Quest to reinvent Tollgrade reflects telecom shakeup
By Kim Leonard, TRIBUNE-REVIEW
Sunday, August 2, 2009
Tollgrade Communications Inc. is one of the few survivors from the days when the Baby Bells and other telephone companies spent millions for devices to test their copper and fiber-optic networks for trouble.
Most of its rivals from that 1990s era later dissolved or were absorbed into other companies. Tollgrade — once a leader in the Pittsburgh region's technology sector — has struggled in the last decade and now is in the final days of a proxy contest that could change its course once again after results are tallied at Wednesday's annual meeting.
A group of investors led by New York hedge fund Ramius LLC is working to convince shareholders that Harmar-based Tollgrade has made a series of missteps — including overspending on research and development, and making too many acquisitions that never added much to the bottom line.
Those errors, and a board that was short of experienced telecommunications industry leaders, explain why the company's stock has lost more than half its value in two years and now languishes in the $4 to $6 range, the fund contends. The Ramius group is backing one of the fund's own executives and two nominees with telecom backgrounds for seats on what will be an eight-member board.
Tollgrade's leaders announced a second-quarter loss of almost $1.51 million last week on revenue of $10.6 million for ongoing operations, the company's third consecutive quarter in the red.
CEO Joseph A. Ferrara said the company's renewed focus on service assurance products, primarily software, for telecom providers along with network service and maintenance contracts is showing promise, but financial results in the midst of a recession don't reflect it yet.
Tollgrade's board, following Ramius's criticisms, recently added two telecom veterans and expanded from seven to eight members.
The story of the company's rise and decline — and its current quest to reinvent itself — traces dramatic changes in the telecom industry in recent years.
Changing technology is a key factor.
"A lot of what Tollgrade has traditionally done for networks is being provided in routers and switches and software now," said Matt Robison of Wedbush Morgan Securities in San Francisco, who covered Tollgrade when he was an a securities analyst with another firm. He still owns "a few shares," he said.
No Wall Street analysts follow Tollgrade these days, and several of its largest shareholders declined comment or didn't return phone calls last week when asked about the proxy battle with Ramius.
Tollgrade hit its zenith in 2000, when revenue nearly doubled to $114 million and its per-share price hit a high point of $166 in July.
"We reached our peak at the peak of the dot-com era," recalled Chris Allison, who retired four years ago as chief executive of the company his father founded in 1986. Allison took the company public in 1995.
Regional Bell phone companies at that time were focused on service quality to win customers, Allison said, and they and smaller phone companies invested in systems to move voice and data communications faster and more smoothly.
Forbes magazine named Tollgrade to its list of 200 Best Small Companies in America several times.
Changes in federal law forced the industry's biggest phone companies to sell parts of their networks to competitive carriers. "They lost, like 20 percent of their line base," Allison said, "and they made the decision around 2000 that until they got regulatory relief they were going to pull in their horns from a (capital expenditure) standpoint."
Faced with falling profits, Tollgrade cut 80 jobs in 2001 and dozens more in subsequent years as it tried to develop new businesses. The company now has about 200 employees.
In 2004, Tollgrade acquired a division of former rival Acterna Inc. that built devices to monitor cable broadband lines, then just starting to be used for Voice over Internet Protocol phone systems.
Tollgrade's venture into cable products did well for a while, Allison said, but a change in industry standards led to more generic, lower-priced equipment. "There were no more proprietary interfaces for cable technology," he said.
The company sold its cable status monitoring line in May for $3.15 million to an investment group. Ramius points out this was far less than the $14.3 million the Acterna deal cost.
Ferrara, Tollgrade's CEO since November 2007, said last week the company will introduce its latest software platform this fall at the Broadband World Forum in Paris.
"We are positioning the company for long-term success and growth when the economic environment improves," he said.
The company has a new managed service agreement with a network equipment provider that is expected to bring in $20 million over four years, and is seeking out similar service and maintenance deals.
And it's continuing trials of its LightHouse test product for power utility lines, which Ramius has criticized as being long-delayed and related only marginally to Tollgrade's core business. Ramius has advocated letting existing customers' needs determine what products Tollgrade develops.
Robison said moving into an electric smart grid product could help the company build sales, but because Tollgrade isn't known in that arena "it's a long-term strategy, and not the primary one."
