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Tellabs Earnings a Downer

News of a downturn stabilization is greatly exaggerated, according to Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA). In its first quarterly report for fiscal 2003, the company revealed a sequential revenue decline of 29 percent, and execs outlined a cost-reduction plan that includes cutting 14 percent of the company's workforce (see Tellabs Lays Off as Q1 Sales Fall).

Tellabs logged a net loss of $43 million, or 10 cents per share, on "disappointing" quarterly revenues of $223 million. Last quarter, the company showed a net loss of $10.2 million, or 2 cents a share, excluding various charges (see Tellabs Posts Q4 Loss).

In the face of ongoing losses, Tellabs is cutting 665 employees from its roster of 4,700, and further cuts could be in the offing as it attempts to whittle its quarterly operating expenses from their present level of $144 million to about $125 million by the end of this year.

The cuts were anticipated (see Give Me Liberty!) and Tellabs has cut jobs all along since the downturn began. But execs seemed unhappy to report a fresh round they'd apparently hoped to do without. The cuts will bring the employee roster to less than half what it was in 2000.

In an interview with Light Reading, CEO Michael J. Birck said the axe has fallen primarily on R&D, which represents over 50 percent of operating expenses.

Other areas, including manufacturing, are candidates for chopping in future weeks and months. There also will be facilities consolidations and outsourcing, though Tellabs hasn't offered specifics.

On the upside, Tellabs plans to save money by using its large available cash (about $1.7 billion this quarter) to acquire other companies, saving time and development costs in key areas.

What areas? "We don't exclude anything, but we probably don't need more crossconnects," Birck quips. "We don't have much presence in access, and we believe data-formatted networking will be predominant." That means Internet Protocol (IP) and Multiprotocol Label Switching (MPLS) have become strategic areas of focus.

Birck acknowledges that White Rock Networks, in which Tellabs holds an interest (see Tellabs Invests in White Rock) could be considered for acquisition -- "perhaps more so than they would have been, had we not made an investment."

For now, though, the focus is strictly on expense cuts. "Maybe we've been a little slower in taking the big steps in downsizing that others have done," Birck tells Light Reading. But the company didn't have to act sooner, he says: "We've had no debt, no bankers running the business. We could use our own evaluation..." Now, the company sees the hoped-for upward bounce isn't going to happen, despite talk of an upswing. "I would take exception to the statement that this industry has bottomed out. It looks like this [downturn] will prevail for some time and we need to take steps."

On today's call, analysts asked what had forced Tellabs to this dismal outlook. Execs cited continued capex cuts by North American carriers; postponement of orders from Asian prospects; a greater-than-anticipated shortfall in revenues from key cable customer Comcast Corp. (Nasdaq: CMCSA, CMCSK); and the penetrating awareness that the market won't support Tellabs' return to profitability without sizeable cost reductions.

A glance at the numbers reflects these factors. Hardest hit in the quarter was SDH/managed access equipment, a category Tellabs used to call broadband access, which includes the Tellabs 6300, 7200, and 8100 platforms sold internationally, where Tellabs primarily sells to Tier 2 players.

Execs attributed the reduction mainly to declines in the Asia/Pacific region after a preceding record quarter. Nonetheless, about 6 percent of overall revenues came from new international products, such as the new high-density 6350, for which Tellabs claims 14 new customers (see Tellabs Ships Metro Crossconnect).

Domestically, the Tier 1 ILECs Tellabs primarily sells to are making life tough by not providing guidance and holding out on new builds. Still, North American sales of new 6400, 7100, and 6500 systems accounted for 7 percent of overall sales. Also, Verizon Communications Inc. (NYSE: VZ) remains Tellabs' largest customer, and new business with Sprint Corp. (NYSE: FON) seems promising (see Tellabs: Alcatel's Silent Partner at Sprint?).

Will any of this help Tellabs to profitability anytime soon? Birck isn't ruling out the possibility, but he notes it probably won't happen until the fourth quarter. While Tellabs will do its part to cut costs, returning to business as usual "depends on the top line."

— Mary Jander, Senior Editor, Light Reading

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