Tellabs Management Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 1.13 | About: Tellabs, Inc. (TLAB)

Tellabs (NASDAQ:TLAB)

Q4 2012 Earnings Call

February 01, 2013 10:00 am ET

Executives

Tom Scottino

Daniel P. Kelly - Chief Executive Officer and President

Andrew B. Szafran - Chief Financial Officer and Executive Vice President

Analysts

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Amitabh Passi - UBS Investment Bank, Research Division

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Roderick B. Hall - JP Morgan Chase & Co, Research Division

Ehud A. Gelblum - Morgan Stanley, Research Division

Greg Mesniaeff - Maxim Group LLC, Research Division

George C. Notter - Jefferies & Company, Inc., Research Division

Operator

Good morning. My name is Brooke, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Tellabs Investor Relations Conference Call. [Operator Instructions] Thank you. Mr. Scottino, you may begin your conference.

Tom Scottino

Thank you, and good morning, everyone. With me today are Tellabs's CEO and President, Dan Kelly; and our Executive Vice President and CFO, Andrew Szafran. This morning, Dan will review the business and Andrew will give you a detailed look at our fourth quarter results. After that, we'll open the floor to your questions.

Before we begin, I want to say that if you have not seen the news release we issued yesterday after the market closed, you can access it at tellabs.com. I will also remind you that this presentation contains forward-looking statements about future results, performance and achievements, financial and otherwise. These statements reflect management's current expectations, estimates and assumptions. The forward-looking statements are not guarantees of future performance, and involve risks, uncertainties and other factors that may cause Tellabs' actual results, performance or achievements to be materially different. A discussion of the factors that may affect Tellabs' future results is contained in Tellabs' most recent SEC filings. The forward-looking statements made in this presentation are being made as of the time and date of its live presentation. If the presentation is reviewed after the time and date of its live presentation, it may not contain current or accurate information.

Tellabs disclaims any obligation to update or revise any forward-looking statement based on new information, future events or otherwise. This presentation may also include some non-GAAP financial measures. Reconciliation between non-GAAP financial measures and GAAP financial measures can be found at our tellabs.com website and in our SEC filings.

Having said all that, I'll turn the call over to Dan.

Daniel P. Kelly

Thank you, Tom, and good morning, everyone. Welcome to Tellabs' Investor Call. In 2012, we strengthened our leadership and returned cash to stockholders. We reduced operating expenses, generated cash from operations and broke even on a non-GAAP basis. Today, I'll review our progress in 2012 and our strategy to take Tellabs forward.

In 2012, I became CEO and I streamlined the executive team. Working closely with stockholders, we added 4 new directors to the board. We also returned significant capital to stockholders. We paid out dividends of $1.08 per share in 2012, including a special $1 cash dividend in the fourth quarter. Tellabs has paid out a total of $456 million in dividends since 2010. In November, we authorized plans to resume a stock buyback of up to $224 million.

We lowered operating expenses and generated cash from operations. In the fourth quarter of 2012, we reduced the year-over-year non-GAAP operating expenses by 24% to $99 million. In the fourth quarter of 2012, we generated $41 million in cash from operations. In the full year of 2012, we generated $45 million in cash from operations. We will continue to reduce operating expenses further in 2013.

After paying out regular and special dividends, Tellabs holds cash and marketable securities of $604 million as of year end. We're improving Tellabs profitability. In the fourth quarter, we earned $0.01 per share non-GAAP. On a non-GAAP basis, in the full year 2012, we broke even. That compares with a non-GAAP loss of $0.05 per share in 2011. We spent significant time in the fourth quarter reviewing Tellabs' fundamentals, including strategy, product portfolio and cost structure. That review tells us loud and clear that change is required. Under my leadership, we are going to change.

Starting with our Data products. Based upon our analysis of return on investment, customer needs and market conditions, we are discontinuing development of the Tellabs 9200. We will reduce our workforce, which will affect about 300 people in 2013. Our Data products address both mobile backhaul and business services applications. We will continue to evolve and extend the IP and Ethernet capabilities on our Tellabs 8600 and 8800 smart routers, based upon customer requirements. Last year, we added 18 new Tellabs 8600 and 8800 customers. We will demonstrate self-organizing networks, or SON, software-defined networking, or SDN, and Tellabs Insight Analytics Services later this month at Mobile World Congress.

Moving to our Optical products. Tellabs delivers multiple services faster and at the lowest cost per bit in metro and regional optical networks. That's how we won 19 new Optical customers in 2012 globally. Service providers now use Tellabs' Optical solutions to deliver enterprise services to 39 of the Fortune 100 companies.

To build on these strengths, we're modestly increasing Optical R&D. For example, we're enhancing our colorless and directionless ROADM capabilities. We're also extending Optical transport network, or OTN, capabilities to the edge. These enhancements will enable our customers to lower cost per bit, improve network resiliency and speed time to service deployment.

We're also enhancing the Tellabs 7300 Ethernet switches to offer higher capacity, higher speeds and new functions, including MPLS-TP and SDN in Access networks. We already support 10-gig, 40-gig and 100-gig wavelengths on a single fiber without reengineering. We're now shipping our new 100-gig module, which customers are deploying in metro networks. We're developing a new higher-capacity shelf that provides a path to future 400-gig services. We will demonstrate a Tellabs 7100 software-defined network proof of concept with customers in the first half of 2013.

Moving to our Access products. We won 10 new Access customers in 2012. We're modestly increasing our Access R&D to enhance the Tellabs' 1150 multiservice Access platform. The Tellabs 1150 is designed to cost effectively deliver triple-play services and mobile backhaul for small cells.

We've also taken the Tellabs 1150 into the enterprise market with the Tellabs Optical LAN solution. Optical LAN provides enterprises with higher bandwidth, higher security, lower energy usage and lower cost. In the second quarter, we'll ship our new Tellabs 120 Mini ONT, the world's smallest enterprise ONT. We're also investing in the sales channel to extend our distribution into enterprises.

Looking at the first quarter of 2013, here's our guidance. We expect first quarter revenue to be in the range from $205 million to $220 million. We expect first quarter non-GAAP gross margin to be 34% plus or minus 1 point or 2. We expect first quarter non-GAAP operating expenses to be flat to down compared with the fourth quarter. Based on Tellabs first quarter outlook, we will not pay a dividend in the first quarter.

2012 was a challenging year. I want to take a moment to thank Tellabs' customers for their business and their support. And I want to thank Tellabs' employees for the hard work they're doing to improve the company's performance. I'm confident that we're on the right track to make Tellabs and our customers successful in the years ahead.

In summary, we've completed a review of our business. As a result, we are discontinuing the Tellabs 9200. We're modestly increasing our investment in Optical and Access R&D. Finally, we are dedicated to profitability.

Now, I'll hand the call over to our CFO, Andrew Szafran, for a detailed look at the fourth quarter and the year.

Andrew B. Szafran

Thanks, Dan, and good morning, everyone. Let's take a look at the fourth quarter numbers on a sequential basis. Revenue in the fourth quarter was $242 million compared with $264 million in the third quarter, as increased revenue in the Services segment was more than offset by lower revenue in the Product segments.

On a GAAP basis, we reported a net loss of $23 million or a loss of $0.06 per share in the fourth quarter. That compares with a net loss of $4 million or a loss of $0.01 per share in the third quarter of this year. GAAP net loss for the fourth quarter of 2012 includes a $9 million charge related to previously announced restructurings and an $8 million charge for inventory and purchase commitments related to discontinuing the 9200 product.

On a non-GAAP basis, excluding restructuring-related charges and equity-related expense, net earnings in the fourth quarter were $3 million or $0.01 per share. Geographically, revenue from customers outside of North America was $110 million or 45% of the total in 4Q. That compares with $138 million or 52% in the prior quarter. While we saw a significant sequential revenue growth in Latin America, that solid performance was more than offset by weakness in Europe and Asia Pacific.

Revenue from customers in North America was $132 million in the fourth quarter. That's up from $126 million in 3Q. North American customers accounted for 55% of total revenue in the fourth quarter and 48% of total revenue in the third quarter of last year.

Now let's take a look at our segment data. Optical revenue was $97 million in 4Q compared with $108 million in the third quarter. Within this segment, increased revenue from our 5,000 digital cross-connect systems, which more than offset by lower revenue from 7100 Optical Transport and 6300 Managed Transport systems. Optical profit, driven primarily by the lower volumes, was $22 million in the fourth quarter compared with $24 million in the third quarter.

Revenue for the Data segment was $52 million compared with $66 million in the prior quarter. Increased revenue from our 8100 Managed Access Systems was more than offset by lower revenue from our 8800 and 8600 smart routers. We had a loss of $9 million in the Data segment, driven chiefly by lower volumes and gross margin. That compares with the segment profit of $1 million in the third quarter.

Revenue in the Access segment was $41 million in 4Q and $42 million in the prior quarter. Access profit, driven primarily by lower product gross margins, was $8 million in 4Q compared with $11 million in 3Q. Services revenue was $52 million in 4Q, up from $48 million in the prior quarter. That $22 million Services profit was up 41% from $16 million in 3Q.

So now turning to our gross margin. Non-GAAP gross margin was 42.2% in the fourth quarter compared with 39.4% in the prior quarter. Gross margin is highly dependent on product and customer mix. The increase in gross margin was driven primarily by increased Services margins and the lower level of 7100 Optical system revenue, which carries margins below the corporate average.

So now looking at our operating expenses. Non-GAAP OpEx came in at $99 million in the fourth quarter compared with $97 million in the prior quarter. Non-GAAP R&D expenses were $58 million in the fourth quarter compared with $53 million in 3Q. Non-GAAP SG&A expenses were $41 million down from $44 million in the prior quarter.

As we announced yesterday, we are discontinuing development of the 9200 product and reducing our expenses. As a result, we plan to take a restructuring charge of about $38 million, primarily in the first quarter of this year. Other income on a non-GAAP basis was $2 million, consistent with 3Q. Our non-GAAP tax rate of 32% resulted in $1 million of tax expense.

So now looking at the balance sheet. Inventory turns were 5.3 in the fourth quarter compared with 5.1 in the third quarter. At the end of the quarter, inventory was $101 million, consistent with the end of the prior quarter. Capital expenditures were $15 million in the fourth quarter compared with $7 million in 3Q. We returned $375 million to shareholders in the fourth quarter via our quarterly cash dividend and the special onetime dividend. We also generated $41 million in cash from operations during the fourth quarter. Our overall cash and investments balance at the end of the year totaled $604 million. We intend to repatriate about $367 million of our foreign cash in the first quarter. Except for foreign withholding taxes of approximately $1 million, we expect net operating loss carryforwards and foreign tax credits to offset the resulting cash tax liability. We resumed the stock buyback after the special dividend was distributed, and we continue to buy back our shares. The actual number of shares outstanding at the end of the fourth quarter was about 368 million.

Employment at the end of 4Q stood at approximately 2,500 compared with 2,600 at the end of 3Q. The book-to-bill ratio was less than 1 on a quarterly basis, but greater than 1 on a full year-to-date basis.

So now looking at 2012 for the full year. Total revenue in 2012 was $1.053 billion compared with $1.286 billion in 2011, as revenue declined across all segments.

Customers outside of North America accounted for 50% of total revenue in 2012 compared with 49% in 2011. Customers in North America contributed 50% of total revenue in 2012 and 51% in 2011.

Non-GAAP gross margin was 39.7% in 2012, essentially consistent with the 39.8% we recorded in the prior year. Non-GAAP operating expenses were $422 million in 2012 or $125 million below the prior year. Non-GAAP net income at $1 million equal breakeven EPS compared with a non-GAAP net loss of $18 million or $0.05 per share in 2011. Altogether, we generated $45 million in cash from operations during 2012.

So now let's turn to our outlook for the first quarter of 2013. Based on our bookings trend, backlog and mindful of current market conditions and uncertainty in Europe and the rest of the world, we expect first quarter revenue to be in a range between $205 million and $220 million. We expect overall quarterly revenue to increase in the back half of the year based on the following: Our expectations for when major customers will release their budgets for 2013, for the commencement of projects we have already won and for projects we expect to win.

We expect first quarter non-GAAP gross margin to be about 34%, plus or minus 1 point or 2, depending on mix. The lower rate is driven primarily by the lower overall revenue level. As our cost-reduction initiatives kick in and if revenue ramps and mix improves in the second half of the year as we are expecting, we'd also expect to see gross margins return to the 40%, plus or minus 1 point or 2 range by year end.

We also expect our non-GAAP OpEx in the first quarter to be flat to down compared with the fourth quarter. Taking into account the restructuring we announced yesterday, we expect non-GAAP quarterly OpEx to drop to the $75 million range by the second half of this year. In addition, we expect our non-GAAP tax rate to continue at 32%.

As noted in our earnings release, the Board of Directors did not authorize a cash dividend for the first quarter.

Now, I'll open the floor to your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Simon Leopold with Raymond James.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Just a quick clarification, Andrew, please. First, you talked about -- you just mentioned OpEx getting to $75 million, but I missed the time frame for that.

Andrew B. Szafran

Yes, Simon, that's going to be in the second half of the year.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

And then in terms of contribute -- contributions in the fourth quarter. Just wondering whether or not there's anything you can call out for maybe storm-related repairs. Wondering if that was some of what shows up in the Access business strength. I'm trying to get a sense of that. And then from a longer-term perspective, interesting that you're talking about software-defined networking and SON. These are activities that I typically wouldn't think Tellabs would do on its own necessarily. So I'm just wondering in terms of kind of the go to the market, whether you're working with partners there and how that really flows into the overall strategy, whether it's more than simply supporting open flow. If you can give us a little bit more color on what you're doing in those new areas.

Daniel P. Kelly

Sure. Simon, this is Dan. Let me take those questions in order. The first question is was there any effect in fourth quarter regarding the Hurricane Sandy? And the short answer is there was minimal impact or lift in our fourth quarter revenues due to that. But I would like to note that the Tellabs Services teams spent a fair amount of time working with our customers just prior to the storm, turning down the Tellabs equipment gracefully, making sure the databases were stable, et cetera. And then working with our customers during and after the storm to bring the equipment back up. And I'm pleased to report that the equipment came up perfectly. We had no issue with restoring service and working with our important customers through that disaster. But we did not see an appreciable lift in any of the revenue to that. As far as SDN and SON, we'll be demoing some of that and what we're doing there. And really the SON, the self-optimizing network, we're really looking at that as a backhaul and what we can do between our network management and our 8600 product that we've sold to over 150 different customers for backhaul. So we have a fairly focused strategy there in which to roll that out. And we will be demoing that in Barcelona at the end of the month. And really, the idea there is that we can shorten the service rollouts quickly with automated provisioning tools, easy installation process and eliminate some of the human error and make sure that we properly document the rollouts as we go. As far as SDN, we're looking at that from both certainly a Data and Optical perspective. But we're -- a particular interest on what we'll be talking about in Barcelona will be around the SDN capabilities for -- at the Optical layer. We are looking at that ecosystem, and we have worked with some partners. And we'll be able to give a little more color on our strategy there in Barcelona at the end of the month, Simon.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Great. And just one last quick one. If you can give us any color on 10% customers for the quarter or for the year.

Andrew B. Szafran

Yes, Simon, I'll do that. Really just, 1 10% customer in both of those, 1 large domestic.

Operator

Your next question comes from Amitabh Passi with UBS.

Amitabh Passi - UBS Investment Bank, Research Division

Maybe just a bigger picture question. Dan, just trying to figure out, what's the end game here? You're involved in 3 major segments: Optical, Data, Access and obviously Services as well. Relatively small share. We're seeing Data revenues decline quite precipitously. Just curious from your perspective, 2, 3 years out, how do you sort of see Tellabs evolving? Which are the areas you want to definitely focus on? And then maybe a couple of questions for Andrew. Are you still committed to the $225 million buyback? And then cash flows definitely were helped in 2012 by working capital. It was a source of cash. Just wondering how do you see that trending in 2013?

Andrew B. Szafran

Okay. So Amitabh, we'll kind of handle those in mixed order. First, on the repurchase, yes, we are still committed to buying back our shares. There was not a lot of volume in the fourth quarter because we did not commence that until after we had distributed our dividend, but we do continue to repurchase our shares, and we are committed to continuing that.

Daniel P. Kelly

And then I'll pick up the next piece, Amitabh. As far as the future or the strategy, the going-forward strategy, what we're doing here is we are investing in all 3 of those areas. And Services is a very important element as well, both our deployment installation services, as well as our professional services is a very important part of our business as well. Over the past few months, we did have to take a critical look at the business. And where is the return on investment, where are we spending, where are we gaining share, where are we losing market share, what's the competitive landscape, what are our customers' needs. And we did have to make a tough decision around the 9200. We made it, and we're moving forward. And we're continuing to invest in the 8600 and 8800. We have a fairly large embedded base there, we have customers who are counting on us to deliver innovations, to continue to help them roll out services. So we are decreasing our spend in the Data business, clearly through the 9200 cancellation. But we're continuing to innovate around the 8600 and 8800. And we will be running that business profitably. The -- in the Optical space, we have had very good success. We added 18 new customers in 2012 in the Optical space. In all 4 regions of the world, we have been developing a new -- expanding our customer base, and we'll continue to do that. And so we're comfortable that we have the right Optical solution. We're complimenting it. We're adding new innovations, and we're going to continue to do that. In the Access space, we're more focused there, but we see some interesting opportunities. Both with our T1000 and T1150 customers, service providers, being able to upgrade those systems to support triple-play services. But also for the Optical LAN solution, where we've taken our GPON technology and developed innovations, including the Tellabs 120 Mini ONT that we'll be shipping in the second quarter. And we're developing an ecosystem around that as well. As mentioned earlier, in order to get the customer reach there, we think it's a very interesting application that provides a compelling business case for our customers. And so we're going to continue to innovate there. So that's the path we're on, and that's the path we're going to continue to with an eye towards profitability across all segments.

Andrew B. Szafran

Yes, Amitabh, and to your last question that we have to answer is on working capital. I think what you've seen is a very intense focus on that this year, which is why you've seen such improvement, and Dan and the rest of the management team here will continue that focus into next year.

Operator

Your next question comes from Jess Lubert with Wells Fargo.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

A couple of questions. First on the Data business, came in much lower than I think many of us expected. Can you help us understand what drove the sequential downtick here? Was it -- is this a function of a small number of customers finishing build? Where there pushouts that maybe come back? Or was this a more broad-based deceleration across customers and end markets?

Daniel P. Kelly

Okay. Jess, so a couple of points there. In the Data business in the fourth quarter, we did see continued weakness. A significant part of our Data business is in the EMEA market. And we did see, as we discussed on the last call, unfortunately continuing decreases in our Data business, specifically in the EMEA region. But having said that, some of that was due to project pushouts. Some of that is due to project timing as well, project start and finish and when do the projects get funded and when do they start. And we did see some customers being very cautious in the fourth quarter and even cautious into the first quarter as well, based upon budget approval and project timing.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

As we think about the Data products business in 2013, would you expect revenue from this category to also improve throughout the year? And if so, what's driving your confidence here? Is it the ability to recapture some of those deals? Is it wins? Is it new projects? Can you help us understand that a little bit more?

Daniel P. Kelly

Sure. So on the call, I believe, in July, we talked about -- a bit about the 8600 refresh that we were doing. We released the feature package to provide higher density Ethernet capabilities on the 8600 platform. We also previously released the 8609 and 11. And those are on a solid trajectory of customer acceptance through our 8600 embedded base. We've also delivered new feature packages on the 8800, which our customers are adopting at a very good rate. So the goal here is to continue to work with our customers, to deliver and roll out those feature packages and those new nodes as part of our Data portfolio in which to help them to continue to roll out services. So we're going to be very focused on the 8600 and 8800 in that space, as well as the network management support for that as the umbrella network manager for all of Tellabs products.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

And then last one for me, in terms of your expectation for revenue to improve through the course of the year, can you help us understand how you're thinking about the U.S. versus international mix? To what extent are you expecting international business to increase through the course of the year, maybe even as a percentage of sales? It seems like it's been pretty weak the last few quarters. Do you expect revenue increase to be a little bit more U.S. centric? Or do you expect that international business to uptick?

Daniel P. Kelly

Well, we see projects and timing -- and budget timing from both regions. So it's really hard to pin that down. We don't give regional forecast throughout the year or for 1 year guidance. But we do see projects and opportunities in the pipeline in both North America and rest of the world that gives us positive indicators, that we do see the revenue will lift throughout the year.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

And just to clarify, when you suggest the revenue will lift throughout the course of the year, does that mean sequential growth throughout the course of the year beyond Q1?

Daniel P. Kelly

We see many things -- many projects in our pipeline, and we do see opportunities that we would expect that it would lift. As far as exactly sequentially, I'm not going to state that here. But we do see a pipeline of opportunities and projects that we've either won or we're very confident that we're going to win, that will increase our revenue as we move throughout the year.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Okay. But maybe a little bit more second half weighted versus first half weighted, would that be fair?

Daniel P. Kelly

Yes.

Operator

Our next question comes from Rod Hall with JPMorgan.

Roderick B. Hall - JP Morgan Chase & Co, Research Division

I guess, I just have 2. One is, you guys have had to get pretty draconian with cost cuts here. How much more flexibility do you think you have on costs? I mean, do you have quite a bit more in your opinion? Or do you think you're getting to the point where cost reduction is kind of at a maximum? So that's the first question I've got. And then the second one is on the revenues. I wonder if you could just comment on Street expectations for revenue in the second half of the year versus what you see in the pipeline and so on? Do you think the Street is appropriately cautious or kind of in line with your thinking? Or do you think there's a deviation there? I'm just curious to know whether you guys are more optimistic or less optimistic at this point than the Street expectation.

Daniel P. Kelly

Rod, so 2 questions there. The first one is have we hit the limit on cost and taking cost out of the business? And the answer is no. We have to -- Andrew mentioned earlier in the call that we will be getting to the $75 million OpEx rate in the second half of the year. And we're doing that in order to focus the business and drive to profitability. As far as the -- and we'll continue to do that and we've shown our ability to do that while still investing in those areas that we do believe that we can grow in. As far as the comparison to the Street and farther out year-over-year, it's really -- it's difficult to say compared to that. And at this point in time, we're only comfortable saying that we do believe the revenue will lift throughout the year, and we'll leave it at that and give you updates in 90 days.

Roderick B. Hall - JP Morgan Chase & Co, Research Division

Have you guys -- just a follow-up on that though. Do you feel people have gotten too pessimistic on the top line? And things, obviously, are not going well. But I just wondered what you think about optimism versus pessimism at this point relative to what reality looks like to you?

Daniel P. Kelly

So Rod, I'm not sure who you're asking, who's pessimistic and optimistic, and it is hard for me to say -- speak for somebody else. So could you give me some color there?

Roderick B. Hall - JP Morgan Chase & Co, Research Division

Well, to give you an example, I mean, in our model right now, we're thinking revenues in the second half of the year somewhere in the ballpark of, let's call it, $520 million to $525 million, somewhere in that ballpark. And I'm just wondering -- and I guess that, that's not too far off where others are. And so I'm just wondering whether you think that kind of ballpark is achievable? Do you think it's too pessimistic considering what you're looking at in the pipeline? And just trying to feel for what you guys are thinking about revenues later in the year because obviously that's pretty, pretty important relative to the cash position and the profitability of the business.

Daniel P. Kelly

So I'm really comfortable around 3 things. One is getting the OpEx down to $75 million that we stated earlier. The second is the revenue that we do see will improve during the year. And then the third is our guidance for the first quarter, and that's really what we're comfortable with today.

Operator

Your next question comes from Ehud Gelblum with Morgan Stanley.

Ehud A. Gelblum - Morgan Stanley, Research Division

A couple of quick questions. First of all, on the OpEx. Dan, I think it was you. Yes, it was last conference call, you said that you're increasing R&D on next-generation products, which will drive future growth. That's why you expect your operating spend to just increase by about $10 million in the fourth quarter compared to the third. So my first question is OpEx went up $2 million versus your planned $10 million, and that was a big topic at the last conference call. So I wanted to just understand a little bit what happened during the quarter that made you reverse that plan. Second of all, cutting -- or not approving the dividend, you have over $600 million in cash. You're still generating free cash flow. You just repatriated another $367 million. Why would you not pay the dividend? I understand that things are getting tough on the top line in the business, but I'm just trying to understand what that logic was behind that, not continue to pay that dividend. And then finally, the gross margin guidance of 34%. If I do math, and I assume that your revenue is as low as possible and your guidance, the $205 million. And to drop the gross margin down to 34% means that your gross profit is going to drop $32 million sequentially on a $37 million decline in revenue, which basically means that your incremental gross margin on the revenue decline is like over 90% or around 90%. Which doesn't totally check. So it doesn't sound as though it's just negative operating leverage unless volume, it sounds like there must be some pricing issues going on as well to bring the gross profit down that much and the gross margin down that much on the revenue decline. So 3 separate questions. I appreciate it.

Daniel P. Kelly

So I'll take the first one there, Ehud. There was a lot of conversation on the last call around the $10 million as far as the OpEx increase from 3Q to 4Q. A lot of conversation around there. As we move throughout the day, day-to-day, month-to-month, we're continuously managing all of our expenses very closely. And as mentioned earlier, after the call there, and into November, December and January, we spent a lot of time looking at the business and our concerns about the softness in the Data business, the market conditions, the customer needs, and the ROI on these products that we invest in. So as we move throughout a quarter, we do aggressively manage costs, and that's what you saw. What -- where we were in October and where we finished, we were able to drive down, as you said, that $10 million increase and make it only $2 million. So that was through the day-to-day managing of the business with an eye towards profitability. As far as the dividend goes, there was a lot of discussion, as the Board of Directors and management reviewed that earlier this week in our meetings. The philosophy there is we should be having positive operating cash flow to fund the dividend. Certainly, we could fund it out of cash in the bank in marketable securities. But the feeling was based upon our outlook for the first quarter, that we would not pay a dividend based upon the operating cash flow in the first quarter. As far as the gross margin one, I think your explanation of the gross margin, I'll let Andrew go into it a little more, but the picture you painted kind of answered your second question about why we're not paying a dividend.

Andrew B. Szafran

Yes, Ehud. I'm at -- I mean, we do have certain above-the-line costs that don't shift. That's not directly variable in the short term. So that weighs down on it, kind of the negative leverage. And then it's really when we look at our margin forecast, it's bottom-up based on product and customer mix, which we've said that's going to drive how the margin profile is. And based on that, we're giving you an honest forthright appraisal of where the margins are going to be. And then as we progress throughout the year, our expectation at this point is that our gross margins will improve and get back to the levels where we've been running.

Ehud A. Gelblum - Morgan Stanley, Research Division

Andy, I appreciate that. But is there a pricing issue? Or is it just mix because it's clearly not a leverage issue. It's either pricing or mix. But if it's mix, it's a big, big mix shift.

Andrew B. Szafran

It's -- we get different margins in different products. And based on the products that we're seeing that we'll be shipping and getting revenue on, it's driving it down along with the negative operating leverage from the volumes.

Ehud A. Gelblum - Morgan Stanley, Research Division

And lastly on the dividend comment, I assume that you're expecting then an operating cash flow -- outflow in the Q1.

Andrew B. Szafran

Yes.

Operator

[Operator Instructions] Your next question comes from Greg Mesniaeff with Maxim Group.

Greg Mesniaeff - Maxim Group LLC, Research Division

I have a question on your -- when you look at your U.S. strategy for 2013. As you try to regain share in the carrier market, what's really your kind of focus on how you plan to do that? Is it through focusing more on service and support? Is it focusing on SDN and SON? Is it just block and tackling on the product front? I mean, what are some of the sort of variables you think can get you to kind of regain some of your share in the core carrier market?

Daniel P. Kelly

Specifically I think you asked around North America, correct?

Greg Mesniaeff - Maxim Group LLC, Research Division

Yes.

Daniel P. Kelly

So our focus there, we have a couple of areas of focus. One is continuing to build on our success with the Optical products, the Tellabs 7100 and 7300 in North America. When you look at our North America business, it's more tilted towards the Optical and Access than our Data segment. So in North America, obviously Services is a very important part of our business in North America, support agreements, deployment, installation, et cetera, but also Professional Services. And Professional Services are successfully sold in North America, even into some customers where the product content is much lower. But it gives us a beachhead with the Professional Services to then have potential opportunities for product sales after that. So we're continuing to build on our success in North America with the metro ROADM Tellabs 7100 and 7300 product line. We're doing extensions and innovations on those. And we do see -- and what -- based on our customer wins last year, we had 18 overall wins -- 19, excuse me, in the Optical space in all markets around the world, but including North America. And we have 1 business in North America in the Optical space that we do see rolling out and ramping up with some new customers in 2013. The Services piece, Optical -- but we also see opportunities for Access off our T1000 and 1150 customers to grow that business with our IP enablement, to enable our customers to offer broadband and triple-play services. As well as our Fed Gov business, which is largely in North America, although sometimes those projects go outside of North America under Department of Defense-based modernization projects, for example. So we also see that as a growth opportunity that we're going to continue, and with the extension of our Optical LAN ecosystem partners to extend into large enterprises in North America as well. If I can add one more comment, Greg, as far as the SON and SDN, we'll be talking more about that at Mobile World Congress, but that's still in its early stages. There's a lot of discussion, a lot of innovation going on there. But I don't see that as a huge revenue driver in the industry in North America in 2013, but we can talk about that at future calls.

Operator

Your next question comes from George Notter with Jefferies.

George C. Notter - Jefferies & Company, Inc., Research Division

I was hoping to better understand a set of factors that led you to discontinue the 9200. I guess, I bring it up because you guys were real far down the path with that product. I know that you had some trials back in Q2 of last year and you were demoing the product for more customers in Q3. I think I recall you're pretty close to delivering it here around year end. So why so late in the game discontinuing that product? And any more color you could give us on the decision would be great.

Daniel P. Kelly

Sure. It was a tough decision, but it was a decision we had to make based upon the trajectory of our Data business and the softness that we saw in 2012 and frankly, the lack of profitability in that segment. We looked at the ROI across all our products, the competitive landscape, market condition, as well as customer needs. It's not to take anything away from the team. The team did a great job delivering on feature package 1.0. We did some customer -- we were in customer testing and customer lab testing, as well as demoing the product with multiple customers. But at the end of the day, these are expensive and complex platforms. They require significant investment. And when we looked at the overall Data business and the ROI, we just couldn't continue to sustain that level of investment on the 9200, or on the 8600 and 8800.

George C. Notter - Jefferies & Company, Inc., Research Division

Got it. Okay. And then just to step back then, what's the bigger picture, just thinking about the long term on your strategy around wireless backhaul? I mean, you're still investing in the 8600 and 8800 platforms. Do you see those investments now being adequate to build sort of next-generation versions of that product or allow you to really compete effectively long term with all the bandwidth growth that's out there? Or is this now more of a harvest strategy in that business?

Daniel P. Kelly

So it's not a harvest strategy. We are investing in those platforms. We have over 150 customers that have deployed the Tellabs 8600 and 8800 for Mobile Backhaul. We also have Professional Services and Tellabs Insight Analytics that are part of that overall solution with our network management. We'll continue to deliver and extend what I referred to as the 8600 refresh, and we're going to be evolving the IP and Ethernet capabilities on those platforms that will allow our customers to migrate from 2G, 3G, as well as into LTE, as well as the small cell extensions off that -- of those platforms as well.

Operator

At this time, there are no further questions. I'll turn it back to the presenters for closing remarks.

Daniel P. Kelly

Okay, so good morning, and I'd like to thank everyone for being here today as we reviewed the close of 2012. We did review our business very closely. We've made some tough business decisions. But we do believe that we are investing in the right areas where our customers are spending money and where Tellabs can bring solutions to help our customers succeed. So thank you again for being here, and look forward to seeing you in 90 days.

Operator

Thank you. This concludes the conference. You may now disconnect.

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Tellabs (TLAB): Q4 EPS of $0.01 beats by $0.02. Revenue of $242.2M misses by $12M. (PR)