly and successfully. We’re able to do that.”
Mike Gospe, a spokesman for Hewlett-Packard’s test-and-measurement group in Santa Clara, conceded little to Tekelec except that “we do recognize Tekelec as a good competitor. We think we’ve got some pretty good products.”
Vicars, 44, took Tekelec’s helm in 1987 when his predecessor, Philip Black, who co-founded Tekelec and took it public in 1986, decided that he needed help to keep the company growing. Tekelec’s other co-founder, Frenchman Jean-Claude Asscher, still owns 55% of the company’s stock, which keeps would-be corporate raiders at bay.
The company has 300 employees and research-and-development facilities in four U. S. cities, Japan, France and Israel, in an attempt to keep Tekelec’s product developers close to its customers.
In any case, a company’s total size isn’t the issue, Vicars said. Even if some competitors are much larger, he said, success is possible “if you are nimble, if you are quick, if you support the customer.”
Yet Tekelec itself has been buying properties to enhance its growth. In 1988, it paid $3.5 million for Protocol Technologies of North Carolina, and in September it bought Hard Engineering for $3 million and the assumption of $1 million of Hard’s debts. Both made equipment that filled in certain holes in Tekelec’s product line.
And with Tekelec’s sizable cash hoard and rising stock price, Vicars doesn’t count out using either to finance more acquisitions. “Strategically, we would be looking for small, entrepreneurial-type companies that would complement us,” he said.
Tekelec At A Glance Tekelec makes equipment that telecommunications companies use to test their networks and related products. The company, based in Calabasas, has 300 employees worldwide and derives 51% of its revenue from foreign customers. Tekelec’s initial public stock offering was in 1986.
