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Optical/IP

Wireless Slowdown Hits Tellabs

A slowdown in spending by North American wireless operators is the main reason for the disappointing second quarter outlook issued today by Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), according to the vendor's CEO Rob Pullen.

Tellabs this morning announced a decent set of first quarter financials, but noted that the second quarter was likely to see a significant reduction in gross margins and revenues as much as to 10 percent below Wall Street's expectations. (See Tellabs Issues Profit Warning.)

That news sent Tellabs's share price down by $0.73, more than 12 percent, to $5.29 by noon EST today.

Pullen, who has only been wearing the CEO hat for about eight weeks, told analysts on today's first quarter earnings conference call that the vendor was seeing "lower spending across North American wireless customers" in the second quarter.

He added that spending by the mobile carriers tends to be weighted toward the first and fourth quarters of the year, and that seasonality, plus the fact that "one North American [operator] is experiencing some strife at the moment," was impacting sales.

Although not named, that operator is Sprint Corp. (NYSE: S), which is going through something of a turbulent time. (See Sprint Still Silent on WiMax Launch, Sprint Reports Q4, Qwest Not Satisfied With Sprint, Clearwire & Sprint: On Again?, Sprint Nextel's New Broom, Sprint to Cut 4,000 Jobs, and 2007 Top Ten: Sprint Shockas.)

"That carrier has a new CEO, and they're minimizing spending while they figure out their strategy," added Pullen later in the conference call. (See Embarq CEO Resigns to Run Sprint.)

The wireless slowdown plus a greater reliance on low margin products, such as the 7100 optical platform that is growing in popularity and optical network terminals (ONTs), means the second quarter's gross margin is likely to be around the 31 percent mark, down from the first quarter's 39 percent.

The CEO added that Tellabs expects revenues from the wireless operators to pick up before the end of the year.

But it's not just wireless that's the problem. Tellabs is supplying technology to both AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) for their respective fiber access rollouts, and there's been a slowdown in orders as the worsening U.S. economy hits housing developments, noted Pullen.

Despite that, Tellabs says its business with Verizon is stable, despite the decision to cease development of the 8865 OLT (optical line terminal), the GPON product that was customer-designed for the operator but for which there was "no path for profitability," noted the CEO. (See Tellabs Kills Its Verizon GPON Efforts.)

Pullen added: "We continue to have a great relationship with Verizon and they continue to need our products and services... We will continue to be a BPON supplier to Verizon," he noted, though that business is certainly on the decline as the carrier upgrades its exchanges to GPON. (See Verizon's Going Strong on GPON and Tellabs's Access Biz Under Fire.)

And the CEO reminded analysts that Tellabs has not abandoned the GPON market altogether.

"We are not exiting the access business. We are investing, and looking to grow" with North American and international carriers, stated the CEO. Any such business would come from sales of the 1100 GPON platform that can be deployed in multiple fiber access scenarios. (See Tellabs Gets Acceptance.)

It's not all negative news, though. The 7100 reconfigurable optical add-drop multiplexer (ROADM) platform, already being deployed by Verizon, is now involved in "a major new network build in North America," said Pullen on today's call. (See Tellabs Updates 7100 and Tellabs Victorious at Verizon.)

In addition, Tellabs has built itself a decent position in the growing wireless backhaul space, where it is ranked by Heavy Reading as one of the vendors at the "forefront of the transition to Ethernet backhaul in cellular networks." Pullen said the vendor's 8800 and 8600 edge switch/router product families are "starting to play a bigger role in the wireless backhaul market." (See HR Tracks Backhaul, Tellabs Sneaks in a Cingular Win, Tellabs Touts 3G Switch, and Carriers Face Backhaul Conundrum.)

— Ray Le Maistre, International News Editor, Light Reading

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