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Tellabs Tanks on Warning

Light Reading
News Analysis
Light Reading
6/20/2001

Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA) today became the latest victim in the trenches of the telecom wars. After warning of a quarterly revenue shortfall, shares got butchered, falling 4.98 (23.49%) in midday trading to 16.22.

The company now projects second-quarter sales of about $500 million, compared with prior guidance of $780 million to $820 million. Earnings per share for the quarter are now expected to break even before restructuring and other charges.

Although much of the shortfall can be attributed to the massive slowdown in spending on telecom equipment, the shortfall raises many questions about Tellabs' position in new optical networking markets.

Since the deal for Tellabs to buy Ciena Corp. (Nasdaq: CIEN) fell through in 1998, the company has been quiet on the aquisition front and hasn't developed any leading market positions in next-generation optical products, especially those employing dense wavelength-division multiplexing (DWDM) technology. Younger companies like Ciena and ONI Systems Inc. (Nasdaq: ONIS), along with incumbent Nortel Networks Corp. (NYSE/Toronto: NT), have dominated emerging optical markets so far. At the same time, demand in Tellabs' primary market, the digital crossconnect, is weakening.

"The demand for crossconnects is slackening, because networks aren't expanding the way they used to," says Scott Clavenna, president of PointEast Research and director of research at Light Reading. "A lot of the crossconnect functions have been reduced into chips or cards in the next-generation Sonet boxes. So they're being squeezed from both sides."

In short, the company's flagship product, the TITAN 5500 is nearing maturity, and new products have been slow to ramp, in an environment where customer purchase decisions have lengthened considerably. The TITAN 6500 is shipping, mainly to Sprint Corp. (NYSE: FON), and the TITAN 6700 platform just recently entered its first field trial.

Other product lines aren't faring much better. Tellabs officials say that broadband access products are expected to be down 10 percent for the year with gradual improvement toward the end of this year.

During the slowdown in telecom spending, Tellabs' positioning in next-generation optical switching systems may give investors the best idea of how it will perform in a recovery. Right now, Wall Street doesn't like this picture.

Christopher P. Bulkey, Research Analyst, and R. Scott Raynovich, Executive Editor, Light Reading
http://www.lightreading.com

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pkumar
pkumar
12/4/2012 | 8:12:43 PM
re: Tellabs Tanks on Warning
This article represent that the cross-connect market is slowing down. Broadband digital cross-connect system ( BDCS) are developed for interconnecting multiple ring and traffic grooming for granularity as required per service need. On the other hand, Silicon vendors are providing the highly integrated grooming switch 32 X 32 OC-48 with fine granularity. How silicon vendors are looking for technology trend in the market according to this forcast for BDCS.
light_geeking
light_geeking
12/4/2012 | 8:12:40 PM
re: Tellabs Tanks on Warning
Mr Bulkey (geez what a last name to have)
In the article on tellabs, you mention that TITAN 5500 is reaching maturity....can you explain what is the rationale behind that statement? If most analysts were forcasting an extremely rosy picture for ADMs and MSPPs not too long ago, doesn't it mean that cross connects will be required to tie all those little boxes together at hubs? I haven't heard any announcement from ADM vendors announcing MD of their ADM products.
-lg
optics_guy
optics_guy
12/4/2012 | 8:12:38 PM
re: Tellabs Tanks on Warning
Mr. Bulkey,

You say that Tellabs has been Quiet on the acquisition front? If by quiet, you actually mean a dismal failure, then yes, you would be correct. In the last two years, Tellabs has spent over a billion dollars in acquisitions, the bulk of which, coming from Netcore and Salix - both for products that Tellabs cancelled little more than 1 yr after acquiring them....

This of course does not include the 260+ million dollar charge in Q2 for costs related to dumping 600 employees and closing various facilities. Just how much money does a company have to waste before you would say they are "not quiet"???

Tellabs hit it big with a single product - the Titan 5500, but they just can't seem to get it done when they try to enter a new field.
light_geeking
light_geeking
12/4/2012 | 8:12:36 PM
re: Tellabs Tanks on Warning
Hey optics_guy,

First of all, I wish you had chosen the name cable_guy. Remember Jim Carey? I sense some carey'ish type scarcasm in your posting.

As you point out, Tellabs hit it big with one product in the past. Now they have quite a number of next generation products in the pipeline, some of which are already mentioned in the article by Mr. Bulkey.

And if history were to repeat itself, even if one of the new products were to hit it big, Tellabs can have an encore stellar performance.

Its the economy stupid, not the company. Name one equipment vendor company in the telecom industry that has come out unscathed from the demand going south.

-lg
genyus
genyus
12/4/2012 | 8:12:35 PM
re: Tellabs Tanks on Warning
optics_guy is correct that TLAB has not had much success on the acquisition front, but Lightreading is correct in using the term "quiet" at the same time. There are different ways to skin a cat, and TLAB clearly is less acquisitive than many in its sector -- so what? The company has managed to consistently post robust growth in sales and profit for years on end.

The demise of the Titan 5500 has been forecast for so long, one does begin to wonder when it will finally happen. As light_geeking implies, the system probably still has legs. It would be interesting to see an article on whether/how carriers are finding ways to flush this "cockroach" of the network out of the system, because it doesn't seem to be happening.

At the same time, the customer relationships built by the Titan 5500 phenomenon are a key to TLAB's future success. The 6000 series naturally must sell on it merits, but the market penetration of the earlier product is a key building block for sales. The focus (and concern) over transition from present Titan to new-gen systems is long-standing, and reasonable. But I think the current extraordinarily poor market conditions deny us any good data with which to judge how that transition is going. I don't see much evidence that TLAB's current troubles are anything more than a consequence of the telecom capex slowdown. (In this regard, seeing the wire-service stories describing TLAB as "struggling" is somewhat amusing; if a debt-free firm with a half-billion in the bank, unmatched market penetration with the strongest carriers, a line of new products, and likely to post a yearly profit in this environment, is "struggling," what word would one use for most of the other companies in the sector? Just a semantic quibble)
optics_guy
optics_guy
12/4/2012 | 8:12:35 PM
re: Tellabs Tanks on Warning
light_geeking,

You are missing the point. I will agree that the flat sales of 'Titan' products and their Cablespan division are a by-product of the reduction of carrier spending, and they can certainly blame their current financial woes on these things. They are certainly not the only one's having this kind of problem.

The failures of the Netcore and Salix Products - especially the Netcore - had nothing to do with the economy - and maybe a billion dollars is nothing to the Cisco's and Nortel's of the world, but for a company who's total revenue in '99 were 2.3 billion, and 2000 were 3.3 billion, That is a lot of money!

ivehadit
ivehadit
12/4/2012 | 8:12:26 PM
re: Tellabs Tanks on Warning
the 6500 also ships to verizon. i believe that is tellabs biggest customer.

all things the same, its a broadband crossconnect, not a next gen machine a la ciena and hdx.

the 5500 is a wideband machine. tellabs has had trouble transitioning its current sales base to the 6500. like almost everyone else.

tellabs obviously believes it needs to stick with embedded carriers, not a bad thought given the doldrums of emerging carriers.
YUB
YUB
12/4/2012 | 8:12:22 PM
re: Tellabs Tanks on Warning
I have heard from a few reliable sources that another ILEC (not Verizon) and an IXC are having some serious problems/difficulties with the Titan 6500 in their labs. Does anyone know what problems they could be running into...just curious?

Also, I recently read a Broadband DCS industry marketing report that said that in order for Titan 6500 to grow to its full capacity (2.56 Tbps = approx. 49K STS-1 equivalents) down the road (report said 2H02), the system will require 32 switch bays and approximately 170 I/O bays to utilize the full capacity. Considering this very large footprint and assuming a customer will need to grow the system down the road, I would bet that this huge footprint could hurt Titan 6500 sales (especially for customers with already crowded COs). Another more recent marketing report I read showed Titan 6500 only having plans to grow to half that core switch size (1.28 Tbps = approx. 24K STS-1 equivalents). Why the change? Does anyone have any further insight on this? I would appreciate any input...thanks.

Regards,
YUB
light_geeking
light_geeking
12/4/2012 | 8:12:07 PM
re: Tellabs Tanks on Warning
Am I missing the point, or are you missing the bigger picture? Let me guess - you are a techie, with no sense at all about business transactions.

If you had any business sense you would have realized that acquisitions were made with virtual currency called stocks, when the currency was strong.

In business, you win some, you lose some. Granted that winning every time is always an objective, and is good to achieve that objective every time.

-lg
jgarten
jgarten
12/4/2012 | 8:12:06 PM
re: Tellabs Tanks on Warning
YUB,

SBC is the one that has had a lot of trouble with 6500 in their lab. I don't know the details but wonder if Verizon will run into the same sort of serious problems as they test the product in their own lab.

I would also love to hear about the density of 6500 since, if what you say is true, it sounds like a real disadvantage relative to some of the competition.

JG



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