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Tellabs's Access Biz Under Fire

Changes in access network strategy at AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) are putting serious pressure on Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA)'s access business.

Most recently, Verizon's aggressive move from BPON toward GPON has one analyst questioning whether Tellabs should bother staying in the broadband access equipment business. "Our conversations with industry contacts suggest that the decline in Tellabs' BPON OLT and ONT businesses at Verizon will be steeper than we previously thought," writes Jefferies & Company Inc. analyst George Notter in a research note sent to clients Monday.

"In the wake of the lost FTTP share at Verizon, Tellabs – in our view – should be reviewing their longer term desire to stay in this business," writes Notter. "Given the ugly margin profile in the business, any decision to exit FTTP might be perceived positively by investors."

Notter has significantly reduced his estimates on access division revenues from $468 million and $351 million in 2008 and 2009 respectively to $350 million and $200 million.

In January, Verizon had announced that it would be aggressively rolling out GPON in most of its new FiOS deployments starting this year. (See Verizon Preps GPON Push.) Tellabs, through its acquisition of AFC had been Verizon's leading supplier of BPON gear, but was only named as a second source in the telco's GPON RFP, which went mostly to Alcatel-Lucent (NYSE: ALU). (See Alcatel Joins Verizon PON Party.)

Now that the transition to GPON at Verizon is happening, it further highlights Tellabs's struggles in the access space. It had also been a primary supplier to Bellsouth's FTTC project, but when AT&T acquired Bellsouth, AT&T imposed its own FTTN strategy on its newly acquired territories. (See Is AT&T Finished With Tellabs FTTC?, Ma Bell Merger Thumps Tellabs, and AT&T Vendors Sing Merger Blues.)

When reached for comment, Mark Cannata, Tellabs director of product management, broadband products, said, "[AT&T's] and Verizon's moves are consistent with Tellabs’ access strategy: enabling carriers to deliver GPON (FTTC and FTTP), IPTV, and FTTN. With more experience deploying PON in North America than anyone else, Tellabs remains focused on enabling carriers to deliver true broadband to users."

Some in the investor community though would applaud a shift away from residential access.

"I hate the residential access business," said Andrew Schmitt of Nyquist Capital . "Fundamentally, you're rolling out services to consumers that don't have the ability to increase the amount of money they're spending on it. To the extent that someone gets out of residential and into enterprise would excite me."

Schmitt does point out though that he believes the BPON business at Tellabs is healthier than some may fear and that the shift toward GPON from Verizon could still take some time.

"My sense is that BPON isn't falling off a cliff, there's still a pretty substantial footprint of it," said Simon Leopold of Morgan Keegan & Company Inc. "But it's certainly not a growth engine."

Leopold says that while revenues from BPON will certainly be flat to down, what really hurt Tellabs in the access space was AT&T abandoning its FTTC project. "That's the business that really drives to zero," said Leopold.

As far as exiting the access space all together, Leopold says, "I definitely think the company needs to come up with a plan. But I've learned it never pays to make Verizon angry."

Putting access aside, Verizon is still Tellabs's single most important customer especially with its 7100 platform and cross connect business. Abandoning access and thus dissing Verizon in one area, could put a strain on its business with the telco in other important areas.

— Raymond McConville, Reporter, Light Reading

ymchu 12/5/2012 | 3:44:57 PM
re: Tellabs's Access Biz Under Fire This is funny way looking at competition and generations of new technology
gocowboys 12/5/2012 | 3:44:57 PM
re: Tellabs's Access Biz Under Fire Hi vrparente,

Tellabs was likely victimized more (than helped) by winning early Verizon business. They won the BPON deployments and that prevented them from focusing on appropriately investing in GPON. As such, when the GPON RFP came out, they were not competitive and ALU had the opportunity to leap frog them for new business. In addition, they won the early ROADM deployment business with Verizon and could not adequately invest in a packet optical device. As such, Fujitsu has won the primary deployment opportunity. IMHO winning business with Verizon can actually be worse than losing business with Verizon as they require considerable customization, negotiate pricing to the bone, and can take you off of the industry competitive curve...and then they become interested in someone else.
vrparente 12/5/2012 | 3:44:57 PM
re: Tellabs's Access Biz Under Fire It was also Tellabs that pioneered the new JI-ONU, not Alcatel-Lucent. So despite the #1/#2 rankings in GPON, it seems that Tellabs is still highly collaborating with Verizon. I didn't see that kind of innovation demonstrated or discussed by Verizon, whereas they were very positive about Tellabs in that regard.
Jeff Boyardi 12/5/2012 | 3:44:56 PM
re: Tellabs's Access Biz Under Fire The logic is actually correct up until the part of ALU somehow being in a better technological position. Tellabs was definitely hog tied by their 95% share of the BPON business, as well as interal infighting and a poor strategy. The original RFP had full deployment in 2H06. At the end of 2H07, Verizon had managed to get two friendly subscribers working on the ALU gear. The competitive advantage ALU had was entirely based on pricing and concessions on other products (DSL). Their product was pretty weak.

All my Ex's live in Texas.

Jeff Boyardi
gocowboys 12/5/2012 | 3:44:56 PM
re: Tellabs's Access Biz Under Fire Hi Jeff,

I agree with one nit. My logic is actually correct relative to ALU. The statement is that Tellabs was not competitive; there was no statement relative to how competitive ALU was. Clearly, the bar was set low. As such, Verizon is likely not getting a lot of innovation these days.

ymchu - Tellabs is in the dumpster. They have been for sale with no takers, Krish has left the company, and their traditional revenue markets have collapsed. They put all their eggs in one basket (Verizon) and that was a very bad idea. In this market there is good revenue and bad revenue. So, ymchu...keep the day job. :-)
FbytF 12/5/2012 | 3:44:56 PM
re: Tellabs's Access Biz Under Fire You gotta figure "gocowboys" is an ALU source in Plano which explains the logic applied to not winning the business is sometimes better. It's the French influence.
Jeff Boyardi 12/5/2012 | 3:44:53 PM
re: Tellabs's Access Biz Under Fire gocowboys (ouch that hurt to type)-

Fair enough. I agree that Tellabs botched the whole thing. Prabhu was hoping to sell the company and did not have a plan B.

JB
Raymond McConville 12/5/2012 | 3:44:51 PM
re: Tellabs's Access Biz Under Fire while landing a big tier 1 customer is always nice, it does do more harm than good sometimes when a mid sized company like Tellabs has to bend over backwards meeting the demands of a huge customer like Verizon. Being forced to throw all your resources at one whale of a customer can inhibit innovation.
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