Optical Networker Tellium Is on the Way to Wall Street

The next big optical-networking IPO will take a hard right off New Jersey's telecom turnpike onto Wall Street later this year.

Optical-switching developer Tellium is likely to be among the most attractive public offerings since rival Sycamore's (SCMR) off-the-charts debut last year. With the stocks of companies that build this kind of gear rocketing up the charts for the last year, investors will be lining up to get into a Tellium deal, which should reach the Street by year-end.

But while the Tellium IPO looks like a sure hit, the company's prospects are less certain in this incredibly competitive area. Tellium, which is working desperately to land its first major sales contract for its latest gear, has changed its technology recently and narrowed its focus, raising the question of whether it might have fallen behind competitors as it reoriented itself. And with stocks in this area garnering incredible valuations, there's always the prospect that the party will end before Tellium can join it. Still, observers are enthusiastic.

Speed of Light Sycamore's rapid rise

Source: BigCharts

Burning Bright

Oceanport, N.J.-based Tellium hasn't yet filed an offering prospectus with the Securities and Exchange Commission, but President and COO Richard Barcus says he expects to file in the next few weeks, which would put the offering on its planned course of late fall or early winter.

Since the IPO fire has been burning brightest under the optical networking sector, observers say most, if not all, of Wall Street's big banks are courting Tellium for a piece of the deal. That list includes the big three IPO firms, Morgan Stanley Dean Witter, Goldman Sachs, and Credit Suisse First Boston, these people say.

Barcus, who has held executive positions with Fujitsu and most recently ADC Telecommunications, is keen on locking in a major sales contract or two before the IPO. So far the company has announced one contract for its first-generation Aurora switch. That contract is a five-year, $250 million deal with Dynegy (DYN), a power utility looking to get into fiber-optic network operations.

Pulsating

Tellium makes optical-electronic switches that convert light waves into electronic pulses and back to light waves. These switches are known as the brains in the network because they are among the few points along an optical-fiber pathway at which software can peer into the traffic flow and help manage routes better.

The company now focuses exclusively on core switching, or switching in the area where the big Internet pipes connect. But in the last year, Tellium pulled back its efforts in two areas, optical backbone gear and so-called metro-area, or edge-of-the-network, equipment, after realizing it had taken on a few too many challenges. It's not clear if the subsequent adjustment cost the company critical time to market, but in three years, the company has just the one contract to point to.

Tellium has also changed religion in the past year. Before adopting a mesh-is-best attitude, Tellium had been a devoted proponent of so-called synchronous optical networking, or SONET, known in the field as a ring configuration. But mesh networks send traffic along a sort of connect-the-dot pattern. If one of the routes between dots is congested, it can be easily bypassed. The topology is thought to be a more efficient use of bandwidth compared to SONET rings, which are fixed duplicated loops built to provide reliability. As they are less flexible, they are quickly falling out of fashion.

The Torrent

As telcos build bigger optical pathways, they continue to look for larger switches to accommodate the torrent of communications traffic. By choosing to develop gear at the intersection of these big new pipes, Tellium has landed in a prime spot, but it remains to be seen if the company can build a box that's up to the task. Meanwhile, some intimidating rivals have dedicated themselves to the same mission.

Sycamore and Ciena (CIEN) make competing products, and each company is close to locking up major contracts with big-name national network operators. As TheStreet.com reported earlier this month, Williams Communications (WCG) is preparing to buy as many as 40 switches from Ciena, starting this year.

Tellium has four potential customers testing its second-generation optical switch. One of those firms is AT&T (T), according to people familiar with the companies. Barcus says he's ready to go public once he's established some real customers. "We want to have the visibility to future revenues," says Barcus. "And that means having a customer list and showing a stability of products."

If "duh" is your natural response, then maybe you're not familiar with the recent history of hot optical IPOs. Optical Internet backbone equipment maker Corvis (CORV) made its eye-popping $10 billion debut last month despite having recorded no sales for its products.

Sycamore was one of the first optical switchers to test the market's tolerance for promised sales rather than cash received. With little more than a roster of executives from former data networking company Cascade, and a purchase commitment from Williams, Sycamore was able to strike one of the best one-day gains of 1999.

Under the Hood

Tellium may have a little more under the hood. The company has 250 employees, including 162 engineers. Two-thirds of that engineering brainpower is focused on software development, the other third on hardware. The core group that helped start Tellium in 1997 came from Bellcore, the research arm of the Bell telephone companies. Bellcore was later acquired by closely held SAIC in San Diego. To bolster its talent, Tellium has recruited from nearby New Jersey telecommunications giants AT&T and Lucent (LU).

"They are in the right space with a very competitive product," says Wit SoundView networking analyst Truc Do. Wit SoundView has been gaining prominence among the stable of tech banking underwriters and was recently involved with the IPO of U.K. optical component maker Bookham (BKHM).

Phone companies like AT&T are potentially prime Tellium customers as they face the need to cast off the old iron of electronic gear for the new high-performance boxes that can help bring network operating costs down while boosting capacity.

"One of the huge efficiencies of optical mesh over SONET rings is that you eliminate a whole equipment layer but you preserve the management functions," says Barcus. To illustrate this, Barcus says four bays of Tellium equipment can replace between 50 and 80 bays of conventional equipment.

"AT&T has every problem a carrier could possibly have because they are just so much bigger," says Barcus. "Congestion in a medium-sized network is a one thing, but congestion for the world's largest network is a rather big problem. They have to figure out a way they can deliver optical services in minutes rather than months, and they need a new technology base in their core to do that," says Barcus.

AT&T says it doesn't have capacity problems but is currently building up its network capacity with optical equipment for future traffic needs. The company declined to comment on who its possible vendors might be.

Barcus says Tellium has been working with AT&T for months and describes AT&T as "an extremely demanding entity."

"But if it doesn't kill you," says Barcus, "it will make you really strong."

And certainly a household name like that would add magnetic qualities to an already attractive IPO.

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