Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) announced better than expected first-quarter results today, posting revenues of $436 million and pro forma earnings of 6 cents a share; analysts were expecting only $408 million in revenues and earnings of 2 cents a share (see Tellabs Reports Q1 Revenue Rise ).

The news gave the firm's share price a boost; Tellabs shares were up $0.52 (7.37%) to $7.58 in trading midmorning.

After one-off items, the vendor's net income was just $700,000, giving a break-even EPS.

But the focus of the earnings conference call was on the vendor's relationship with Verizon Communications Inc. (NYSE: VZ), where Tellabs inherited a major FTTP contract with its acquisition of Advanced Fibre Communications Inc. (AFC) (see Tellabs & AFC: Together at Last!, Verizon Expands FTTP Plan, and AFC Finalizes Verizon FTTP Contract).

The Verizon contract hasn't always run smoothly for AFC, and, following a number of hiccups, the RBOC announced last September it would source FTTP products from a second supplier starting in 2005 (see Rough Week for AFC).

And, with classic timing, Verizon announced that second source this morning, less than an hour before the Tellabs conference call (see Motorola Wins Verizon FTTP Deal).

Tellabs CEO Krish Prabhu did his best to remain calm when asked about Verizon's second-sourcing strategy. "I'd do the same if I was Verizon. We are just concentrating on our customer's needs. We have our products in Verizon's network, and we've worked through the operational issues. In addition, we're developing technology with input from our customer."

He got more emphatic when asked whether Tellabs' account will continue to grow when Motorola Inc. (NYSE: MOT) gets its piece of the pie. "You should ask the customer, but from my experience the RBOCs are motivated to work with one supplier for 90 percent [of their needs], and we have the inside track on that business," said Prabhu. "But I feel uncomfortable speaking on behalf of our customers."

Prabhu also talked up the prospect of Verizon ordering Vinci optical networking terminals (ONTs) during the coming quarters (see Tellabs Vacuums Up Vinci). And that's something Tellabs needs to have happen. AFC's low margin units are dragging down Tellabs' gross margins -- by 5 points in the first quarter -- and they can only be used in single-family homes.

The Vinci ONTs, which can also be used for multi-dwelling units, "are in Verizon's lab at the moment and if the evaluation is successful we're hoping for deployments in the second and third quarters, and a ramp-up in the third and fourth quarters," stated Prabhu. If that timetable is met, Tellabs' current gross margin of 42 percent should improve from the third quarter onwards.

Overall, the vendor's first-quarter revenues were up by 65 percent from a year earlier, but the $436 million total includes $128 million of AFC sales. But even without AFC, the revenues were still up by 17 percent year-on-year.

Transport equipment sales were up 16 percent from a year ago to $158 million, with sales to North American wireless operators delivering 58 percent of that total.

Sales of the vendor's broadband data products, from the 2003 acquisition of Vivace, are still very low -- just $6.6 million in the three-month period. But Prabhu said the 8800 multiservice router is now generating revenues from 12 customers, eight of which are using it in their live networks, "and we're aiming to have 16 live deployments by the end of this year." (See Broadwing Picks Tellabs and Tellabs Snags Vivace for $135M.)

— Ray Le Maistre, International News Editor, Light Reading