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Telular withdraws from fixed cellphone efforts

The ferocious competition in world markets among cellphone makers is forcing a Chicago company toward the sidelines.

Telular Corp., a provider of fixed cellphones and equipment in third-world countries where copper transmission lines are notably absent, is switching its focus to the security market.

Telular introduced over a year ago a digital device that attaches to alarm systems – both residential and commercial – to send intrusion or fire signals back to central command centers. The product, called Telguard, has been a hit. In results for the first quarter ended Dec. 31, the company said Telguard sales soared threefold to $8.4 million compared with the same quarter a year ago.

Including service revenue and other spin-off products, Telular saw its total security revenue double in the first quarter to $14.6 million. Meanwhile, the company’s fixed cellphone sales fell in half to $8.1 million, a steeper decline than analysts expected.

“We haven’t been able to achieve as much as we had hoped in the phone business,” Michael Boyle, president and CEO of Telular, conceded at the company’s recent annual meeting.

Boyle, 61, took the top job 18 months ago and has been steering Telular away from cellphone markets he deemed unprofitable.

In the years after the company was founded in 1987, Telular targeted poor countries in Africa, Central America and Asia where landline phone service was poorly distributed. But the rise of mobile cellphones and a bevy of other competition undercut Telular’s efforts to sell its fixed wireless products.

A year ago the company shifted manufacturing from the United States, where 150 hourly workers were once employed, to China to save on costs. But China has become so competitive, with dozens of cellphone makers, that Telular has decided not to try to sell to that market at all, electing instead to focus on India, where there are fewer competitors.

Just two years ago, 80 percent of Telular’s sales were in cellphones. By the middle of 2006, sales were evenly split between cellphones and security products.

“Two years from now, we could well have 80 percent of our sales coming in the security area,” Boyle said.

Profits are driving the change in focus. In the first quarter, overall gross margin rose to 27 percent from 20 percent a year earlier, driven by a 33 percent margin in security.

The phone business had a gross margin of 15 percent in the quarter, a rise from 10 percent a year earlier.

“The cellphone business has done OK some years, and other years it’s been a struggle,” observed Kevin Dede, an analyst with the San Francisco stock brokerage firm Merriman Curhan Ford & Co. who follows Telular. “The security business was always there, but it was ignored for the most part. Now the company has a digital technology which puts it in an ideal position to attack that market.”

H. Lee Murphy is a reporter with Crain’s Chicago Business, a sister publication of RCR Wireless News. Both publications are owned by Crain Communications Inc.

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