Tekelec Announces Q1 Results; Achieves Orders of $121.3 Million and Re

    Business Editors

    CALABASAS, Calif.--(BUSINESS WIRE)--May 3, 2005--Tekelec (Nasdaq:TKLC) today reported financial results for its 2005 first quarter.
    Revenue for the first quarter of 2005 was $119.4 million, compared to $78.9 million in the first quarter of 2004. On a GAAP basis, Tekelec's net income was $6.7 million, or $0.10 per diluted share, for the first quarter of 2005, compared to net income of $5.8 million, or $0.09 per diluted share, in the first quarter of 2004. Non-GAAP net income for the first quarter of 2005, which excludes the effects of acquisition-related amortization, non-cash stock-based deferred compensation, restructuring charges, and the loss on the sale of certain Alcatel shares held by Santera, was $9.7 million, or $0.14 per diluted share, compared to non-GAAP net income of $8.1 million, or $0.12 per diluted share, in the first quarter of 2004, excluding the effects of similar items. Orders received in the first quarter for Tekelec products and services were $121.3 million, compared to $86.1 million in the first quarter in 2004.
    Tekelec President and CEO Fred Lax commented, "Tekelec's performance in the first quarter was strong, with orders up over 40% year-over-year, and with revenue increasing 51% year-over-year and up 3% sequentially. For the second consecutive year, revenues increased sequentially in the first quarter, unlike the 10 - 20% seasonal decline typically experienced in first quarter revenues. Finally, for the tenth consecutive quarter, strong order volumes provided us with a book-to-bill ratio greater than one.
    "Regarding our Switching Solutions Group, revenue increased 22% sequentially to $24.8 million, and we added 28 new customers, bringing Tekelec's next-gen switching customer total to over 225. We are pleased to announce that we have expanded our switching relationship with US LEC, an integrated telecom carrier providing voice, data and Internet services to 23,000 mid-to-large size businesses across 15 states. US LEC originally selected the T9000 in Q4 2003 to offer new services with both Class 4 and Class 5 functionality. The additional orders and expanded switching relationship provide further validation for the quality of Tekelec's product offerings and demonstrates our ability to grow our switching relationships as our customers experience Tekelec's superior product and service offerings.
    "With regard to our Network Signaling Group, revenue was $74.4 million, up 24% year-over-year and the highest first quarter signaling revenue in the history of the Company. We are pleased to announce today that BellSouth Long Distance, Inc. has selected Tekelec's Eagle 5 Signaling Applications System with integrated local number portability to provide BellSouth flexibility while providing a more cost-efficient solution. This is a significant customer win and highlights the ongoing growth opportunities for our signaling and number portability platform in the U.S. market.
    "In the first full quarter of operations for our Communications Software Solutions Group, revenue was $9.5 million. During the quarter, we announced a significant product evolution, with the introduction of our Integrated Application Solutions, a suite of applications consisting of real-time data collection, correlation, and processing. Today we are pleased to announce that Syniverse Technologies, a leading provider of mission-critical technology services to wireless telecom companies worldwide, is deploying the IAS to generate critical business intelligence for mobility management.
    "Finally, regarding global expansion, approximately 24% of sales during the quarter were from outside the U.S. As one example of this success, we are pleased to announce that Orange Caribbean, a leading mobile operator in the French West Indies and Guyana, has purchased Tekelec's Eagle 5 platform to provide signaling in its GSM network. The purchase also includes Tekelec's number portability solution, as well as the equipment identity register feature to help combat the fraudulent use of stolen GSM mobile phones. The addition of Orange Caribbean as a customer expands our relationship with France Telecom and its Orange Group subsidiaries, which is one of the world's largest mobile communications companies, with operations in 16 countries worldwide."

Group Revenue Results

The year-over-year Group revenue results are as follows:

Revenue ($ in Millions) Group Q1 2005 Q1 2004 Switching Solutions $24.8 $6.4 Network Signaling $74.4 $60.1 Communications Software (1) $9.5 $3.2 IEX Contact Center $10.7 $9.2

(1) As a result of the Steleus acquisition, a new operating group, the Communications Software Solutions Group, was created in Q4 2004. This Group's products consist of the Steleus solutions and Tekelec's business intelligence applications and other network element independent solutions that were previously reported as part of the Network Signaling Group. The revenue related to these Network Signaling Group solutions was reclassified from the Network Signaling Group to the Communications Software Solutions Group for 2004. The Communications Software Solutions Group revenue for Q1 2004 does not include any Steleus revenue.

Q2 FINANCIAL GUIDANCE

Q2 2005 Guidance Q2 2004 Actual Results

Total Revenue: $128.0 million - $95.6 million $132.0 million GAAP Net Income $0.06 - $0.09 per $0.00 per diluted diluted share(1) share(2)

(1) For the 2nd quarter of 2005, Tekelec expects expenses to include amortization of acquired intangibles, amortization of non-cash stock-based deferred compensation, and restructuring charges related to our Hyannis and Corporate relocations in the aggregate amount of approximately $4.6 million, pre-tax.

(2) Second quarter 2004 net income includes an $8.0 million one-time, non-cash charge for the write-off of in-process research and development related to the Taqua acquisition.
    Lax concluded, "The year-over-year and sequential revenue growth, as well as the continuing book-to-bill ratio above one, profitability and strong cash flow from operations achieved in the quarter demonstrate the traction we are gaining on our strategic objectives focused on next-gen switching, signaling, communications software solutions and global expansion. I am confident that Tekelec's unique solutions portfolio is well positioned for significant market opportunities."

    Employment Inducement Stock Options

    On May 2, 2005, 85 new Tekelec employees hired during the first quarter of 2005 were granted options to purchase a total of 720,975 shares of Tekelec common stock. The number of shares subject to such options amounts to less than 1% of the outstanding shares of Tekelec common stock. The option grants were made under Tekelec's 2004 Equity Incentive Plan for New Employees and met the "employment inducement" exception to the Nasdaq rules requiring shareholder approval of equity-based incentive plans.

    About Tekelec

    Tekelec is a leading developer of now and next-generation switching and signaling telecommunications solutions, network performance management technology, and value-added applications. Tekelec's innovative solutions are widely deployed in traditional and next-generation wireline and wireless networks and contact centers worldwide. Corporate headquarters are located in Calabasas, CA. with research and development facilities and sales offices throughout the world. For more information, please visit www.tekelec.com.

    Non-GAAP Information

    Certain non-GAAP financial measures are included in this press release. In the calculation of these measures, Tekelec generally excludes certain items such as amortization of acquired intangibles, restructuring charges, non-cash stock-based compensation charges, and unusual, non-recurring charges. Tekelec believes that excluding such items provides investors and management with a representation of the Company's core operating performance and with information useful in assessing our prospects for the future and underlying trends in Tekelec's operating expenditures and continuing operations. Management uses such non-GAAP measures to evaluate financial results and to establish operational goals. In addition, since the Company has historically reported non-GAAP measures to the investment community, we believe the inclusion of this information provides consistency in our financial reporting. The attachments to this release provide a reconciliation of non-GAAP net income referred to in this release to the most directly comparable GAAP measure, GAAP net income from continuing operations. The non-GAAP financial measures are not meant to be considered a substitute for the corresponding GAAP financial measures.

    Forward-Looking Statements

    Certain statements made in this news release are forward looking, reflect the Company's current intent, belief or expectations and involve certain risks and uncertainties. There can be no assurance that the Company's actual future performance will meet the Company's expectations. As discussed in the Company's 2004 Annual Report on Form 10-K and other filings with the SEC, the Company's future operating results are difficult to predict and subject to significant fluctuations. Factors that may cause future results to differ materially from the Company's current expectations include, among others: overall telecommunications spending, changes in general economic conditions, unexpected changes in economic, social, or political conditions in the countries in which the Company operates, the timing of significant orders and shipments, the lengthy sales cycle for the Company's products, the timing of the convergence of voice and data networks, the success or failure of strategic alliances or acquisitions including the success or failure of the integration of Santera, Taqua, Steleus, and VocalData's operations with those of the Company, litigation or regulatory matters such as the litigation described in Tekelec's SEC reports and the costs and expenses associated therewith, the ability of carriers to utilize excess capacity of signaling infrastructure and related products in their networks, the capital spending patterns of customers, the dependence on wireless customers for a significant percentage and growth of the Company's revenues, the timely development and introduction of new products and services, product mix, the geographic mix of the Company's revenues and the associated impact on gross margins, market acceptance of new products and technologies, carrier deployment of intelligent network services, the ability of our customers to obtain financing, the timing of revenue recognition of multiple elements in an arrangement sold as part of a bundled solution, the level and timing of research and development expenditures, and sales, marketing, and compensation expenses, regulatory changes, and the expansion of the Company's marketing and support organizations, both domestically and internationally. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

TEKELEC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Three Months Ended March 31, 2005 2004 ---------------------------------------------------------------------- (thousands, except earnings per share data) Revenues $119,375 $78,870 Costs and expenses: Cost of goods sold 31,602 19,385 Amortization of purchased technology 1,755 3,064 Research and development 30,006 20,619 Selling, general and administrative 47,388 32,271 Amortization of intangibles 879 532 Restructuring (1) 257 942 --------------------------------------------------- --------- -------- Income from operations 7,488 2,057 Interest and other income (expense), net (174) 468 Loss on sale of investments (1,344) -- --------------------------------------------------- --------- -------- Income before provision for income taxes 5,970 2,525 Provision for income taxes (2) 5,689 6,253 --------------------------------------------------- --------- -------- Income (Loss) before minority interest 281 (3,728) Minority interest 6,375 9,577 --------------------------------------------------- --------- -------- Net income $6,656 $5,849 --------------------------------------------------- --------- -------- Earnings per share Basic $0.10 $0.09 Diluted (3) 0.10 0.09 --------- -------- Earnings per share weighted average number of shares outstanding: Basic 65,598 62,034 Diluted (3) 74,407 65,194

Notes to Condensed Consolidated Statements of Operations (000's):

(1) This amount represents restructuring costs related to the relocation of our manufacturing operations and our corporate headquarters.

(2) For the three months ended March 31, 2005 and 2004, Santera, a majority-owned company, is included in the consolidated results of operations of Tekelec. The consolidated provision for income taxes does not include any benefit from the losses generated by Santera due to the following:

- Santera's losses cannot be included on Tekelec's consolidated federal tax return because its ownership interest in Santera does not meet the threshold to consolidate under income tax rules and regulations.

- A full valuation allowance has been established on the income tax benefits generated by Santera as a result of Santera's historical operating losses.

(3) For the three months ended March 31, 2005, the calculation of earnings per share includes, for the purposes of the calculation, the add-back to net income of $581 for assumed after-tax interest cost related to the convertible debt using the "if-converted" method of accounting for diluted earnings per share. The weighted average number of shares outstanding for the three months ended March 31, 2005 includes 6,361 shares related to the convertible debt using the "if-converted" method. For the three months ended March 31, 2004, the results of the "if-converted" calculations are anti-dilutive and therefore excluded from earnings per share.

TEKELEC NON-GAAP (1) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

Three Months Ended March 31, 2005 2004 ---------------------------------------------------------------------- (thousands, except earnings per share data) Revenues $119,375 $78,870 Costs and expenses: Cost of goods sold 31,266 19,616 Research and development 29,843 20,619 Selling, general and administrative 46,634 32,271 --------------------------------------------------- --------- -------- Income from operations 11,632 6,364 Interest and other income (expense), net (174) 468 --------------------------------------------------- --------- -------- Income before provision for income taxes 11,458 6,832 Provision for income taxes (2) 6,984 7,140 --------------------------------------------------- --------- -------- Income (Loss) before minority interest 4,474 (308) Minority interest 5,266 8,412 --------------------------------------------------- --------- -------- Non-GAAP net income $9,740 $8,104 --------------------------------------------------- --------- -------- Non-GAAP earnings per share Basic $0.15 $0.13 Diluted 0.14 0.12 Non-GAAP earnings per share weighted average number of shares outstanding: Basic 65,598 62,034 Diluted(3) 74,407 71,555

Notes to Non-GAAP Condensed Consolidated Statements of Operations (000's):

(1) The above Non-GAAP Statements of Operations exclude the effects of the following:

- For the three months ended March 31, 2005 and 2004, restructuring costs related to the relocation of our manufacturing operations and/or corporate headquarters amounting to $257 and $942, respectively.

- For the three months ended March 31, 2005, amortization of deferred stock compensation related to stock options and restricted stock units granted amounting to $920.

- For the three months ended March 31, 2005, the amortization of purchased technology and other intangibles related to the acquisitions of Taqua, VocalData, Steleus and majority interest in Santera amounting to $2,967. The related income tax benefits for the three months ended March 31, 2005 were $1,295.

- For the three months ended March 31, 2005, the loss on sale of investments amounting to $1,344.

- For the three months ended March 31, 2004, the amortization of purchased technology and other intangibles related to the acquisition of IEX amounting to $3,365. The related income tax benefits for the three months ended March 31, 2004 were $557.

(2) The above Non-GAAP Statements of Operations assume an effective tax rate of 35% for the Tekelec business excluding Santera for the three months ended March 31, 2005 and 2004. There were no income tax benefits associated with the losses generated by Santera.

(3) For the three-month periods ended March 31, 2005 and 2004, the calculation of earnings per share includes, for the purposes of the calculation, the add-back to net income of $581 for assumed after-tax interest cost related to the convertible debt using the "if-converted" method of accounting for diluted earnings per share. The weighted average number of shares outstanding for both period includes 6,361 shares related to the convertible debt using the "if-converted" method.

TEKELEC CONDENSED CONSOLIDATED BALANCE SHEETS

March December 31, 31, 2005 2004 ---------------------------------------------------------------------- (unaudited) (thousands)

ASSETS Current assets: Cash and cash equivalents $35,782 $48,925 Short-term investments, at fair value 164,825 134,435 Accounts receivable, net 94,114 107,850 Inventories 40,983 33,654 Deferred income taxes, net 14,213 15,804 Prepaid expenses and other current assets 48,274 44,639 ------------------------------------------------------------ --------- Total current assets 398,191 385,307 Long-term investments, at fair value 90,926 93,622 Property and equipment, net 34,251 30,617 Investments in privately-held companies 7,322 7,322 Deferred income taxes 47,314 45,748 Other assets 6,141 6,757 Goodwill, net 128,804 128,732 Intangible assets, net 83,408 83,538 ------------------------------------------------------------ --------- Total assets $796,357 $781,643 ============================================================ ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of deferred revenues $112,748 $92,182 Other current liabilities 88,202 93,123 ------------------------------------------------------------ --------- Total current liabilities 200,950 185,305 Long-term portion of notes payable 32 78 Long-term convertible debt 125,000 125,000 Deferred income taxes 18,703 19,586 Long-term portion of deferred revenues 1,629 2,187 ------------------------------------------------------------ --------- Total liabilities 346,314 332,156 ------------------------------------------------------------ --------- Minority interest 14,114 20,489 ------------------------------------------------------------ --------- Total shareholders' equity 435,929 428,998 ------------------------------------------------------------ --------- Total liabilities and shareholders' equity $796,357 $781,643 ============================================================ =========

TEKELEC IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME (unaudited)

Three Months Ended March 31, 2005 GAAP Adjustments Non-GAAP ---------------------------------------------------------------------- (thousands, except earnings per share data)

Revenues $119,375 $-- $ 119,375 Costs and expenses: Cost of goods sold 31,602 (606)(1)(2) 30,996 Amortization of purchased technology 1,755 (1,485) (2) 270 -------------------------------------------------------- ------------- Total cost of sales 33,357 (2,091) 31,266 -------------------------------------------------------- ------------- Gross profit 86,018 72.1% 2,091 88,109 73.8% -------------------------------------------------------- -------------

Research and development 30,006 (163) (1) 29,843 Selling, general and administrative 47,388 (754) (1) 46,634 Amortization of intangibles 879 (879) (2) -- Restructuring 257 (257) (3) -- -------------------------------------------------------- ------------- Total operating expenses 78,530 (2,053) 76,477 -------------------------------------------------------- ------------- Income from operations 7,488 4,144 11,632 Interest and other income (expense), net (174) -- (174) Loss on sale of investments (1,344) 1,344 (4) -- -------------------------------------------------------- ------------- Income before provision for income taxes 5,970 5,488 11,458 Provision for income taxes 5,689 1,295 (5) 6,984 -------------------------------------------------------- ------------- Income before minority interest 281 4,193 4,474 Minority Interest 6,375 (1,109) (6) 5,266 -------------------------------------------------------- ------------- Net income $6,656 $3,084 $9,740

======================================================== ============= Earnings per share Basic $0.10 $0.15 Diluted (7) 0.10 0.14 -------------------------------------------------------- ------------- Earnings per share weighted average number of shares outstanding: Basic 65,598 65,598 Diluted (7) 74,407 74,407 ======================================================== =============

(1) The adjustments represent the amortization of deferred stock compensation related to stock options and restricted stock units assumed or granted.

(2) The adjustments represent the amortization of purchased technology and other intangibles related to the acquisition of Taqua, VocalData, Steleus and majority interest in Santera.

(3) The adjustment represents restructuring costs related to the relocation of our manufacturing operation and corporate headquarters.

(4) The adjustment represents a realized loss on the sale of Santera's holdings of Alcatel shares received in conjunction with warrants exercised in December 2004.

(5) The adjustments represents the income tax effect of footnotes (1), (2), (3), and (4) in order to reflect our non-GAAP effective tax rate at 35% for the Tekelec business, excluding Santera.

(6) The adjustment represents the minority interest impact of footnote (2) and (4).

(7) For the three months ended March 31, 2005, the calculation of earnings per share includes for the purpose of calculation the add-back to net income of $581 for assumed after-tax interest cost related to the convertible debt using the "if-converted" method of accounting for diluted earnings per share. The weighted average number of shares outstanding for the three months ended March 31, 2005 includes 6,361 shares related to the convertible debt using the "if-converted" method.

TEKELEC IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME (unaudited)

Three Months Ended March 31, 2004 GAAP Adjustments Non-GAAP ---------------------------------------------------------------------- (thousands, except earnings per share data)

Revenues $78,870 $-- $78,870 Costs and expenses: Cost of goods sold 19,385 -- 19,385 Amortization of purchased technology 3,064 (2,833)(1) 231 ---------------------------------------------------------------------- Total cost of sales 22,449 (2,833) 19,616 ---------------------------------------------------------------------- Gross Profit 56,421 71.5% 2,833 59,254 75.1% ---------------------------------------------------------------------- Research and development 20,619 -- 20,619 Selling, general and administrative 32,271 -- 32,271 Amortization of intangibles 532 (532)(1) -- ---------------------------------------------------------------------- Restructuring 942 (942)(2) -- ---------------------------------------------------------------------- Total operating expenses 54,364 (1,474) 52,890 ---------------------------------------------------------------------- Income from operations 2,057 4,307 6,364 Interest and other income (expense), net 468 -- 468 ---------------------------------------------------------------------- Income from continuing operations before provision for income taxes 2,525 4,307 6,832 Provision for income taxes 6,253 887 (3) 7,140 ---------------------------------------------------------------------- Income (Loss) from continuing operations before minority interest (3,728) 3,420 (308) Minority interest 9,577 (1,165)(4) 8,412 ---------------------------------------------------------------------- Net income $5,849 $2,255 $8,104 ====================================================================== Earnings per share: Basic 0.09 0.13 Diluted (5) $0.09 0.12 ====================================================================== Earnings per share weighted average number of shares outstanding: Basic 62,034 62,034 Diluted (5) 65,194 71,555 ----------------------------------------------------------------------

(1) The adjustments represent the amortization of purchased technology and other intangibles related to the acquisitions of IEX and Santera.

(2) The adjustment represents restructuring costs related to the relocation of our manufacturing operations.

(3) The adjustment represents the income tax effect of footnotes (1) and (2) in order to reflect our non-GAAP effective tax rate at 35% for the Tekelec business, excluding Santera.

(4) The adjustment represents the minority interest impact of footnote (1).

(5) For the three months ended March 31, 2004, the non-GAAP calculation of earnings per share includes, for the purposes of the calculation, the add-back to net income of $581 for assumed after-tax interest cost related to the convertible debt using the "if-converted" method of accounting for diluted earnings per share. The weighted average number of shares outstanding for the three months ended March 31, 2004 includes 6,361 shares related to the convertible debt using the "if-converted" method. For the GAAP results for three months ended March 31, 2004, the results of the "if-converted" calculations are anti-dilutive and therefore excluded from earnings per share.

--30--SW/la*

CONTACT: Tekelec Michael Attar, 818-880-7821

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