Lehman Likes Tellabs/Vivace

The acquisition of a startup often marks a key turning point in the life of a large company. And Tellabs Inc.'s (Nasdaq: TLAB; Frankfurt: BTLA) deal with Vivace Networks looks to be crucial to its fortunes over the next year (see Tellabs Closes Vivace Acquisition).

So will it pay off? One influential Wall Street analyst likes the deal. Lehman Brothers' Steve Levy this morning raised his revenue estimates for Tellabs, saying that Vivace sales could provide some upside.

Levy is now forecasting $933.5 million in sales for Tellabs in 2003, up from his previous estimate of $922.2 million. In addition, Lehman thinks Tellabs sales will grow 9 percent sequentially in 2004, to $1 billion. Much of the boost in that estimate is dependent on success from Vivace.

Levy sees Vivace generating $11 million in sales through year end and $35 million in calendar 2004. Most of this comes on the back of an existing relationship with huge Japanese carrier NTT DoCoMo Inc. (NYSE: DCM).

Vivace -- a startup that managed to remain fairly stealthy before being acquired by Tellabs -- is now likely to become a key product category for Tellabs. It also marks a major turning point for Tellabs, which has traditionally been a manufacturer of Sonet/TDM transport equipment.

Vivace makes the Viva5100 and Viva1050 IP/MPLS multiservice switches. These are designed to sit at the edge of the transport network, aggregating and switching Ethernet, ATM, and Frame Relay access traffic and handing it off to an IP/MPLS-routed network or an ATM-switched backbone. The boxes are specially designed to help a carrier migrate its legacy network to an IP/MPLS core.

There is currently quite a lot of action in this space among large carriers, and it has the potential to develop into a multibillion-dollar market. Many of the most sought-after requests for proposal (RFPs) circulating from RBOCs include specifications for collapsed backbones that route data and voice traffic over a common network using MPLS switches -- hence Vivace’s importance (see How Will Verizon Go National?, Qwest Adds More States, BellSouth Unveils MPLS Backbone, Qwest Heads for Convergence, and AT&T’s New Gods).

Other large equipment vendors clearly have their eyes fixed on the multiservice routing and switching market. The need for more IP/MPLS gear in the portfolio drove Alcatel SA's (NYSE: ALA; Paris: CGEP:PA) deal for TiMetra Networks (see Alcatel & TiMetra Seal the Deal).

Ed Kennedy, Tellabs’ president for North America, is driving the move into this market. According to Kennedy, likely growth in the telecom equipment market will come from multiservice switching provided by products like the Vivace switch.

“Things are moving toward converged platforms,” said Kennedy in an interview with Light Reading at the Supercomm 2003 tradeshow. “We can go futher and further out toward the edge of the network.”

Kennedy says the major telecom carriers have to make the investment in converged platforms, because they can’t afford to build parallel voice and data networks anymore.

“For the RBOCs, many of their connections are broadband, and they’re carried in the service layer: T1, ATM, IP, Frame Relay... It’s costing them a ton of money to maintain all these network elements. The real money is in the edge of the network. We’re going after this multibillion-dollar market, which is the converged multiservice edge.”

What’s the potential catch? Tellabs competitors would point to the fact that, while Tellabs is one of the leaders in the incumbent transport market, it has historically shown little expertise in the datacomm market, which is dominated by companies such as Cisco Systems Inc. (Nasdaq: CSCO) and Juniper Networks Inc. (Nasdaq: JNPR).

In the meantime, watch this space. The multiservice market appears to be heating up and is likely to yield more action in 2003.

— R. Scott Raynovich, US Editor, Light Reading

signmeup 12/4/2012 | 11:53:11 PM
re: Lehman Likes Tellabs/Vivace Mr. Levy needed to get the stock price down on tlab so he could buy more shares before he submitted this report....

Call it like you will, they are all a bunch of crooks.
opticalweenie 12/4/2012 | 11:53:11 PM
re: Lehman Likes Tellabs/Vivace Steve Levy of Lehmans downgraded Tellabs just 10 days ago (along with a couple other "analysts",
when he knew that this aquisition was going to
take place and what Vivace had in the pipeline with respect to sales. I recollect he said Tellabs stock wasn't worth more than $4.75. Tlab rolled off it's high as a result.

So my question. Why the flip flop today? The income figures haven't changed. Something fishy here.
wilecoyote 12/4/2012 | 11:53:10 PM
re: Lehman Likes Tellabs/Vivace Insiders tell me orders are accelerating. I think they will surprise even Tellabs. Watch out Kennedy, here comes Koenig. The battle of the K's. Should be interesting. Belmont stakes got nothin' on this story-to-be (yeah I'm speculating, but only having some fun here).

Looks like both sides got a good deal. Vivace avoided the re-capitation and Tellabs got real revenues. I love it. Viva Vivace!

lightmaster 12/4/2012 | 11:53:08 PM
re: Lehman Likes Tellabs/Vivace Unfortunately, this article emphasizes the positive aspects of Levy's report and sort of igniores the negatives. Levy does believe that the aqusition is positive strategically and that the integration should go well. He is changing revenue forecasts based on Tellabs own estimates, which are bound to be conservative.

However, he also states that the revenue contributions from Vivace could have a negative effect on margins. He maintains an underweight rating on Tellabs stock, thinks the stock is over-priced, and that they will still need to make more cuts to reach the right financial model.

Don't blame Levy...his analysis has been pretty consistant.
materialgirl 12/4/2012 | 11:52:50 PM
re: Lehman Likes Tellabs/Vivace Back to the same old OSS question. How are service providers going to manage and provision this stuff? If MPLS/IP becomes a hardware-based, packet-forwarding-speed type of commodity, won't competitive advantage fall to the guys with the best management software (how ever you want to define that)? Do these guys have a edge here? If not, who does? I doubt revenues are going to jump before this issue gets resolved.
rjmcmahon 12/4/2012 | 11:52:49 PM
re: Lehman Likes Tellabs/Vivace won't competitive advantage fall to the guys

For the egoists amongst us, and in this context, the competitive advantage is held by the gals that know out how to transition public goods into private goods. Unfortunately, most don't understand that game. Rather most just give up their knowledge or their acummulated savings to those that do understand. (Witness the content refineries exploitation of artists, corporate exploitation of sw programmers and hw designers who are the least educated in finance, stock market IPOs taking advantage of indvidual investors, etc.)

Also, in this context, the trends worth watching are the public domain movements of content ownership and of infrastructure control. The winner will determine the future economic health of our society.

Who should win? Well, my opinion is fairly obvious to anybody that reads my posts.

It is in the best interest for our society that the content ownership be privatized over it's distribution. Why? Because private trade stimulates diversity and diversity makes our short lives more interesting. And we have the side benefit of becoming a wiser people. Also, if we don't find a way to trade intangible ideas, not only we will consume every resource we can get our grubby hands on, our descendants we'll end up being colonized by those that do figure out how to trade in knowledge. Placing our descendants on the other side of today's Iraqi "situation" is no legacy worth leaving.

PS. It looks like condemnation may be the only answer to our provisioning of public goods problem.
rite2nikhil 12/4/2012 | 11:52:32 PM
re: Lehman Likes Tellabs/Vivace switch on the edge which is what its developed.
qos on this would certainly count
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