Tellabs Regroups

In an effort to ride out troubled economic seas, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) will jettison staff, toss out R&D on a next-generation telephony switch, and focus efforts on optical networking, company officials said this morning in the company's quarterly conference call (see Tellabs Announces Earnings, Cuts).

"We're operating in a very different market than we were just a few short months, even weeks, ago," CEO Richard C. Notebaert told analysts.

That market is in the midst of a major slowdown in carrier spending, which forced Tellabs to reduce its guidance earlier this month (see Tellabs Chops Q1 Estimates (Again)).

As anticipated, the company reported first-quarter 2001 earnings per share of 29 cents on revenues of $772 million. Tellabs also reported that it expects 2001 EPS for the year to be between $1.55 and $1.65 on revenues of $3.6 billion to $3.7 billion. That forecast is about 27 percent lower than expectations publicized earlier this year.

Analysts focused on gathering details about the performance and prospects of individual Tellabs products. Most of the revenue growth for the quarter took place in Tellabs' optical networking products and professional services, which, respectively, grew 22 percent and 160 percent sequentially. Optical gear accounted for $482 million in revenues this quarter, roughly 62 percent of total sales.

Indeed, Tellabs is looking to its optical products to carry the company through tough times. And its high-end 6100 and 6500 Digital Cross-Connect Systems will account for $175 million in revenues next year, the company says.

"On the 6500 we are not getting an indication of deferral, and, if anything, we're catching a little grief about not ramping up faster," Notebaert said.

In contrast, sales of other Tellabs equipment, including its 5300 Digital Cross-Connect System, were reduced slightly from last year. And analysts say there's some indication that an $83 million deferral in revenues last quarter was due to carriers passing on some of Tellabs' earlier-model crossconnects, like the Titan 5500.

The difference is that higher-end products have the connectivity carriers need to wed their older networks to next-generation optical ones, say analysts. "The 6500 is where the growth is now," says Lawrence Harris, VP at Josephthal & Co.. He notes that Sprint Corp. (NYSE: FON) is testing the product, and rumors are that Qwest Communications International Corp. (NYSE: Q), Verizon Communications (NYSE: VZ), and WorldCom Inc. (Nasdaq: WCOM) also are considering it.

Despite solid optical revenue expectations, the company still needs to trim costs in order to manage its business. Notebaert said Tellabs will take a restructuring charge of about $150 million to $225 million in the upcoming quarter. That will cover the cost of laying off 550 employees, roughly 6 percent of the workforce, eliminating 450 contractors and temporary workers, and not filling 1,100 open job requisitions.

The company also plans to move to a four-day work week at manufacturing plants in Texas and Illinois. Significantly, though, it won't make any changes to manufacturing of its optical networking gear, including its new Titan 6000 series of crossconnects.

Tellabs also plans to terminate development on a series of softswitch products based on Tellabs' purchase of Salix Technologies for $300 million back in 1999. It will close R&D, write down assets on inventory, cancel trials, and lay off employees.

"We've made no significant traction with Salix," Notebaert said. The company hinted it will integrate the softswitch technology it's already created into customer switches on a case-by-case custom basis, then put software-based telephony capabilities into future intelligent optical switches.

"Doing the right thing for the long-term health of the business, however painful, is the best for Tellabs and our shareowners," Notebaert said.

Early this afternoon, Tellabs shares were trading at 35.70, up 0.61 (1.74%).

- Mary Jander, Senior Editor, Light Reading http://www.lightreading.com
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