Optical Stock Watch: Tellabs

Crossconnect vendor seeks to diversify its product suite

February 21, 2001

3 Min Read
Optical Stock Watch: Tellabs

Can shares of Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), a crossconnect giant, retain their value as the company diversifies its product portfolio?

While blood has been shed in the telecommunications and networking sector, shares of Tellabs have remained relatively stable compared with networking and telecommunications peers such as Cisco Systems Inc. (Nasdaq: CSCO), Nortel Networks Corp. (NYSE/Toronto: NT), and ADC Telecommunications Inc. (Nasdaq: ADCT).

What’s the story behind this performance? Analysts say it’s mainly because Tellabs has a solid base of strong customers that are continuing to demand its TITAN 5500 crossconnect, which is deployed in over 3,000 central offices. The 5500 provides nearly 60 percent of total revenue for the company.

Tellabs also has limited exposure to the enterprise market and almost no exposure to the emerging carrier sector. CLECs (competitive local exchange carriers) account for just 5 percent of total revenue, while RBOCs (regional Bell operating companies) and long-distance companies make up roughly 33 percent and 15 percent of total revenue, respectively.

Analysts say virtually all carriers need a 5500 or similar product to manage traffic at the T1 level. Despite talk of an all-optical local network in the future, the reality is that carriers still need to meet the demand for high-quality service on their current networks, and that still involves the deployment of the core Tellabs product. According to A.G. Edwards telecom equipment analyst David Heger, many RBOCs are barely able to keep up with demand for T1 circuits.

Tellabs’ newly released TITAN 5500 version 7.0 increases port capacity by 50 percent. The company has said that it has indications that most of its top 25 customers will order the upgrade; Tellabs ultimately expects half of its installed base of customers to take the upgrade, which analysts say provides good earnings visibility at a time when carrier spending is being cut.

Critics of Tellabs say the company is too reliant on its TITAN 5500 product, and must extend its portfolio to offer a more diversified suite of optical, broadband, and next-generation switching technologies. Indeed, TITAN 5500 sales growth slowed to just under 45 percent in the latest quarter, down from 60 percent to 65 percent growth in recent previous quarters. Some analysts predict growth for the core 5500 product will slow even further to the 30 percent to 35 percent range this year.

But Tellabs is forging ahead with new products. Broadband access (mainly international sales of MartisDXX and CABLESPAN products -- see Tellabs Launches Radio Access Solution) and next-generation switching products are expected to account for 25 percent of total revenue this year. In addition, Tellabs is expanding on its core TITAN product line. The company recently announced Sprint has signed on as the first major customer for the TITAN 6500 transport switch, snubbing Alcatel SA (NYSE: ALA; Paris: CGEP:PA) in the process. Sprint Corp. (NYSE: FON) signed a multiyear $100 million deal to deploy the 6500 across its network. Four customers are currently in trials with the 6500; word has it that WorldCom Inc. (Nasdaq: WCOM) and Verizon Communications (NYSE: VZ) may soon formally announce they’ll deploy the product.

Tellabs also announced its new metro DWDM TITAN 6100 optical transport system and SALIX 7600 softswitch control suite are both shipping. The company’s new TITAN 6700 optical switch, expected to be commercially available by the second half of this year, will go head to head with products from Ciena Corp. (Nasdaq: CIEN) and Sycamore Networks Inc. (Nasdaq: SCMR). According to management, there are a few "large established" service providers already lined up for 6700 field trials.

At a recent price of $60, shares of Tellabs trade for less than the company’s expected earnings growth rate for 2001. Reliance on one key product is a major reason why the stock’s price/earnings (P/E) multiple is so low in relation to other companies in the networking space. But Tellabs generates more than 65 percent of its total revenue from optical networking, and the stock’s low P/E offers investors a less risky way to play this space.

-- Rob DeFrancesco, special to Light Reading http://www.lightreading.com

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