Tollgrade Tries a Makeover

The existing management of Tollgrade Communications Inc. (TLGD - Analyst Report) has received a shot in the arm against activist shareholder Ramius Group, an investment firm that currently holds approximately 14% of Tollgrade’s common outstanding shares, before the Annual General Meeting of the company to be held on August 5. In a proxy filing to all shareholders, Ramius cited several concerns regarding the business strategy of the current management and will try hard to nominate its own members on the board.

Tollgrade announced that the company has renewed three multi-year software services agreements with its existing Tier1 telecom customers in U.S. and Europe. These three contracts will provide $21 million in total revenue in the next five years, the maximum term for these contracts. These renewed contracts will help Tollgrade to brighten its future growth in a challenging economic environment where the company faces stiff competition from JDS Uniphase (JDSU - Snapshot Report), Agilent Technologies (A - Analyst Report), and Tektronix Inc (TEK).

Recently, in another strategic move, the Board of Directors has unanimously elected Mr. Edward H. Kennedy, a highly respected telecommunications industry expert with over 25 years of global experience, as the company’s new independent director.

With the assistance of investment bank Needham & Co LLC, Tollgrade has evaluated its business strategy and will focus on core growth areas with a longer-term perspective. Tollgrade instituted an integrated software platform for the telecom industry that supports multiple IP-based applications and products with a market opportunity of approximately $1 billion over the next four years.

The company is shrinking its balance sheet by disposing non-core assets. In May, the company sold its cable status monitoring product line to a private equity firm for a total consideration of $3.15 million. This will further enhance Tollgrade’s solid net cash position of more than $60 million ($4.73/diluted share) at the end of the first quarter 2009. We maintain our Hold recommendation for the stock.