Optical/IP Networks

Optical Boosts Tellabs Quarter

In the midst of a cranky technology market, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) announced record third-quarter earnings this morning, and executives credited optical networking with a key role in the strong showing.

"We've seen demand for optical networking accelerate, and we expect the trend to continue," said CEO Richard C. Notebaert in an analyst conference call before the market opened. Tellabs saw 63 percent growth in revenues from sales of its optical networking gear, including the Focus series of SDH (synchronous digital hierarchy) transport and DWDM (dense wavelength-division multiplexing) gear and the Titan series of digital crossconnects, according to Notebaert. Tellabs made more money on optical gear during the first nine months of this year than in all of 1999, he said.

In all, optical equipment and services accounted for $544.5 million, about 62.5 percent of $870.6 million in revenues for the quarter, according to Tellabs' financials. (Diluted earnings per share were 47 cents, compared to 33 cents the same time last year.) The overall revenue represents 46.2 percent growth over sales of $595.4 million for last year's third quarter. Optical equipment is now showing an annual run rate of $2 billion at Tellabs, and the vendor expects the product area to show at least 50 percent growth rate overall for the year.

Tellabs execs also credited optical networking with a 91.1 percent increase in revenue in its network services division, where customers receive design and implementation services. The vendor expects that segment to grow over 70 percent for the year, as customers demand more help installing and running new optical gear.

All this reflects well on Tellabs, an old-guard regional bell operating company (RBOC) supplier that has managed to grow with the times -- in contrast with others such as General Datacomm. According to market research firm RHK Inc., Tellabs now dominates the North American digital crossconnect market, surpassing Alcatel SA (NYSE: ALA) and Lucent Technologies Inc. (NYSE: LU). In Europe, it ranks second to Alcatel.

"They're doing very well, and have kept apace of market conditions," says Lawrence Harris, VP at investment bank Josephthal & Co.. This morning, for instance, execs admitted that the August 1999 purchase of NetCore Systems Inc., which makes IP and ATM routing gear, was a disappointment and is being redesigned. The vendor says IP, not ATM, is the direction it will take in North America.

But changes are coming to Tellabs' market. Experts warn that the digital crossconnect market, in which Tellabs markets the Titan 6500, may increasingly be eroded by new optical switches from the likes of Corvis Corp. (Nasdaq: CORV) and Nortel Networks Corp. (NYSE/Toronto: NT) (see DACS Sent Packing? ).

Tellabs also admits that its yearly gross margins will be "flat for the fourth quarter" thanks to the ongoing shortage of optical components and ASICs. "We still find ourselves in almost a hand-to-mouth situation," says Tellabs president Michael J. Birck. "We'll get through it, but gross margins will be affected."

Tellabs also faces the need to update its switching products, which showed the quarter's only loss: $51.3 million in third-quarter sales compared with $72.5 million at the same time last year. Analysts say the shortfall has to do with declining demand for echo-cancellation equipment, as voice switching increasingly is replaced with IP-based packet switching gear.

Tellabs stock price rose $1.19 and was trading at $44.69 by midmorning.

-- by Mary Jander, senior editor, Light Reading http://www.lightreading.com

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