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Tellabs, Inc. (NASDAQ:TLAB)

May 01, 2013 3:00 pm ET

Executives

George Stenitzer - Vice President of Marketing and Corporate Communications

Michael J. Birck - Co-Founder

Hillary Hothan

Charles Kennedy

Daniel P. Kelly - Chief Executive Officer and President

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

Tom Scottino

George Stenitzer

Hello, good afternoon, and welcome to Tellabs' 2013 Annual Stockholders' Meeting. I'm George Stenitzer, Vice President of Communications, and I welcome you here.

Today's presentation contains some forward-looking statements, and such statements are subject to risks and uncertainties. Actual results may materially differ. A discussion of the factors that may affect future results is contained in Tellabs' most recent SEC filings. Tellabs disclaims any obligation to update and revise statements contained in this presentation based on new information or otherwise. This presentation may include non-GAAP financial measures. Reconciliations between the non-GAAP financial measures and the GAAP financial measures can be found on our website, tellabs.com.

Today, we'll first hear from Tellabs' Co-Founder and Chairman, Mike Birck, who will conduct the official business of the meeting. Today's business includes voting on the election of Class 3 Directors: Alex Mashinsky; Gregory J. Rossmann; Vincent H. Tobkin; and Mikel H. Williams, as well as other matters before our stockholders. Then we'll hear from CEO and President, Dan Kelly, who will review Tellabs' financial results and strategy.

During this meeting, we welcome shareholder questions, but it's important to hold your questions until the question-and-answer period. If someone disrupts the meeting, we reserve the right to remove you from the room. After our presentations, we welcome your questions, and if you want to ask a question, just come up to the podium so you can speak into the microphone and everyone on the webcast can hear you. Out of courtesy to shareholders, we're going to ask you to limit your questions to 3 minutes. There's a timer right here that will tell you when your 3 minutes are up. On the webcast, you can use the Q&A feature to ask a question, and I'll read your question aloud in the room so everyone here can hear.

We have a full agenda today, so without further ado, here's Mike Birck.

Michael J. Birck

Well, thank you very much, and welcome. It is -- these things are getting a little long in the tooth. We've had quite a few of these annual meetings now, [indiscernible] reminded me the first one was down at Continental Bank in Chicago, where we had like 8 people, I think, total. So this is rather different from what we've become accustomed to.

Okay, George, thank you. I would like to welcome all of you to this 2013 annual meeting and call the meeting to order. The purpose of this meeting is to elect 4 directors to amend the company's restated certificate of incorporation, to declassify the board, to approve, on our advisory, basis named executive officer compensation, to reapprove performance criteria under the company's amended and restated '04 incentive compensation plan and to ratify the appointment of our independent registered auditor for fiscal year 2013, and to transact any other business that may properly become -- come before the meeting. Jim Sheehan will record the minutes of the meeting. Sorry, Jim, you will, all right? Okay.

I would like to introduce members of the board at this time with the executive officers and representatives of our auditors. I'll ask the directors, executives and auditors to stand for a moment while I read your name. The current members of the Board of Directors are: Bo Hedfors; Frank Ianna; Vince Kelly; Mike Lavin; Dr. Stephanie Marshall; Greg Rossmann; Jan Suwinski; Vince Tobkin, you'll hear more about him in a little bit; Mike Williams; and Dennis Strigl, who wasn't able to stay around for this -- for the meeting. He's on his way back East, and of course, I am, for a couple -- well, for about another hour, a member of the Board of Trustees. I'd also like to introduce a new nominee to the board, and not someone that I suspect many of you are familiar with. That is Alex Mashinsky, and if he's elected, he will serve the vacant directorship held by myself immediately after this meeting. As I think you know, I am retiring as Chairman of the Board and as a Director, effective in a little over an hour, I think. Alex, where are you? Please stand, would you, so they can get a look at you? Thank you.

Okay. The executives of the company are Dan Kelly, President and Chief Executive Officer, and you will hear from Dan in a little bit; John Brots, Executive Vice President of Global Operations; Ken Craft, Executive Vice President of Product Development; Roger Heinz, Executive Vice President Global Sales and Service; Tom Minichiello, Vice President, Finance and Chief Accounting Officer; Jim Sheehan, Executive Vice President and Chief Administrative Officer, General Counsel and Secretary and the guy who keeps us all in line; and Andrew Szafran, Executive Vice President and Chief Financial Officer. Seeing you've met all of these guys now. Representing Ernst & Young, our independent registered auditor, is Merick Wersba [ph]. Thank you, Merick [ph]; and Martin Schneider. They will be available to answer any questions or to talk to you about accounting matters and that sort of thing either during the question-and-answer period if that's appropriate or at the end of the meeting. But you know where they are, they're over here on the side.

The board fixed March 4, 2013 as the record date for this meeting, and that's when shareholders of record were entitled to vote and have notice of the meeting. The meeting is being held pursuant to a notice of Annual Meeting of Stockholders, which was sent on out on or about March 28 to all stockholders of record as of the close of business on March 4, 2013, the record date. Mr. Sheehan, do you have an appropriate affidavit? You do. Will you make sure that, that gets filed with the notice of the meeting and a proxy card and anything else that needs officially to be filed? Thank you.

At the close of business on the record date, which was March 4, as you recall, there were 357,445,780 shares of common stock issued and outstanding. A copy of the list of registered stockholders available to vote at this meeting is available for inspection by any stockholder at any time during this meeting or afterwards.

Next, I would like to appoint Hillary Hothan; Tom Scottino; Kathleen McCarthy [ph] as inspectors of election. You will serve in that role, right, all of you? Okay. They will ascertain them and report the number of shares represented at the meeting, count all the votes and report the results of voting at the end of this meeting. Hillary, Tom and Kathleen, will you please sign the oath of office? You probably already have. Thank you.

Hillary, will your report the attendance of the meeting?

Hillary Hothan

Mr. Chairman, on behalf of the inspectors of election, I report that there are in attendance either in person or by proxy holder of shares representing greater than 50% of the shares entitled to vote at this meeting.

Michael J. Birck

Thank you, Hillary, and I understand that we had over 90%, right? That's pretty remarkable when you think about it. I'm impressed that our shareholders care enough to at least give us the insight into their activities. Okay, we obviously have a quorum present so we'll declare that this meeting will be -- will proceed under due authorization.

At the first order of business, a motion is in order to waive the reading of the minutes, as always, of the prior meeting and to approve them as written. A copy of these minutes is available for inspection by any stockholder during the course of this meeting or immediately thereafter. Laura Dooley?

Laura Dooley

[indiscernible]

Michael J. Birck

Thank you. Anwar Hassan?

Anwar Hassan

[indiscernible]

Michael J. Birck

Thank you very much. Is there anybody here that really wants to hear us read those things? I didn't think so. All right, we'll dispense with that and move on to other and more interesting things. In order to expedite the flow of business at this meeting, a motion will be made and seconded for each matter to be acted upon as set forth in the proxy statement. However, the actual vote on each matter will be determined by these people over here that will count them all and will defer the reporting of the count until the end of all the -- until all the matters have been taken into account, and we'll then ask Hillary or somebody over there to report on them. Okay. The company currently has 3 classes of directors, as I expect you know, each with staggered terms with the members of each class serving a 3-year term. At this annual meeting, the terms of the Class III directors will expire. The 4 nominees for Class III director are Alex Mashinsky; Greg Rossmann; Vince Tobkin; and Mikel Williams. If elected, the 4 nominees will serve until the 2016 Annual Meeting of Stockholders or until their respective successors have been duly elected and qualified. Each stockholder is entitled to 1 vote for each share held. Shares cannot be voted for more than 4 nominees. The favorable vote of a majority of the shares present and entitled to vote at this meeting will be necessary for a nominee to be elected as director.

Now let's proceed with the nominations. Charlie Kennedy?

Charles Kennedy

My name is Charlie Kennedy. As of the record date, I was a Tellabs stockholder and I nominate the following persons for election as Class III directors of the company: Alex Mashinsky; Gregory J. Rossmann; Vincent H. Tobkin; and Mikel H. Williams.

Michael J. Birck

Thank you, Charlie. The chair recognizes Jae Kim.

Jae Kim

My name is Jae Kim. As of the record date, I was a stockholder. I second the nominations.

Michael J. Birck

Thank you, Jae. The nominations have been made and seconded. No stockholder having previously notified the company of any other nominations, I declare that the nominations are closed. This is the usual Chicago way.

We will now move on to the second item to be voted on today, which is to amend the Tellabs and restated certificate of incorporation to declassify the Board of Directors. I think everybody probably knows what that means, but we're -- each director here before us has been elected for 3-year term, and needs 3 years there, then up for election. If we were to declassify the board, then each director would stand for election every year.

The company is asking its stockholders to approve the amendment of the company's restated certificate of incorporation to provide for the annual election of directors on a phase-out basis beginning with the 2014 annual meeting and elimination of the classified board structure, following the 2016 annual meeting, which gets through to 3 years. The affirmative vote of holders of 75% or more of the outstanding shares of capital stock of the company is required to approve the amendment of the corporation's restated certificate of incorporation.

Now I'd like to recognize Linda Codas [ph].

Unknown Shareholder

My name is Linda Codas [ph]. As of the record date, I was a Tellabs stockholder. I move to vote to amend the Tellabs Inc. restated certificate of incorporation to declassify the Board of Directors.

Michael J. Birck

Thank you, Linda [ph], and now I recognize Joe Gunther [ph].

Unknown Shareholder

My name is Joe Gunther [ph]. As of the record date, I was a Tellabs stockholder. I second the motion.

Michael J. Birck

Thank you, Joe. We will now move onto the third item to be voted on today, which was to improve -- to approve on advisory basis named executive officer compensation. The company is asking its stockholders to approve on advisory basis the compensation of the named executive officers, and there are 5 of those as you probably know. This proposal, commenting in those say-on-pay proposal gives stockholders the opportunity to express their views on the named executive officers overall compensation as described in the company's proxy statement. The say-on-pay vote is advisory, and will provide the Board of Directors and the compensation committee with input from stockholders to consider for future actions regarding named executive officer compensation. The chair recognizes Sue McDonnell.

Sue McDonnell

My name is Sue McDonnell. As of the record date, I was a Tellabs stockholder. I move to vote on the approval of the say-on-pay proposal.

Michael J. Birck

Thank you, Sue. The chair recognizes Sandra Muer.

Sandra Muer

My name is Sandra Muer. As of the record date, I was a Tellabs stockholder and I second the motion.

Michael J. Birck

Thank you, Sandra. We will now move onto the fourth item to be voted on today, which is -- this is like a long list of things, but that's the way it is in this day and age. The fourth item to be voted on today, which is to approve or reapprove the performance criteria under Tellabs Inc. amended and restated 2004 incentive compensation plan. The board is asking stockholders of the company to reapprove the performance criteria that apply to certain performance awards granted under the Tellabs Inc. amended and restated 2004 incentive compensation plan. That's a lot. Under Section 162(m) of the Internal Revenue Code, such performance criteria must be reapproved by stockholders every 5 years or 5 years into it. The affirmative vote of the majority of the outstanding shares of common stock of the company entitled to vote at this meeting is required in order for this amendment to be approved. I'd like to recognize Dave -- or not Dave. Deb Ragusa. That's not a Dave.

Deb Ragusa

My name is Deb Ragusa. As of the record date, I was a Tellabs stockholder. I move to vote to reapprove performance criteria under the Tellabs Inc. amended and restated 2004 incentive compensation plan.

Michael J. Birck

Okay. Thanks, Deb, and the chair recognizes Ken Rakowski [ph].

Unknown Shareholder

My name Ken Rakowski [ph]. As of the record date, I was a Tellabs stockholder. I second the motion.

Michael J. Birck

Thank you, Ken. Let's move on to the last item, finally, to be voted on today, which is the ratification of Ernst & Young as the company's independent registered auditor for the fiscal year 2013. The company's audit and ethics committee have selected Ernst & Young, they've been around a long time, to act as the independent registered auditor for the company for this year. We believe that it's appropriate to seek stockholder ratification of this appointment in light of the critical role played by the independent registered auditors and a request -- and we, therefore, request a motion for such ratification. The chair recognizes Jerry Simandl.

Jerry Simandl

May name is Jerry Simandl and as of the record date, I was a Tellabs stockholder. I move to ratify the appointment of Ernst & Young as their company's independent registered auditor for the fiscal year 2013.

Michael J. Birck

Thank you, Jerry. Jerry is a real old-timer with this company. I can tell you. The chair recognizes Steve Smith.

Stephen Smith

My name is Steve Smith. As of the record date, I was a Tellabs stockholder and I second the motion.

Michael J. Birck

Thank you, Steve. He's another old timer. This is kind of old home week out here. Okay. The motion has been made and seconded to ratify the appointment of Ernst & Young, LLP as the company's independent registered auditor for this year. The company has not received notice from any of its stockholders of any other matter to be considered in today's meeting, and therefore, no other proposals may be properly introduced at this Annual Meeting.

The polls will be opened at this time. We will now proceed to vote on the previously discussed matters. If anyone here has not submitted a proxy vote or would like to change their vote, if you would let us know, we'll immediately make sure you get a copy of the ballot and we'll allow that vote to take place. If you want to change your previously mentioned vote, we'd do that too. We're not ready for questions yet if that's...

Unknown Attendee

You're not?

Michael J. Birck

No.

Unknown Attendee

I'm sorry.

Michael J. Birck

We'll tell you. We'll let you know.

Unknown Attendee

All right.

Michael J. Birck

Okay, thanks. Does anybody want a ballot? I don't see anybody that's waving their hand around. All right. We will announce the date of -- or the results of today's voting as soon as we finish with the more interesting part of this meeting. While the results of the voting are being tabulated, I would like to ask our CEO, Dan Kelly, to join me up here. Dan will discuss briefly the 2012 and first quarter of 2013 financial results. Dan and I will then take questions in accordance with the procedure discussed at the beginning of the meeting. Detailed information concerning the 2012 financial results is presented in the company's Form 10-K, which was distributed to all stockholders with the proxy materials for this meeting. Dan, you're on.

Daniel P. Kelly

Thank you, Mike. So before I give a review of the business and what are we doing going forward with the business, allow me to take a brief moment to recognize and thank Mike on behalf of all the stockholders for his vision and leadership over the past 38 years in founding Tellabs and leading us for the last 38 years. Thank you very much, Mike.

So again, I'm going to give an update, a little review of how we did last year, some of the positives, some of the negatives, how have we done starting out the beginning of 2013, where are we investing and where are we investing to win. So first of all, Tellabs is very fortunate. Over the past 38 years, we've built up great customer relationships around the world, and today, we can count 40 of the top 50 service providers in the world as customers. On the screen here is a picture of some of those top carriers, as well as some new customers that we've added over of the past year. With our optical products, specifically the Tellabs 7100 and 7300, we added 19 customers in 2012. With our data products portfolio, largely used for mobile backhaul applications, the Tellabs' 8600 and 8800, we added 18 new customers last year, some big, some small, but customers around the world. And then our access products, which is the Tellabs 1150 and the Tellabs 1000 portfolio. We added a total of 10 customers.

To start the year, with our optical platform in the first quarter, we added 7 new customers. With our data products, we added another 7 customers and on the access side, we added 4 new customers. So we're off to a good start in 2013 with customer addition, which will produce revenue later this year and into next year. As I mentioned, this is the summary of our results in 2012, a mixed picture. It was a tough year. We're disappointed with our results on the top line from a revenue perspective, but we did aggressively manage down our operating expenses. In 2012, our revenue was about 18% lower than 2011, but we managed through carefully managing our expenses to decrease expenses by 21% and turn a $0.05 per share non-GAAP loss into a breakeven in 2012. From a cash flow from operations perspective, the story was better. In 2011, we consumed $49 billion -- $49 million in cash to run the business. We turned that around to a plus $45 million for a net gain of $94 million cash from operations year-over-year.

In 1Q, the results that we announced last Friday -- Thursday and Friday, the revenue was $209 million. 41% was revenue outside of North America, which is a little different than traditional, where we've been more 50/50. We saw some weaknesses in Mexico, as well as Western Europe, but we also saw some strengths with some Tier 1 customers in North America. Our GAAP gross margin was 34.5% and non-GAAP, 34.8%. We did reduce our non-GAAP operating expenses to $95 million in the quarter from a quarter a year ago of $120 million. But unfortunately, we still had a loss, a GAAP loss of $0.16 per share and a non-GAAP loss of $0.04 per share.

Second quarter, the guidance we gave last Friday, we see the revenue in the range from $200 million to $220 million, and we do see a list in the margin based on product and customer mix of 36%, plus or minus 1 or 2 points, and we do see operating expenses continuing to trend down around in the mid-$80 million range. We do see some positive signs later in the year where we do see some -- based on some project and customer activity, but we do see the revenue will pick up in the second half of the year.

Let's take some of -- a few minutes here to talk about our strategy going forward. It is a challenging industry that we live in, but we do see opportunities as well. We do see spending increasing on a regional basis in North America as well as in Latin America, but we also see our customers struggling with their investment pieces and their investment portfolio, and where they're spending their money. The demands from consumers like us with smartphones, smart devices, demands for greater bandwidth, video bandwidth in developed markets, our service providers are responding by upgrading to LTE, as well as providing video and cloud services. Emerging markets, we still see strong, very strong growth in mobile subscriber growth, as well as the demand for broadband. But consumers like us, we don't want to pay more. We want to pay the same amount. We want to pay $100 a month for broadband smartphones, but we expect more and more services every year. That puts a strain on our customers' business model because they can't charge more. So following Moore's Law with the increased density of electronics, doubling every 18 months, we've got to be able to chase that down, help our customers' business model, help them to ride these waves, invest in these waves in these inflection points. There's also a lot of innovation and architecture work going on that we see as an inflection point in the industry, where our customers will be driven to change the architecture of their networks, go to a more virtualized network, go to something called a software-defined networking, take some of the best practices from the IT world and apply them to the carrier world in order to drive down costs, be able to deliver services faster and lower cost over time, and we need to be a part of that transition as it goes.

Our strategy going forward. We're still very focused in investing in areas where we see growth, where we have good customer relationships and where we have innovation. So it's in a couple of areas. In the Packet Optical area, with the Tellabs 7100 and 7300; in Mobile Backhaul, with the Tellabs 8600 and 8800; as well as Optical LAN, a relatively new technology for Tellabs and a growth opportunity, where we can take GPON technology and repurpose it for enterprises in order to deliver high-bandwidth services for the desktop.

We also are starting to look at and invest in this inflection point I referred to, where our software-defined networking is going to be moving from the IT world into the service provider world, and we've done some demonstrations. We're doing some proof of concepts. We're working with our customers on this, the thought leaders of the world, the large tier-1s in North America, and where are they going and participating in that. We've done some demos. We've had a pretty interesting demo on congestion control and application around that for backhaul networks to help our customers dynamically manage the bandwidth congestion problems in the network, which accounts for about 40% of the problems in a mobile network. We had a demonstration at Mobile World Congress in Barcelona earlier this year. It went very well. Customers, analysts were impressed with that. We're going to continue to invest in that as we go forward.

So the 2 areas where a lot of our investment and a lot of our focus and success is in the Packet Optical area. The optical networking area is a very broad market. So we focused in the metropolitan, what's called the metro ROADM area. So that's where we're providing wavelength services, building large optical networks in metropolitan areas with a technology called the ROADM, which is a reconfigurable, optical add-drop multiplexer. This market is about a $2.5 billion market, and it's growing as you can see from the screen on the right-hand side.

Within those networks, there's different types of wavelengths and speeds and feeds that go into building these networks. Today, most of the transport optical metro networks are carried in 10-gigabit wavelength services. As you can see from the chart, it's growing. The number of connections, the number of links, 10-gig links is growing from the chart on the left, but we also see a trend coming with 100-gig. The demand for more and more bandwidth for video services, for mobile services continues to grow. We recently released our 100-gigabit technology on the Tellabs 7100, and we have 3 customers today that have already deployed the technology, and we're in testing with others.

We do see this market, by the way, if you look to the right-hand side, continuing to grow upwards from $2.5 billion to $4 billion. The disappointment last year was we expected this market to grow a little faster, and it looked like it was pretty much flat if you look at the chart. Some of that was softness in the customer investments in Europe, but we do see that improving and picking up in 2013.

So why will we win? Well, we already have been winning. As I mentioned before, we had 19 wins last year in the optical area. Today, we have #2 market share in Latin America for metro ROADM optical networking, and we have #3 share in North America. We have a differentiated solution with the Tellabs 7100, leading density for 10-gig circuit on a single card, as well as very low cost, first cost optics, which is very important for our customers because they can't afford to invest heavily upfront. They want to pay as they grow, as they add traffic. So having a low first card cost for our solution, with something called the Tellabs nano, is very compelling and has been very successful. We have also architected the product so that it can support both packet, as well as OTN or optical transport networking, as well as TDM switching in a single platform, and we have a very strong network-management solution with the Tellabs 8000 intelligent network manager that can manage both optical as well as data traffic. We're also working on some SDN proof of concepts in the second half of the year with a key customer, and we're also working on creating partner ecosystems. We have an example here with NEC networks that enabled us to add a very important new mobile customer in Asia.

Next, moving onto the Mobile Backhaul, which is largely served by the Tellabs 8600 and 8800 solution. It's around the $3 billion market. That is edge router product like the 8800 and 8600 that are used to build Mobile Backhaul networks. This market is relatively flat, but we do see some growth through 2015. And also at the lower left, the opportunity we see in front of us, today, most of the world is 2G and 3G, but will be migrating over the next few years to LTE or 4G networks. We see that as an opportunity and advantage for us because we've built those 2G and 3G networks with our customers. We know how they operate, and we've invested in the ability to extend these portfolios to support that migration.

So why do we win? Like I said, we can help our customers evolve these networks to 4G. We have a suite of nodes that help our customers cost-optimize the deployment from small cell site devices to larger devices deeper in the network. We understand how to design and build these networks, how we can manage like timing and synchronization across very complex networks. We can help migrate 2G, 3G to 4G and again, we have a very powerful network-management solution that our customers love. They enjoy it. It's a great opportunity for Tellabs to help our customers better troubleshoot and manage their networks, as well as Tellabs to sell additional products to our customers all under one network manager. We're also looking at the rollout coming over the next few years of small cell, which customer -- mobile carriers will be deploying in order to improve coverage and improve throughput, and we have technology that we can help. We're not going to build small cells, but we have the technology to aggregate that traffic and to build that ecosystem and partner with these small cell providers to provide an end-to-end solution. We're also working on SDN. That is the software-defined networking demo that we're going to be doing with our key customer later in the year, involves both the packet, as well as the optical solution.

In summary, we're building on our strengths, which is in the packet optical, the Mobile Backhaul, as well as Professional Services area. We've unfortunately had to make some tough choices, but that's what we have to do based on the situation we're in and the markets we're competing in, in order to be competitive, in order to be healthy, in order to survive. We are confident, and we do see some improvement in the revenue in the second half of the year, and we're looking forward to doing -- achieving that.

So with that, I know there's always one person who already wanted to ask a question. Mike, I think you can join me, and we're ready to take any Q&A, following the guidelines that George has outlined.

Question-and-Answer Session

Unknown Executive

Okay. So now we will take your questions in the room and via the webcast. If you want ask a question in the room, come forward to this podium, and when your turn comes, just speak into the microphone so everyone on the webcast can hear you. I will ask you to limit your questions to 3 minutes. There's a timer here to help you with that. And on the webcast, there's a Q&A feature that you can use to ask your question. I'll read your question aloud so everyone can hear.

Okay, and I see we have our first question.

Unknown Shareholder

And Mike, congratulations on your retirement.

Michael J. Birck

Thank you.

Unknown Shareholder

I wish I could do that too. But anyway, my name is Ben Chilou [ph], I'm a local resident and also a very, very small stockholder for this company for a long, long, long time. Today, we have seen the performance in everything, and also congratulations, again. Your Board of Directors consists of 1 female with a Ph.D., that's Stephanie; 1 professor from Cornell clinic professor. As I am, you are -- the age group of your Board of Director, ranging from 40 to 50, 60 and the professor in the 70s. You're younger than me, okay, professor. But my question is really we have seen very, very bad informations for this company in the past few years. And everybody, if you care, look at Page 27. Here, every year, you have accumulated a comparison. Tellabs has been way, way down to the bottom as compared to other, Page 27, okay? Then look at Page 50 on your revenue and assets, been declining from $1.8 billion to $1.6 billion and so forth. And now last year, it's barely about $1 billion. So everything seems to be going down, but I don't know how the proposed Item 4 and 5 with this incentive compensations, particularly the Board of Directors that's serving on the compensation committee with this kind of incentive increases and all this compensations about our executive, as well as other people. So I'm worried about what is going to be happening to us because the picture show there which have percentage. As a statistics professor, you're always talking about figures do not lie. Liars always figure. I'm not saying you're lying here, but if you have no percentage, it's very checking thing [ph]. It's a denominator versus numerator thing [ph]. So here I sound a little bit worrisome about our company's continuing downtrend, okay? The revenue, the assets, everything. So here, I question you about because, Mr. Chairman, you didn't ask the question. After the procedures, you say, "Hey, anybody, nominate? Anybody, second?" I thought there would be a discussion or question there. So today, at the meeting, we do not have anything called discussion or questioning until right now. So I feel a little bit worried about the company, as well as the compensation schedules, all right, and specially, Dr. Stephanie and Dr. Suwinski, and I'm glad that your Board of Directors are so such diversity, which are mixed, except just on the 1 female with a Ph.D. and 1 professor. That's all. So how would you view the compensation for the executives and for the others with respect to our performance and continuous decline in assets and revenues? And it's a huge decline from $1.6 billion to barely about $1 billion in terms of assets, okay? So I ask, first, any explanation for that. Second, I want to know what's the proportion of our employees or our job are located outside the country, okay? Among our -- just give me a proportion, how many percent of our people are located in the United States and what kind of revenues generates from the United States in relation to the employment situation? Did you understand my questions?

Michael J. Birck

Okay. We, I think, understand the questions, and we may have to call on somebody else here to answer, at least, a portion of them. Let me say this, to start with. I don't think anybody affiliated with this company is happy with what's happened over the past couple of 3 years. We've been muscled aside by the big guys, and that's a tough thing to have to acknowledge. But when we started this company many, many -- 38 years ago, and for a good portion of our early years, we were able to go toe to toe with just about anybody. And we were not as big a some of those, but we were maybe a little quicker and maybe a little more intuitive, and we did some very, very good things, and we had some extraordinary people that were involved in the company. We still do. But as consolidation occurred in the industry and as our customers became mechanized in their procurement, instead of having a salesman go in and convince somebody -- or us for the CEO or anybody, go in and convince a customer that they ought to try our stuff, a machine made those decisions. Just push a button, and what came out in the way of purchase requisitions was pretty well-established long before we ever got there. So we faced a very difficult time over these last few years, and we're modifying things to deal with that. We have to. We have to get bigger. We have to get more muscle so that we can contend with those in almost every case. When we call on a customer, we're the smallest vendor calling on that customer for that particular product. That's tough. And we win some, but we don't with them all. We don't win enough to get our numbers up out of the mud. So we've got homework to do. There's no question, and thank God I don't have to do that. I'm going to get out of there. But this guy does have to do it. Dan, do you want to talk a little bit about that?

Daniel P. Kelly

Sure. You asked a couple questions. One, and I'd like to echo Mike's comments, no one here, no one on the management team, no one on the Tellabs' Board of Directors is happy with our performance over the last few years. We're all disappointed and we're working very hard to turn that around. I think, if you noticed, the Board of Directors, over the last year or so, there's a fair amount of change and -- which I view as a positive. We've had some great people. We said goodbye to some great people, but the board composition has changed and they're keenly aware and very focused on working with the management to help turn the situation around. You asked some questions about domestic versus international, I think, at last count, we had roughly 2,200 employees around the world. Just off the top of my head, I don't have the split, but from a revenue perspective, in the first quarter, 41% of our revenue was international and the rest was North America. It slightly reversed the trend that we had for the last 1 or 2 years, which were roughly 50/50 from a revenue perspective. But we're in a lot of markets around the world, selling all these products, competing against the big guys that Mike talked about. We didn't win those 19 optical, 18 data and 10 access customers without competing against all those guys, but we do compete against the big guys on a daily basis. So as far as the exact employee count around the world, I don't have it off the top of my head, Jim. Yes, it's a little skewed, I think, towards North America the last time I looked. But actually, Kyle Matthews, Head of Human Resources, would know that a little better than that. We have a large R&D center in Finland, as well as one in Shanghai, China, and then we have sales offices throughout the world.

Unknown Shareholder

So are you aware of your asset and liability? What is the highest portion of equity, stockholder's equity? Do you have any idea? In terms of stockholder's equity, what is the proportion of that amount to [indiscernible]. Do you have any idea?

Daniel P. Kelly

I don't know off the top of my head. We can ask our finance team.

Unknown Shareholder

It's more than 1/2. It's 1.6 [ph] or something like that, okay? So I'm wondering what's going on for the stockholders' welfare because stockholders equity consists of stock [indiscernible] of your total liability [indiscernible]. So stockholders' well-being, how are you taking care of the stockholders well-being? Because their equity numbers [indiscernible] is quite high proportion [indiscernible].

Michael J. Birck

Okay, thank you.

George Stenitzer

And we have a next question.

Unknown Shareholder

Well, a tough act to follow. So just one comment on compensation since I look at compensation daily in my portfolio. And the bottom line is, if you pay people less, you're going to get worst people almost always. The market for talent is expensive in this country. So just as a -- not a defense of Tellabs or a defense of any company, if there is somebody more qualified at half the price, the company would hire them. So that's just my comment as an owner. I'm very curious to hear from Mike, some 13-year perspective or even a 15-year perspective, because I was around and invested in Tellabs back in '98 during the Ciena negotiations and the notorious AT&T facsimile that came in at the last minute, and so I know the company quite well, owned it on and off for years. And I imagine that the world today in 2013 versus 1998, 2000, is extraordinarily different. And I think the whole room has a very unique opportunity to hear what ended up being super different than you expected on both the customer side in terms of what the customers wanted and how much they wanted, and then in terms of the competition from suppliers. If you could kind of go back and look at the way you thought the world was going to be. And just one little statistic and then I will sit down, the breakup fee in the Ciena merger is actually higher than the current enterprise value of Tellabs. So the world have changed quite a bit since then so I'd be very curious if you could talk about that for a few minutes. And enjoy your retirement.

Michael J. Birck

Thank you. Well, that was a pretty perceptive question and issues that we think about a lot. I think what has changed in this world is really consolidation in our part of the world both on the customer side and on the supplier side. Back in the days when we were doing really well, we were competing against some of these same organizations. But at that time, our customer base was a lot more diverse than it is now, but through consolidation of the industry -- you look at AT&T now, which is a sort of a reconsolidation of what AT&T was before the Justice Department broke them up. And they're tougher to deal with, no question. And so they are maybe by necessity, but more likely by choice, focusing their procurement activities and there -- in general, their construction activities on the bigger problems and the bigger suppliers. So they're -- they go to Alcatel-Lucent and Cisco, Huawei, where they can, Ericsson, and those are the ones that are on those registers. So when they push the button, that's the number that comes or the name that comes up, not Tellabs, and not a lot of the other smaller ones. So industry consolidation has been a tough deal for us, a tough thing to contend with. But I think we're beginning to learn how to deal with that, and it sometimes involves us backing down a little bit in our aspirations. Dan mentioned that we're a lot smaller than we were this time last year. And then, this time last year, a lot smaller than the year before. We don't do that lightly. That's not something we like to think about or do, but sometimes you have to. Sometimes, you have to spend less money and that's kind of what has befallen us. Dan, you got any other thoughts?

Daniel P. Kelly

Yes, I would agree with that. If you look back to the time frame that Bob asked about in '98, there used to be 7 regional Bell Operating Companies and 2 or 3 long-distance carriers in North America, and we would target the PR [ph] box one at a time, and did a great job with multiple products, being able to run the table and go through all 7. Today, we have AT&T and Verizon, and then CenturyLink is the third largest non-wireless carrier. But certainly, the competition has heated up significantly. I wouldn't discount and I don't want to make this sound like a bunch of excuses, but the competitive base has also changed. We live in roughly a $200 billion global telecom market today, and we have 2 competitors from China that in 1998, if they existed, it was in a garage somewhere that now account for roughly $40-plus billion out of that $200 billion market. So the competitive landscape has changed, as well as the customer space has changed dramatically, and that's the world we live in, and we have to learn how to adjust and compete and to continue to compete. And we do compete with these guys on a day-to-day basis, and we -- some of those larger customers that we used to do a lot more business with a few years ago, our goal is to figure out how to get back in there, and that's our goal ahead of us. Good question.

Michael J. Birck

Okay, we have another question from the floor.

Unknown Shareholder

My name Jay Stray [ph]. I'm a shareholder of the company, and I just have a couple of basic questions, and the first one really relates to how the board considered 2 issues. And, I guess, my first question is why did the board consider the repurchase of shares, which you have an ongoing program to do? Why did you consider that to be a good investment for the company? And at the same time, why did you feel it was prudent to pay a rather large special dividend at the end of the year at a time when the company obviously was struggling and cash is important to the company even though it has a large reservoir of cash? So the special dividend could have been used to repurchase shares if you felt they were a good investment. And that would be the only reason that I would think you'd repurchase shares because you thought it was a better place to invest your money than into additional R&D. But yet, you paid the special dividend which, I suppose, was motivated by the fear that the capital gain rate was going to accelerate with the fiscal mess in our country. So that's my first question, and then I have a couple more, or I'll ask those now and...

Michael J. Birck

I'll answer -- let me do the first one now and then you can...

Unknown Shareholder

You want to respond to that first question?

Michael J. Birck

Pardon?

Unknown Shareholder

About the special dividend versus the share repurchase?

Michael J. Birck

Yes. Yes, I can tell you what the board's philosophy was there, and I will assure you that we have shareholders on all sides of these issues and who are asking that we return money to shareholders either via a special dividend or repurchase of shares, and we've done both of those things. Now the repurchase issue tends to reward people who become ex-shareholders. And our thought was, with regard to the special dividend, was that, perhaps, it's time for us to do something for people who are shareholders and plan to continue to be shareholders. So that was really the rationale. We did not use cash for any aspect of the business. We were -- I wouldn't say replete with cash, but we certainly had more than our operating needs required. And so we thought, well, let's see if we can do something for our shareholders since our -- we haven't done anything in the stock price area. We're -- and so that was the rationale for the special dividend. The jury is out on stock repurchase. I've read learned pieces on why you should repurchase shares and I've read equally learned one about why it's a waste of money. I think if you go back over the years and look at the companies who repurchase their own shares that they didn't fare as well as they might have hoped, and we repurchased a lot of shares over the years in our stock, most -- well, virtually all of it, at prices considerably higher than our stock price right now. That might say, well, those aren't very good investment decisions. But at that time, under the circumstances that existed that time, sometimes they do make some sense. But that's all about I can say in that regard. You got some other questions?

Unknown Shareholder

Well, that's why you have a Board of Directors to make those tough decisions, and they obviously have to look -- have some forward vision as to what the results might be in paying a special dividend or repurchasing the shares. And I understand you're going to repatriate in the future around $367 million from offshore and bring that back into the United States? Is that motivated by any reason other than taxes?

Michael J. Birck

I think we've done it already, haven't we?

Unknown Shareholder

It's done. It's done. I saw it in your 10-K.

Michael J. Birck

Andrew is in here somewhere, right? Do you want to talk about that a little bit?

Andrew B. Szafran

Yes. We already have [indiscernible].

Michael J. Birck

Andrew is our Chief Financial Officer as I think you know.

Andrew B. Szafran

Is this on? Okay. We already have repatriated about $370 million from offshore entities.

Unknown Shareholder

And was the only reason for that because you weren't going to pay any taxes on that money?

Michael J. Birck

The dividend too...

Andrew B. Szafran

It certainly was an effective way to utilize the company's tax attributes.

Unknown Shareholder

Okay. So bringing it into the U.S. was -- it didn't make any difference what country it was in, is what you're saying? You -- but because you could bring it in tax-free, you've brought in into the U.S.?

Andrew B. Szafran

Well, we were able to -- it's not necessarily tax-free. We did not have to pay any cash tax liability. It's just a very little bit in order to repatriate the funds, which is good when you're a U.S.-based company, okay? Normally, U.S.-based companies have cash all over the world and this was a good opportunity for us to do so, to bring the cash back to the parent.

Unknown Shareholder

Okay. I think you've answered my question there. So on the abandoned intangible assets, I think there were $47 million worth of abandoned assets of the company during the last fiscal year. Is that correct? Was that the full cost of those assets or was that an amortized value at the time that you abandoned them?

Andrew B. Szafran

We have to ask our finance team. Yes, yes, so that would be the carrying value at the time. So it's been amortized.

Unknown Shareholder

Okay. So that doesn't the amount of investment you had in those assets.

Andrew B. Szafran

It's whatever the amortized value is at that time.

Unknown Shareholder

Okay. Because the amount of the investment was written off over multiple years?

Andrew B. Szafran

Well, in that particular case, it was really just over 1 year because -- what you're referring to had to do with the WiChorus acquisition.

Unknown Shareholder

Okay. So -- and those are intangible assets you acquired during that acquisition? Were they mainly patents or what were they?

Andrew B. Szafran

Yes, yes, technology-related patents.

Unknown Shareholder

Okay. All right. And my last question. Why do you refer to GAAP earnings and non-GAAP earnings? Why should the shareholders care about non-GAAP earnings?

Michael J. Birck

We got our working guys working over there.

Andrew B. Szafran

I will answer that, okay. So GAAP are some very prescribed rules that we follow. All U.S. companies follow GAAP. And sometimes, we present non-GAAP, which has certain adjustments made to it, which we feel are beneficial to shareholders, investors, analysts, that take out certain charges in order to paint a more complete picture of the company's performance. For example, when we do a restructuring where we make a onetime reduction in our cost, we feel it's appropriate to show those costs on the side, so you have a good picture of how the company is going to look on a go-forward basis, but these are voluntary -- or I would call it, discretionary moves by the company to reduce its cost structure, and we think it's very instructive to analysts and investors to understand how the company will look setting aside those charges. So we show it both ways, more information.

Unknown Shareholder

Okay. And so it's important to investors or shareholders because the company is doing better than the GAAP numbers show, is that the point?

Andrew B. Szafran

Well, just to give you an example, we've made a couple of restructuring moves over the past couple of years. The company was running a quarterly operating expense level of about $140 million back in 2011. As of the most recent quarter, that number is $95 million, okay? So we've made tremendous progress taking cost out of Tellabs. Along the way, we had to make some restructuring charges, which showed that stair-step decline in our operating expenses. So yes, we do feel that that's valuable to investors and analysts to understand the moves that we're making, correct.

Michael J. Birck

Thank you. Those were good questions.

George Stenitzer

We have one question from the Internet that regard share repurchases. And this might be best directed...

Unknown Executive

[indiscernible]

George Stenitzer

It's a bit different spin on the question.

Unknown Executive

[indiscernible]

George Stenitzer

Yes. Let me share this with you, and we can see if we need to further respond. Please explain how share repurchase is added to shareholder value. The amount of treasury stock exceeds current market value of the entire firm. More recent 10-Q suggests the average cost of treasury stock to be $5.90 to buy 68.1 million shares. The balance sheet shows treasury stock cost of $1.258 billion for the shares about $8.20 a share when the share's currently trading at $2. That was the common...

Michael J. Birck

Yes, and we did address that issue. But suffice to say, George, that if your stock price goes up after you've repurchased shares, it looks like a good investment. If it goes down, it doesn't look like such a great investment. And that's what's happened to us. So on balance, when our average repurchase price is what, $5 or $6 or $7 a share and our stock sell for $2 a share, not a very good investment. If we were clairvoyant at the time, we might have changed things, but right now, we -- our clairvoyance is not quite working well. So we're -- but we aren't buying shares back right now.

Daniel P. Kelly

Yes. Actually, Mike, with -- the share repurchase that we announced is ongoing, and shares were purchased in the first quarter and that will continue as per the plan.

Unknown Shareholder

Dick Murphy [ph], long-time shareholder. You talked about the customers consolidating, AT&T being the prime example. What about Tellabs looking to be acquired to become larger and more powerful? Or acquiring another company, become larger and more powerful?

Daniel P. Kelly

So I'll take that one. As far as Tellabs acquiring companies, for competitive reasons, we don't get into that. But we do look, and we are very cognizant of things going on in the industry. But obviously, for competitive reasons, we don't discuss either a question or direction that you asked for that.

George Stenitzer

Any other questions? Looks like we have one in the back of the room.

Unknown Shareholder

At what point is the stock delisted from the NASDAQ? In view of the precipitous drop to around $2 a share, is there a level at which we can no longer follow it?

Daniel P. Kelly

Tom? Yes, Andrew?

Andrew B. Szafran

To answer to your question, per the rules of the NASDAQ, you would have to be below $1 for a period of time. I don't know offhand what it is, but you'd have to be below $1 for a certain number of trading days in a month. Okay?

Unknown Shareholder

We're getting there if, in fact, that happens. Well, it's a little bit too much. Reverse, that could change if it's going beyond is a possibility...

Andrew B. Szafran

Yes, we don't want to speculate on that at this time.

Unknown Shareholder

Brad Wayne. I've been a stockholder for a number of years. I just like to thank Mike for his service, over 38 years and since the time I've been of stockholder. And just wondering if, going forward, there is any addition to the new customers? If there's any reasons for optimism you can give us or some more detail on what the plan is going forward?

Daniel P. Kelly

Okay. Good question. I have optimism, as I tried to outline earlier today. We do have a 38-year history, strong customer relationships, an excellent team, and we are investing in a couple of markets, the Mobile Backhaul area, where we have a long history of success in that market, as well as in the packet optical area. We believe, and our customers are showing that they believe with some of their customer wins that I talked about last year, that we are investing in the right space, and -- in both Packet Optical as well as Mobile Backhaul. So we have optimism, but we also recognize that it is a competitive world we live in. And we have to compete and be tougher and faster and stronger in order to compete better. So I wouldn't be standing here if I don't believe in the future.

George Stenitzer

Any other questions?

Unknown Shareholder

Well, it's not exactly a question. It's like I'd like to get your opinion about something. I was reading an article by the analyst that said -- which shows that our company is strong. It said it continues to pay a dividend. And if I'm not mistaken, didn't Tellabs stop paying a dividend this last quarter? And my other concern is I read articles were a lot of companies are going to sue Tellabs for misleading them. And I don't understand why because in your annual report, it's -- as you stated, it's says these are forward-looking statements and then there's pages of things that could go wrong that could affect it. So could I have your view on that?

Andrew B. Szafran

Sure. So that's a couple of questions there, Mike. Shareholders and then I think the question was around dividend, and we did not pay the $0.02 a share dividend last quarter or this quarter. But we did return $1 to shareholders late last year. Going back to that dividend question from before, if we will roll back the clock a year ago, we had a lot of large shareholders who were asking why were we sitting on so much cash, and that, obviously, we don't need that much cash for operations. All the cash in the bank is owned by the stockholders, so people here and people around the world who own the stock. So we have tried to return value to shareholders through the $0.02 per share dividend, as well as the $1 per share special dividend, as well as the share repurchase that was also started when the $1 dividend was announced. So we tried to take very tangible actions over the last year to return value and cash to shareholders because the cash is theirs. As far as the lawsuit, it's hard to speculate the motivations on that, but we live in a world that people like to sue one another and they're more than welcome to do that. We don't believe those suits have any merit, and we'll continue to defend ourselves in court on those.

Unknown Shareholder

[indiscernible]

Andrew B. Szafran

Sure.

Unknown Shareholder

As Mr. Birck said that in the past, that the share buyback in a lot of instances wasn't as successful as they had hoped. Wouldn't it have been better to return that money to the stockholders as a dividend rather than to a share buyback?

Michael J. Birck

Well, there are lots of views or opinions on that. Some people think we should buy back stock, and we get a lot of letters and comments in that direction. And others think we should pay more of a dividend. Our philosophy on dividends has been that you pay dividends out of your cash surplus, on an operating basis, ongoing basis. And for the last couple of years, we've actually been cash flow positive, notwithstanding the fact that we've not been earning a very good return on investment -- on our investment in the market. So we -- with a positive cash flow, we opted to pay a dividend. I hope we get back to that. I'm not going to be making that decision. It's going to be these guys and gals in front of you that will make that decision as we go along. The dividends are a return of capital to shareholders, and if you don't -- if you try to pay dividends when you don't have positive cash flow, you can get in trouble. We have that positive cash flow over the years, and we do have a fair amount of cash in the bank. We returned a fair amount of that, as was just mentioned, at the end of last year. We thought we'd beat the feds on the tax side of things and pay it out in December instead of waiting for January when the rates go up. Dividend policy is set by the board, and they will do that. They will investigate that and decide on it at each board meeting. Thank you.

George Stenitzer

I think that's all the questions.

Michael J. Birck

Okay. Then let's get back to the somewhat less interesting stuff. I think the questions are the highlight of the meeting. Tom Scottino, has been diligently counting all these things, all this ballots. Would you report on your count?

Tom Scottino

Mr. Chairman, on behalf of the inspectors of election, I wish to announce that each of the following nominees received votes exceeding the majority of the shares represented at this meeting: Alex Mashinsky; Gregory J. Rossmann; Vincent H. Tobkin; and Mikel H. Williams.

Michael J. Birck

Okay. I then declare that each nominee -- each of the nominees has been elected a Class III director to serve until the year 2016 annual meeting, or until his respective successors has been duly elected. Congratulations. Those are good choices. We're very pleased.

Okay. Hillary, would you please report on the vote to amend of the Tellabs restated certificate of incorporation?

Hillary Hothan

Mr. Chairman, on behalf of the inspectors of election, less than 75% of the outstanding shares of the company were voted in favor of amending the Tellabs Inc. restated certificate of incorporation to declassify the Board of Directors. Since the required vote did not occur, the company's restated certificate of incorporation will not be amended to declassify the Board of Directors.

Michael J. Birck

Thank you, Hillary. And I might just make a couple of comments in that regard. Back in the days when we drafted the charter for this company, we never foresaw anything like the need or the desire to declassify the board. We didn't -- we thought if there was something like that materialize, we would make it a fairly punitive or difficult thing to achieve. A plurality of 75% of the shares, not just voting shares, but everybody in the company shares or everybody -- all the shareholders or shares in the company is a pretty tall task to achieve. The board and Tellabs recommended declassifying the board. We understand the issues of the day, and we voted corporately in favor of that. We can't control all of our shareholders, obviously, so we didn't get the 75% of the outstanding total of shares voting in favor of that. So as Hillary said, it didn't pass. Okay. So the amendment didn't pass, and that's for the record. Okay. Tom, will you please report on the vote on the approval of the say-on-pay?

Tom Scottino

Mr. Chairman, on behalf of the inspectors of election, I wish to announce that the majority of the shares represented at this meeting were voted in favor of the approval of the say-on-pay proposal.

Michael J. Birck

Thanks, Tom. I therefore declare that the say-on-pay proposal has been approved. Hillary, will you please report on vote to reapprove performance criteria under our amended and restated 2004 Incentive Compensation Plan?

Hillary Hothan

Mr. Chairman, on behalf of the inspectors of election, I wish to announce that a majority of the shares represented at this meeting were voted in favor to reapprove performance criteria under the Tellabs Inc. amended and restated 2004 incentive compensation plan.

Michael J. Birck

Okay. Thank you. I hereby declare that the performance criteria under the amended and restated plan has been approved.

Kathleen, how come you never get to answer any of these things? Okay. Tom, will you report on the vote for the ratification of the appointment of Ernst & Young?

Tom Scottino

Mr. Chairman, on behalf of the inspectors of election, I wish to announce that a majority of the shares represented at this meeting were voted in favor of the ratification of the appointment of Ernst & Young LLP as the company's independent registered auditor for fiscal year 2013.

Michael J. Birck

Okay. Merick [ph], do you have anything you want to say to the assembly?

Unknown Attendee

[indiscernible]

Okay. Congratulations. We're delighted you guys are the still be around, not that we had any great concerns about that, but Ernst & Young has been our public auditor for a long time, many years. And they are very objective in what they do, and they make us walk a pretty straight line. We appreciate it.

Okay. Now I would like also to ask Vince Tobkin to stand and just -- you acknowledge, he is the new chair of the board. Vince is taking over for me. So next year, you can stand up here and answer those questions.

Okay. I think that concludes the business of this meeting. I sincerely appreciate everybody's good wishes and also your attendance at this meeting and I'm sure I'll be here next year -- or at least, I think, I'll be here next year, good Lord willing, and -- but I won't be standing up here in front of you. It will be Vince and probably Dan, and who knows? But is there is no further business, I'd like to declare a motion to adjourn this meeting. I'd like to make that motion and I need a second. Thank you. Is there any objection? All right, we are finished. Thank you, folks.

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