Bucking the Trend

By John Mulqueen  |  Posted 2001-01-15

Telecommunications equipment vendors have been among the most battered stocks on the Nasdaq, driven down by fears that carriers will cut capital spending and that emerging carriers will run out of money or perhaps even disappear. Two software vendors that have bucked the trend are Tekelec, an established supplier, and Ulticom, a 6-month-old spin-off from Comverse Technology, itself one of the most successful telecommunications equipment companies and one of the best-performing technology stocks in the last five years.

Tekelec is the leading supplier of Signal Transfer Point for Signaling System 7 networks that route calls through carrier networks, and Ulticom is a leader in software and hardware kits used by Alcatel, Ericsson, Siemens, Tellabs and other suppliers of SS7 products and soft switches.

Ulticom has a market value of almost $1.4 billion and Tekelec about $1.5 billion. Ulticoms price-earnings ratio is about 235 and Tekelecs is 133. Short sellers have been targeting such high-flying stocks.

Ulticoms "share price really has not suffered very much, considering the coming severe fall-off in global telecom infrastructure spending," newsletter Short On Value notes. "When the giants of an industry sneeze, their suppliers both large and small will eventually catch cold."

Ulticoms stock did take a beating late in November 2000, falling about 45 percent from where it was in October, but it has since recovered and is off less than 30 percent, compared with the Nasdaqs decline of more than 30 percent. Tekelec has done better. It is off about 15 percent since the middle of October.

The shorts dont bother Michael Margolis, Tekelecs president, who says: "Any of them who has had one or two runs at us has gotten burnt."

Shawn Osborne, Ulticoms president, tells short sellers to look at the industry into which the company is selling, the wireline and wireless carriers whose networks depend increasingly on software to deliver new services to generate revenue. "If you look at the evolution of the network, this is a slam dunk," Osborne says.

Doug Ashton, a securities analyst at Bear Stearns & Co., estimates Ulticoms revenue for the year ending Jan. 31 will be $31 million, up from $25.8 million last year, and increasing next year to $44 million.

Jeff Kvaal, an analyst at Lehman Brothers Holdings, Ulticoms underwriter, has higher estimates. He projects revenue of $46 million this year, and $65.2 million next year.

Ashton says Ulticoms heritage from Comverse earns the company a willing audience on Wall Street. Comverse has been one of the most consistent performers, has never missed a quarterly earnings estimate and has always exceeded analysts initial estimates. Comverses chief financial officer, David Kreinberg, is also Ulticoms CFO, and Kobi Alexander is chairman of both companies.

Tekelecs revenue should come in at $316 million for 2000, up from $226.1 million a year earlier, and next year should be $410 million, says Joe Bellace, an analyst at Jefferies & Co.

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