Optical/IP Networks

Tellabs Pins Hopes on Optical

In a brisk, low-key presentation to Wall Street this morning, executives at Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) announced reduced third-quarter earnings but touted the firm's next-generation 6000 series optical crossconnects as a hope for better things ahead (see Tellabs Closes Q3).

"Customers continue to embrace Tellabs' new optical products," said CEO Richard Notebaert in a prepared statement. Notebaert was joined on the call not only by CFO Joan Ryan but by Robert Pullen, the company's VP and general manager of the Optical Networking Group at Tellabs.

In all, the company's optical gear accounted for $233 million, or 52 percent, of Tellabs' third-quarter revenues of $448 million. In contrast, broadband access sales of $122 million were down from $148 million in the preceding quarter; voice-quality enhancement gear accounted for $36 million, down from $45 million in the second quarter; and professional services were $57 million, compared to $102 million last quarter -- reflective of the overall reduction in product sales, the execs said.

Tellabs says about 20 percent of optical sales were of the firm's new Titan 6000 series of crossconnect products, which includes the Titan 6100 ring-based DWDM transport switch, the Titan 6500 ATM crossconnect, and the Titan 6700 optical switch. In addition, the company says sales of the Titan 5500 digital crossconnect maintained stable levels through the quarter.

But such a strategy raises many questions at a time in which Tellabs is competing with a host of companies focusing solely on optical DWDM equipment. Indeed, at least one significant customer appears to be chary of the company's new offerings. Earlier this month, it became known that Verizon Communications Inc. (NYSE: VZ) backed out of a contract for 6000 series gear (see Tellabs Losing Its Edge?).

Analysts greeted the Verizon loss negatively, since the rest of Tellabs financials indicate that plenty of help is needed. Quarterly sales of $448 million, or 1 penny earnings per share represent a reduction of 13 percent over second-quarter sales of $516 million and EPS of 2 cents.

Optical sales are up from last quarter's $210 million, but they're down substantially from last year's third quarter, when optical networking sales were $544.5 million on overall sales of $870.6 million.

What's more, Tellabs is reporting a net loss of $49 million, or 12 cents per share, including one-time items. These include a $50 million restructuring charge, of which $18 million is associated with the layoff of 1,000 employees announced this summer (see Tellabs Cuts 1000) and $32 million to the closure of roughly one-third of the company's plants.

Still, Tellabs says the restructuring is working. Third-quarter operating expenses were down about 13 percent sequentially, says Notebaert, without sacrificing investment toward future growth.

Analysts grilled Tellabs this morning about the status of customers for its Titan 6000 series. Pullen admits there's just one customer, Sprint Corp. (NYSE: FON), for the 6500, although trials are in progress for this product and the 6100, and the 6700 is on track for release.

There are other flags indicating that the Titan line may not live up to Tellabs' hopes, at least in the near term. In response to analyst queries, CFO Ryan said half of the company's inventory reductions during the quarter were "relative to the 6000 series." And the book-to-bill ratio for the new products is less than one.

Tellabs faces other challenges too. European sales are off, and so far that region hasn't responded significantly to the 6000 series. And it's too soon to tell what the impact of the September 11 attacks will be on Tellabs financials.

Still, not everyone is alarmed by Titan series performance. "They did better than we anticipated in revenues for the 6000 series this quarter, and we're pleased to see stabilization in the flagship 5500," says Michael Ching of Merrill Lynch & Co. Inc. Originally, he predicted about $30 to $35 million in 6000 series sales, in contrast with over $45 million that materialized. But Ching says he remains "conservative" about Tellabs in the near term.

Notebaert acknowledged today that the market downturn will likely continue for the next several quarters. And while declining to give specific future guidance, he said Tellabs earnings will probably be "flat" for the foreseeable future. CFO Ryan indicated that margins will probably be "lower than average" for the next few quarters.

At press time, noon today, Tellabs shares were trading at $13.16, up 0.19 (1.46%).

— Mary Jander, Senior Editor, Light Reading
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