Complex Business, Simple Success : Selling Futuristic Building Blocks for Telecommunications Networks

Just what exactly does Tekelec do? CEO Philip Alford hears that question all the time. But although people are confused by what Tekelec makes, they understand the bottom line.

So do investors: Tekelec’s stock has leaped nearly 700% in a year to $23.25 a share from around $3 early last year. The Calabasas company is getting lots of attention. And Alford’s getting lots of practice handling the what-do-you-do questions.

What Tekelec does is make testers and switches for phone systems--building blocks, if you will, of information networks.

But when you get more specific, you quickly enter what Alford calls “an industry of three-letter words.” Tekelec’s literature overflows with terms such as: LAN, WAN, SS7, GSM, PCS, to name a few. Cram a few into a single sentence, and you start to understand why Alford is so good at answering questions. Even Tekelec’s customers suffer from this syndrome, with names like NEC, GTE and AT & T.

Sure, it all gets a little confusing, Alford said. But for those with the temerity to delve into this world, there’s money to be made. And Tekelec is not the only local company to cash in. Many companies in the San Fernando Valley and Ventura County are quietly exploiting arcane niches of the booming telecommunications business, and some with startling success.

Tekelec, MRV Communications Inc., Semtech Corp., Vitesse Semiconductor Corp. and Micom Communications Corp. are examples.

In a nutshell, these companies provide hardware and software for the world’s exploding new information networks. People are doing all sorts of new things with phones and PCs: carrying them about, hooking them together, using them for telecommuting, video conferencing and surfing the Internet.

All of these activities require more of what the industry calls “bandwidth”--the amount of information--voice, fax, data or video--that can be sent over a network in a given length of time. More bandwidth requires a better infrastructure: no longer just copper wires strung from poles, but fiber-optic cables and faster, more powerful transmitters, switches and receivers. These in turn require a host of complex, futuristic components--like laser diodes, voltage suppressors, and semiconductor switches--gadgets as vital to the Information Age as the steam engine was to the Industrial.

Among companies that make such things, growth has come at hectic speed. With the exception of Micom, all these local companies have enjoyed sharp sales growth recently.

In MRV’s case, the growth was dramatic: Annual sales increased 136% to $17.5 million between 1993 and 1994. And stock prices for some have soared: Tekelec and MRV Communications were the first- and second-best-performing stocks, respectively, in the Valley area last year. MRV’s stock, now at $14.56 per share, was trading as low as $5.19 in March, 1994. And Semtech shares, which traded as low as $2.50 last June, are now at $13.75, a performance especially impressive as Semtech’s roots are in defense contracts. And though Vitesse is still posting losses, it is in the midst of a turnaround, one of the lucky survivors of the dying supercomputer industry.

“Communications are coming into the limelight,” said Tekelec’s Alford. “Everyone’s looking for an edge.” But lest it appear that this is easy money, Tekelec’s history is instructive. Just two years ago, the company was having troubles and racked up a whopping $18.5 million loss in 1993. “We were trying to focus on too many things,” Alford said.

Alford, 41, decided to concentrate on what Tekelec did best. He homed in on testing devices for new phone systems and switching platforms--essentially boards of circuitry that help setup 800 numbers and other phone services provided by phone and cellular companies.

These were good choices. The testing devices, which monitor signals as they travel through networks, are doing well because Tekelec’s customers--including Sprint and AT & T--are using lots of new cables and switches and other technology, all of which needs to be tested. And switches in general enjoy an exalted place among telecommunications gadgets. Your network is only as good as your switch. In the industry jargon, a switch that doesn’t cut it is a “bandwidth bottleneck.” Tekelec’s switching systems, introduced by the company as a new product just three years ago, have already grown to 35% of sales.

As a result, Tekelec’s profit for the first quarter that ended March 31 shot up to $1.47 million from $126,000 a year earlier. Revenues increased 43% to $18.6 million. Alford had laid off about 60 employees during 1992 and 1993. But thanks to the company’s recent growth, Tekelec has started hiring again.

Another success story is Chatsworth-based MRV Communications. You could hardly make anything more basic for today’s communications systems than MRV’s laser diodes. These convert good old electronic signals like those in your kitchen phone into beams of light that shoot voice and data through fiber-optic cables.

But MRV’s chief executive Noam Lotan said that when its founders tried to start another similar company in 1985 it failed. “The market was not ready,” said Lotan, 43.

When they tried again by forming MRV just three years later, it was a different story. Suddenly smaller companies were clamoring to build fiber-optic networks--not just for international calls this time, but for zapping data across university campuses. That meant plenty of business for MRV. In a fast-changing industry like communications, “timing is everything,” said Lotan.

MRV’s products consist of tiny diodes integrated into circuitry and charged to emit light signals that are zinged across glass wires. Although some large phone companies make similar devices in-house for their own fiber-optic networks, new, smaller, competitors in cable, data and voice communications networking have provided a market for MRV’s devices.

MRV is now growing so quickly that the company recently had to expand into bigger quarters. In the first quarter that ended March 31, its profits jumped by 141% to $705,000. Revenues went up 144% to $6.7 million. Last week, MRV announced the $2.7-million acquisition of assets of Galcom Networking Ltd., an Israeli manufacturer of computer networking products.

Keeping up requires a breathless pace. MRV’s 90 employees work long hours, and its plant is humming six days a week. The company is constantly coming out with new products, high-speed switches for example. “People ask me why (laser diodes) are not a commodity,” said Lotan. “A commodity is usually characterized by an industry where standards are all set and people can produce the same product over and over. In our case, the standards are evolving and the applications are always different.”

Keeping costs down is a concern, but reliability is more so. Aharon Orlansky, an analyst with Hampshire Securities of New York, says MRV’s business is not especially price-sensitive because few companies have mastered the art of shooting lasers through tiny holes in glass wires. “If one zero gets chopped off” of a stream of data being shot over wires, “the whole transmission means nothing,” Orlansky said.

For Vitesse Semiconductor of Camarillo, and for Semtech of Newbury Park, communications have been a life raft. Vitesse makes pricey, high-performance gallium arsenide semiconductors. The chips were originally made for supercomputers. When that industry went into a tailspin, Vitesse nearly went with it. Losses in the first six months of fiscal 1994 were $4.4 million on sales of $16.8 million.

Luckily, Vitesse saw that its chips could be adapted to compressing and “multiplexing” data across high-speed long-distance communications networks such as those that use fiber-optic cables. AT & T and other big firms have begun using them. “We have switched our market from 60% computers in 1993 to 60% communications in 1995,” said Chris Gardner, ASIC marketing director for Vitesse. In the first six months of this fiscal year, Vitesse narrowed its loss to $486,000 while revenues grew to $19.8 million. (Much of the loss had to do with a $1-million charge owing to the bankruptcy of one of Vitesse’s supercomputer customers.)

Telecommunications also rescued Semtech from an uncertain future, in the sinking defense industry. The company makes semiconductors that regulate voltage changes and protect against power surges. Three years ago, 72% of Semtech’s sales were in military electronics. Last year, thanks largely to the company’s successful shift to telecommunications, that percentage dropped to 36%, said CEO Jack Poe.

Semtech’s semiconductors are installed in telephone circuitry boxes to protect them from, for example, bolts of lightning. Semtech’s devices are useful across a wide swath of communications networks: “Wherever a wire connects one box to another,” as Poe puts it. Profits in the fiscal fourth quarter that ended Jan. 29 were up more than 700%, to $596,000, from a year earlier on record revenues of $7.7 million.

Despite the impressive numbers, companies that make pieces of networks have remained low profile. Tekelec’s Alford said he has trouble finding trained engineers because “there is not really a focus on communications here. . . . The glamour businesses in L. A. are aerospace and entertainment.”

Micom Communications Corp. spokesman Rich Borden said most people only know the Simi Valley concern as “that big gray building” even though company, which makes circuitry that compresses information and sends it across private networks, has a 38% share of its market worldwide. Micom’s products allow small- and medium-sized businesses to squeeze more bandwidth out of their private phone, fax and data communications lines for just a few thousand dollars. But the company has faced increased competition of late. Profits were $1.3 million on revenues of $20.3 million in fiscal third quarter that ended Dec. 31, roughly flat from last year

The communications industry in general is also still beset with huge uncertainties. What will be the standards of new telecommunications and data-communications networks? What services do people want? Who will pay?

What is clear is that public appetite for bandwidth will probably keep growing. That means wires and switches and other components will have to be upgraded to the level of the neighborhood or office.

But “the question mark gets bigger as you get closer to home,” said Alan Willner, associate professor of electrical engineering at the University of Southern California. “Will we have (fiber-optic cable) hooked up to your desktop? The answer is absolutely, 100% yes. But the question is, will it be in five years or 50 years?”

Richard Neustadt, a Santa Monica entrepreneur and former communications policy director to President Carter, believes that the dizzying variety of technologies, services and standards now proliferating in communications will continue for a long time. And that would assure the components business will remain confusing for a while. No matter what, though, “a huge amount of money will still be spent,” he said.

As or the future of these markets, “no one knows the answer. It’s like theology. You can believe anything you want,” Neustadt added.