The sale of Tekelec’s network diagnostics division, which provides testing and support for wireless networks, caught analysts by surprise Tuesday.

But the $60 million acquisition by California-based Catapult Communications is a perfect compliment to Catapult’s business, says Ed Jackson, an analyst with US Bancorp Piper Jafffray who covers Tekelec.

Catapult provides the same products and services for testing the network components of equipment manufacturers and service providers, such as Lucent Technologies and Motorola — the same sector Tekelec’s division targeted.

Jackson says he has been advocating the sale of Tekelec’s network diagnostic division for some time, but adds that Tuesday’s announcement caught him off guard.

“It was a surprise,” Jackson says. “Other people think they should get rid of their call center operations all together and I am advocating this as well. They need to get back to concentrating on their core business, which is switching technologies.”

In a conference call with analysts Chirs Stephenson, vice president and chief financial officer of Catapult, said his company should have no problem integrating Tekelec’s products with Catapult’s existing offerings, even though they run on different software platforms.

“The biggest difference is that you have a difference with user interfaces,” Stephenson says. “Once a customer learns how to use one they generally don’t like to switch to another program, but I don’t envision them becoming an integrated product line and there has been no discussion yet about sharing the same software platform.”

Needed “exit’ for Tekelec?

Ken Muth, an analyst with Baird U.S. Equity Research, who also follows Tekelec, says the company’s main source of revenue, a full 70 percent, comes from its SS7 switching division and that Tekelec has needed to exit the network diagnostics services market for some time.

“I think this is a great move, and I also think we will continue to see consolidation like this within the industry in the coming months,” Muth says. “We need to see more consolidation.”

The diagnostics division has been a losing proposition for Tekelec during the past fiscal year; it lost $3.1 million during first quarter 2002, although the division did generate $12.2 million in revenue, compared to a $573,000 profit during the same period in 2001.

Shares of TKLC remained virtually unchanged following news of the sale and recently traded near $6.90 after opening the day at $7. During the last 52 weeks shares of Tekelec ranged in price from $5.97 to $22.25. Through first quarter 2002 overall revenues decreased 14 percent to $72.6 million while net income fell 16 percent to $1.2 million, which is less than the combined salaries of the company’s executives, according to documents filed with the Securities and Exchange Commission. Tekelec’s market capitalization totals $421.3 million.

Catapult revenues increased 12 percent to $23 million during first quarter 2002 while net income also increased 16 percent to $7.1 million. The company says those results reflect strong sales of 3G products, which its testing programs support. Shares of CATT ranged in price from $9.90 to $30.90 during the last 52 weeks and recently traded near $11.19, an increase of .83 percent from Tuesday’s opening price. The company’s market capitalization is $137.7 million.


Catapult Communications