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Backhaul

Tellabs Guns for Global Growth

Rob Pullen is on a mission to make Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) a bigger force in international markets, where he believes his company has the technology and wherewithal to take on the likes of Huawei Technologies Co. Ltd. head-to-head.

Speaking on today's second quarter earnings conference call, Pullen said his management team is developing a new corporate strategy to be revealed later this year. (See Tellabs Reports Q2, TLAB Shakeup Coming, and Tellabs CEO Says He's Not Scared of Change.)

"We have been too customer-focused and not market-focused in the past few years," said the CEO, who wants to break even further away from the vendor's reliance on the big North American carriers.

An international focus is already showing in the vendor's revenue split.

Of Tellabs's second quarter revenues of $432 million, international sales accounted for $145 million, or 33.5 percent of the total. That compares with non-U.S. sales of $121 million, 22.6 percent of total revenues, a year earlier, and $115 million (24.8 percent of revenues) in the first quarter of 2008.

Pullen is optimistic about competing in the tough international marketplace. Answering analyst questions today, the CEO confirmed that the firm's 6300 multiservice edge provisioning platform has "traction in developing countries," and that the company's aim is to "be relentless in product cost reduction" to "aggressively" develop business in overseas markets.

One analyst noted that the message differs from the one given by Pullen's predecessor, Krish Prabhu, who thought it was pointless trying to compete with Huawei with products such as the 6300. (See Tellabs Appoints Robert Pullen CEO.)

Pullen's decision to go after Huawei, in particular, doesn't come lightly. "Huawei hasn't disappeared -- it's a formidable competitor," Pullen said. (See Huawei Reports 2007 Revenues of $12.5B.)

But Pullen is pulling Tellabs towards some of Huawei's prime markets in emerging countries. Pullen cited Eastern Europe, India, and Malaysia as regions where he sees growth opportunities. By contrast, he noted he sees some macroeconomic weakness in North America and western Europe.

Backhaul potential
Pullen believes there's plenty of business to be won in the mobile backhaul market, where the company has just got its foot in the door at BT Group plc (NYSE: BT; London: BTA), according to an exclusive report from Unstrung, and where other vendors are reporting success. (See BT Uses Tellabs for Ethernet Backhaul and Ceragon Rides Backhaul Wave.)

That backhaul market, where Tellabs is regarded as one of the leading players in the transition to Ethernet-based systems, is being addressed primarily with the company's 6300 and 8600 platforms. The latter now has 75 customers, of which 50 are already generating revenues, said the CEO. The other 25 are in trials or working towards commercial deployment. (See HR Tracks Backhaul, Tellabs Touts 3G Switch, and Carriers Don't Trust Ethernet Backhaul? .)

And Pullen believes Tellabs has the goods to beat rivals, as it has focused on all-important synchronization capabilities that allow voice traffic, in addition to data traffic, to be backhauled over Ethernet aggregation pseudowires. As operators do that, and as data traffic grows, "some carriers are going to need between 100 Mbit/s and 200 Mbit/s [connections] to their base stations."

Transport slowdown
Tellabs needs to diversify. Its 5500 digital cross-connect has been a big sales driver in the North American wireless market for some time, but, as the company warned in April, carriers have put the brakes on those network investments, knocking the Transport division's sales down by 37 percent year-on-year to $141 million. The company did, though, score some success with its highly-rated 7100 reconfigurable optical add-drop multiplexer (ROADM), including some international wins. (See Tellabs Touts Packet Optical, Tellabs Strengthens Optical Outlook , and Wireless Slowdown Hits Tellabs.)

As a result, the vendor's revenues were down 19 percent compared with a year ago to $432 million, matching analyst expectations.

Gross margins were higher than expected at 35 percent, while net income, at $39 million, got a big boost from a one-time tax benefit of $35 million. Without that boost, the earnings were slightly better than analysts, on average, had expected.

Third-quarter revenues are set to be flat or slightly below the second quarter's numbers, a traditional pattern for Tellabs.

With no big surprises, and the company showing it is growing internationally with a range of products, Tellabs's share price edged up slightly, rising $0.07, about 1.5 percent, to $4.76.

Any M&A plans?
So does the company's international expansion plan involve any acquisition activity?

Pullen said he is more focused on using the vendor's considerable cash pile -- $1.2 billion in cash and "marketable securities" -- on the current business.

"We have work to do there. ... We will invest in cost reductions" and growing international coverage, either directly or through partners such as Ericsson AB (Nasdaq: ERIC), Harris Stratex Networks Inc. (Nasdaq: HSTX), and Nokia Networks , he said. (See Tellabs Lays Out WDM-PON Plan and Tellabs Kills Its Verizon GPON Efforts.)

Pullen added the usual caveat that Tellabs wouldn't ignore any deals that crop up, though CFO Tim Wiggins said there is "nothing right around the corner – we won't be announcing anything in the next few days."

— Ray Le Maistre, International News Editor, Light Reading

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