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Optical/IP

Tellabs: Holding On in Europe

Things may be tough overseas but Tellabs is not retreating from Europe, the company's managers said on the vendor's conference call with investors Friday. (See Tellabs Loses $5M in Q2.)

The telecom equipment maker predicted that its third quarter revenues will be in the range of $260 million to $290 million, which was below analysts expectations of $292 million. "There are no plans on retreating from where we are in Europe today," said Dan Kelly, Tellabs acting CEO and president. (See Tellabs Joins the Party.)

As ever, analysts and investors on the call were poking around with questions to find growth areas and regions where Tellabs might need to pull back because of economic uncertainty. But Tellabs managers were firm and stated that even with the weakness in the European economies, the company was sticking it out, noting that Europe was the second largest market in which it participates.

Tellabs says it had two customers, one in North America and one international, that made up at least 10 percent of its quarterly revenues. The company's managers also noted that there were a couple of customers "in the high single-digits."

Now if you're looking for an easy way to size up Tellabs' business, well, that's tough, too. The company won't break down how much of its optical business is in Europe; it won't say how much of its business comes from wireline vs. wireless carrier capital expenditures; and it didn't really break down any regional activity or revenue projections.

That lack of granularity brought up another point of pain on the call -- the fact that some investors feel Tellabs isn't buying back its own stock, which has been below $4 since April and spent much of this week below $3. With almost $1 billion in cash, why isn't Tellabs convinced its own shares are worth a small risk?

"We didn't buy back stock last quarter given the uncertainties of the economy and so on," Tellabs Chairman Michael Birck said on the call. Birck says the company discusses share buybacks frequently but has many other things to do with its cash to run the business besides buying back shares.

— Phil Harvey, Editor-in-Chief, Light Reading

paolo.franzoi 12/5/2012 | 5:25:39 PM
re: Tellabs: Holding On in Europe

 


So, Mark ...


I spent a long time thinking about this and am not sure if I could really name a good candidate for the job.  But I would tell you what I would do if I were the BOD.


 


Given the cash and products that Tellabs has, I think they have 1 more go round to see if they can figure out what's next for them.  I have my views to that but that is for another post another day.  I would not worry so much about the person's name or position, but I would want a presentation of a plan.  I would not take a "well we will figure it out".  I would start the interview process by a 1 hour presentation by each candidate on a strategy going forward.  I would expect the actual presentation to be 30 - 45 minutes followed by a Q&A session.  


From there, the BOD would take the best of the presentations and talk about the candidates as they made and presented them.  This would make my short list and then do the normal interviews and selection.


The big problem that Tellabs has is it is not crucial to any of its customers but I know inside Chicago they believe they are.  They are going to continue to be crowded out by bigger players if they don't accept the fact that they are bit players.  In other words a bigger version of Adtran.  By not buying any NSN or Nortel businesses they did not buy into any of the legacy.  Instead they went after trying to build on their 3G success with the 8600 (and to a lesser extent the 8800) and completely botched it (and I warned about buying WiChorus - that it was too late - something nobody wanted to hear).  This is after (and I had a front row seat for this) botching the number 1 Access position in the US.


seven


 

paolo.franzoi 12/5/2012 | 5:25:41 PM
re: Tellabs: Holding On in Europe

 


Hey Mark,


Don't know Steve but two things:


1 - I don't see Mike doing it.  Look I liked Rob as a guy but Tellabs needs a complete overhaul and the folks being able to go around the CEO to Mike is a huge issue.  Mike thinks of the company as a family and I am not sure that this is going to be some easy stuff.  I could give you some really odd anecdotes about Schofield taking over from Don Green, but that relationship was touchy at best.


2 - I think Ciena is a problem for a new Tellabs CEO as a history thing.  The folks in Chicago have memories like elephants and the Ciena one has a bad taste.


I am really not sure who would make a good CEO for Tellabs.  It is going to be a wrenching experience.  I will put some thought into it when I get on the treadmill shortly and see what I come up with.


Phil,


The investment company thing is not semantics.  Investment firms have different SEC rules around reporting than operating companies do and it would be a big deal for Tellabs.


 

spc_markl 12/5/2012 | 5:25:41 PM
re: Tellabs: Holding On in Europe

seven,


In terms of going outside for a CEO, just in general, what do you think about Steve Alexander from Ciena as a possibility?


Mark

paolo.franzoi 12/5/2012 | 5:25:42 PM
re: Tellabs: Holding On in Europe

 


Phil,


Operating companies are not supposed to work as investment firms.  The SEC used to try to change AFC into an investment firm all the time.  Operating firms are supposed to do something with their cash or return it to their shareholders.  


Note the use of the word supposed....you need to keep enough around to efficiently run the business.  But why is Cisco or Apple or Google or Tellabs investing cash in mutual funds better for me than them giving it to me and letting me do it?


seven


 

DCITDave 12/5/2012 | 5:25:42 PM
re: Tellabs: Holding On in Europe

I see buying my biggest customers' stock as doubling down, not becoming an investment firm. But I get your point.


And Tellabs should be returning more cash to shareholders. When Birck's brigade starts to talk about M&A it makes people nervous.

paolo.franzoi 12/5/2012 | 5:25:43 PM
re: Tellabs: Holding On in Europe

mark,


Agreed, but the way to get there is to basically cut the R&D investment.  The systems are going to get filled out if the spot in the network is still occupied by the 7100.  The problem with the 7100 is that it is not going to win lots of new business.  So, nuke the dev org down to a sustaining level and win what business you can and do something else.  Filling out the slots is nice cash flow to fund another growth business but not a growth business on its own.  Of course, Dan won't make that change but it is necessary if an external CEO is brought in.


seven


 

DCITDave 12/5/2012 | 5:25:48 PM
re: Tellabs: Holding On in Europe

What if they kept the dividend going and used some cash to buy shares of AT&T and Verizon? They'd make some money on the appreciating shares and T's dividend. That be some silver lining when capex gets cut again.

spc_markl 12/5/2012 | 5:25:49 PM
re: Tellabs: Holding On in Europe

Seven,


While I agree with you that Tellabs' 7100 would not be that attractive to other vendors, Tellabs does have a tremendous amount of business in filling those systems out going forward.


Mark Lutkowitz

paolo.franzoi 12/5/2012 | 5:25:52 PM
re: Tellabs: Holding On in Europe

 


So, as I sat here reading this...I concluded I agreed with the no buyback and in fact I would cancel the dividend.  Fundamentally, Tellabs is extending some of the products it already has but has not had any real new ones for some time other than WiChorus.  With the nuking of WiChorus, basically I would argue that the R&D spend on the existing portfolio is massively too high and something brand new needs to get worked on.  One way to get a jump start on that is to take the $1B and buy something.  Tellabs has a terrible track record with that but not sure it has a lot of choices.


The other alternative is to break up the business - the problem is who would want any of it.  As I sat here about the only thing I found is that the 8600 might have some value to other vendors.  The rest have a lot less value including the 7100 (given the number of vendors who have competing products).


seven


 

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