Tellabs 'Stays the Course'

Here's an earnings story that seems to mark the mood of the day: Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) reported on a rough quarter, with breakeven earnings and drooping optical sales (see Tellabs Reports Q2). Yet Wall Street promptly sent shares up $0.53 (8.15%) to $7.03 in early morning trading.

"It's an interesting time when stability and flat seems good," says Steve Levy of Lehman Brothers. "But is this something to scream loudly about? No." Levy says he's maintaining a Strong Buy rating on the company.

Tellabs reported $345 million in sales this quarter, 7 percent lower than last quarter. Sales of optical networking gear dropped 10 percent sequentially to $162 million. Broadband access sales were down 7 percent, to $107 million.

Total charges, including restructuring, were $219 million, which the company says is lower than the $240 million it estimated back in April.

Tellabs' pro forma net income of $565,000 will result in no EPS for the quarter, even though First Call analyst consensus had called for a penny per share. Overall, the company posted a net loss of $0.35 per share.

Tellabs refused to give guidance for the next quarter, saying the company is living day to day, in keeping with the spending cutbacks of its top customers, which include Sprint Corp. (NYSE: FON) and Verizon Communications Inc. (NYSE: VZ). (Each is said to have accounted for better than 10 percent of Tellabs' sales this quarter.)

On the upside, Tellabs claims a good reception on new optical networking gear, including the Tellabs 6400 transport switch, which Tellabs acquired with its purchase of Ocular Networks in January (see Tellabs Nabs Ocular).

Tellabs says revenue booked from the single 6400 customer, Broadwing Inc. (NYSE: BRW), plus two customers (Sprint and Verizon, by all accounts) for the newly enhanced 6500 transport switch comprised 9 percent of Tellabs' total quarterly sales. Last quarter, optical products accounted for 4 percent of total revenues (see Tellabs Sees Ocular Upside and Tellabs Comes Ready to Play).

"We're in a tough time, but our goal is to remain profitable," says CEO Michael J. Birck, who sees Tellabs' mission as being the leader in delivery of bandwidth management in metro and regional networks to Tier 1 carriers. And he acknowledges that meeting this goal -- which means continued spending on R&D and acquisitions like Ocular -- conflicts with keeping the firm's bottom line in good order.

But Birck and his team seem determined. R&D was cut 10 percent this quarter, to $86 million. The firm has closed half its manufacturing facilities and is proceeding with previously announced workforce reductions that will bring its current level of 6,800 employees to 5,400 by the end of September 2002.

Regarding his tenure, Birck says he's back for awhile, even though the company will plan a successor, given that he probably won't be staying long term. Birck recently stepped back into his former post on the defection of Richard Notebaert to Qwest Communications International Inc. (NYSE: Q) (see Notebaert Takes Out Nacchio).

Throughout today's call, Birck maintained the firm's determination to "stay the course" through the downturn, while preparing for the eventual upturn.

Levy of Lehman says that's probably all that can be expected. "This report doesn't change any of my views on the market," he says. "The rare company will be able to grow in this environment. You need to watch for stability. People aren't spending on next-generation equipment." Eventually they will, he concedes, but when that will happen remains a mystery.

— Mary Jander, Senior Editor, Light Reading
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