Tellabs Pulls a Switch
The company said the move is an attempt to "reinvent Tellabs" by more closely aligning its "cost structure and asset base with expected revenues." The TITAN 6700 isn't in any trials and was therefore not likely to produce revenues anytime soon.
Tellabs' mediocre results in next-generation optical networking have become more apparent in recent months, as it struggles to compete with a host of startups in a bleak spending environment (see Tellabs Losing Its Edge?). The news is especially troubling for investors, because the company has pinned future expectations to the success of its new lines of optical switches (see Tellabs Pins Hopes on Optical).
But some analysts say the move is positive because it indicates Tellabs' willingness to make tough decisions. "Equipment makers are having to decide which of their children will stay in the liferaft," says Rick Schafer of CIBC World Markets. "This shows Tellabs is willing to address meaningful change."
Schafer says the TITAN 6700, a point-to-point, electrically-based optical core switch, was over 12 months late to market and lacked key features, such as support for mesh networking. These drawbacks made competition against the likes of established players such as Ciena Corp. (Nasdaq: CIEN) and Tellium Inc. (Nasdaq: TELM) tough, particularly given the downturn in carrier spending.
Tellabs says it's redeploying most of the resources that were dedicated to the TITAN 6700 to its other optical platform, the TITAN 6100, a 32-channel DWDM system that supports ring topologies for metro networks. For instance, a wavelength management system initially developed for the optical switch is set to be ported to the TITAN 6100.
But the jury's out on whether these measures will be sufficient to propel Tellabs' optical strategy out of its inertia.
The TITAN 6100 has a couple of strikes against it. Despite its solid feature set and the fact that it's generating revenue for Tellabs, it reportedly hasn't distinguished itself with carriers. Though Tellabs' latest quarterly report states that the 6100 and the 6500 ATM crossconnect combined accounted for more than 10 percent of last quarter's revenues (see Tellabs Pins Hopes on Optical), analysts believe the 6100's share of that slice was minimal.
To boot, the TITAN 6100 recently made headlines by being passed over by Verizon Communications Inc. (NYSE: VZ), which is a longtime customer of Tellabs' digital crossconnect switch, the TITAN 5500.
Reasons for Verizon's snub aren't clear. But analysts believe the 6100's features aren't compelling enough at the price. "We consider [the TITAN 6100] a 'me too' product," states Alex Henderson of Salomon Smith Barney in a note issued today.
Henderson indicates that Tellabs is between a rock and a hard place. "In our opinion, the weak performance of the TITAN 6500 and the waning position of the TITAN 5500 puts Tellabs in a precarious position in terms of new product opportunity and portfolio longevity."
"This is a legacy equipment company that has struggled to make inroads in next-generation Sonet and WDM," says CIBC's Schafer. "They need to make an aggressive move." In his opinion, it would behoove Tellabs to consider leveraging the strength left in its balance sheet and stock price toward acquiring the optical innovation it lacks.
He isn't alone. For months, the industry rumor mill has featured a marriage of Tellabs and Sycamore Networks Inc. (Nasdaq: SCMR). From time to time, gossip also favors a possible acquisition of Calient Networks Inc., the photonic switch startup with which Tellabs has a longstanding investment and interoperability relationship (see Calient Networks).
Right now, Sycamore is favored. "Tellabs reportedly has had some problems with software, and Sycamore's strong in software," says Sam Greenholtz, senior analyst at Communications Industry Researchers Inc. He says Sycamore lacks Tellabs' expertise in hardware.
Tellabs declines to comment on strategic elements of its business plans, such as acquisitions. But the present economic crunch could put any hopes of a merger on hold. Calient has struggled in recent months with its own financial position, and Sycamore's problems are well known (see Sycamore Enters Crisis Mode).
— Mary Jander, Senior Editor, Light Reading