Analysts See Bumps in Tellabs Fiber Biz

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) could see sales of its fiber-to-the-curb (FTTC) equipment decline more quickly than expected as AT&T Inc. (NYSE: T) moves to deploy more fiber access equipment in the former BellSouth territories.

Tellabs has acted as the supplier of FTTC equipment for the BellSouth region since winning an RFP with the company in 2005. While that contract was supposed to last only a year, Tellabs has remained the de facto supplier of FTTC gear in the BellSouth regions ever since. (See Analysts See Tellabs Win at BellSouth, BellSouth Picks Tellabs, and Tellabs Secures BellSouth Biz.)

But the merger with AT&T could change the fiber access strategy of the carrier. While BellSouth ran FTTC throughout its footprint, AT&T deploys fiber-to-the-premises (FTTP) equipment in new housing developments. So analysts say it should come as no surprise that Tellabs would lose a cut of that business.

"It's logical that the same mandate would apply to the BellSouth regions, so Tellabs' fiber-to-the-curb business would be affected in those regions," says Jefferies & Company Inc. analyst George Notter.

In a research note issued Monday, Morgan Keegan & Company Inc. analyst Simon Leopold wrote: "We slightly reduced assumptions for Fiber to the Curb (FTTC) purchases for AT&T's BellSouth region and allowed the decline to continue into 2008. We imagine that the FTTC purchases could spike if AT&T makes a 'last buy' to stock-pile spares before capping deployment, but ultimately, we expect AT&T to shift to a Fiber to the Premises architecture for new home developments with gear from Alcatel-Lucent or Ericsson rather than FTTC."

AT&T picked Alcatel-Lucent (NYSE: ALU) and Ericsson AB (Nasdaq: ERIC) to be its gigabit passive optical networking (GPON) suppliers earlier this year. (See AT&T Picks GPON Partners and AT&T Picks GPON Players.)

But there's been some question as to the timing of those deployments. While most analysts do not believe AT&T will begin deploying FTTP gear until 2008, Leopold thinks Tellabs' sales could start to decline sooner.

"There is a more rapid migration toward the architectures that had been previously selected by AT&T," Leopold says. "My impression has been that [Tellabs] has had strong supporters from BellSouth employees, but the transition to FTTP is happening faster than we had imagined."

Analysts still see plenty of risk for the company as AT&T settles on its suppliers for the integrated company. UBS AG analyst Nikos Theodosopoulos says he doesn't believe it makes sense for AT&T to have three separate platforms for FTTC, FTTP, and fiber-to-the-node (FTTN) deployments.

In a research note issued after Tellabs' second-quarter earnings release, Theodosopoulos wrote, "We continue to look for confirmation from ATT on the preferred video architecture of choice for the BellSouth territories, and will continue to assess the potential impact once a decision is finalized. It is our expectation that ATT will choose to move towards a FTTN/FTTP architecture at BellSouth over time."

Though that would be a blow to Tellabs, it wouldn't necessarily mean losing AT&T as a customer. As Notter points out, the Tellabs 1150 supports FTTC, FTTP, and FTTN deployments.

— Ryan Lawler, Reporter, Light Reading