Vertel’s Focus on Speeding ‘Mediation’ Gains Favor

WOODLAND HILLS â€”  The demand for ever-faster telecommunications, and the software that can make that speed possible, is helping fuel the rocketing stock price of Vertel Corp.

Shares in the company rose 192.4% in the fourth quarter of 1999, and were up 249% for the calendar year--impressive even by the Jack-and-the-beanstalk standards of fast-growing technology stocks. On Monday, the stock closed at $9.06.

Vertel’s stock price, however, has been volatile, ranging from a 52-week low of $1.06 to a high of $14. For much of the year, however, Vertel traded well below the $5 range.

Indeed, the good news at year’s end contrasts with more sober tidings in the third quarter, when Vertel announced a restructuring. The company reduced its work force by 20%, and took a charge against earnings of $600,000.

Formed four years ago as a spin-off of Marina del Rey-based Retix, Woodland Hills-based Vertel makes software for the telecommunications industry. The company’s specialty is “mediation,� or software that enables different communications systems to “talk� to one another, and to exchange such electronic objects as messages or images.

The efficiency of such software is a critical issue at a time when telephone companies, cable television providers and Internet service providers are trying to make their networks move as nimbly as possible to accommodate the sharp growth of broad-band communications.

The big jump in stock price came last month when Vertel announced the roll-out of a new software package, E-Orb, that the company claimed would represent a significant advance in mediation software.

Unlike earlier versions of mediation software, the E-Orb made use of Corba (common object request broker architecture) technology, a popular software protocol that allows different systems to communicate with each other without reformatting all the information.

The innovation of E-Orb lies in applying the Corba technology to telecommunications, a field that hitherto has been plagued by complex, slow-working mediation software.

At least one industry analyst agrees that the software could be a “significant event, if it works as the company has promised.�

“It allows open and free-wheeling communication among different devices,� said Karl Whitelock, operations and support systems program director for Stratecast Partners, a firm in Denver that monitors technology companies.

Particularly promising is the size of the software, which requires far less resident memory than earlier mediation systems. The new software, on the other hand, is a comparatively small file, which can fit into the memory of small devices, such as Palm Pilots. That gives the software a potentially huge market.

“The revolutionary thing that we have done is to produce the software at such a small size, and made it even faster, so that people can use it in small devices, such as the wireless environment,� according to Vertel president and chief executive officer Bruce Brown.

At the same time, Whitelock added, the new software must prove itself in the field for Vertel to maintain its momentum. Tellium and other companies that may buy the software from Vertel must come out with new products in the next 60 to 90 days for the new software to keep its market credibility.

“If you can’t really show that it [the software] is really working well, people in this industry will pass you by on the side of the road, as if you were road kill,� Whitelock said.

Breaking the $5 per share threshold is an important one for the company, not only in earnings, but in terms of potential investors as well. Institutional investors, who have the ability to pump hundreds of millions of dollars into technology stocks, rarely invest in “penny� stocks that fall below the $5 mark.

Currently, about 70% of Vertel investors are small individual investors, according to the company.

Even if Vertel is little-known in its own community, the company has made a name for itself, particularly in Europe and Asia, where Vertel’s earlier software products are used by many telephone carriers, including Deutsche Telecom and Korea Telecom.

Domestic customers include IBM and Lucent.

The company’s software is also well established in China, according to Brown.

Although he conceded that no company is immune from competition, Brown argued that Vertel is “out ahead of any competitors in terms of research and development on any potentially competing software� by about nine months.

The company continues to funnel about a quarter of its revenues into research and development, he added.

Another advantage of Vertel is the access it has with its existing customer base with major telephone carriers, according to Brown.

“Our customer base makes it really hard for other people to break into the market, Brown said. “It’s not just a matter of having a better mousetrap. [The advantage lies] in access to potential buyers of that technology.�

One customer that appears pleased with Vertel is Tellium, which tested E-Orb in Beta versions for months before agreeing last month to use the software in its new switches.

“Vertel is not only a pioneer in [the Corba protocol] but they are also experts in telecommunications,� said Frank Gielen, Tellium’s director of software development.

Vertel engineers worked closely with Tellium to ensure that the new software would work with the latter’s products, and Gielen said he is “very confident� that the software, which will be embedded within the operating system of the Tellium switches, will be free of bugs.

The fee structure of the software also promises future earnings, according to company officials. Although an individual software package might cost $100,000, prices vary widely, because the software is tailored to individual customers. That same customer, however, will likely pay the company $1 million to $3 million in coming years, because of royalties and service fees built into the purchase.

“The initial sales are not necessarily where the home run is. It’s when [customers] start using the software throughout their networks,� said Gordon Almquist, chief financial officer. With future earnings “built in� to present-day software purchases, “we hope to see some fairly dramatic growth in years ahead,� he added.

Brown argued that Vertel was not technology flash in the pan.

“Unlike a lot of companies that have done [initial public offerings] in the last few years, we actually have revenue and customers,� he said. “We are coming into the limelight, and it’s based on real success, not on what we might do someday.�

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Vertel Corp.

* Charting share price: Woodland Hills-based Vertel Corp. stated the year as a penny stock but had a share price of $5.44 by year’s end, a 249% increase.

Jan. 4: $1.56

Dec. 31: $5.44

Source: Bridge Information Systems