VERTEL The company went from penny stock to powerhouse in three months

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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 $24 as of late last week. And Brown is 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.”

Telecom giant Alcatel demonstrated its confidence in the technology this month by selecting Vertel to develop software to facilitate “number portability,” the ability for customers to select and change service providers while keeping the same number.

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.

Vertel’s market cap, meanwhile, has risen from about $50 million to in excess of $600 million in a matter of weeks. The run-up has prompted some profit-taking among company insiders, who as a group unloaded 737,000 shares this month, according to Bloomberg News.

Brown, who sold 425,000 of those shares, said this was the first opportunity officers have had to sell part of their holdings, but that each retains a significant stake. Brown’s sale represented 25 percent of his total holdings, and none of the other officers sold more than 30 percent of their shares.

“We did take a profit, but we talked to our shareholders, and they felt like the management team deserved a small payday,” he said.

The insider stock sales follow Vertel’s early-February announcement 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.

For the year ended Dec. 31, Vertel reported a net loss of $7.8 million, compared with net income of $7.3 million in 1998.

While Vertel would be a speculative play, Higgins expects earnings to start catching up to its stock price in the second half of the year thanks to royalty payments.

The chief executive believes Vertel has a leg up on its competition because its relationships with telecom giants like Alcatel as well as Lucent, Alcatel, Siemens, Nokia and NEC are well established.

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.

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