Rob Pullen, CEO, Tellabs

With Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) undergoing a makeover, this is a good time for Light Reading to catch up with CEO Rob Pullen, the 24-year company veteran who's doing the moving and shaking. (See Tellabs Sinks on $1B Loss.)

Pullen preaches the company line well, frequently calling up the mantra of "mobile backhaul, optical networking, and service delivery." (He says it so often, Tellabs should print posters.) Mobile backhaul is a major play for Tellabs now: Just this month, the vendor trotted out a new Ethernet switch and got cozier with BT Group plc (NYSE: BT; London: BTA). (See Tellabs Gets Edgy With Ethernet and Tellabs Joins 21CN Ranks.)

Those are just the latest changes since Pullen took over from Krish Prabhu at the start of April. He's facing the difficult task of expanding Tellabs's markets while managing a restructuring program intended to cut $100 million from annual costs. (See Tellabs Appoints Robert Pullen CEO and Tellabs CEO Says He's Not Scared of Change.)

In a phone interview with the oft-traveling CEO, Light Reading got an earful about why the Verizon Communications Inc. (NYSE: VZ) GPON project had to go, and what an Ethernet-heavy world means for Tellabs.

— Craig Matsumoto, West Coast Editor, Light Reading

Light Reading: So, you've added a CTO after a couple of years without one. (See Tellabs Adds a CTO.) What's that mean for the company?

Pullen: At the highest level, one of the things we're going to do is to compete on innovation. We're going to have Vikram [Saksena, the CTO in question] not only interact with our customers' chief technology officers but also evaluate additions to the Tellabs portfolio.

Light Reading: You mean acquisitions.

Pullen: Well -- first of all, we don't have anything imminent. But if it makes sense for our customers and our shareholders, I don't mind spending our money. There are bargains out there. I don't mind using our strong balance sheet to invest for the long term. It's my intent to have Vikram look at those opportunities.

Light Reading: Another major move you've made is to discontinue your GPON business with Verizon Communications Inc. (NYSE: VZ). Are you worried people might think GPON is dead, dead, dead at Tellabs?

Pullen: There's some confusion there. We canceled a custom development we were doing for Verizon.

We still have our 1100 Multiservice Access Platform that does GPON. We have roughly 700 access customers around the world and are still the PON leader in North America. What we did, though -- you're right, we stopped a custom development that we didn't think we could make money on and was not going to be for sale outside a single customer.

Light Reading: I didn't realize it was custom. How so?

Pullen: We had integrated the service router into the OLT [optical line terminal, the system sitting on the carrier's side of a PON connection] architecture with the goal of saving router and switch ports. It was a great idea, and before its time, but when you couple that with the outlook on profitability, we made the right decision.

When it's tough times, a corporation should focus more than expand. I don't mind investing in innovation to come out stronger. I'm not talking about the breadth of our portfolio, some of which isn't profitable -- I wont invest in that. I will continue to fund innovation in mobile backhaul, optical networking, and service delivery.

Light Reading: How difficult was the Verizon decision?

Pullen: There was a lot of discussion with Verizon, my management team, and my board. Verizon is a great customer of ours, and we had helped them with the largest and probably the most feature-rich broadband deployment in the world. So it was a difficult decision, but we told them we were going to focus. They told us that was the right thing to do, and I've gotten that feedback from customers in the past and customers in the past seven months.

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Light Reading: You seem to be particular fans of WDM-PON. What are your plans there?

Pullen: [Pause.] We still participate in the Sardana group, anticipating that that will likely be the next generation of Gigabit passive optical networks.

Light Reading: Any interest in becoming an end-to-end WDM-PON supplier?

Pullen: We have the technology today. The question is: Are customers going to go with that, and when? We expect from the trends that there's going to be a viable market there.

Light Reading: Another move you've made is the addition of the 7300 Metro Ethernet Switching series. (See Tellabs Gets Edgy With Ethernet.) But really -- why does the world need another Ethernet switch?

Pullen: The real value is the end-to-end solution with Tellabs products all managed by the 8000 Network Manager, which we have in over 500 customers now. Don't think about it as just a standalone product. Think about it as an end-to-end solution with the 7100 Optical Transport System and also with the 8800 Multiservice Routers.

Right now, that [architecture] terminates on some other company's device. In the future, next year, it would terminate on the 7300 device.

Light Reading: So, you're hoping to displace other companies' Ethernet switches.

Pullen: Our goal is to steal their share.

We'll also be reusing technology from the 7100 and repackaging that into the 7300. And there will be other derivatives over time.

We can deliver Ethernet and IP from an Ethernet services perspective. We can also do Layer 2 aggregation over our optical products. We have Layer 2 aggregation in the 7100 that we're already deploying for our customers.

Light Reading: But these derivatives of the 7300 -- are we talking more Layer 2 work or outright optical capabilities?

Pullen: It'll be dominantly layer 2.

Light Reading: Ethernet is prized for being cheap, so what does the Ethernet trend do to your margins?

Pullen: You're right that Ethernet is viewed as cheap, particularly in the enterpise, but for higher classes of Ethernet, like carrier Ethernet, you'll justify a higher premium. The cost per bit is certainly lower than time division. Having said that, we have better-than-corporate-average margins in this space.

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Light Reading: How about the old stuff, like the cross-connects?

Pullen: You mean the 5500 [Digital Cross-Connect]?

Light Reading: Yes.

Pullen: Well you know, the 5500, which I've been involved with at Tellabs since day one, has played a critical part of our success. As you know, also, it's later in its lifecycle and will likely decline over time, but we continue to support it out in the field as well as enhance it from a cost-reduction perspective. Our customers make a lot of money on business services delivery for private-line T1s.

Light Reading: So it's not a drain on the new-look Tellabs.

Pullen: Oh, not at all. No. The 5500 has better-than-average margins. Most importantly, our customers make fairly high profits through the annuity of leased-line sales through the 5500. If that ever were to wane, they - and we - would be in trouble.

Light Reading: Do you agree, though, that the world's getting taken over by Ethernet?

Pullen: It's not happening even as fast as people said a decade ago, because I was fielding these questions a decade ago. These transitions happen over time, and we are beneficiaries of that with our 8800.

Light Reading: You've been with Tellabs 23 years?

Pullen: 24.

Light Reading: So, how's life as a CEO?

Pullen: Obviously, I've been spending a lot of time with our customers and our employees around the world. I spend a lot of time traveling -- in fact, I'm under the weather right now from it. I've been on planes for the last seven months. That'll continue.

I'm taking a look at where we have profitable businesses and unprofitable businesses, and I'm cutting the areas that are unprofitable. We had growth products that needed focus. I thought we were spending in a few areas where it wasn't a good idea for our shareholders, so we made those tough decisions.

We're going to focus on mobile backhaul, optical networking, and business services delivery. We think these are big and growing markets where our customers have big business problems that we can use our innovations to solve, and we think they are growing at capex rates that are greater than the overall capex rates.

We've changed out some of our management as well as promoted some from inside and hired from the outside.

Light Reading: How much less fun is this job because of the economy?

Pullen: Our stock price isn't reflecting how fun a job it is. I don't know how long this thing is going to last. I have my opinions.

Light Reading: Such as?

Pullen: The most rational explanation I've heard has to do with following the GDP trends. I think we're going to have the worst and most negative GDP in the fourth quarter. It'll be negative in the first quarter but slightly better than the fourth quarter, then up in the second or third quarter. That's my most optimistic view; the markets give you a six-month lead time before a recovery, so we could see something in the middle of next year.

Light Reading: How about your most pessimistic view?

Pullen: I'm not sure if I can predict that. The pessimistic view would certainly be that the trough would last longer than through '09.