Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) missed one big optical transition 10 years ago, and it looks like the company doesn't want to botch its second chance.
Tellabs plans to release an OTN switch this year, CEO Rob Pullen mentioned on Wednesday's earnings call. It would be the company's chance to catch the wave of optical-network refreshes based on packet-optical transport systems (P-OTS).
Years ago, Tellabs underestimated demand for optical cross-connects, figuring carriers would stick with digital cross-connects for quite a while. That opened the door for others -- mainly Ciena -- to enjoy the optical boom and eat up the cross-connect market.
"They just let that entire thing go," says Sterling Perrin, an analyst with Heavy Reading. "For them, this is probably the only opportunity to get back into that switching market."
Tellabs wouldn't comment much on the OTN switch; a spokeswoman said via e-mail that the company plans to add "enhanced Ethernet, OTN, and multi-layer control plane" to the Tellabs 7100 OTS.
That shouldn't deter Tellabs. "Depending on when this Tellabs product ships, it may not be behind, really. I guess the key to that is that they've been designing it for some time," Perrin says.
Tellabs's primary P-OTS target is probably Verizon. The carrier uses the Tellabs 7100 but has been looking to other vendors; in 2008, it picked the Flashwave 9500 from Fujitsu as a second option. Verizon is looking to upgrade its optical core, too, and as of a couple of months ago, Tellabs didn't seem to have the product to fit the bill.
(See Fujitsu Confirms Verizon Packet Optical Win and AlcaLu, Ciena Look Good for Verizon RFP.)
Tellabs's stakes here go beyond Verizon, though. "If Verizon likes a certain feature, it's likely other operators will be interested as well," Perrin says.
All told, depending on what's in the new P-OTS product and when it starts shipping, Perrin thinks Tellabs could have a shot at gaining the optical glory it missed.
"The best scenario for Tellabs would have been to participate in the optical cross-connect market the first time around," Perrin says -- and Tellabs would have to recruit some special new talent to make that happen.
I would not categorize it as Tellabs missing the broadband/optical cross-connect space. It did have the 6500. Once 9/11 happened, there was less of a willingness to put so much traffic into a single box. Tellabs also bought Ocular to try to help bolster that product line. However, once the previous management came in, it made a fundamental mistake in not remaining committed to cross-connects.
The current CEO at Tellabs has been totally committed to developing a new switch since he took the helm. The future of the company is pretty much riding on this development and it certainly has the cash and the technology knowhow to be successful.
[Wow, that is a pretty rose colored view of history and love for Rob Pullen.]
Believe me, I am not even close to being one of Rob’s favorite people – we have said too many negative things about the company over the years. I was mainly responding to the assertion that Tellabs totally missed the boat.
[The current product the 7100 has actually been kicking around inside of Tellabs for about 10 years. It was bought from IBM and almost killed multiple times.]
Fujitsu, a major player in the space, sees the 7100 as a very competitive product.
[The 6500 was a bad product. Your argument about single boxes might hold except other optical cross-connects came in and worked (see CoreDirector).]
I agree that the 6500 was a bad product – and a tank. The CoreDirector is a much more elegant solution.
[Previous management (which included Rob by the way) have tried LOTS of things to replace the revenue of TITN (aka the 5500) for a long time. Luckily wireless needed a lot of T-1s or Tellabs would have died an ugly death quite some time ago]
Despite the previous management’s blunders, Tellabs would not have disappeared – it is too much of an entrenched incumbent.
[The number of competitors in the NA cross connect business was very limited (Lucent and DSC). That is not true in any optical space, so even a success - which is far from certain - means less money than TITN. Ever get a straight answer on 7100 margins? How about this question...What product group loses the most money inside Tellabs (could it start with 71 and end with 00)?]
Tellabs will get less money than with the TITN because the OTN market size will be smaller. The number of competitors will continue to be limited for the OTN cross-connect space – in the US – Tellabs, Ciena, and Alcatel-Lucent as a long-shot. The margins on a potential switch will more than make up for the 7100.
[Then, you best explain the reason behind WiChrous. They have basically dumped the NA router group into that product pretty exclusively and you should probably note the drop in 8800 sales in Q1. It ain't going back up. The NA team working on the 8600 has been pulled off of that as well and pushed to WiChorus. They doing mobile packet core or optical?]
Mobile packet core may be a stretch. However, the deep packet inspection capability it received more than paid for the investment. (Of course, the Street probably will not appreciate that fact.) Also, not sure I agree about the 8800 – I think it still has some legs.
[And that cash came thanks to AFC. Nobody screwed up an acquisition more than Tellabs screwed up AFC (yes let's get rid of virtually the entire management team AND all the senior folks on retention plans to replace them with the group that ran Marconi Access into the ground...WOW). But let us take a look past that and remember Salix and Vivace and Occular and all the other bets in the past that have failed). Is Tellabs going away tomorrow? No - but seriously they have been shrinking for years - the only real bump up came from AFC and have yet to turn it around in any way. The big issue remains that people remember it as the TITN DACS company and how great that was. Well, the folks who in bulk made that work are long gone. Mike has to let go and do something different. The longer he hangs on the worse it is.]
Tellabs only bought AFC for the cash – clear and simple. I agree that Tellabs’ acquisition record is nothing to write home about. The most important person in making the new switch work will be Pullen himself.
Wow, that is a pretty rose colored view of history and love for Rob Pullen.
1 - The current product the 7100 has actually been kicking around inside of Tellabs for about 10 years. It was bought from IBM and almost killed multiple times.
2 - The 6500 was a bad product. Your argument about single boxes might hold except other optical cross-connects came in and worked (see CoreDirector).
3 - Previous management (which included Rob by the way) have tried LOTS of things to replace the revenue of TITN (aka the 5500) for a long time. Luckily wireless needed a lot of T-1s or Tellabs would have died an ugly death quite some time ago.
4 - The number of competitors in the NA cross connect business was very limited (Lucent and DSC). That is not true in any optical space, so even a success - which is far from certain - means less money than TITN. Ever get a straight answer on 7100 margins? How about this question...What product group loses the most money inside Tellabs (could it start with 71 and end with 00)?
5 - Then, you best explain the reason behind WiChrous. They have basically dumped the NA router group into that product pretty exclusively and you should probably note the drop in 8800 sales in Q1. It ain't going back up. The NA team working on the 8600 has been pulled off of that as well and pushed to WiChorus. They doing mobile packet core or optical?
6 - And that cash came thanks to AFC. Nobody screwed up an acquistion more than Tellabs screwed up AFC (yes let's get rid of virtually the entire management team AND all the senior folks on retention plans to replace them with the group that ran Marconi Access into the ground...WOW). But let us take a look past that and remember Salix and Vivace and Occular and all the other bets in the past that have failed).
Is Tellabs going away tomorrow? No - but seriously they have been shrinking for years - the only real bump up came from AFC and have yet to turn it around in any way. The big issue remains that people remember it as the TITN DACS company and how great that was. Well, the folks who in bulk made that work are long gone. Mike has to let go and do something different. The longer he hangs on the worse it is.
[Previous management (which included Rob by the way) have tried LOTS of things to replace the revenue of TITN (aka the 5500) for a long time. Luckily wireless needed a lot of T-1s or Tellabs would have died an ugly death quite some time ago]
Also, Rob was not in control with the previous management.
Too much an entrenched incumbent in WHAT? That is what you miss about the AFC acquisition (which I can tell you since I sat in on it was NOT about the cash). Just so you are clear about my knowledge of this the reverse diligence AFC did on Tellabs occured the day after a Legg-Mason conference in Chicago. Tellabs had figured out and continues to figure out that it was NOT a strategic supplier to pretty much anyone. Note: AT&T who bought 8800, 8600, 1100, 1000, and 5500 was so not worried about replacing Tellabs that they are not a domain supplier but is in a worse situation than Adtran.
As to the 8800, the two main customers have been Telstra and AT&T (for wireless). The 8800 is not part of the EPC at AT&T. So, where would 8800 growth come from? Note: most of the engineers already do not work on the 8800 but on the 9100.
As to the 7100, I can tell you that it was almost killed when the Burlington group when away, just before BellSouth bought it and before Verizon bought it. Those are the times I was aware of.
Are you really thinking that the sub-30% margins on the 7100 have anything to do with the 75%+ margins on the 5500? Really take a look at the latest Q and think through the loss of corporate margin.
Obviously, you were much closer to the situation than I regarding the AFC acquisition. I don’t doubt for a minute that the previous management, which was clueless about the corporate culture, failed to figure out how it was a strategic supplier. Cash or no cash, I can almost guarantee you that Pullen would have never purchased AFC because it was outside of its core business. My understanding (and feel free to correct me) was that AFC had stopped investing in its product line before the purchase by Tellabs.
At the very least, Tellabs was an entrenched incumbent on the 5500 and needed to continue to support that product. Next to a central office, there is nothing more vital to the network than a cross-connect – because if it goes down, a lot of people do not have service.
I think it is fair to say that Verizon continues to view Tellabs an important, if not strategic supplier, and the carrier does not want it to go away. With its track record in cross-connects, Verizon would prefer to deal with Tellabs on an OTN switch. Ciena has not always been reliable in coming through on features, etc. involving its entire product line. Also, given past history, it would not like to depend on Alcatel-Lucent for its cross-connects.
Regardless of the margin situation today, the plan by Tellabs is to have its switch evolve on its growing base of 7100 systems. This situation will be unlike what happened in the case of the 5500 in which it did not offer a SONET transport solution. Tellabs will use its 7100 to switch STS‐1s across the shelves and the ADM on a blade has full STS‐1 grooming capability. In selling the OTN switch/7100 as more of a package, Tellabs will be hoping that the margins on the latter will improve dramatically.
LOL - AFC had not changed its investment at all before the acquisition. One common misconception by Rob is that AFC dropped its DLC investment prior to the acquisition. That was dropped by Tellabs afterwards.
As to the 5500, Tellabs felt that nobody cared what it had to say about other products. For a company that did a lot of business with AT&T and Verizon it was outside any forward planning. Yes, they bought the 5500 - but as far back as 2001 it was clear that they had nothing really forward looking. Enter Vivace, which really went nowhere compared to the investment. Being a big supplier does not get one invited to the table. Someday I we will have to meet and I can tell you how Tellabs got the 7100 inside of Verizon. It might change your views here rather dramatically (let's see how big of an ONT discount it required for example).
seven
PS: And how about that data shelf upgrade on the 5500...how did that go.
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