Tellabs, Inc.: Growth Will Come From Overseas

After reporting earnings, everyone seems to focus on AT&T (T) (including BellSouth and Cingular account for 30% of equipment sales!) spending at a slower pace and Verizon (VZ), Tellabs' (TLAB) second largest customer, doing the same. At least this is the reason given for this quarter's consensus miss.

Some analysts were disappointed with TLAB’s 2006 Q4 revenue results as well. The assertion was that historically Q4 should have been the strongest quarter in the year. Actually, this is true only 50% of the time. Q1 2007 revenue is below Q1 2006 yet ahead of Q1 2005. Going back five years, quarterly revenue and earnings is consistently inconsistent.

As the US economy slows, TLAB will have to do what everyone else is doing in order to maintain growth and profitability - export more!

Reorganization

In August 2002, TLAB reorganized the Company’s International operations under the tutelage of Anders Gustafsson. The primary idea was to separate the differing needs of customers in North America and the rest of the world. To date, this has not panned out to a 50/50 revenue split. Divergent technology and market requirements between the US and Asia has left Asia wide open for the competition. R&D is geared towards US market needs and the rest of the world is expected to follow suit. Obviously this isn’t working.

In order for TLAB to increase its worldwide market share, it is going to have to create an independent R&D division whose sole concern is servicing non US customers. Currently the Tellabs 6300 and 8000 series managed access and transport systems and Tellabs 7200 optical transport system is offered internationally. It is not clear to this analyst if these systems have been modified to work with old & new French (Alcatel) based technology and other requirements from overseas customers.

To the best of this analyst’s knowledge, international sales of the Tellabs 2000 cable distribution systems, Tellabs 3000 broadband & narrowband echo cancellers and VQE solutions are still routed through the North American division - not the international division. If such is the case, there could very well be a technical and/or monetary reason for this. Overseas customers tend to view things differently.

Growth

The US market is expected to contract 3% in 2007. Asia and Eastern Europe is expected to grow 15% and 11% respectively.

The same situation occurred in 2001. US spending decreased as international grew at a fast pace. TLAB’s was not set up at the time to take advantage of this. In 2007, TLAB may have a better chance getting a larger portion of international growth.

Based on the latest reports, the company seems focused on the US when it should be focusing more on exports. This is troublesome.

Evaluation

We were not able to ascertain enough hard data to calculate an estimated EPS for 2007. The last quarterly report didn’t reveal anything new. 2007 EPS could come in anywhere from $0.15 to $0.55. We expect management to take exports seriously and EPS coming in towards the lower range as TLAB forges new relations with overseas customers.

We would settle for a 10% increase in revenue, from exports, coupled with a 10% decline in EPS. The CrossProfit evaluation line is based on this scenario. We never claimed to have invented the wheel (helm) and are confident; TLAB management has a handle on exports.

TLAB 1-yr chart

Disclosure: No conflicts