Mike Margolis

Had Tekelec President and CEO Mike Margolis taken the advice of advisors 18 months ago, his company might today be suffering the fate of many of its network equipment-manufacturing peers. Instead, as the leader in signaling systems and a major player in the diagnostics space, Tekelec has done remarkably well.

Margolis was told at the time — “when we were not being appreciated as much as some of the dotcoms,” he says — that his story was too complicated, that he shouldn't be so diversified and that shareholders like to see simple approaches.

“Fortunately, we didn't listen to that and continued down our path,” Margolis says.

It was almost embarrassing to have real profit, he says. “It was like them saying you should get rid of your profit and be measured on some arbitrary growth measure and you, too, could have a market cap of $15 billion.”

So far, the company has been able to live up to its mantra of being “agnostic to the rate of change” by remaining diversified. Tekelec is best known for its signaling solutions and, to a slightly lesser degree, for its diagnostics business, which grew by 38% in the first quarter over last year. However, the company also has a contact center division, which gained some bulk with the acquisition of IEX two years ago. Tekelec also continues to develop its next-generation softswitch and media gateway controller business.

“We have said all along that companies making pure play bets — doing just one thing and placing all their bets on that one thing being needed within a certain time frame — was a risky strategy,” Margolis says.

Although Tekelec's stock steadily declined since November before bouncing back in April, Margolis claims its market share has steadily increased over the length of his three-year reign and that the company's favorable first quarter earnings (ending March 31) speak to its performance and staying power.

Revenues for first quarter 2001 grew 40% over the previous year, from $60.1 million to $84.3 million. In a market that saw orders for new equipment being cancelled across the board, Tekelec's orders for products in the first quarter increased 23% over the previous year. The company netted $1.4 million in the quarter compared with a net loss in 2000 of $1.8 million.

Margolis points to three drivers that have kept the momentum going for his company: international expansion, the packet revolution and the growth of the wireless market. “We predicted some of them, made some decisions and rode with them,” he says.

Tekelec rode those drivers to a 75% market share among signal transfer point providers, according to Frost and Sullivan. Alcatel and Nortel own 15% and 10%, respectively.

Much of Tekelec's share comes from the wireless market. “A regular wireless call generates on average about seven times as much signaling traffic as a wireline call,” Margolis says.

Wireless now constitutes approximately 40% to 50% of Tekelec's business, depending on the quarter. Three years ago, wireless accounted for 25% to 30%.

That level of success was not always so. And as much as the sudden downturn affected businesses throughout the industry, gradual and incremental changes often have as much impact.

Tekelec had trouble breaking into the signaling space, which was at one time dominated by the big switch manufacturers — the same ones now scrambling to rediscover themselves. Tekelec did it by “continuing to build a better mousetrap,” Margolis says, and by being in the right place at the right time.

Tekelec took advantage of the window of opportunity created by the shift from a market in the 1980s, when regulations required an STP in every LATA, to a market in the 1990s, when competition and high-profile network failures drove the industry to new standards for reliability.

“The big guys became uncertain on how much they should commit to areas that were no longer their mainstream business,” Margolis says. “By the end of the ‘90s several of them had left the field.”

This left Tekelec to its field of choice. “We tend to play in uncrowded spaces, which is also one of the reasons we have managed to do quite well in these harder times,” Margolis says.

Doing well didn't always describe Tekelec. It closed down its data diagnostics division three years ago because it had become too crowded. With some 30 competitors, “it had descended into a commodity-type dogfight,” Margolis says.

In a market where lower — or at least more sane — valuations can create good acquisition opportunities, playing in an uncrowded field has its disadvantages. Tekelec held off on some planned acquisitions, which, Margolis says, turned out to be the right decision. “If you are looking to acquire, you can't easily find a company doing similar work,” Margolis says.

He says now is the time to think about the future. “We try to encourage R&D where we ourselves can break out a small group of people and create our own revolutions,” Margolis says.

Tekelec has made some adjustments, albeit not headline-making ones. With regards to hiring: “We have taken our foot off the accelerator to some extent,” Margolis says.

This points to one of the ironies of the current economic downturn: Companies have been complaining for years about the dearth of available talent. Now that talent is available, companies cannot afford to hire it.

Margolis offers no predictions as to how long the downturn will last but says, “There certainly are people who are drawing the conclusion that things have bottomed.”

Margolis, however, knows better than to rely on the advice of others.