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Tellabs (NASDAQ:TLAB)

Q3 2011 Earnings Call

October 25, 2011 8:30 am ET

Executives

Tom Scottino -

Robert W. Pullen - Chief Executive Officer, President and Director

Timothy J. Wiggins - Chief Financial Officer and Executive Vice President

Analysts

Blair King - Avondale Partners, LLC, Research Division

Ted J. Moreau - WJB Capital Group, Inc., Research Division

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Tim Long - BMO Capital Markets U.S.

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

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

Ehud Gelblum - Morgan Stanley, Research Division

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

Jeffrey T. Kvaal - Barclays Capital, Research Division

Michael Genovese - MKM Partners LLC, Research Division

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

Mark Sue - RBC Capital Markets, LLC, 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 CEO, Rob Pullen; and our Executive Vice President and CFO, Tim Wiggins. If you haven't seen the news release we issued this morning, you can access it at our tellabs.com website.

Before we begin, I would like to remind you that this presentation contains forward-looking statements about future results, performance or achievements financial and otherwise. These statements reflect management's current expectations, estimates and assumptions. These 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 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 include 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 that, I'll turn the call over to Rob.

Robert W. Pullen

Thanks, Tom, and good morning, everyone. In the third quarter, Tellabs faced headwinds as spending was pushed out in North America. Third quarter revenue was $314 million. A previously announced restructuring charge and non-cash accounting charges in the Broadband segment led to a GAAP loss. As you may recall, in July, we announced restructuring that's designed to improve profitability by aligning expenses with our revenue. We plan to cut $50 million in expenses and cost over 4 quarters. As a result, we took a third-quarter restructuring charge of $20 million.

We completed our previously announced analysis of goodwill in the Broadband segment. We took non-cash accounting charges of $83 million for goodwill impairment, and $20 million for an in-process R&D impairment due to lower-than-expected broadband product revenue and increased R&D spending for the next-generation products. Largely as a result of these charges, we lost $0.38 a share on a GAAP basis. Although revenue was lower than we expected, we improved on a non-GAAP basis with a loss of $0.01 a share compared with $0.02 a share in the previous quarter. That said, we made progress to transition our business and prepare for the mobile Internet opportunity.

Many of Tellabs' fundamentals improved during the quarter. Revenue rose outside of North America, gross profit margins increased sequentially, operating expenses sell, and we continue to generate positive cash from operations. We continue investing in R&D in our next-generation product portfolio.

We're encouraged by continuing growth in our business outside North America, which for the first time generated more than half of Tellabs' quarterly revenue. Third quarter revenue outside of North America rose 24% compared with a year ago. For the first time, one of our customers outside of North America generated more than 10% of Tellabs' overall revenue. Gross products generated 59% of third quarter revenue compared with 52% a year ago. Non-GAAP gross profit margins were 41%, up sequentially from 37.7% in the second quarter. Non-GAAP operating expenses continue to fall to $135 million, down from $138 million in the second quarter.

We generated positive cash flow from operations totaling $21.5 million in the third quarter. Our cash, cash equivalents and marketable securities at the end of the quarter stood at $1,030,000,000. We're making progress as we concentrate our research and development on the smart mobile Internet. We are leveraging Tellabs' strong position in mobile backhaul in reduced scenarios such as our new content-aware routing platform, our optical platform, analytics and Professional Services for the mobile Internet.

Tellabs continues investing in R&D and next-generation platforms. On a non-GAAP basis in the third quarter, we invested $79 million in R&D. About 90% of R&D is going into our growth products. The lion's share is dedicated to creating smart networks for the mobile Internet. We believe that our R&D is crucial to position Tellabs and our customers for success in the early innings of the mobile Internet game.

In September, we announced a new next-generation solution, Tellabs SmartCore 9200 Content-Aware Routing Platform. This new platform will help our customers succeed in making network simpler and smarter, by improving the user experience and by enabling new revenue streams. With the new platform, we're ready to make networks smarter, simpler, more scalable and more adaptable.

As industry analysts have said, Tellabs is offering a truly differentiated platform with Layer 7 capabilities that customers need and that competitors cannot match. We also announced our new Tellabs Insight Analytics Services, a set of professional services for that enables customers to pull together the network analytics puzzle. With Insight Analytics, customers can more easily identify and address network pain points to improve the user experience. The SmartCore 9200 and Insight Analytics are 2 ways that Tellabs is advancing our mobile Internet strategy.

We're continuing to make progress in gaining customers around the world. In the third quarter, we recognize revenue from 9 new customers for our Optical Tellabs 7100 and 7300 systems, 4 new customers for the Tellabs 8600 and 8800 mobile backhaul systems, and 1 new customer for the Tellabs SmartCore 9100 platform. Our new Tellabs 8609 began shipping in August and we started to recognize 8609 revenue in the third quarter. This new product is a high-density, low-cost Ethernet-optimized mobile backhaul platform that fits LTE networks perfectly. Our customers are excited about it. We expect the Tellabs 8611 to go into lab trials with customers soon and to ship early next year.

Looking ahead to the fourth quarter, we're targeting revenue to be flat to slightly up. Right now, we have lower visibility in the customer spending, so we're guiding to a wider range than usual, from $300 million to $330 million. In the fourth quarter, we expect non-GAAP gross margin to be flat, plus or minus a point or 2, again, depending on mix. We expect operating expenses to be down again in the mid-$130 million range.

Going forward, we're making progress in stabilizing our business in a tough economy. We are committed to focus on the mobile Internet, to invest in R&D for growth products and to grow our business outside of North America. While we're fighting headwinds in the short term, we're positioning Tellabs for long-term success in the mobile Internet. We believe that's the right thing to do for our customers, for our shareholders and for our business.

With that, I'll pass over the call to Tim.

Timothy J. Wiggins

Thanks, Rob, and good morning, everyone. Before I get into the numbers, I'll make a few observations about our overall performance in 3Q. As Rob mentioned at the top of the call, lower capital spending in North America created some headwinds for Tellabs during 3Q, at the same time we made some good progress. We continue to make progress for customers outside of North America. Revenue from these customers continue to grow both sequentially and what can be a slow quarter for us in a year-over-year basis. For the first time, revenue from customers outside North America made up over half of Tellabs' total revenue, and we had a customer outside North America that accounted for more than 10% of total revenue. We generated $22 million in cash from operations and we announced a new Tellabs SmartCore 9200 platform and Tellabs Insight Analytics Services.

In the end, lower operating expenses and improved gross margin enabled us to narrow our non-GAAP loss in 3Q compared with 2Q, even taking into account revenue that came in lower than we expected. Let's take a look at the third quarter numbers. On a sequential basis, 3Q revenue was down 6% from $334 million in the second quarter this year. On a GAAP basis, we recorded $138 million net loss in the quarter compared with the $20 million net loss in 2Q. As we disclosed in this morning's press release, our GAAP loss for 3Q '11 includes a non-cash goodwill impairment of $83 million, a non-cash in-process R&D impairment of $20 million, and $20 million of restructuring and other charges primarily associated with the restructuring we announced in July. Concerning the non-cash charges, we review goodwill annually for impairment, unless potential interim indicators exist that could result in an impairment. As you know, we have continued to experience a significant decline in business from a major customer that has had an adverse impact on the results of the Broadband segment. Given that we don't expect this trend to reverse in the near term, and that our overall market capitalization remains below book value, we completed an interim step one goodwill impairment review. Based on that review, we determined the segment's fair value was less than its carrying value. That required us to perform a step two analysis. We determined that the fair value of the identifiable net assets, excluding goodwill, was greater than the fair value of the segment, resulting in no value attributable to goodwill. As a result, we are taking a charge this quarter for the full amount of Broadband segment goodwill of $83 million. The remaining $122 million of goodwill relates to our Services segment. We review intangible assets each reporting period for indicators of impairment, including intangible assets with indefinite lives, such as in-process research and development. We recorded $20 million of IP R&D as part of the WiChorus acquisition accounting in 2009.

The WiMAX market, which was our first target for the WiChorus pack of core product, has not developed as we expected. The lack of the robust WiMAX market and the related expected revenue has adversely impacted the outlook for cash flows in this segment in the near and medium term. In addition, projections for revenue and expenses associated with the IPR&D have changed. As a result, we recorded $83 million of goodwill impairment and $20 million of IPR&D impairment in the third quarter. Excluding the non-cash goodwill and IPR&D impairments and the other charges, our non-GAAP net loss for the third quarter amounted to $3 million, or $0.01 per share. That compares with $7 million, or $0.02 per share, net loss in Q2. Okay, if you take $3 million in non-GAAP net loss and add $6 million, or $0.012 per share per equity-based comp, to be consistent with the way First Call Reuters compiled reports estimates for Tellabs, the result rounds to a $0.02 net loss in the third quarter of 2011. On a geographic basis, revenue from customers in North America was $151 million in 3Q, compared with $177 million in the prior quarter. North America contributed 48% of total 3Q revenue. That compares with the second quarter this year, when North America was 53% of total revenue. Revenue from customers outside North America was $163 million in the third quarter, up 4% sequentially. That amounts to 52% of total revenue and compares with 47% in the prior quarter, and 31% in the year-ago quarter. On a year-to-date basis, international revenue grew 42% compared with the first 9 months of 2010.

On a portfolio basis, revenue from our growth portfolio accounted for 59% of total revenue in the third quarter, compared with 61% in the prior quarter. Growth portfolio revenue for the third quarter of 2011 was $185 million, compared with $203 million in the prior quarter.

Let's take a look at the segment data for the third quarter. On a sequential basis, increased Broadband segment revenue and essentially flat Services segment revenue were offset by lower Transport segment revenue. Broadband segment revenue for the third quarter of 2011 was $170 million, up 5% from $163 million in the prior quarter. Looking within the Broadband segment, managed access and access revenue grew and data revenue declined.

Managed access revenue in the third quarter of 2011, driven by higher revenue from both our 8100 Managed Access System and 6300 SDH transport system was $46 million, up 67% from $28 million in Q2. In the third quarter, access revenue was up 9% sequentially to $43 million, as higher sales of single family ONTs more than offset lower sales from access systems. Revenue from the data product category was $81 million in the third quarter of 2011 compared with $95 million in Q2. On a sequential basis, revenue from both our 8800 Multiservice Router series and the 8600 Managed Edge system declined.

Broadband segment profit for the third quarter 2011 was $23 million compared with a segment loss of $3 million in the prior quarter. The increase in segment profit was primarily driven by the higher level of managed access revenue. Transport segment revenue for the third quarter of 2011 was $87 million compared with $114 million in the prior quarter. Within the Transport segment, we saw lower revenue in North America from Digital Cross-Connect Systems and Optical Transport System revenue.

Transport segment profit, driven primarily by the lower overall level of revenue, was $5 million in the third quarter of 2011 compared with $27 million in the prior quarter. Services segment revenue was $57 million in 3Q, consistent with the 2Q 2011 level. Services segment profit, driven by increased Professional Services revenue, was $23 million compared with $22 million in the second quarter of 2011.

Non-GAAP gross margin for the third quarter of 2011 was 41.0% compared with 37.7% in the prior quarter. Gross margin is dependent on product and customer mix. The shift this quarter is attributed primarily to the following factors: Increased managed access revenue and a more favorable data product mix contributed about 6 points to margin improvement, which was offset by a combination of lower Transport segment revenue and the impact of lower overall revenue on costs to sales.

Turning to operating expenses, tight control over expenses enabled us to continue to reduce overall non-GAAP operating expenses on a sequential basis. Total OpEx on a non-GAAP basis came in at about $135 million, below the prior quarter and consistent with our guidance. Non-GAAP R&D expenses for the quarter were almost $79 million compared with $80 million in the prior quarter. SG&A expenses for the quarter were a little less than $57 million, down from $58 million in the second quarter this year and down $7 million from $64 million in the third quarter of 2010.

Given the changes we've seen in the business during this transition period, we're maintaining downward pressure on overall expenses while increasing investment in products for future growth. Despite a slight third quarter decline, we expect R&D expenses for the full year to increase about 11% compared with 2010.

Other income on a non-GAAP basis amounted to $3 million in the second quarter compared with $2 million in the prior quarter. Our tax provision on a non-GAAP pretax earnings for the quarter was a benefit of $1.2 million for an effective tax rate of 32%.

Turning to the balance sheet now, day sales outstanding was 75 days down from 76 in 2Q. Inventory turns were 4.4x compared with 4.6x in the second quarter. At the end of the third quarter of 2011, inventory in terms of dollars was $156 million consistent with the prior quarter. CapEx was $14 million for the quarter and $46 million year-to-date. We returned about $7 million to our shareholders via our cash dividend.

While we generated $22 million in cash from operations during the quarter, our overall cash and investment balance dropped to $1,030,000,000 as a result of the CapEx spend, the dividend and the impact of a strengthening dollar on a euro-denominated cash and investments. There was no open-market stock buyback during the quarter. The actual number of shares outstanding at quarter's end was about 365 million. Headcount at the end of the quarter still at approximately 3,300, compared with 3,350 at the end of the second quarter. Book-to-bill was below 1 for the quarter as it has been throughout 2011.

Turning to our outlook for the fourth quarter this year, based on our orders in 3Q, current backlog and given market conditions, we are targeting fourth quarter revenue to be flat to up slightly. Right now, we see uncertainty around customer spending particularly in North America so we are guiding in a broader range from $300 million to $330 million. We expect non-GAAP gross margin to be about flat to 3Q, plus or minus a point or 2 depending on mix. We expect non-GAAP OpEx for the fourth quarter to be down again in the mid-$130 millions. We also expect the effect of expense in the equity-based compensation in the fourth quarter will be about $6 million, split between operating expenses and cost of goods sold. In addition, we expect the fourth quarter non-GAAP tax rate to be about 32%.

In summary, despite some headwinds in North America, we are making progress. We continue to make progress with customers outside North America, we generated positive cash flow from operations and we announced new strategic product and service offerings. In addition, lower operating expenses and improved gross margins enabled us to narrow our non-GAAP loss in 3Q compared with 2Q despite lower overall revenue levels.

Okay. We'll open the floor to your questions.

Question-and-Answer Session

Operator

[Operator Instructions]

Your first question comes from Mark Sue with RBC Capital Markets.

Mark Sue - RBC Capital Markets, LLC, Research Division

I'm just trying to get a sense of what the bottom might be for revenues in North America before we see the ramp of the 8609 and maybe of the new products? Can we potentially see North American revenues stabilize and is it really just diving in more into international markets to drive that before we see that stabilization in North America?

Robert W. Pullen

First of all, we just faced headwinds in North America from several customers, we think due to meeting macroeconomic events, but also strikes in the latter is probably a push out. We continue to see more growth outside of North America as evidenced by our 24% year-over-year increase. And as both Tim and I mentioned, we do see the -- we recognize a modest amount of revenue for the 8609 here in the quarter. We both launched it in the quarter and we underlined a modest amount of revenue. But it's also we're now in trials with the 8609 with many customers around the world and that platform is showing promise.

Mark Sue - RBC Capital Markets, LLC, Research Division

So you think that the base number in North America, going forward, assuming the macro doesn't improve, sort of at the $150-million level or can it actually go below that? Could you try to see how that stabilizes?

Robert W. Pullen

We don't have great visibility, Mark, and it's going to be based on mix on both products as well as geography.

Operator

Your next question comes from Simon Leopold with Morgan Keegan.

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

First, if you could just clarify, Rob, you mentioned the strike and also we had the hurricane in Northeast. Can you give us some rough idea of how you can quantify what that effect was in the quarter? And then the bigger picture question, I'd like to see if you could drill down a little bit more on the 9200 product and help us understand what the addressable market would be? How you size it, and what competing platforms you would compare it to?

Timothy J. Wiggins

Simon, let me -- it's Tim. Let me just touch on the first question and I'll let Rob handle the second one. We certainly did see some impact from those factors. In fact, if you adjusted for those factors, Simon, we would've been inside our revenue guidance range, and you can also see that in the decline in our Transport segment revenue. So those are heavily impacted by those issues.

Robert W. Pullen

And the second portion, 9200, Simon, is focused on the mobile backhaul space. You can consider both the mobile backhaul space and you have the router space, it's a multibillion-dollar industry, and we're going against all of the big competitors in that backhaul space like we do today.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

So is it more mobile than sort of the classic edge router enterprise, consumer broadband application?

Robert W. Pullen

It's -- we're hoping, it's more towards the mobile space, Simon, but it can play in both areas.

Simon M. Leopold - Morgan Keegan & Company, Inc., Research Division

And you think of that as kind of a $2-billion opportunity?

Robert W. Pullen

Probably bigger than that. $4 billion to $5 billion.

Operator

Your next question comes from Nikos Theodosopoulos with UBS.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

I guess, first question would be on the 10% customers. You mentioned you had one internationally. Can you comment on what types of products that this customer is purchasing? Any information on that? And then just in general, the aggregate number of 10% customers in the quarter?

Robert W. Pullen

Sure, Nikos, I'll take that. First of all, we had 2 10% customers in the quarter. One fell off from the previous quarter and one was added. The one that was added was a global wireless Tier 1 customer. And then additionally, we're selling 3 different products to them. The 8600, the 8800 and the 7100, but it's dominantly the 8600.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Okay. And the reason the customer fell off has just been the consistent decline in backhaul opportunities in that account?

Robert W. Pullen

That's true.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Okay. And then, I guess just in terms of looking out to next year, with this -- as you mentioned, you did this goodwill evaluation, the stocks trading close to book value. I think in the last call, you said the company would look at how to use the cash either to buy back more stock, do acquisitions, do dividends. Have you had those discussions? Any update on that?

Robert W. Pullen

We have had those discussions on how to use the cash. We don't have an update as of now. Tim mentioned, we didn't buy any stock back in the open market but we are evaluating that and we expect to have a recommendation toward the end of this year.

Nikos Theodosopoulos - UBS Investment Bank, Research Division

Okay, all right. And just one last question, on U.S. CapEx, obviously this year was more seasonally front-end loaded, which is what this tougher second half and then throw in the strike and bad weather and so forth. Do you have any feel for how the market in the U.S. next year will shape up? I mean, are we still looking for normal growth or is this weaker second half you think indicative of a tough 2012 as well?

Robert W. Pullen

Well, it's hard to tell what's going to happen next year, Nikos. It is clear, however, that there were some macroeconomic concerns here in North America this quarter. We don't know if it's going to spillover to next year but with the way the U.S. economy is going, we are -- we do have our concerns and we're watching it closely, which is why Tim and I are now instead, we are taking $50 million of expense out of our business to prepare for it.

Operator

Your next question comes from Jess Lubert with Wells Fargo Securities.

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

A couple of questions. First, can you tell us what the revenue was as a percent of sales from your top 2 North American carriers combined? You've historically given us that, and do you expect the revenue that was pushed from Q3 to fall into Q4?

Robert W. Pullen

[indiscernible]

Timothy J. Wiggins

Yes, we typically provide that guidance at year end. We did provide it in 2Q because we thought it was helpful. The numbers haven't changed significantly. In terms of the 10% customers, the one that fell out missed by 0.02%, so there really are 3 large customers at this point but it didn't meet the criteria.

Robert W. Pullen

And then I think the second part of your question, Jess, was if some of that revenue that was pushed from Q3, well it did Q4. The answer is yes. We believe that, that will occur. On the other hand, we guided that we'd be flat to slightly up from 3Q to 4Q, sequentially. But we also mentioned that because we have lower visibility that we widened our range here from $300 million to $330 million as well.

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

Okay. And then on the Broadband data side, this business was down quite a bit sequentially and year-over-year for second consecutive quarter, so I guess I was hoping you can help us understand how much of this is due to the large North American customer? How the business perform excluding this customer?

Robert W. Pullen

It was dominantly the 8800 at the North American customer.

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

And do you believe Q3 is likely to be a bottom for Broadband data revenues off of which we see improved sequential growth going forward or is visibility in this category still pretty limited as well?

Robert W. Pullen

We hope so, but it could be flat, plus or minus.

Operator

Your next question comes from Rod Hall with J.P. Morgan.

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

I've got a couple, so I wanted to start off with the gross margins. You guys said in the statement, I think, that the lower deployments help the gross margins but it wouldn't quantify. I just wonder if you could help us with how much that might have impacted the gross margin in the quarter?

Timothy J. Wiggins

Sure. Well, a couple of things to think about. One is that, if we think about the margin lock, we saw a fairly significant increase to some of our legacy products we call Managed Access, our 8100 and 6300, is a pretty nice improvement that was a positive. We also saw improvements in the mix in our data business and this is on a sequential basis. Contributing -- those factors contributed about 6 points of an improvement. The decrease in our Transport segment revenue sequentially down, along with just lower volume impacted absorption of our manufacturing costs and those netted down that improvement that we saw from the managed access and data. We also saw improvement in our Services margin around the Professional Services and lower deployment services, that maybe what you're getting at, but that's a much smaller factor.

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

Okay, so it's pretty inconsequential compared to the other margin.

Timothy J. Wiggins

That's right.

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

And then on the international revenue, I also noticed that was down a little bit q-over-q in the quarter. I just wonder if you're -- in the U.S. we're obviously seeing a front-end loaded CapEx situation. But it seems like there's a lot of negative CapEx data coming through from the international carriers as well. I just wonder if you can comment on what you think is going on from a macro point of view there?

Robert W. Pullen

Yes, Rod, it's a -- we did feel that, as both Tim and I said, a slowdown in North America from several customers. We saw some softness in Asia Pac as well. We did see strong growth in our EMEA region, the Europe, Middle East and Africa, and strong growth in Latin America. You're probably concerned like we are with some of the European economy. We haven't seen that impact yet but we do have concern about it, which is why we're being more aggressive in lowering our cost structure.

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

Okay, and, Rob, have any of the Europeans communicated to you? Any intent to spend less or you're just kind of nervous given the macro situation?

Robert W. Pullen

No, no. In fact they've all said that they -- most of them said that they have to continue spending to keep up with demand, but we're concerned about just a bit broader macroeconomic event.

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

Okay, okay. And then just one last question, which is on the international cash. Obviously, you're in a little bit of a cash burn situation now and you got this $391 million, $392 million of cash sitting outside the U.S. Do you guys have any intention to accelerate repatriation of that? And if you did, would that have any impact on how you're accounting for the cash on the balance sheet? I mean, I'm not sure, maybe you could just remind us what your assumptions for tax are on the balance sheet accounting for the cash at the moment?

Timothy J. Wiggins

Sure. There is part of the cash that we generate overseas we are able to bring back and do that, but that's in the $20 million, $30 million a year range. Our position is that the cash overseas is permanently reinvested. At this point, we'll maintain the cash over there. If circumstances would change down the road, we could repatriate the cash and then get paid the incremental tax that would be involved in bringing it back, which would be depending on the circumstances and our tax position, 10% or 15%, give or take, of the repatriated cash. If you change your fact pattern without a good reason, it could impact the accounting of the company. So that's why we maintain the current position.

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

Right, and you don't foresee any need to accelerate repatriation of the cash in the next year given current business conditions, or do you think that's a possibility?

Timothy J. Wiggins

No, that's correct.

Operator

Your next question comes from Tim Long with Bank of Montréal.

Tim Long - BMO Capital Markets U.S.

Just a few, if I could. Rob, you talked about some of the new customers for some of the growth products. I think 9 with the 7100 and 7300, and 4 with the 86 and the 88. Would you talk a little bit about the complexion there? With these new customer wins, are they predominantly international and what type of applications? Number 1. And then second, just, Tim, on that managed access jump in the quarter, was there any kind of one-time big deals in there? You mentioned some strengths, but I'm just curious if it was just more of a one-time or in that number?

Robert W. Pullen

Okay, I'll take the first one, Tim. You were right. You repeated some of our data. We had 9 new customers in the optical space, which included 7100, 7300. We have 4 new customers in the data networking and backhaul space, which is the 8600 and the 8800. And we did have one new customer on the 9100. The 9100 customer was North American. All of the other customers, for the most part, were international or outside of North America.

Timothy J. Wiggins

On the second part, Tim, we saw in the 6300, I think, just some catch up from pent-up demand. We do see some strength on the deployment or several deployments on the 8100 and I would expect that the business will stay up, probably not quite at this level, but we do think that we'll see some continued strength or relative strength in this sector for a couple of quarters, that would be my hope.

Operator

Your next question comes from Ehud Gelblum with Morgan Stanley.

Ehud Gelblum - Morgan Stanley, Research Division

Couple of quick questions. Going back to the CapEx question, and just understanding the environment we're dealing with right now, are you seeing basically uniform across your main Tier 1 customers or some of them weaker than others as you look, probably from Q3 as well as you look, Tim, into Q4? Are they equally weak or is it more one, you're more afraid than the other?

Timothy J. Wiggins

Well, I think our largest impact came from customer that had some labor issues and you could see that in our Transport segment. And then, I would say, just kind of a general malaise across the other carriers, nothing as large as that. I think this quarter, what's interesting in that is it start off fairly strong and then it seem kind of halfway through the quarter, at least in North America and maybe around the world, we were trying to talk ourselves into a double-dip recession. And we saw a lot of caution develop both in North America and certainly concern globally. So that's why we say it's really hard to tell. There are macro conditions that are causing people concern. And then each of our large carriers in North America has some unique circumstances or potentially have impacted their spending. So it's a little hard to tell at this point, left the uncertainty that Rob talked about, Ehud.

Ehud Gelblum - Morgan Stanley, Research Division

Appreciate it. So the customer that had the labor issues, how will they treat their fourth quarter? Are they looking to come back and perhaps some little bit more because they missed those couple of weeks? Or are they basically assuming that their dollars that they didn't spend are loss for good? Clarify maybe a little more of a bounce back as they came in.

Robert W. Pullen

We do expect some bounceback, Ehud, but like I said, we do have lower visibility, which is why be widened our range.

Ehud Gelblum - Morgan Stanley, Research Division

Okay. That's really helpful. Can you let us know if that labor dispute customer was the one that made the 10% or was just below 10%? Or is it too much to say?

Robert W. Pullen

They didn't make the 10%, Ehud.

Ehud Gelblum - Morgan Stanley, Research Division

Okay, so they were above the 10% mark, appreciate it. Can you -- looking at the 9200 in a big revenue opportunity we're talking about, how do you differentiate with what looks like right now somewhat of a crowded market already? How do -- what's the angle that you're coming in and talking to customers just trying to win some of the business away from the guys who are there with established product over the last few years?

Robert W. Pullen

Sure. Well, first of all, we believe we're unique in the fact that we have this content-aware router, which is a system that's architected for Layer 4 through 7 from the ground up. Second is it's all integrated under our network management system, which is deployed over 700 networks around the world and certainly in around 160 of our mobile backhaul carriers. The third is we'll compete on customer service to differentiate ourselves with some of the big guys. And then lastly, we designed a bunch of operational enhancements in the product consistent with our 8600 family for minimizing ease of troubleshooting during packet loopback testing, doing end-to-end synchronization over the mobile networks, over the Ethernet and IP, which is designing synchronization that works as well as the time division synchronization in the past. So we've innovated a couple of these areas as well. And then lastly, we leveled that install base we have for about 160 customers from our commercial perspective as well.

Ehud Gelblum - Morgan Stanley, Research Division

Okay. How long do you think, I mean, like you said, it's a multi, multi-billion dollar opportunity, how long do you think it would take for you to -- I mean, are you personally pushing it more internationally or more North America? I believe most of the North American carriers already have their edge driving vendors and they're pretty much hooked up with them. And how long do you think it will take for you for this to be, let's say, even $20 million, $30 million a quarter?

Robert W. Pullen

Well, first of all, we'll push it globally, Ehud. Second of all, it's hard to tell when it will be $20 million or $30 million but let me at least tell you that where do have some more control over. We expect the software to be ready in the product probably around end of the first half of 2012 and we would ramp after that. And these are longer sales cycle products, and so you have to take that in consideration.

Ehud Gelblum - Morgan Stanley, Research Division

Okay, and then finally, between here and there, so we've another year of waiting for these new products to come, to start coming to fruition. Are there any R&D project from the pipeline or is that basically between moving my cards over to LTE, and given this 9200 and 8609, were those the main R&D projects you have in the pipeline or are there more that you're working on?

Robert W. Pullen

Well, there's more. Well, certainly the pushing of 9100 in LTE, we already talked about, the 9200 we just discussed. We just introduced the 8609, which one customer told us is a best-in-class product in the world. And we have -- like I said, we did generate some revenue this quarter, albeit modest, but that has a lot of interest from customers globally as well. We are also are working on a new 8611, which is a reuse of the 8609 software, which has higher switching capacity as well as redundancy both in the processor, as well as switching network. That product will be in trial by the end of this year and introduced toward the end of the first quarter. We also announced new enhancements on our 8600 family, which we're extending, we're calling it Feature Package 4.0 and 4.1. So those are new higher-density lower-cost Ethernet enhancements to the existing installed base. And then we're also working on 7100 optical networking enhancements, both higher speeds as well as more Ethernet aggregation functionality. And so we continue to invest that -- Tim and I both highlighted that we're investing about 90% of our R&D in the growth products and at a high level, that's somewhere we're investing.

Operator

Your next question comes from Michael Genovese with MKM partners.

Michael Genovese - MKM Partners LLC, Research Division

With your Transport segment, was the sequential decline in metro optical and in Cross-Connects were those roughly equal, or did one stand out more than the other?

Timothy J. Wiggins

I'll tell you, Michael, we're disappointed in both from a standpoint of the gross in the quarter. They were both down and you could see that the segment was down from $114 million to, call it, $86 million or $87 million. So they both contributed significantly to that decline. And it was close to comperable.

Michael Genovese - MKM Partners LLC, Research Division

Okay. And with the customer that fell out of the 10%, I mean, that customer has been coming down all year. I mean, were you seeing a continuation of the same trends with some macro weakness or is there, which, to your knowledge, is there a very specific event in the quarter that maybe might have had them pull back on spending even more of that if that haven't had occurred?

Robert W. Pullen

Mike, you have to talk to them, and -- but then we believe it's been a general trend.

Michael Genovese - MKM Partners LLC, Research Division

Okay, then finally, any initial view on the flooding in Thailand and the impacts on the component suppliers and router supply, how that could affect future quarter's router revenues?

Robert W. Pullen

Yes, we do have a supplier in Thailand. It's very unfortunate what's happened. They did release the water from the main city into the suburbs the other day, but we don't expect it to be a material impact to Tellabs.

Operator

Your next question comes from George Notter with Jefferies.

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

I have a question on the timing of the 8611. I think you've mentioned that it's going to ship early next year. But I wanted to know is it fair to say that you guys are looking to ship that product for GA in Q3? I'm not sure if I misheard that historically. And if that's the case, why the delay?

Robert W. Pullen

We may have, at one point in time, forecasted that we wouldn't be doing trials in this year, but we did have a little bit of slip in our development, so that may be the revision you're referring to, George.

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

Got it, great. And then when you think about how the 8609 and 8611 relate to your 8600 product line, I'm just thinking about how it impacts Tellabs as you guys ramp those products. I mean, do you see it being consistent with the current 86 in the product line in terms of gross margins? And then how should I go with the revenue opportunity since I look at it in the per cell site or per unit of capacity basis, I mean, is this revenue accretive or dilutive to Tellabs? How should I look at that?

Robert W. Pullen

Well, first of all, sure, it's very consistent with the 8600 family. It's an extension and reuse of the software, George. Next, it should be accretive. Additionally, not only is this a next-generation cell site aggregator and then the 8611 will be an aggregation node, but these are both lower cost solutions to our existing 8620 and 8630. So they're higher density and lower cost, thereby giving us competitive solution on the market place, as well as maintaining our margins. That's the goal, George.

Timothy J. Wiggins

I would add, George, Tim, that we're on pace to see our 8600 product grow in the low 20% range for the year if we continue. So we're seeing, as Rob mentioned, growth in terms of leveraging the installed customer base, winning new customers, adding new capabilities. So we're pleased with the growth we're seeing there.

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

Is there an inflection point in this business where you have somebody larger North American customers kind of bottom and with some customer adds internationally if I look at sort of the mix between those customer sets, I mean, do we start to reaccelerate from a growth perspective at some point here? Is that a logical thought?

Robert W. Pullen

It's a very logical thought. We hope so, George. But as we said, we do have a lower visibility so we can't predict that accurately.

Operator

Your next question comes from Simona Jankowski with Goldman Sachs.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Just a clarification first on your guidance, I think you mentioned a couple of times that some of the revenue that might have come into third quarter got pushed out into the fourth quarter because of the strike and the hurricane in other regions. And invest about $15 million or $20 million that would have reached you to your formal guidance and that's now going to help in Q4. Is there an offsetting decline that you're assuming? And I know you talked about visibility not being very good, can you just be a little bit more specific as far as what other area you're expecting to decline to kind of offset some of the revenue coming back?

Robert W. Pullen

Yes, a couple of thoughts, Simona. One, I think you also mentioned that the impact is probably a little high. Two, the labor situation hasn't completely resolved itself in terms of back to normal. So I think that's the reason for the broader range. At this point, we're kind of expecting 4Q to look something like 3Q. And if that situation resolves itself, it's possible that, that business would come back. We don't believe the business has gone. But the traffic is growing. These are important parts, but we know our customers in the short term could manage inventory and change some of their underlying -- or the metrics in their network in terms of hot or not-so-hot. So we're not sure what happens in 4Q and that's some of the point that Rob has made about visibility. We certainly don't believe the revenue is lost. We think that the traffic is growing and the customer would need it. It's a matter of when it fits their schedule and their operational issues.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Got it. So it sounds like it's more a matter of timing of when that comes back as opposed to you having identified another part of the business that you expect to come down meaningfully.

Robert W. Pullen

That's probably the way we look at it, Simona.

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Okay, that's very helpful. I also had a follow-up on the 10% international customer this quarter. Would this be the type of customer that might be a 10% customer going forward as well? And do you have any other international customer that could potentially cross that 10% threshold in the next year or 2?

Robert W. Pullen

First of all, we don't forecast which are going to be the 10% customers, Simona, but we hope they are. And so we didn't look at any other international customers who are greater than 10%. We do know that we get about roughly 70% to 80% of our revenue from our top 15 or 20 customers, so...

Simona Jankowski - Goldman Sachs Group Inc., Research Division

Got it, got it. And just to be clear on that 10% customer. I guess, the question was a little bit more, was there anything unusually lumpy for them this quarter so they wouldn't necessarily be a 10% customer going forward, or is this kind of a recurring long-term type of engagement? So while you can't exactly predict, but it's reasonable that they may hover in that range a few quarters going forward?

Timothy J. Wiggins

Simona, Tim. A couple of thoughts. One is certainly our north American business is soft right now and that would impact how this calculation plays. They've been in the kind of the neighborhood, and as I mentioned earlier on the call, there are really 3 customers that are either 10% or very close. It happens that this particular customer moved into the mix, another customer moved out. But I think from quarter-to-quarter, we could see that kind of in or out. There was nothing particularly unusual with this international customer, just a combination of the factors. And in fact, they've been closed in the past anyway.

Operator

Your next question comes from Ted Moreau with WJB Capital.

Ted J. Moreau - WJB Capital Group, Inc., Research Division

I was wondering, Tim, given the difficult visibility and the environment that we're expressing, how are you guys managing your inventory levels, and for cash flow purposes and working capital?

Timothy J. Wiggins

Sure. Well, Ted, we were disappointed with our inventory levels this quarter and that's really not a function of the good work that our operations team did, but it's a function of when you have long lead times and you prepare for customers based on their best guess of what they're going to need and they decide they can't take that right now, it ends up happening. So the shortfall you saw vis-à-vis our guidance in North America and offsetting the inventories. So it does impact cash. We'd hope to see inventory down even $10 million this quarter, which would further improve my cash flow from operations and my overall cash situations. So we watch it very carefully. Kind of a short answer is if the business ends up softer than you expect, the first place it's going to show up is inventory because we have long lead times.

Ted J. Moreau - WJB Capital Group, Inc., Research Division

Okay. And then are you going to be -- going to try to make your inventories a little bit more lean?

Timothy J. Wiggins

The #1 priority for us is supporting our customers and being in a position to fill the orders, and the strong second is moving inventory down to drive cash flows. So believe it, or believe me when I say, we're looking at all the cash flow levers, receivables, inventory, CapEx, they're all getting a fair amount of scrutiny.

Ted J. Moreau - WJB Capital Group, Inc., Research Division

Okay. And then now that the international has exceeded North America revenue, can you provide any color or on geographic splits like what percentage comes from which regions?

Robert W. Pullen

We really haven't done that, Ted. I mean, we can pull that information but -- let me kind of give it to you at a high level. The North America has the highest revenue. Our Europe, Middle East and Africa is second, Latin America is third and Asia Pac is fourth.

Ted J. Moreau - WJB Capital Group, Inc., Research Division

Okay. And then finally, a couple of equipment guys out there have been talking about the Russian market slowing after a heavy spend in the first half of the year. And you guys had a couple of announced deals in, I think, the April timeframe. What are you guys seeing there? Have you seen softening in there as well?

Robert W. Pullen

Well, we've heard of the softening, but we haven't seen that yet. We've had strong demand out of our multiple customers in Russia. But we've heard of that although we just had one customer here at a session we had in our international headquarters, and he was seeing saying that he has at least spent what he did this year or next year and they're based on wireless demand. But we've heard mixed feedback, Ted.

Operator

Our next question comes from Blair King with Avondale Partners.

Blair King - Avondale Partners, LLC, Research Division

Just a couple of questions. This is a follow-up question has been asked a couple of different times, but just trying to really get a feel for the trajectory of the 860,0, 8800 product line specifically in North America. And then really to what extent you might expect to see any upside off of that driven off of the introduction of the 8609 and the pending introduction of the 8611 at some point next year. And then with the 8609, could that be 10% of the data revenue or is it still going to be significantly under that as we look through 2012 in your view?

Robert W. Pullen

Well, first part of your question, Blair, is the 8800, 8600 in North America is in decline based on what we've shared with you over the past year of losing some share on a major customer here. So that's all consistent with, I think, what we've talked about over the past year or so. And then the 8609 is in trials all over the world with Tier 1s, including our Tier 1 here in North America. And it's too early to tell, but it could be 10%.

Blair King - Avondale Partners, LLC, Research Division

Okay, all right. And so you just don't see a bottoming out of the 8600, 8800 in North America, that trend line is just you think continuing? Anyway, at some point, do you find yourself hitting some of level state of business?

Robert W. Pullen

Well, we've been at the lower state that we've been at some sort of over the past year since we've talked about this. We hope we're at the bottom, but you can't predict that at this stage, Blair.

Blair King - Avondale Partners, LLC, Research Division

All right, and then one quick last question, if you don't mind. On the 9200 outlook versus kind of the 9100 outlook, it sounds like you're planning to lay a lot of word behind the 9200 product line, but what's the expectation there for the 9100? Is there any lesser than expectation now than there was a quarter ago?

Robert W. Pullen

Well, I'll describe it like this, Blair. The 9100 hasn't met our revenue expectations. We've had slower WiMAX rollout. We do continue to invest. We have 25 customers and we already use all the software architecture on the 9200 content aware product.

Blair King - Avondale Partners, LLC, Research Division

So should we just think about that as sort of a transition to 9100 and the 9200, or do they maintain separate statuses?

Robert W. Pullen

No, they maintain separate statuses, but we're trying to reuse as much as we can.

Tom Scottino

Rob, this is Tom. We'll have time for one more question.

Operator

Your last question comes from Jeff Kvaal with Barclays Capital.

Jeffrey T. Kvaal - Barclays Capital, Research Division

I guess, I have one for each of you, really. I'm wondering, Tim, if you could take us through the gross margin variables. I think, traditionally, we've thought about the 5500 decline as being somewhat dilutive to the gross margin and also international is being dilutive. You've put up some good gross margin this quarter, I'm wondering if that strength should continue or we should see the mix pressure that? And then...

Timothy J. Wiggins

One is we've guide to the margins being similar in 4Q, so we're very happy to be out of the 30s and in the 40s. You know that's very much dependent on mix. So let me talk a little bit about the international. Actually, it very much depends on customer geography and product. But I would tell you that our international margin sometimes are better than our North American margins. Other times the reverse is true. So if you think about geographies, if we're selling product into certain geographies in Asia, for example, China and India, we tend to expect lower margins. That's not always the case, but that's our expectation. If we're selling 7100 products globally, we tend to expect lower margins on our corporate average with an opportunity to grow those as we get installed bases. If you think about data products, we tend to think about margin as better than our corporate average. Sometimes that will vary if we're trying to gain share or do something unusual. But there's a sense that the international margins are lower than our North America. That can be the case but it's not necessarily the case. We see some strong margins outside North America, and you could see that this quarter where our international business is now greater than half and our margins are up. So not necessarily the case, but depending on the mix and the customer and the product, it could be true.

Jeffrey T. Kvaal - Barclays Capital, Research Division

Okay. And then secondly, I was wondering if you guys could talk a little bit about where your are with your OpEx and if this is the right level and what might change? What the variables are in terms of thinking about either a step down or step up in OpEx?

Timothy J. Wiggins

Sure, good question. We've been thinking a lot about OpEx and we've gone through this process of targeting $50 million of reduction that we think when that program is implemented or should be fully implemented by the end of 2Q of next year, we'd expect our OpEx run rate to be in the kind of low-130s range, or $530 million, for the year. At the same time, we've been doing that. We've been increasing the spending in R&D. And I mentioned earlier in the call that we expect that our R&D spend to be up about 11% in the low $300 million range compared to last year. So the levers are continued pressure or focus in terms of productivity and efficiencies in all of our areas. Going forward we have to ask ourselves, is that the right amount of R&D spend? Is it too much or is it too low? Are there other things that we can do given the volume of the business, our supply chain? All those areas are under a lot of scrutiny, and part of it is a question of what can we afford? We've been focusing on driving the business back to break even. We were disappointed that our North American revenue was a little short this quarter, but we did make continued progress around driving toward breakeven. We are still focused on cash flow and we've made some progress there that the real cash issue that we have this quarter, one big one was the strengthening U.S. dollar and the impact on the -- in the international cash and investment balances. So I think the company continues to be open to our spend levels relative to our revenue. And we've got one eye very squarely focused on investing for future growth and we have another eye squarely focused on stabilizing the business and giving to reduce the cash burn or generating cash while we wait for this transition.

I'm going to turn it over to Rob.

Robert W. Pullen

Thank you very much. Thanks, everyone. We appreciate you attending the call this morning and your good questions. As we said, although we faced some headwinds here in the quarter, we are making progress in stabilizing our business in a tough economy. As you can see, we continue to make progress in our business outside of North America. We need to turn that around within North America. And we're investing in our new next-generation solutions to help our customers succeed. Thanks a lot and we'll talk with you soon.

Operator

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

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