Lehman Likes Tellabs/Vivace

The acquisition of a startup often marks a key turning point in the life of a large company. And Tellabs Inc.'s (Nasdaq: TLAB; Frankfurt: BTLA) deal with Vivace Networks looks to be crucial to its fortunes over the next year (see Tellabs Closes Vivace Acquisition).

So will it pay off? One influential Wall Street analyst likes the deal. Lehman Brothers' Steve Levy this morning raised his revenue estimates for Tellabs, saying that Vivace sales could provide some upside.

Levy is now forecasting $933.5 million in sales for Tellabs in 2003, up from his previous estimate of $922.2 million. In addition, Lehman thinks Tellabs sales will grow 9 percent sequentially in 2004, to $1 billion. Much of the boost in that estimate is dependent on success from Vivace.

Levy sees Vivace generating $11 million in sales through year end and $35 million in calendar 2004. Most of this comes on the back of an existing relationship with huge Japanese carrier NTT DoCoMo Inc. (NYSE: DCM).

Vivace -- a startup that managed to remain fairly stealthy before being acquired by Tellabs -- is now likely to become a key product category for Tellabs. It also marks a major turning point for Tellabs, which has traditionally been a manufacturer of Sonet/TDM transport equipment.

Vivace makes the Viva5100 and Viva1050 IP/MPLS multiservice switches. These are designed to sit at the edge of the transport network, aggregating and switching Ethernet, ATM, and Frame Relay access traffic and handing it off to an IP/MPLS-routed network or an ATM-switched backbone. The boxes are specially designed to help a carrier migrate its legacy network to an IP/MPLS core.

There is currently quite a lot of action in this space among large carriers, and it has the potential to develop into a multibillion-dollar market. Many of the most sought-after requests for proposal (RFPs) circulating from RBOCs include specifications for collapsed backbones that route data and voice traffic over a common network using MPLS switches -- hence Vivace’s importance (see How Will Verizon Go National?, Qwest Adds More States, BellSouth Unveils MPLS Backbone, Qwest Heads for Convergence, and AT&T’s New Gods).

Other large equipment vendors clearly have their eyes fixed on the multiservice routing and switching market. The need for more IP/MPLS gear in the portfolio drove Alcatel SA's (NYSE: ALA; Paris: CGEP:PA) deal for TiMetra Networks (see Alcatel & TiMetra Seal the Deal).

Ed Kennedy, Tellabs’ president for North America, is driving the move into this market. According to Kennedy, likely growth in the telecom equipment market will come from multiservice switching provided by products like the Vivace switch.

“Things are moving toward converged platforms,” said Kennedy in an interview with Light Reading at the Supercomm 2003 tradeshow. “We can go futher and further out toward the edge of the network.”

Kennedy says the major telecom carriers have to make the investment in converged platforms, because they can’t afford to build parallel voice and data networks anymore.

“For the RBOCs, many of their connections are broadband, and they’re carried in the service layer: T1, ATM, IP, Frame Relay... It’s costing them a ton of money to maintain all these network elements. The real money is in the edge of the network. We’re going after this multibillion-dollar market, which is the converged multiservice edge.”

What’s the potential catch? Tellabs competitors would point to the fact that, while Tellabs is one of the leaders in the incumbent transport market, it has historically shown little expertise in the datacomm market, which is dominated by companies such as Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR).

In the meantime, watch this space. The multiservice market appears to be heating up and is likely to yield more action in 2003.

— R. Scott Raynovich, US Editor, Light Reading