Tekelec Reports Second-Quarter Results; Orders up 57 Percent; Favorable Market Response to Convergence Solutions - 2nd qtr and six months ended Jun 30 1999 - Company Financial Information

Cambridge Telcom Report, August 16, 1999

Tekelec (Nasdaq/NM:TKLC) has reported financial results for the second quarter and six months ended June 30, 1999.

Revenues for the second quarter increased 20 percent to $51.7 million from $42.9 million in the second quarter of 1998. The revenue increase was attributable to Tekelec's acquisition of IEX Corporation, completed on May 7, 1999.

Orders for the Company's products in the second quarter increased 57 percent to a record $66.3 million from $42.3 million a year ago due to strong orders for both switching and diagnostics products and the addition of IEX product orders. Total backlog at June 30, 1999, rose to $125.1 million, composed of $65.9 million in product backlog and $59.2 million in multi-year service agreements.

Pro forma net income was $4.7 million, or $0.08 per diluted share, excluding the merger-related charges and net amortization of intangible assets resulting from the acquisition of IEX Corporation. This compares to net income of $8.4 million, or $0.14 per diluted share, reported in the second quarter of 1998. Including the merger- related charges and net amortization of intangible assets, the Company reported a net loss in the second quarter of $6.1 million, or $0.11 per share.

The Company's profitability in the second quarter of 1999 continued to be impacted by Tekelec's commitment to maintain its planned levels of R&D and infrastructure spending in spite of a lower revenue base than was anticipated when the expenditure levels were originally set. Tekelec views this investment in its future as critical towards maximizing its longer-term growth potential.

Tekelec President and CEO Michael L. Margolis commented, "We are pleased that order activity continued to increase during the quarter, driven partially by the continued expansion of our customer base and customers' favorable response to our convergence offerings, which help them commit to deploying Tekelec solutions today. We received initial orders from several new customers within each operating division, including Mobil Rom, which is the Romanian subsidiary of France Telecom, Novus Telecom, Gateway Telephone and Talk.com (formerly Tel-Save), as well as a significant order for switching products from a long-established customer, AT&T Wireless. Also particularly exciting was the recent announcement that Level 3 will use our IP7 Secure Gateway to provide signaling in its IP network.

"Our commitment to R&D led to several product introductions during the quarter that create the foundation for Tekelec's future, including the IP7 product line and DaVinci VoX Gateway Controller, among others," Margolis continued. "These innovations, which serve the unique needs of converged networks, provide a clear migration path to our customers, ensuring to them that their existing investments in Tekelec equipment will play a key role in networks of the future. We are very enthusiastic about the significant level of interest in our new offerings, although -- consistent with most industry forecasts for convergence-related solutions -- we don't anticipate volume shipments before the second half of next year."

A complete list of products introduced by Tekelec during the second quarter includes the following:

-- IP7 product line -- Anchored by the IP7 Secure Gateway, these products facilitate true convergence by linking the Public Switched Telephone Network (PSTN) with Internet Protocol (IP) networks via Signaling System No. 7 (SS7). IP7 extends the connectivity and control of traditional voice networks to IP, allowing carriers to preserve their investments in existing infrastructure and realize the cost efficiencies of packet-based networks.

-- DaVinci VoX Gateway Controller -- Introduced by the IEX Division, the gateway-independent VoX interfaces to multi-vendor Asynchronous Transfer Mode (ATM) or IP networks to provide tandem switching capabilities for a wide range of voice services. Coupled with the IP7 products, the VoX Gateway Controller measurably extends Tekelec's suite of convergence-related solutions.

-- MGTS i3000 -- i3000 is an advanced diagnostics platform for converged networks that enables equipment manufacturers to support testing of several emerging technologies, including IP telephony, SS7 over ATM, General Packet Radio Service (GPRS), and third-generation (3G) mobile, among others.

-- ATM7 Inspector -- A diagnostics system that tests, monitors and simulates signaling traffic over high-speed voice and data networks, ATM7 Inspector enables the seamless deployment of SS7 over ATM high-speed links.

Margolis concluded, "I am also encouraged to report meaningful progress in integrating our newly acquired IEX Division. Collaborative efforts to leverage IEX's R&D and sales capabilities have already led to a number of initiatives that should enable us to pursue new opportunities and serve our expanded base of customers more efficiently."

For the six months ended June 30, 1999, revenue increased 8 percent to $84.4 million from $77.9 million in the first six months of 1998. The increase was attributable to revenue contributions from IEX in the second quarter of 1999. Pro forma net income, excluding a restructuring charge in the first quarter of 1999 and merger-related charges and net amortization of intangible assets resulting from the IEX purchase, was $6.4 million, or $0.11 per diluted share. This compares to net income of $14.0 million, or $0.24 per diluted share, before a one-time gain from the settlement of an insurance claim in the six-month period a year ago. Including the first-quarter restructuring charge, the merger-related charges and net amortization of intangible assets, the Company recorded a net loss of $5.6 million, or $0.10 per share, in the first six months of 1999. This compares to net income of $15.0 million, or $0.26 per diluted share, including the one-time gain in the comparable six-month period of 1998.