Tekelec 8K Announces Q1 2006 Results | TKLC 12 Jul 06

EXHIBIT 99.1

R E L E A S E

Tekelec Announces Q1 2006 Results

Morrisville, N.C.July 12, 2006 — Tekelec (NASDAQ: TKLC) today will file with the Securities and Exchange Commission (the “Commission”) its Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 (the “Q1 2006 Form 10-Q”).

Q1 2006 Results

Revenue for the first quarter of 2006 was $107.5 million, down 23% compared to $138.9 million for the first quarter of 2005. For the first quarter of 2006, the Company had orders of $138.6 million, up 14% compared to $121.5 million for the first quarter of 2005, and a book-to-bill ratio of 1.29. Backlog as of March 31, 2006 was $604.5 million, up 30% compared to backlog of $463.5 million as of March 31, 2005 and up 5% compared to backlog of $573.3 million as of December 31, 2005.

On a GAAP basis, the Company reported a net loss for the first quarter of 2006 of $16.5 million, or $0.25 loss per diluted share, compared to net income of $17.5 million, or $0.24 per diluted share, for the first quarter of 2005. On a non-GAAP basis, the net loss in the first quarter of 2006 was $9.8 million, or $0.15 loss per diluted share, compared to net income of $20.6 million, or $0.28 per diluted share, for the first quarter of 2005. Please refer to the attached financial statement schedules for a reconciliation of the Company’s GAAP operating results to its non-GAAP operating results.

At March 31, 2006, Tekelec’s consolidated cash, cash equivalents and investments totaled $245.3 million, up from $226.3 million at December 31, 2005, and compared to approximately $237 million at June 30, 2006, excluding proceeds from the sale of IEX which closed on July 6, 2006. Deferred revenues were $305.3 million at March 31, 2006, up from $232.0 million at December 31, 2005 and $179.4 million at March 31, 2005.

The operating results for the first quarter of 2006 highlight the variability and volatility of revenues the Company experienced as a result of its change to the residual method of revenue recognition reflected in the Company’s 2005 consolidated financial statements and its restated financial statements and data, which were included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (the ‘2005 Form 10-K’) filed with the Commission on May 30, 2006.

The application of the residual method of revenue recognition in the first quarter of 2006 affected the timing of revenue recognition for certain NSG customer shipments. Although the Company shipped substantially all deliverables under several large orders in the first quarter of 2006, it deferred approximately $21.9 million in revenue relating to these shipments because it did not ship all the products included in the purchase orders. The Company currently expects to deliver the remaining products and related software upgrades called for under these arrangements and record most of the revenue in the second half of 2006, primarily in the fourth quarter. The reversal of previously deferred revenue under the residual method into the first quarter of 2006 was not significant.

The operating results and gross margins for the first quarter of 2006 were adversely impacted by various factors, including lower revenues from our higher margin NSG products and a reduction in SSG gross margins due primarily to pricing pressure in our Alcatel channel and contract mix.

Corporate Office: 5200 Paramount Parkway, Morrisville, N.C. 27560• Tel 919.460.5500• Fax 919.460.0877

With the filing of the Q1 2006 Form 10-Q, the Company has become current with its filings with the Commission, and now believes it has met all the conditions set by a Nasdaq Listing Qualifications Panel for the continued listing of the Company’s Common Stock on the Nasdaq Global Market. The Company also expects to timely file its Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.

Frank Plastina, president and chief executive officer of Tekelec, stated “Due primarily to the continued work on the restatement during the second quarter and our current process of closing the second quarter results, we are not in a position to provide guidance for the full year or the second quarter of 2006. However, we do not believe that the first quarter results reflect a trend in our revenues, gross margins, operating income or earnings per share or are representative of the performance we expect for the second quarter or second half of 2006. In fact, we currently expect an improvement in each of these periods relative to the first quarter of 2006. We currently estimate that revenues from our Telecom business for the full year 2006 will increase on a year-over-year basis compared to Telecom revenues of $486.5 million in 2005.”

Conference Call

Tekelec has scheduled a conference call for Wednesday, July 12, 2006, for senior management to discuss first quarter results. The Company also plans to discuss during this call and to provide on its web site historical non-GAAP numbers for each of the quarters in 2004 and 2005, the full years 2004 and 2005 and the first quarter of 2006 and certain information concerning the Company’s financial results for the first quarter of 2006.

“Live” Webcast and Replay

Tekelec will host a live webcast of its conference call on Wednesday, July 12, 2006, at 4:45 p.m. EDT. To access the webcast, visit Tekelec’s web site located at www.tekelec.com, enter the Investor Relations section and click on the webcast icon. A webcast replay will be available at approximately 7:45 p.m. on July 12^th and for 90 days thereafter.

Telephone Replay

A telephone replay of the call will also be available for one week after the live webcast by calling either (800) 642-1687 or (706) 645-9291, and entering the conference ID # 2313839.

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 and other charges, non-cash stock-based compensation charges, and unusual, non-recurring gains and 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 its 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, the Company believes 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 press release are forward looking, reflect the Company’s current intent, belief or expectations and involve certain risks and uncertainties. The Company’s actual future performance may not meet the Company’s expectations. As discussed in the Company’s Q1 2006 Form 10-Q to be filed today, its 2005 Form 10-K and its other filings with the Commission, 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, in addition to those identified in its 2005 Form 10-K and other Commission filings, include, among others, the impact on future operating results of changes in revenue recognition described in the 2005 Form 10-K and in prior reports filed with the Commission and the risk that the Company’s financial results for the remainder of 2006 will not meet the Company’s expectations. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise.

About Tekelec

Tekelec is a high-performance network applications company that is accelerating the transition to IP Multimedia Subsystem (IMS) networks for service providers around the globe. With its experience at the intersection of network applications and session control, Tekelec creates highly efficient platforms for managing media and delivering network solutions. Corporate headquarters are in Morrisville, N.C., in the Research Triangle Park area, with research and development facilities and sales offices throughout the world. For more information, please visit www.tekelec.com.

###

Investor Contacts:
Jim Chiafery
Director of Investor Relations
919-461-6825 office
James.chiafery@tekelec.com

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended
	March 31,
	2006			2005
	(Thousands, except per share data)
Revenues	$	107,466		$	138,863
Cost of sales:
Cost of goods sold		56,006			42,737
Amortization of purchased technology		1,276			1,485

Total cost of sales		57,282			44,222

Gross profit		50,184			94,641

Operating expenses:
Research and development		36,550			30,429
Selling, general and administrative		41,046			37,873
Restructuring and other (1)		164			257
Amortization of intangible assets		578			879

Total operating expenses		78,338			69,438

Income (loss) from operations		(28,154	)		25,203
Other income (expense):
Interest income		1,651			1,264
Interest expense		(922	)		(998	)
Gain (loss) on investments		1,793			(1,344	)
Other, net		(573	)		(444	)

Total other income (expense), net		1,949			(1,522	)

Income (loss) from operations before provision for income taxes and minority interest		(26,205	)		23,681
Provision for income taxes (2)		(9,696	)		10,988

Income (loss) before minority interest		(16,509	)		12,693
Minority interest		—			4,782

Net income (loss)	$	(16,509	)	$	17,475


Earnings (loss) per share:
Basic	$	(0.25	)	$	0.27
Diluted (3)		(0.25	)		0.24
Weighted average number of shares outstanding:
Basic		66,833			65,598
Diluted (3)		66,833			74,407

Notes to Unaudited Condensed Consolidated Statements of Operations (in thousands):

(1)		This amount represents restructuring and other costs (e.g., costs associated with duplicate staff during the transition, recruiting fees, etc.) related to our manufacturing, corporate headquarters, and Taqua relocations.

(2)		On October 3, 2005, we acquired the remaining shares of Santera capital stock held by the minority shareholders and on that date, Santera became a wholly owned subsidiary of Tekelec. For all periods presented, the results of Santera are included in the consolidated statements of operations of Tekelec. The consolidated provision for income taxes does not include any benefit from the losses generated by Santera prior to October 3, 2005 due to the following:

	•		Prior to October 3, 2005, Santera’s losses could not be included on Tekelec’s consolidated federal tax return because Tekelec’s ownership interest in Santera did not meet the threshold to consolidate under income tax rules and regulations.

	•		Prior to October 3, 2005, a full valuation allowance had 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 diluted share includes 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 earnings per diluted 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, 2006, these adjustments were excluded from the calculation of earnings per diluted share as these adjustments were anti-dilutive.

TEKELEC
UNAUDITED NON-GAAP⁽¹⁾ CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended
	March 31,
	2006			2005
	(Thousands, except per share data)
Revenues	$	107,466		$	138,863
Cost of sales:
Cost of goods sold		54,354			42,131

Gross profit		53,112			96,732

Operating expenses:
Research and development		32,490			30,266
Selling, general and administrative		36,381			37,101

Total operating expenses		68,871			67,367

Income (loss) from operations		(15,759	)		29,365
Interest and other income (expense), net		156			(178	)

Income (loss) from operations before provision for income taxes and minority interest		(15,603	)		29,187
Provision for income taxes (2)		(5,773	)		12,283

Income (loss) before minority interest		(9,830	)		16,904
Minority interest		—			3,673

Net income (loss)	$	(9,830	)	$	20,577


Earnings (loss) per share:
Basic	$	(0.15	)	$	0.31
Diluted (3)		(0.15	)		0.28
Weighted average number of shares outstanding:
Basic		66,833			65,598
Diluted (3)		66,833			74,407

Notes to Unaudited Non-GAAP Consolidated Statements of Operations (in thousands):

(1)		Please refer to the attached reconciliation of the GAAP Statements of Operations to the above Non-GAAP Statements of Operations.

(2)		The above Non-GAAP Statements of Operations assume an effective income tax rate of 37% for the three months ended March 31, 2006 and an effective income tax rate of 35% for the three months ended March 31, 2005. For the three months ended March 31, 2005, there were no income tax benefits associated with the losses generated by Santera, resulting in overall effective income tax rate of 42%.

(3)		For the three months ended March 31, 2005, the calculation of earnings per diluted share includes 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 earnings per diluted 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, 2006, these adjustments were excluded from the calculation of earnings per diluted share as these adjustments were anti-dilutive.

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME


	Three Months Ended March 31, 2006
	(Thousands, except per share data)
	GAAP			Adjustments			Non-GAAP
Revenues	$	107,466		$	—		$	107,466
Costs and expenses:
Cost of sales:
Cost of goods sold		56,006			(1,382	)⁽¹⁾		54,354
					(270	)⁽²⁾
Amortization of purchased technology		1,276			(1,276	)⁽²⁾		—

Total cost of sales		57,282			(2,928	)		54,354

Gross profit		50,184			2,928			53,112
Research and development		36,550			(4,060	)⁽¹⁾		32,490
Selling, general and administrative		41,046			(4,436	)⁽¹⁾		36,381
					(229	)⁽³⁾
Restructuring and other		164			(164	)⁽⁴⁾		—
Amortization of intangible assets		578			(578	)⁽²⁾		—

Total operating expenses		78,338			(9,467	)		68,871

Loss from operations		(28,154	)		12,395			(15,759	)
Interest and other income (expense), net		1,949			(1,793	)⁽⁵⁾		156

Loss before provision for income taxes		(26,205	)		10,602			(15,603	)
Provision for income taxes		(9,696	)		3,923	⁽⁶⁾		(5,773	)


Net loss	$	(16,509	)	$	6,679		$	(9,830	)

Loss per share
Basic	$	(0.25	)				$	(0.15	)
Diluted⁽⁷⁾		(0.25	)					(0.15	)
Earnings per share weighted average number of shares outstanding:
Basic		66,833						66,833
Diluted⁽⁷⁾		66,833						66,833

(1)		The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock purchase rights granted under our employee stock purchase plans.

(2)		The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus, iptelorg and Santera.

(3)		The adjustment represents $229,000 in legal expenses incurred to settle the IEX vs. Blue Pumpkin litigation.

(4)		The adjustment represents restructuring and other costs related to our manufacturing, corporate headquarters and Taqua relocations.

(5)		The adjustment represents the gain recognized related to our receipt of 642,610 shares of Lucent that were released from escrow.

(6)		The adjustment represents the income tax effect of footnotes (1), (2), (3), (4) and (5) in order to reflect our non-GAAP effective tax rate of 37%.

(7)		For the three months ended March 31, 2006, the calculations of non-GAAP earnings per diluted share exclude a potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the “if-converted” method as the effects of including such amounts are anti-dilutive.

TEKELEC
UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME


	Three Months Ended March 31, 2005
	(Thousands, except per share data)
	GAAP			Adjustments			Non-GAAP
Revenues	$	138,863		$	—		$	138,863
Costs and expenses:
Cost of sales:
Cost of goods sold		42,737			(3	)⁽¹⁾		42,131
					(603	)⁽²⁾
Amortization of purchased technology		1,485			(1,485	)⁽²⁾		—

Total cost of sales		44,222			(2,091	)		42,131

Gross profit		94,641			2,091			96,732
Research and development		30,429			(163	)⁽¹⁾		30,266
Selling, general and administrative		37,873			(772	)⁽¹⁾		37,101
Restructuring and other		257			(257	)⁽³⁾		—
Amortization of intangible assets		879			(879	)⁽²⁾		—

Total operating expenses		69,438			(2,071	)		67,367

Income from operations		25,203			4,162			29,365
Interest and other income (expense), net		(1,522	)		1,344	⁽⁴⁾		(178	)

Loss before provision for income taxes		23,681			5,506			29,187
Provision for income taxes		10,988			1,295	⁽⁵⁾		12,283

Income before minority interest		12,693			4,211			16,904
Minority interest		4,782			(1,109	)⁽⁶⁾		3,673


Net income	$	17,475		$	3,102		$	20,577

Loss per share
Basic	$	0.27					$	0.31
Diluted⁽⁷⁾		0.24						0.28
Earnings per share weighted average number of shares outstanding:
Basic		65,598						65,598
Diluted⁽⁷⁾		74,407						74,407

(1)		The adjustments represent stock-based compensation expense recognized related to awards of in-the-money stock options and awards of restricted stock or restricted stock units.

(2)		The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Taqua, VocalData, Steleus and Santera.

(3)		The adjustment represents restructuring and other costs related to our manufacturing, corporate headquarters and Taqua relocations.

(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 footnotes (2) and (4).

(7)		For the three months ended March 31, 2005, calculations of earnings per diluted share on both a GAAP and non-GAAP basis include the add-back to net income of $581,000 for assumed after-tax interest cost related to the convertible debt using the “if-converted” method of accounting for earnings per diluted share. The weighted average number of shares outstanding for the three months ended March 31, 2005 includes 6,361,000 shares related to the convertible debt using the “if-converted” method.

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,			December 31,
	2006			2005
	(Thousands, except share data)
ASSETS
Current assets:
Cash and cash equivalents	$	40,670		$	52,069
Short-term investments, at fair value		204,598			174,260

Total cash, cash equivalents and short-term investments		245,268			226,329

Accounts receivable, net		134,289			122,783
Inventories		60,064			48,347
Deferred income taxes		37,708			27,802
Deferred costs and prepaid commissions		83,916			78,190
Prepaid expenses and other current assets		16,469			15,739

Total current assets		577,714			519,190
Property and equipment, net		41,456			40,794
Investments in privately held companies		7,322			7,322
Deferred income taxes, net		63,636			68,598
Other assets		4,277			6,047
Goodwill		125,526			126,022
Intangible assets, net		55,090			57,214

Total assets	$	875,021		$	825,187


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	34,417		$	33,227
Accrued expenses		39,488			50,649
Accrued payroll and related expenses		18,706			29,391
Short-term notes and current portion of notes payable		43			96
Current portion of deferred revenues		296,639			226,753

Total current liabilities		389,293			340,116
Long-term convertible debt		125,000			125,000
Deferred income taxes		1,638			1,694
Long-term portion of deferred revenues		8,632			5,217

Total liabilities		524,563			472,027

Commitments and Contingencies
Shareholders’ equity:
Common stock, without par value, 200,000,000 shares authorized; 67,169,166 and 66,838,310 shares issued and outstanding, respectively		281,980			274,413
Deferred stock-based compensation		—			(5,680	)
Retained earnings		69,157			85,666
Accumulated other comprehensive income (loss)		(679	)		(1,239	)

Total shareholders’ equity		350,458			353,160

Total liabilities and shareholders’ equity	$	875,021		$	825,187

TEKELEC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	March 31,
	2006			2005
	(Thousands)
Cash flows from operating activities:
Net income (loss)	$	(16,509	)	$	17,475
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Loss (gain) on investments		(1,793	)		1,344
Minority interest		—			(4,782	)
Recoveries of doubtful accounts and returns		(93	)		(592	)
Depreciation		4,381			4,365
Amortization of intangibles		2,124			2,967
Amortization, other		1,143			876
Deferred income taxes		(5,255	)		(114	)
Stock-based compensation		9,878			938
Tax benefit related to stock options		—			252
Excess tax benefits from stock-based compensation		(287	)		—
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		(11,393	)		14,103
Inventories		(11,695	)		(6,771	)
Prepaid expenses and other current assets		(6,776	)		(1,379	)
Trade accounts payable		1,177			(3,442	)
Accrued expenses		(11,213	)		6,696
Accrued payroll and related expenses		(10,691	)		(3,759	)
Deferred revenues		73,264			1,160

Total adjustments		32,771			11,862

Net cash provided by operating activities		16,262			29,337

Cash flows from investing activities:
Proceeds from sales and maturities of investments		137,216			33,490
Purchases of investments		(165,683	)		(64,048	)
Purchases of property and equipment		(5,041	)		(7,648	)
Purchase of technology		—			(4,000	)
Change in other assets		1,578			(93	)

Net cash used in investing activities		(31,930	)		(42,299	)

Cash flows from financing activities:
Payments on notes payable and capital leases		(53	)		(668	)
Proceeds from issuance of common stock		3,904			956
Excess tax benefits from stock-based compensation		287			—

Net cash provided by financing activities		4,138			288

Effect of exchange rate changes on cash		131			(469	)

Net change in cash and cash equivalents		(11,399	)		(13,143	)
Cash and cash equivalents at beginning of period		52,069			48,925

Cash and cash equivalents at end of period	$	40,670		$	35,782

Tekelec (TKLC) Inactive 8-KTekelec Announces Q1 2006 Results