Vertel Stock Jumps 800% As Its Software Takes Off

With shares of Vertel Corp. languishing below $3 for much of 1999, investors complained bitterly on Internet message boards about the company’s performance. They wondered if the software developer would ever rise above the ignominy of penny-stock status. A number of critics were even calling for the ouster of President and Chief Executive Bruce Brown. But in the span of a few months, Vertel has seen its share price skyrocket by 800 percent, moving from about $2 in early December to about $19 in recent days. And Brown is suddenly looking like a hero. Yet despite the sudden interest by Wall Street, Vertel still loses money. Why the run-up? The answer is e*ORB, telecommunications software the company rolled out last year that some analysts say has blockbuster potential. The software basically allows different telecommunication networks, be they digital, wireless or cable, to interact. Specifically, it manages, or “mediates,” the exchange of voice, data or video from one system to another. Unlike earlier versions of the company’s Telecommunications Managed Network (TMN) products, e*ORB has a small memory footprint, is easy to install and is compatible with Unix, Linux and Windows NT operating systems. “It’s fast, it’s small and it can run in virtually any operating environment,” Brown said. “The other technology out there is slow and not as reliable and it has a large (memory) footprint.” Colin Higgins, an analyst at San Francisco-based investment research firm Hoefer & Arnett, said that because the software requires little memory, it can be installed in everything from the largest networks to the smallest cell phones or palm pilots. “It’s really scalable. It will go from networks run by AT & T; or Sprint down to handheld devices,” said Higgins. “I think the run-up (in the stock price) is in anticipation that companies like Nokia, Siemens or others will incorporate the software into every one of their handsets.” If that happens, Vertel can expect its revenue to explode as it reaps royalties for each device in which its software is embedded. Royalties range from $25 for each small handheld unit up to $1,000 for the large networks, said Brown. The company’s stock blasted off in early December when it announced that Tellium, a leading maker of optical networking systems, selected Vertel’s e*ORB for its next generation of high-capacity optical switches. The share price went from about $2 to about $22 before settling down to around $19. Vertel’s market cap, meanwhile, has risen from about $50 million to $466 million in a matter of weeks Then in early February, the company announced that Compaq Computer Corp. selected e*ORB for its advanced telecommunications networks, which route much of the world’s phone traffic. “e*ORB will run on every server going forward. That’s hundreds of thousands (of units), and Vertel gets royalties every time e*ORB is deployed,” said Brown. But so far, Vertel hasn’t seen the kind of earnings it will need to buttress its stock price. The net loss in the fourth quarter ended Dec. 31 was $1.5 million (6 cents per share), compared to a net loss of $3.0 million (12 cents) in the like year-earlier period. Revenue was $5 million vs. $3.5 million. While Vertel would be a speculative play, Higgins expects the company’s earnings to start catching up to its stock price in the second half of the year, as Vertel reaps the benefits of its royalty payments. Brown said the company’s growth strategy is to build critical mass of at least $100 million in revenue as quickly as possible. He plans to do that through internal growth and acquisitions. The chief executive believes Vertel has a leg up on its competition because it already has relationships with telecom giants such as Lucent, Alcatel, Siemens, Nokia and NEC. Gordon Almquist, the company’s chief financial officer, said while it’s a temptation to cash in on the increased trading price, the company doesn’t wish to dilute investors’ shares. Brown said he might consider offering more shares if the company needed the money for a major acquisition or for going after new market opportunities. Ironically, Vertel officials identified the network management software as key to their business model as long as five years ago. With the convergence of the Internet, broadband, and wireless, the model only now appears to be paying off. “It’s hard not to be pleased,” said Brown.