Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) ended last week with news that it expects revenues to sink 15 percent to 25 percent this quarter (see Tellabs Lays Off, Warns). It started this week with a rollout of products aimed at the Western European market (see Tellabs Targets Ethernet-Over-Sonet).

The two news items show that optical vendors are now looking outside the U.S. for traction, say analysts.

Let's start with the warning. Tellabs, whose report of $345 million in sales was a relief from a stream of otherwise terrible news last quarter (see Tellabs 'Stays the Course'), was hoped by analysts to be on track for a flat report this quarter. Now, though, it's anticipating a loss, due to reduced North American carrier spending.

Tellabs is cutting 800 jobs, half in North America and half elsewhere, thereby reducing its overall workforce by about 14 percent. It's closing a plant in Shannon, Ireland, where echo cancellers and some other voice enhancement products are made, and moving the manufacture of those products to Espoo, Finland, and Bolingbrook, Ill. Charges of about $110 million will be recorded this quarter related to the news.

Tellabs' news is disappointing but not surprising, analysts say. "It's consistent with what we hear across the industry," says George Notter of Deutsche Banc Alex Brown LLC. Nortel Networks Corp. (NYSE/Toronto: NT) is guiding Wall Street to a 10 percent sequential drop, he says. ADC Telecommunications Inc. (Nasdaq: ADCT), which issued its own press release pointing to Tellabs' (see ADC Comments on Tellabs' Warning), has implied to analysts that it expects a falloff of about 16 percent this quarter, Notter notes. Ciena Corp. (Nasdaq: CIEN) has seen business fall off dramatically (see Ciena Follows the Incumbents), and it's repositioned itself to cater to international incumbents.

Which brings us to the second part of Tellabs' news. Like Ciena, Tellabs also recently underwent a regrouping to aim for the international market, particularly Europe (see Tellabs Reorganizes). Today's announcement is the first news to emerge since that restructuring. It's primarily aimed at carriers and enterprises that want to replace time-division multiplexed (TDM) leased lines with faster, cheaper Ethernet connectivity that also incorporates Sonet (Synchronous Optical NETwork) and SDH (Synchronous Digital Hierarchy) protection and management.

Tellabs' 6300 transport switch will be equipped with the ability to send Ethernet traffic over SDH channels. Specifically, by the end of this year, Tellabs expects to be able to funnel gigabit Ethernet into VC-12 (2 Mbit/s) or VC-4 (155 Mbit/s) channels. The Ethernet 6300 additions, called the Tellabs 6340 switch node and 6310 edge node, support virtual concatenation, a method of glomming together small Sonet channels to create larger Ethernet pipes without wasting bandwidth.

The new gear also will support Generic Frame Protocol (GFP), a method of mapping any kind of traffic onto Sonet/SDH, and, by the end of 2003, GMPLS (generic Multiprotocol Label Switching (MPLS)), Tellabs says.

Tellabs announced virtual concatenation for its Sonet gear at the Supercomm tradeshow in June (see Tellabs Comes Ready to Play). And the company says European markets typically lag North America by six to eight months. Still, Tellabs says its motivation in announcing Ethernet-over-SDH isn't just to flesh out the same thing for Europe. Instead, it's following a market, a spokesperson says.

Tellabs certainly isn't alone. Startups like Appian Communications Inc., as well as older players like Nortel and ECI Telecom subsidiary Lightscape Networks Ltd. also offer Ethernet-over-SDH gear with virtual concatenation capabilities. And some say customers are looking to replace leased lines with Ethernet more eagerly in Europe than stateside.

"Do we see the trend accelerating in Europe compared with North America? Yes. Do we see it as contributing to recovery? Yes," says Karen Barton, VP of marketing at Appian. She's not sure where to attribute the European market strength, but she says there appears to be a bit more money to spend among European carriers, possibly because they didn't subscribe to the bubble as expansively as their North American counterparts did.

Others agree. "Apparently, Europe is doing OK and Asia is doing really well," writes analyst Steve Levy of Lehman Brothers in an email today.

If no one thinks the 6300 enhancement will boost Tellabs' earnings this quarter, some think it's certainly a stab in the right direction. "I would say we see global demand for Ethernet over Sonet/SDH, it's one of the things carriers like to talk about the most," says Emanuel Nachum, acting president of Lightscape Networks.

But these days, few are willing to say when carrier interest in any part of the globe will translate into an upturn or even a bottom for plummeting spending. "I'm really hesitant to call a bottom. Analysts who've tried to call a bottom have been wrong for a year and a half," George Notter says. "I envision nothing will change a terrible amount going forward."

— Mary Jander, Senior Editor, Light Reading
www.lightreading.com