Tellabs Tanks on Warning
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