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Tellabs Calm Over AFC Hiccup

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) CEO Krish Prabhu had expected to focus on his company's burgeoning revenues and profits during today's second-quarter financial results conference call (see Tellabs Revenue Grows to $304M).

Instead he was deluged with analyst questions about the ongoing acquisition of Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI), which last night revealed it had breached the conditions of its high-profile FTTP contract with Verizon Communications Inc. (NYSE: VZ) (see Tellabs Buys AFC for $1.9 Billion, Investors Deprecate AFC-Tellabs Deal, and Verizon's FTTP Demo Helps AFC).

During a late afternoon conference call about AFC's latest quarter (see AFC Reports Q2 Results), the access gear vendor reported that its profits had been hit by a $1 million fine it had to pay Verizon for missing a June deadline. The delay was caused by a parts shortage.

This isn't the first time AFC has hit a bump in the road with Verizon (see AFC/Verizon Glitch Alleged and More Trouble for AFC ), and ongoing problems for AFC just might create an opening for the likes of Alcatel SA (NYSE: ALA; Paris: CGEP:PA) or Motorola Inc. (NYSE: MOT) to snatch some of Verizon's FTTP action as the carrier turns its plans into action (see Verizon's FTTP Texas Feeler).

AFC's CEO John Schofield told analysts that while the circumstances around the fine were "serious," he said the parts shortage was being resolved and that deliveries to Verizon are back on track, as is the operator's new network rollout.

But AFC also reported second-quarter revenues and earnings that fell way below analyst expectations, and it offered a lackluster forecast for the third quarter.

So is Prabhu concerned that Tellabs might be taking on an albatross in this merger? Not a bit of it, says the CEO: "We are aware of all the developments at AFC, and we have had no surprises, but I can't speculate on what will happen between AFC and Verizon between now and the closing [of the acquisition], which is due very soon," says the CEO.

The purchase of AFC is "a strategic deal. Verizon is transitioning to FTTP, AFC is well placed in FTTP, and we believe we can approach the FTTP market better as a merged company than AFC could do on its own. The deal still makes strategic sense. Our customers tell us [it's] a good one," adds Prabhu.

Meanwhile, Tellabs is making decent progress on its own steam. Its second-quarter revenues of $304 million are up 30 percent from last year's $234 million, and up 15 percent from $264 million in the first quarter. Net profit was $49.6 million, or 12 cents per share, in sharp contrast to a loss of $110.7 million a year ago. That income level is being driven by higher revenues, higher margins (in the mid to high 50 percent range), and lower operating costs, says CFO Tim Wiggins.

The CFO added that third-quarter revenues are expected to be between 20 percent and 25 percent higher than the $245 million recorded in 2003, putting the range at $294 million to $306 million.

But the increase in revenues is still being fueled by growing sales of traditional product lines, such as sales of the 5500 transport switch and echo cancellers to wireless carriers (for example, see Ntelos Picks Tellabs' Gear ). That was also the case in the previous quarter, and this, coupled with slow sales progress in Tellabs' new data product lines, gave some analysts cause for concern three months ago (see Tellabs Returns to Profit).

Revenues from the new data products were miniscule again in the latest quarter, amounting to just $2 million from four customers, though the company points to multiple trials around the world for its 8800 and 8600 edge routers, as well as the first shipment of its 8600.

Prabhu says sales of the broadband products are "well within expectations. Unlike some of our data product rivals that work with a larger number of small customers, we are working with a small number of large customers, so the sales cycle is long. No one knows what the timetable is, but everyone knows that the transition to packet networks will take place. We're working very closely with a number of carriers to deliver the products they need for their migration strategies," but it's tough to tell what the revenues from data products will be in, for example, 2005, and when they'll really start to ramp up, says the CEO.

He also believes the current strong revenues from wireless customers can be maintained, as the mobile operators add extra capacity to existing and new towers to deal with increasing volumes of voice and data traffic. "This is one of our nuggets. We play a strategic role in the North American wireless market, and we're well placed to leverage our strong transport position into a strong data position."

The CEO also says Tellabs is due to announce "one or two significant partnerships in Asia" to strengthen its international business.

Today's news saw Tellabs' share price jump by 30 cents, nearly 4 percent, to $7.97 from yesterday's close of $7.67.

— Ray Le Maistre, International News Editor, Light Reading


For more info on the state of industry financials, check out the coming Light Reading Live! event:

  • Light Reading's Telecom Investment Conference, in New York City, November 10.

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