Tellabs Returns to Profit

Does Krish Prabhu have the Midas Touch? Hosting his first Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) earnings conference call today, the new CEO announced the vendor's first quarterly profits in two years, for earnings per share of 3 cents (see Tellabs Turns Profitable).

Prabhu, who joined in February (see Tellabs Names Prabhu as New CEO), said he "couldn't be happier" with the results -– and the market seemed pleased, too. Tellabs' share price shot up nearly 10 percent in early trading, climbing 83 cents to $9.48, which values the company at nearly $4 billion.

The return to the black came from better-than-expected revenues and lower operating costs. First quarter revenues were $263.8 million, up 19 percent from last year's $222.5 million, but down from the previous quarter's $279.3 million. Net income was $13.4 million, compared with a loss of $42.9 million a year earlier and a loss of $23.2 million in the previous quarter.

The revenues were better than analysts, and even Tellabs itself, had expected (see Analysts See Trouble at Tellabs ). Despite this, the conference call was peppered with questions from analysts wanting a better understanding of the prospects for Tellabs' new product lines.

In a nutshell, the analysts are not convinced that the vendor's new product lines will be a big enough hit with carriers in the future. They're also worried that Tellabs, which has $1.18 billion in current assets ($263 million in cash, $917 million in marketable securities) might embark on an acquisition spree that could turn sour.

The other problem is that while this quarter's headline figures are impressive, growth is coming from old, well-established gear that will likely have a limited lifespan. The increasing revenues have been driven by sales of traditional 5500 crossconnect switches to wireless carriers, and sales of Series 3000 echo cancellers to VOIP equipment manufacturers and, again, to wireless operators.

The analysts would rather see more action from the company's next-generation gear. Sales of the firm's "broadband data" equipment, the 8800 multiservice edge router developed from Vivace technology, amounted to just $3.9 million from three paying customers (see Tellabs Sharpens Its Edge and Lehman Likes Tellabs/Vivace). The other product in this sector, the 8600 router, is in its final development stages and due for carrier deployment in the second half of this year, says Tellabs.

Prabhu, though, says that while the market for these products might look slow at present, carrier interest is strong. The 8800 is in trials with more than 30 operators now, up from ten in the previous quarter, and Tellabs is devoting about 40 percent of its R&D (currently running at $62 million a quarter) to these and other new broadband products.

The new CEO is confident that this interest will evolve into sales. Carriers have a lot of decisions to make about how to handle their broadband and Ethernet traffic, says Prabhu, but at the end of the day, "the packets have to be aggregated, groomed, processed, and transported, and that's generating interest in the 8800." The slow uptake is "not a product issue; it's just an evolving market. I'm confident we'll get our share of the business."

Analysts will need more convincing, however. Ehud Gelblum at J.P. Morgan Securities Inc. believes the vendor's potential to "produce meaningful earnings growth looks uncertain, as new product sales have thus far fallen short." Gelblum still expects Tellabs to use its cash pile for acquisitions "to counterbalance future declines in sales of legacy equipment," and that's a concern for the J.P. Morgan analyst and others.

But while the likes of Gelblum worry about a decline in future sales, some of the traditional products are going gangbusters. Revenues from echo cancellers have gone through the roof in the past year -– $24.9 million in revenues, compared with $8.7 million in the first quarter of 2003 –- as wireless operators use the product to help boost basestation capacity and OEMs integrate the product into VOIP gateways and switches. However, Prabhu and his team couldn't say whether these levels of revenue were sustainable.

Furthermore, the 5500 crossconnect accounted for the vast majority of transport equipment sales, as wireless carriers boost capacity between their basestations and switching centers. Transport gear sales were $133.9 million, up from $104.5 million a year earlier and from $116.8 million in the previous quarter. That sequential growth was largely driven by two key customers, both of which accounted for more than 10 percent of total transport revenues.

Revenues from SDH and Sonet gear, however, tanked to $69.4 million from $96.5 million in the previous quarter. Prabhu described the market as "brutal," and made even tougher by the influx of much cheaper gear from "the Chinese suppliers," though he couldn't actually bring himself to name Huawei Technologies Co. Ltd. and ZTE Corp.

The company didn't say much about its next quarter, other than that revenues should be up by approximately 5 percent, which would be $277 million, while costs should be about flat.

— Ray Le Maistre, International Editor, Boardwatch

Be the first to post a comment regarding this story.
Sign In