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Long Side of Tekelec

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This techie has means to do great things.

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Prof. Zucchi,

Tekelec (TKLC) is a name I also know well in this bandwidth supplier space. Let me and the readers know what you think differentiates it vs. the ADTRAN's (ADTN) and ADC Telecommunications (ADCT) of the world and why do you think their newer growth business lines will trump the degradation of their legacy business lines?

Great balance sheet, but maybe I'm too aware of the bear case and need to revisit it. TKLC is a very lumpy reporter as well. For what it's worth, ADCT has reported as solidly as any company in the group of late, but that big offering they did recently took all the starch out of the stock. Take care and interested to hear your thoughts.

-Prof. Udall

Prof. Udall,

I have not thought of Adtran and ADC Telecom as the primary competitors for Tekelec in the signaling space. I know Cisco (CSCO), Ericsson (ERICY), Siemens (SI), and RadiSys (RSYS) are heavily involved, but the first three are hardly pure plays and RSYS is a bit too small for my taste. Also, I am not sure what you are referring to when you mention TKLC's "legacy business lines".
But to expand on why I have gone long TKLC, here are my thoughts, which by the way coincide to a great degree with the views of Morgan Stanley's analyst Scott Coleman:

  • AT&T (T) is TKLC's main customer, and there is little doubt in mind that the integration of AT&T and SBC wireless systems caused order disruptions at TKLC.

  • That integration is now behind the company, and it has been rather well publicized that T has been left with a less than perfect wireless network from a coverage and capacity standpoint. So the necessary improvements to those aspects of the network should play right to TKLC strength.

  • TKLC's newer products integrate signaling capabilities and software-based network management features, which carry much higher margins than the typical chassis / cards products.

  • Throw-in the coming deployment of 3G services by T-Mobile, another major customer of TKLC, and the burst in orders seen this past quarter seems real.

  • I am not overlooking that this is a brutally competitive space, where price pressures at the top (the newly announced all wireless "all you can eat" plans) ultimately flow down to the suppliers. But to the extent that lower rates and newer services fuel more Minutes of Usage, then MOU's require more signaling capacity.

  • I don't view TKLC as a secular story. Its business will ebb and flow, and yes it is very lumpy given its lack of recurring revenues. I simply think that we may be on the verge of a good stretch, and the valuation and balance sheet offer a fair amount of support if my optimism is misplaced.
Always worth repeating: I believe we are in a bear market – a big one at that – and I will make much more money if the market keeps going down rather than up. But in this context, I must still have long exposure, and I am focused on buying valuation, growth potential, and good balance sheets. TKLC fits enough of that bill to merit a smallish position.
Positions in ADCT, CSCO, TKLC
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